<PAGE>
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
REGISTRATION STATEMENT NO. 333-3606
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
ALPHA HOSPITALITY CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 7011, 7993 13-3714474
- ------------------------------------------------------------------------------
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code)
organization)
12 EAST 49TH STREET
NEW YORK, NEW YORK 10017
(212) 750-3500
-----------------------
(Address, including zip code and telephone number,
including area code, of Registrant's principal
executive offices)
JAMES A. CUTLER
CHIEF FINANCIAL OFFICER
ALPHA HOSPITALITY CORPORATION
12 EAST 49TH STREET
NEW YORK, NEW YORK 10017
(212) 750-3500
------------------------------
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies To:
------------------------------
JAY M. KAPLOWITZ, ESQ.
GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP
575 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 752-9700
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and from
time to time.
------------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
-------
<PAGE>
* The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(ii)
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title or Maximum Maximum
Securities To Amount Being Offering Price Aggregate Amount of
Be Registered Registered(1) Per Share(2) Offering Price Registration Fee
- --------------------------------------------------------------------------------
Common 791,880(3) $4.31 $3,413,002.80 $1,176.90
Stock, par
value $.01 per
Share
782,609(4) $4.31 $3,373,044.70 $1,163.12
24,000(5) $11.50 $276,000 $95.17
385,000(6) $3.25 $1,251,250 $431.47
701,017(7) $4.31 $3,021,383.20 $1,041.86
Total 2,684,506 $-- $11,334,680 $3,908.45
(1) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of the Registrant's common stock,
$.01 par value per share (the "Common Stock") issuable upon the exercise of
options pursuant to anti-dilution provisions contained therein, which
shares of Common Stock are hereunder.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended (the "Securities
Act").
(3) Represents 791,880 shares of the Registrant's Common Stock (the "Company
Shares') to be issued by the Registrant to B.C. of Mississippi, Inc.
(formerly known as Bayou Caddy, Inc.) ("B.C.") and certain shareholders of
B.C., valued at 17.6 CENTS per share, pursuant to an agreement by and among
the Registrant's Subsidiary Alpha Gulf Coast, Inc., B.C. and certain
shareholders of B.C.
(4) Represents 782,609 shares of Common Stock valued at $5.75 per share issued
to an escrow agent on behalf of the Cotton Club of Greenville, Inc. in
connection with the acquisition by the Registrant of all of the issued and
outstanding shares of Cotton Club of Greenville, Inc.
(5) Represents 24,000 shares of Common Stock to be issued upon the exercise of
outstanding options granted pursuant to the Registrant's 1993 Stock Option
Plan (the "Plan") exercisable at $11.50 per share.
(6) Represents 385,000 shares of Common Stock to be issued upon the exercise of
outstanding options granted pursuant to the Plan exercisable at $3.25 per
share.
(7) Represents 701,017 shares of Common Stock valued at $3.00 per share issued
to an escrow agent on behalf of Bally Gaming, Inc. in connection with the
restructuring of the mortgage on the Registrant's gaming vessel, the Bayou
Caddy's Jubilee Casino.
(8) No fee is due upon filing as $5,975.46 was paid upon the April 17, 1996
filing of the Registration Statement.
(iii)
<PAGE>
ALPHA HOSPITALITY CORPORATION
CROSS REFERENCE SHEET
------------------------------
FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS CAPTIONS
1. Forepart of Registration Cover Page of Registration Statement
Statement and Outside Front and Outside Front Cover Page of
Cover Page of Prospectus Prospectus
2. Inside Front and Outside Inside Front and Outside Back Cover
Back Cover Pages of Prospectus Pages of Prospectus; Available
Information
3. Summary Information, Risk Prospectus Summary - The Company;
Factors and Ratio of Earnings Risk Factors
to Fixed charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Calculation of Registration Fee
6. Dilution Inapplicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Description of Securities Description of Securities
to be Registered
10. Interests of Named Experts Legal Matters; Experts
and Counsel
11. Information with Respect to Business; Properties; Certain Market
the Registrant Information; Management's Discussion and
Analysis of Financial Condition and
Results of Operations.
12. Disclosure of Commission Undertakings
Position on Indemnification
for Securities Act Liabilities
(iv)
<PAGE>
PROSPECTUS
ALPHA HOSPITALITY CORPORATION
2,684,506 SHARES OF COMMON STOCK
PAR VALUE, $.01 PER SHARE
The Prospectus relates to the offer by Alpha Hospitality Corporation (the
"Company") of 791,880 shares (the "Company Shares") of the Company's common
stock, $.01 par value (the "Common Stock"), to be issued by the Company to B.C.
of Mississippi, Inc. ("B.C.") (formerly known as Bayou Caddy, Inc.) and certain
shareholders of B.C. pursuant to an agreement dated as of May 14, 1993 by and
among the Company's subsidiary Alpha Gulf Coast, Inc., B.C. and certain
shareholders of B.C. (the "B.C. Agreement"). See "Plan of Distribution -
Company Shares" and "Certain Transactions - Bayou Caddy Acquisition."
This Prospectus also relates to up to 1,892,626 shares of Common Stock (the
"Selling Stockholders' Shares") which may be sold by certain stockholders (the
"Selling Stockholders") who have acquired or will acquire such shares from the
Company as follows: (i) 782,609 shares of Common Stock issued to an escrow agent
on behalf of shareholders of the Cotton Club of Greenville, Inc. in connection
with the acquisition by the Company of all of the issued and outstanding shares
of Cotton Club of Greenville, Inc., (ii) 409,000 shares of Common Stock to be
issued upon the exercise of options granted pursuant to the Company's 1993 Stock
Option Plan, and (iii) 701,017 shares of Common Stock issued to an escrow agent
on behalf of Bally Gaming, Inc. in connection with the restructuring of the
mortgage on the Company's gaming vessel, the Bayou Caddy's Jubilee Casino. See
"Selling Stockholders," "Management - 1993 Stock Option Plan" and "Plan of
Distribution - Selling Stockholders' Shares."
The Company's Common Stock is traded on the over-the-counter market on the
Nasdaq Stock Market ("NASDAQ") under the symbol "ALHY" and on the Boston Stock
Exchange ("BSE") under the symbol ("ALH"). On June 17, 1996, the closing bid
and asked quotations for the Common Stock as reported by NASDAQ were $4 1/4 and
$4 3/8 per share.
Underwriting
Discounts and
Price to Public Commissions Proceeds to Issuer
- --------------------------------------------------------------------------------
Per Share . . . . . . $1,527,250 --- $1,527,250
Total . . . . . . . . $1,527,250 --- $1,527,250(1)
- ---------------
(1) Represents amounts the Company may receive from Selling Stockholders upon
the exercise of options for which the underlying shares are being
registered hereunder. Based upon the current market price of the Company's
Common Stock and the exercise prices of the options for which the
underlying shares are being registered hereunder, the Company does not
anticipate that the Selling Stockholders will exercise such options in the
immediate future. See "Use of Proceeds" and "Selling Stockholders."
<PAGE>
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL
DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR
ENTIRE INVESTMENT. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER "RISK FACTORS" BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Selling Stockholders' Shares that may be offered from time to time by
Selling Stockholders may be sold through ordinary brokerage transactions in the
over-the-counter market or on the BSE, in negotiated transactions or otherwise,
at market prices prevailing at the time of sale or at negotiated prices.
The Selling Stockholders' each may be deemed to be "an underwriter," as defined
in the Securities Act of 1933 (the "Securities Act"). If any broker-dealers are
used by the Selling Stockholders, any commissions paid to broker-dealers and, if
broker-dealers purchase any shares of Common Stock as principals, any profits
received by such broker-dealers on the resales of the shares of Common Stock may
be deemed to be underwriting discounts or commissions under the Securities Act.
In addition, any profits realized by the Selling Stockholders may be deemed to
be underwriting commissions. All costs, expenses and fees in connection wi of
the securities offered by the Selling Stockholders will be borne by the Company.
All brokerage commissions, if any, attributable to the sale of the Securities
offered by the Selling Stockholders will be borne by the Selling Stockholders.
See "Selling Stockholders" and "Plan of Distribution - Selling Stockholders."
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained or incorporated by
reference in this Prospectus in connection with the offer contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. Neither the delivery
of this Prospectus nor any sale hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof. This Prospectus does not constitute an offer to sell or
a solicitation by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation.
2
<PAGE>
Under the Securities Exchange Act of 1934 (the "Exchange Act") and the
regulations thereunder, any person engaged in a distribution of the securities
offered by this Prospectus may not simultaneously engage in market-making
activities with respect to shares of the Common Stock during the applicable
"cooling off" period (two or nine days) prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rule 10b-5,
in connection with transactions in the securities, which provisions may limit
the timing of purchases and sales of the securities by the Selling Stockholders.
----------------------------------------
The date of this Prospectus is , 1996
---------------
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission ("Commission")
a registration statement (as amended, the "Registration Statement") under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith, which may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, NW,
Washington, DC, 20549, and copies of the material contained therein may be
obtained from the Commission upon payment of applicable copying charges.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the reporting and other informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at the offices of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661-2511, and at 7 World Trade Center,
New York, New York, 10048. Copies of such materials can also be obtained by
written request to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, NW, Washington, DC, 20549, at prescribed rates.
The Company's Common Stock is listed on NASDAQ and the BSE at the offices of
NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at
1 Boston Place, Boston, Massachusetts, 02108, and the Company's periodic
reports, proxy statements, and other information can be inspected at NASDAQ and
the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or
the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION
AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE STATED OR IS MADE OBVIOUS FROM THE CONTEXT,
THE TERM THE "COMPANY" SHALL INCLUDE ITS SUBSIDIARIES ALPHA GULF COAST, INC.,
JUBILATION LAKESHORE, INC. (FORMERLY KNOWN AS THE COTTON CLUB OF GREENVILLE,
INC.), ALPHA MISSOURI, INC., ALPHA MONTICELLO, INC., ALPHA RISING SUN, INC.,
ALPHA ST. REGIS, INC., AND ALPHA HOTEL MANAGEMENT COMPANY, INC.
THE COMPANY
Alpha Hospitality Corporation (the "Company"), through its seven subsidiaries,
is engaged in (i) the ownership and operation of two gaming vessels [the first
being the Bayou Caddy's Jubilee casino (the "Jubilee Casino"), located in
Greenville, Mississippi, which is operated by the Company's subsidiary Alpha
Gulf Coast, Inc. ("Alpha Gulf"), and the second being the Jubilation casino (the
"Jubilation Casino"), located in Lakeshore, Mississippi, which is operated by
the Company's subsidiary Jubilation Lakeshore, Inc. ("Jubilation Lakeshore"),
formerly known as the Cotton Club of Greenville, Inc. (the "Cotton Club")], (ii)
the pursuit of gaming licenses for additional casinos in various states (which
is accomplished through the Company's subsidiaries Alpha Missouri, Inc. ("Alpha
Missouri"), Alpha Monticello, Inc. ("Alpha Monticello"), Alpha Rising Sun, Inc.
("Alpha Rising Sun") and Alpha St. Regis, Inc. ("Alpha St. Regis"), and (iii)
the provision of management services to hotels owned by third-parties (which is
conducted through the Company's subsidiary Alpha Hotel Management Company, Inc.
("Alpha Hotel")). See "Business - Casino Operations - Current Operations,"
"Business - Casino Operations - Development Activities" and "Business - Hotel
Operations."
In connection with its current casino operations, the business strategy of the
Company has been to increase return on the Company's existing gaming assets in
Mississippi. Consistent with this strategy, in October 1995, the Company
acquired the Jubilation Casino in connection with its acquisition of all of the
issued and outstanding shares of the Cotton Club (the "Cotton Club
Acquisition"). Specifically, the Company and the Cotton Club stockholders
entered into an agreement (the "Cotton Club Agreement") pursuant to which the
Company acquired 100% of the issued and outstanding shares of the Cotton Club,
existing stockholder notes in the amount of approximately $8 million and certain
additional assets of affiliates of the Cotton Club, which support the casino
operations in exchange for $5,821,700 in cash and promissory notes in addition
to 782,609 shares of the Company's Common Stock. After the Cotton Club
Acquisition, the Company moved the larger Jubilee Casino, formerly operated at
Lakeshore to Greenville (which site was acquired in the Cotton Club Acquisition)
and moved the Jubilation Casino (which was acquired in the Cotton Club
Acquisition) to Lakeshore. The Company relocated the Jubilee Casino and the
Jubilation Casino as stated above in order to accommodate and better serve the
larger market in Greenville. See "Business - Casino Operations - Current
Operations."
The Company's pursuit of additional gaming licenses is accomplished through the
business of four of its subsidiaries, Alpha Missouri, Alpha Monticello, Alpha
Rising Sun and Alpha St. Regis. Alpha Missouri has applications pending for
site approval and a gaming license with respect to the development of a
riverboat gaming facility in Missouri. The Company entered
5
<PAGE>
into a memorandum of understanding with Catskill Development L.L.C. ("Catskill")
pursuant to which Alpha Monticello is to participate in the development and
management of a casino to be built adjacent to the Monticello Raceway in
Sullivan County, New York. Alpha Rising Sun and Alpha St. Regis are currently
inactive although they were previously utilized to explore the establishment of
gaming facilities in Indiana and Hogansburg, New York, respectively. See
"Business - Development Activities - New York," "Business - Development
Activities - Missouri," and "Business - Development Activities - Indiana."
In connection with its hotel operations, through Alpha Hotel, the Company
provides management services to sixteen (16) hotels or motels. The Company
provides management, financial, administrative and marketing services
("Management Services") to fourteen (14) of such hotels or motels primarily
under a service agreement (the "Service Agreement") with Bryanston Group, Inc.
("Bryanston"). The Company provides Management Services to these fourteen (14)
hotels on behalf of Bryanston (which is 50% owned by Mrs. Beatrice Tollman, the
spouse of the Company's Chairman and co-Chief Executive Officer, and 50% owned
by a trust for the benefit of a child of Mr. Monty D. Hundley, the Company's
former President and co-Chief Executive Officer), pursuant to individual
management agreements (the "Management Agreements"). The rights to provide the
Management Services were acquired by the Company in partial consideration for
the issuance of the Company's Common Stock to Bryanston. Such rights were
recorded by the Company at no cost to the Company based on its predecessor's
cost, which was $0. Pursuant to the Service Agreement, the Company is the sole
provider to such hotels of Management Services required of Bryanston, and
receives substantially all fees due to Bryanston under the Management Agreement.
Under the Service Agreement, the Company is compensated for its services by
receiving a percentage of total net revenues of the managed hotels. Additional
fees may be earned from various incentive agreements and accounting fees. In
addition, the Company provides Management Services to two (2) hotels located in
Myrtle Beach, South Carolina and Branson, Missouri, respectively, under
agreements with the hotel's respective owners. All of the sixteen (16) hotels
are "mid-priced," ranging between $40 and $70 per night, and all but two are
operated as Days Inns hotels. In addition to the provision of such Management
Services, the Company is seeking to expand its management of hotels through its
marketing efforts. See "Business - Hotel Operations," "Business - Hotel
Operations - Marketing," and "Certain Transactions - Bryanston."
The Company was incorporated in Delaware on March 19, 1993, Alpha Gulf was
incorporated in Delaware on May 4, 1993, Jubilation Lakeshore was incorporated
in Mississippi on December 8, 1992, Alpha Missouri was incorporated in Delaware
in Delaware on March 17, 1995, Alpha Monticello was incorporated in Delaware on
May 30, 1996, Alpha Rising Sun was incorporated in Delaware on August 6, 1993,
Alpha St. Regis was incorporated in Delaware on June 24, 1994, and Alpha Hotel
was incorporated in Delaware on March 19, 1993. The Company's principal
executive offices are located at 12 East 49th Street, New York, New York, 10017
and its telephone number is 212-750-3500.
6
<PAGE>
THE OFFERING
SECURITIES OFFERED
COMPANY SHARES........................... 791,880 shares of Common Stock
to be issued in connection with
the B.C. Agreement. See "Plan
of Distribution - Company
Shares."
SELLING STOCKHOLDERS'
SHARES................................... 1,892,626 shares of Common
Stock which may be sold by the
Selling Stockholders who have
acquired or will acquire such
shares from the Company as
follows: (i) 782,609 shares of
Common Stock issued to an
escrow agent on behalf of
shareholders of the Cotton Club
of Greenville, Inc. in
connection with the acquisition
by the Company of all of the
issued and outstanding shares
of Cotton Club of Greenville,
Inc., (ii) 409,000 shares of
Common Stock to be issued upon
the exercise of options granted
pursuant to the Company's 1993
Stock Option Plan, and (iii)
701,017 shares of Common Stock
issued to an escrow agent on
behalf of Bally Gaming, Inc. in
connection with the
restructuring of the mortgage
on the Company's gaming vessel,
the Bayou Caddy's Jubilee
Casino. See "Plan of
Distribution - Selling
Stockholders' Shares," and
"Selling Stockholders."
The Company will not receive
any cash proceeds from the sale
of the Company Shares.
However, the Company may
receive approximately
$1,527,250 from certain Selling
Stockholders upon the exercise
of options for which the
underlying shares are being
registered hereunder. Based
upon the current market price
of the Company's Common Stock
and the exercise prices of the
options for which the
underlying shares are being
registered hereunder, the
Company does not anticipate
that the Selling Stockholders
will exercise
7
<PAGE>
such options in the immediate
future. See "Use of Proceeds."
The exercise prices of the
shares of Common Stock issuable
upon the exercise of options,
and the number of shares
issuable, may be subject to
adjustment in the event of a
merger, stock split, stock
dividend and similar
transaction. See "Executive
Compensation - 1993 Stock
Option Plan" and "Description
of Securities."
COMMON STOCK OUTSTANDING
AT THE DATE OF THIS PROSPECTUS(1) ....... 13,403,275 Shares
AFTER THE OFFERING(2).................... 13,887,325 Shares
COMMON STOCK SYMBOLS...................... NASDAQ: ALHY
BSE: ALH
USE OF PROCEEDS.................,,........ The Company will not receive
any proceeds from the sale of
the Company Shares and any
proceeds from the exercise of
options underlying the Selling
Stockholders' Shares being
registered hereunder will be
used for working capital
purposes. See "Use of
Proceeds."
RISK FACTORS.............................. An investment in the Company's
Common Stock involves a high
degree of risk and should be
made only after a careful
consideration of the
significant risk factors that
may affect the Company. Such
risks include special risks
concerning the Company and its
business, including among other
risks, History of Losses;
Explanatory Paragraph in
Independent Auditor's Report,
and Defaults in Outstanding
Indebtedness; Loan Covenants
and Security Interest. See
"Risk Factors."
- ------------------
(1) Includes 716,881 shares held as treasury stock of the 791,880 shares to be
issued to B.C. of Mississippi, Inc. pursuant to the B.C. Agreement. See
"Certain Transactions - Bayou Caddy Acquisition."
(2) Assumes the issuance of all 2,684,506 shares of Common Stock being offered
hereby.
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the financial
statements appearing elsewhere in this Prospectus. Such information should be
read in conjunction with such financial statements, including the notes thereto.
<TABLE>
<CAPTION>
Three Months Year Ending Period Ending
Ended December 31, December 31,
March 31, ------------------- -------------
------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of
Earnings Data:
Revenues $13,667,729 $ 30,520,276 $46,100,441 $876,977
Net loss $(2,827,505) $(17,993,633) $(9,900,543) $(4,704,714)
Loss per share $(.22) $(1.69) $(.97) $(.53)
Balance Sheet Data:
Working capital
(deficit) $(25,395,057) $(39,993,555) $(17,341,755) $(9,535,249)
Total assets $65,251,403 $ 66,773,492 $45,490,305 $47,201,031
Total liabilities $64,072,076 $ 64,869,712 $32,347,801 $35,319,490
Total stockholders'
equity $1,179,327 $ 1,903,780 $13,142,504 $11,881,541
</TABLE>
9
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS
WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS.
1. HISTORY OF LOSSES; EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITOR'S REPORT.
Since its inception, the Company has suffered significant losses from
operations. The Company had net losses of $17,993,633 in the fiscal year
ended December 31, 1995, $9,900,534 in the fiscal year ended December 31,
1994, and $4,704,714 in the fiscal year ended December 31, 1993, of which
$13,103,928, $11,270,048 and $0, respectively, were incurred by the Jubilee
Casino. The Company had net losses of $2,827,505, and $2,807,072 for the
three months ended March 31, 1996 and March 31, 1995, respectively, of which
$601,892 and $2,835,555, respectively, were incurred by the Jubilee Casino.
As of December 31, 1995 has a working capital deficit of $39,993,555 and an
accumulated deficit of $32,598,881. As a result of the material
uncertainties relating to the Company's ability to continue as a going
concern and fund its operations, the Company's independent auditors have
included an explanatory paragraph in their report on the Company's financial
statements addressing such uncertainties.
2. GOVERNMENT REGULATION.
GENERAL
The Company's ownership and operation of its properties are subject to
regulation by federal, state and local governmental and regulatory authorities,
including regulation relating to environmental protection. While the Company
has not been the subject of any complaints or other formal or informal
proceedings alleging any violations of government regulations, no assurance can
be given that the Company is, or in the future will be, able to comply with, or
continue to comply with current or future governmental regulations in every
jurisdiction in which it conducts or will conduct its business operations
without substantial cost or interruption of its operations, or that any present
or future federal, state or local regulations may not restrict the Company's
present and possible future activities. In the event that the Company is unable
to comply with any such requirements, the Company could be subject to sanctions,
which could have a materially adverse effect upon the Company's business. See
"Business - Government Regulation - General," and "Business - Casino Operations
- - Current Operations."
LICENSING; LOSS OF GAMING LICENSE
The gaming industry is highly regulated by each of the states in which gaming is
legal. The regulations vary on a state by state basis, but generally require
the operator, each owner of a substantial interest (usually 5% or more) in the
operator, members of the Board of Directors, each officer and all key personnel
found suitable, and be approved, by the applicable governing body.
10
<PAGE>
The failure of any present, or future, person required to be approved to be, and
remain qualified to hold a license could result in the loss of license. In
almost all instances, the governing body has broad discretion in granting,
renewing and revoking licenses. The loss or suspension of any license would
have a material adverse effect on the Company. The requirement that the
governmental body approve substantial shareholders, directors, officers and key
personnel could discourage, delay or prevent a change in control of the Company.
The operations of the Jubilee Casino and the Jubilation Casino are regulated by
the Mississippi Gaming Commission (the "Mississippi Commission"). In October
1995, the Company's original licenses to operate the Jubilee Casino and the
Jubilation Casino were renewed until December 1997. Each Mississippi gaming
license has a term of two years and is subject to renewal. In the event the
Mississippi Commission were to revoke or fail to renew either of the Company's
licenses, the Company's operations and financial condition would be materially
adversely affected.
The Company recently withdrew its application in Colorado since the Company does
not intend to proceed with the acquisition for which such license was required.
The Company applied for a gaming license in Missouri in the early part of 1995.
At present the Company cannot predict when a final determination will be made
regarding its license application in Missouri since the Missouri gaming
authority (the "Missouri Commission") makes such determination at its discretion
and is not required to do so within a fixed period of time. However, based upon
discussions with the Missouri Commission, the Company does not anticipate
receiving a final determination with respect to its license application within
the next twelve months. The failure of the license to be granted could have a
material adverse effect on the Company's expansion plans. See "Business -
Casino Operations - Development Activities."
3. DEFAULTS IN OUTSTANDING INDEBTEDNESS; LOAN COVENANTS AND SECURITY INTEREST.
The Company has incurred substantial indebtedness in connection with its
operations and the acquisition of its casino properties; a substantial portion
of this indebtedness is presently held by Bryanston, an affiliate of the
Company. Substantially all of the Company's assets utilized in connection with
its casino operations are pledged as security for these loans. The various loan
documents contain covenants and restrictions which may limit or interfere with,
the operation of the Company's business. See "Certain Transactions -
Bryanston."
At March 31, 1996, the Company was in default of (i) its mortgage notes
payable for non-payment, (ii) the equipment notes relating to the Jubilation
Casino aggregating approximately $3,433,000 for the breach of several loan
covenants and certain loans payable aggregating approximately $3,655,000 for
non-payment. The Company received a waiver of the defaults of the loan
payable and mortgage note payable to Bryanston. Accordingly, the mortgage
note payable ($3,656,000) and the equipment notes payable ($3,433,000)
relating to the Jubilation Casino, in addition to another certain loan
payable ($1,181,000) are reflected in current liabilities at March 31, 1996.
In the event of a violation by the Company of any of the loan covenants, or upon
the occurrence of any other events of default set forth in the loan documents,
the lenders could exercise rights of foreclosure under the agreements, which
would have a materially adverse effect on the
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Company's financial condition.
From time to time the Company has made late payments of certain installments of
its indebtedness and is presently not current in payment of the debt due to the
Cotton Club shareholders. While no default or acceleration has been declared by
any of the lenders, no assurance can be given that a default will not be
declared in the future. Declaration of a default would allow the lender whose
indebtedness was in default to foreclose on any collateral for the loan and have
a material adverse effect on the Company's business and operations.
4. INTENSE INDUSTRY COMPETITION.
MISSISSIPPI GAMING OPERATIONS
The Company believes that its major market area is approximately 150 miles
around the Jubilee Casino and approximately 50 miles north and west of the
Jubilation Casino, based upon analysis of customer records completed by
marketing and operational employees at the respective sites. Within the market
area of the Jubilee Casino there are presently 6 other casinos in operation and
two additional casinos in the planning stage. One of the existing casinos is
immediately adjacent to the Company's casino. Within the marketing area of the
Jubilation Casino there are approximately 15 competing casinos, all of which are
vessels or floating casinos. In addition, there was a land based casino in New
Orleans which opened and then closed. The Company understands that the owner of
this casino is negotiating the re-opening of the casino with the governmental
authorities. Substantially all of these competitors have significantly greater
financial, and other, resources than the Company and more experience in the
gaming industry. It is likely that the intense competition in the Company's
market area may limit the profitability of its operations, or even render them
unprofitable. In addition, the Company experienced declining revenues during the
year ended December 31, 1995 with respect to the operation of the Jubilation
Casino. In management's opinion, this decline is due to the remote location of
the Jubilation Casino and the increasing casino development in the Biloxi and
Gulfport markets, which have proven more attractive to casino patrons. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HOTEL OPERATIONS
There are many hotel management companies that provide services to hotels
similar to the services provided by the Company. Many of the other companies are
larger, better capitalized and have more experience in the management of hotels.
While the Company believes that its management has expertise in operating major
mid-market hotel franchises, economies of scale, innovative marketing
strategies, there can be no assurance that the Company will be able to expand
this segment of its business or that existing agreements will be renewed as they
expire.
5. RELIANCE ON SIGNIFICANT CLIENTS; ADVERSE EFFECT OF TERMINATION OF
AGREEMENTS.
The Company provides Management Services to sixteen (16) hotels or motels. Of
such hotels, fourteen (14) for which the Company provides Management Services
are owned by five companies. These five companies accounted for 23%, 19.7%,
17.1%, 16.8%, and 13.1% of revenues from hotel operations, respectively, in the
Company's most recent fiscal year. The
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Management Agreements contain termination provisions which are consistent with
hotel industry practice and may be terminated by either party due to an uncured
default by the other party. One of the underlying Management Agreements is
terminable at the discretion of the hotel owner, all are terminable upon a sale
of the property by the owner and others are terminable if there is a material
decrease in the hotel's operating results. The termination of a significant
number of Management Agreements would have a material adverse effect on the
Company's financial condition and results of operations. In addition, because
almost all of the Company's current hotel management clients are sub-contracted
through Bryanston, any failure on the part of Bryanston to continue its business
operations or to maintain its Management Agreements would adversely affect the
business, financial condition and results of operations of the Company.
The Service Agreement pursuant to which the Company provides Management Services
expire on various dates, subject to renewal if the underlying Management
Agreements are renewed. Four of the fifteen existing Management Agreements
terminate in 1996, one during the month of June, two in October 1996, and one in
December 1996. There can be no assurance that such agreements will be renewed.
See "Business - Hotel Operations."
6. DEPENDENCE ON SUCCESS OF MANAGED HOTELS.
As the Company's hotel management revenues are based upon a percentage of an
individual managed hotel's net revenues, any decline in a particular hotel's
revenues because of a decrease in the number of hotel guests or other
significant profit center, such as a hotel's restaurant or bar, would adversely
affect the Company's results of operations. Furthermore, any downturn in general
economic conditions, or of economic conditions in the localities where such
managed hotels are located could likewise have an adverse effect on the
Company's results of operations. See "Business - Hotel Operations."
7. POSSIBLE LOSS OF JUBILATION CASINO DUE TO SEVERE WEATHER CONDITIONS;
INSURANCE COVERAGE.
Areas along the Gulf of Mexico are prone to flooding from storms and hurricanes.
The Jubilation Casino was built to withstand winds of 155 miles per hour and 16-
foot water surges. However, there can be no assurance that these measures will
be adequate to protect the Jubilation Casino and related facilities in the event
of a natural disaster. Although the Company maintains property insurance at
replacement value, less a $100,000 deductible and has obtained business
interruption insurance, a prolonged or total loss of the Jubilation Casino would
have a materially adverse impact on the Company's financial condition and
results of operations.
8. POSSIBLE INSUFFICIENCY OF LIABILITY INSURANCE.
The Company maintains and intends to continue to maintain general liability
insurance in amounts which management believes will be sufficient to cover
casualty risks normally associated with the operation of a business open to the
public. There can be no assurance, however, that such insurance will be adequate
to cover unanticipated liabilities.
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9. TAXATION OF GAMING OPERATIONS.
The Company believes that the prospect of significant additional revenue through
taxation is one of the primary reasons why jurisdictions legalize gaming. As a
result, gaming operators are typically subject to significant taxes and fees in
addition to normal federal and state corporate income taxes, and such taxes and
fees are subject to increase at any time. Any material increase in these taxes
or fees would adversely affect the results of operations of the Company.
Presently, the Company pays approximately 12% of gaming revenues in taxes and
fees in Mississippi.
With respect to any future operations in Missouri, the tax is 5% of the first
$1,000,000, 12% of the next $2,000,000 and 20% of all adjusted gross receipts
above $3,000,000. In addition there is a boarding tax of $1 payable to each of
the local government and the state. See "Business - Casino Operations -
Development Activities - Alpha Missouri."
10. SEASONAL FLUCTUATIONS.
The results of the casinos' operations have been seasonal, with the greatest
activity occurring during the months of May through September. Consequently, the
Company's operating results during the calendar quarters ending in December and
March are not as profitable as those quarters ending in June and September, and
losses result from time to time. The seasonal nature of the casinos' operations
increases the risk that natural disasters or the loss of the casinos for any
other reason during the May through September period would have a material
adverse effect on the Company's financial condition and results of operations.
The hotel industry is in general seasonal. Though the hotels that receive
Management Services from the Company are distributed through various regions of
the country, the revenues generated by such hotels are anticipated to be
typically lower in the first and fourth quarters of each year. Since fees
received by the Company are based on a percentage of the total net revenues
generated by such hotels, the Company's operations are susceptible to seasonal
variations.
11. CONFLICTS OF INTEREST.
Mrs. Beatrice Tollman, the spouse of Mr. Stanley S. Tollman, the Chairman of the
Board, President and Chief Executive Officer of the Company, is one of the
principal owners of Bryanston. Certain conflicts of interest may arise with
regard to the negotiation of agreements and business opportunities between the
Company and Bryanston. Furthermore, Stanley S. Tollman is one of the principal
owners of the Tollman-Hundley Hotel Group (the "T-H Hotel Group"), the
constituent companies of which own or manage hotel properties containing an
aggregate of 5,593 rooms and which may be in direct competition with hotels that
receive Management Services from the Company. While Stanley S. Tollman and the
T-H Hotel Group have entered into agreements with the Company pursuant to which
each has agreed that any opportunity to provide Management Services to hotel
properties owned by third-parties will be offered first to the Company for a
period of five years commencing September 1, 1993 and the Company has
established a policy that any agreements between the Company and Bryanston or
the T-H Hotel Group must be approved by a majority of disinterested members of
the Company's Board of Directors, there can be no assurance that conflicts of
interest will not arise
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among such parties and the Company. See "Certain Transactions - Bryanston."
12. DEPENDENCE UPON KEY PERSONNEL; ABSENCE OF FULL-TIME MANAGEMENT.
The success of the Company is largely dependent upon the personal efforts of Mr.
Stanley S. Tollman, its President and Chief Executive Officer. The Company does
not maintain and does not intend to obtain a key employee life insurance policy
on the life of Mr. Stanley S. Tollman. Although Mr. Stanley S. Tollman is only
required to devote approximately 20% of his business time to the operations of
the Company, the loss of the services of Mr. Stanley S. Tollman would have a
material adverse effect on the prospects of the Company. In addition, although
the casino operations are managed by full-time personnel, the Company and its
hotel management operations are managed by individuals who also work for
Bryanston." See "Management" and "Certain Transactions - Bryanston."
13. NO ASSURANCE OF PUBLIC MARKET FOR SECURITIES.
Although the Company's Common Stock is quoted on NASDAQ and listed on the Boston
Stock Exchange, there can be no assurance that the Company will be able to
maintain such quotation or listing, or that, if maintained, a significant public
market will be sustained. For continued listing on NASDAQ, the Company is
required to maintain a minimum stockholders' equity of $1,000,000 and assets of
$2,000,000. The Boston Stock Exchange's maintenance criteria require the Company
to have total assets of at least $1,000,000 and total stockholders' equity of at
least $500,000. At March 31, 1996 (unaudited), the Company had stockholders'
equity of $1,179,327 and assets of $65,251,403. The Company has continued to
operate at a loss through the date of this Prospectus.
In the event the Common Stock were delisted from NASDAQ, trading, if any, would
be conducted on the Boston Stock Exchange and in the over-the-counter market on
the NASD's electronic bulletin board, in what are commonly referred to as the
"pink sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. In addition, the Common Stock would be subject to Rules 15g1-15g6
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally, a person with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with his or her spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, these rules may
affect the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in the Offering to sell their securities in the
secondary market.
The Commission has also recently adopted regulations that define a "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the regulations require the delivery, prior to the transaction, of a disclosure
schedule prepared by the Commission relating to the penny stock market. The
broker-dealer must also disclose the commissions payable to both the broker-
dealer and the
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registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
While many NASDAQ-listed securities are covered by the definition of penny
stock, transactions in a NASDAQ-listed security are exempt from all but the sole
market-maker provision for (i) issuers who have $2,000,000 in tangible assets
($5,000,000 if the issuer has not been in continuous operation for three years),
(ii) transactions in which the customer is an institutional accredited investor,
or (iii) transactions that are not recommended by the broker-dealer. In
addition, transactions in a NASDAQ security directly with a NASDAQ market-maker
for such security are subject only to the sole market-maker disclosure, and the
disclosure with respect to commissions to be paid to the broker-dealer and the
registered representative.
Finally, all NASDAQ securities would be exempt from the recently-adopted
regulations regarding penny stocks if NASDAQ raised its requirements for
continued listing so that any issuer with less than $2,000,000 in net tangible
assets or stockholders' equity would be subject to delisting. These criteria are
more stringent than the current NASDAQ maintenance requirements.
14. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
The Company has 17,000,000 shares of Common Stock authorized, of which
13,403,275 are issued and outstanding. Of such 13,403,275 shares, 716,880 shares
are being held as treasury shares in connection with the B.C. Agreement. In
addition, 409,000 shares may be issued upon the exercise of outstanding and
currently exercisable options.
Of the 13,403,275 shares of Common Stock currently issued and outstanding,
9,384,205 shares of Common Stock are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, in that such
shares were issued and sold by the Company in transactions not involving a
public offering and are, as of November 5, 1995, eligible for sale under Rule
144. In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, after at least two years have elapsed from the sale by the
Company or any affiliate of the restricted securities, can (along with any
person with whom such individual is required to aggregate sales) sell, within
any three-month period, a number of shares of restricted securities that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on NASDAQ or a national
securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
the Company for at least three months, after at least three years have
elapsed from the sale by the Company or an affiliate of the restricted
securities, is entitled to sell such restricted shares under Rule 144 without
regard to any of the limitations described above. Of such 9,384,205 shares,
3,467,827 are eligible for sale pursuant to Rule 144 by affiliates and
non-affiliates of the Company who are restricted as to the number of
securities they can sell during any three-month period and 5,916,378 shares
are eligible for sale pursuant to Rule 144 by non-affiliates without regard
to any restrictions on the number of shares to be sold. Possible or actual
sales of such Common Stock by stockholders of the Company under Rule 144 may
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have a depressive effect upon the price of the Common Stock, and could also
render difficult the sales of Common Stock and currently outstanding Redeemable
Common Stock Purchase Warrants (the "Warrants") by investors. See "Description
of Securities."
15. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK.
The Company's Certificate of Incorporation authorizes the issuance of 1,000,000
shares, par value $.01 per share, of "blank check" preferred stock (the
"Preferred Stock") with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. The Preferred Stock could be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company. There can be no assurance that shares of Preferred Stock of the Company
will not be issued at some time in the future. See "Description of Securities -
Preferred Stock."
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USE OF PROCEEDS
The Company will not receive any cash proceeds from the sale of the Company
Shares, which shares will be issued to B.C. and certain shareholders of B.C.
pursuant to the terms of the B.C. Agreement. According to the B.C. Agreement,
the Company will issue 791,880 shares of Common Stock to B.C. upon the
conversion of a convertible promissory note in the principal amount of
$3,500,000, bearing interest at 10% per annum (the "B.C. Note"). The B.C. Note
was issued by the Company in favor of B.C. in exchange for certain assets of
B.C., including B.C.'s leasehold interests under certain lease agreements,
certain other assets incidental to the development and ownership of the Jubilee
Casino, and B.C.'s interest in certain related license applications, approvals
and permits. The conversion of the B.C. Note into 791,880 shares was determined
in accordance with a formula contained in the B.C. Agreement. Bryanston made a
capital contribution to the Company of 716,881 shares of Common Stock owned by
Bryanston to help satisfy the number of shares of Common Stock into which the
B.C. Note converted. The 716,881 shares are currently held as treasury stock
and will be issued to B.C. and certain B.C. shareholders promptly after the
effective date of the Registration Statement. See "Certain Transactions -
Bayou Caddy Agreement."
The Company may receive approximately $1,527,250 from certain Selling
Stockholders upon the exercise of options for which the underlying shares are
being registered hereunder. However, there can be no assurance that any or all
of such options will be exercised particularly since the Company cannot redeem
or cancel such options to encourage their exercise. Should such options be
exercised, any proceeds derived therefrom will be used by the Company for
working capital purposes, which may include the repayment of debt and/or
payables, depending upon if and when any such funds are received. Based upon the
current market price of the Company's Common Stock and the exercise prices of
the options for which the underlying shares are being registered hereunder, the
Company does not anticipate that the Selling Stockholders will exercise such
options in the immediate future. See "Selling Stockholders."
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CERTAIN MARKET INFORMATION
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and its Redeemable Warrants are traded on the
Automated Quotation System of the National Association of Securities Dealers,
Inc. ("NASDAQ") and the Boston Stock Exchange under the symbols "ALHY" and
"ALHYW," and "ALH" and "ALHW." The following table sets forth the high and low
sale prices for Common Stock and Warrants as reported by NASDAQ.
COMMON STOCK WARRANTS
1996 QUARTERS HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
First $ 3 1/4 $2 3/8 $7/16 $1/8
1995 QUARTERS
First $6.875 $3.375 $9/16 $33/64
Second 4.250 2.250 3/8 3/16
Third 4.375 2.215 7/16 5/32
Fourth 6.125 4.00 9/16 5/16
1994 QUARTERS
First $18.251 $11.75 $7 $4 5/8
Second 13.325 5.265 4 1/8 1 1/4
Third 6.75 5.50 2 1/8 7/8
Fourth 7.50 4.625 1 1/4 5/8
As of June 17, 1996, 13,403,275 shares of Common Stock and no shares of
Preferred Stock of the Company were issued and outstanding. The outstanding
shares of Common Stock were held of record by approximately 800 persons
including ownership by nominees who may hold for multiple beneficial owners.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at March 31,
1996 and December 31, 1995, and as adjusted to reflect the satisfaction of the
obligations for which the Company Shares are being registered. This table should
be read in conjunction with the Consolidated Financial Statements of the Company
and the Notes thereto included herein (in thousands, except par values).
Actual and As Adjusted
---------------------------------------
March 31, December 31,
1996 1995
------ ------
(Unaudited)
Current portion of long-term debt $11,910,435 $27,319,666
Long-term debt, less current maturities $14,507,463 $2,311,751
Stockholders' Equity
Preferred Stock, $.01 par value,
authorized 1,000,000 shares; none issued
and outstanding $ -- $ --
Common Stock, $.01 par value,
authorized 17,000,000 shares; issued and
outstanding 12,702,308 and 12,354,482
shares at March 31, 1996 (unaudited) and
December 31, 1995, respectively $127,022 $123,544
Capital in excess of par value $36,478,691 $32,779,117
Common Stock subscribed $ -- $1,600,000
Accumulated deficit $(35,426,386) $(32,598,881)
Total Stockholders' equity $1,179,327 $1,903,780
Total capitalization $15,686,790 $4,215,531
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DIVIDEND POLICY
The Company has not paid any dividends, cash or otherwise, since its inception.
The Company plans to use earnings, if any, to fund growth and presently has no
intention to pay any cash dividends in the foreseeable future. Pursuant to the
terms of a loan to the Company currently held by Bryanston (the "Term Loan"),
the Company may not pay cash dividends without the consent of Bryanston until
the Term Loan is paid in full. See "Certain Transactions - Bryanston" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -Liquidity and Capital Resources."
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SELECTED FINANCIAL DATA
Period ended December 31, 1993 and years ended December 31, 1994 and 1995 and
the three months ended March 31, 1996.
(DOLLARS IN THOUSANDS)
March 19, 1993
Three Months (Date of Inception)
Ended to
March 31, Year Ended December 31, December 31,
--------- ------------------------ ------------
1996 1995 1994 1993
---- ---- ---- ----
(unaudited)
Revenues $13,668 $30,520 $46,100 $877
Net Loss $(2,828) $(17,994) $(9,901) $(4,705)
Loss per common share $(0.22) $(1.69) $(.97) $(.53)
March 31, December 31,
--------- --------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(Unaudited)
Total assets $65,251 $66,773 $45,490 $47,201
Long-term debt $26,418 $29,631 $20,100 $24,874
Mandatorily redeemable
common stock $ -- $ -- $565 $ --
Stockholders' equity $1,179 $1,904 $13,143 $11,882
SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL STATEMENTS.
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BUSINESS
Alpha Hospitality Corporation (the "Company"), through its seven subsidiaries,
is engaged in (i) the ownership and operation of two gaming vessels [the first
being the Bayou Caddy's Jubilee casino (the "Jubilee Casino"), located in
Greenville, Mississippi, which is operated by the Company's subsidiary Alpha
Gulf Coast, Inc. ("Alpha Gulf"), and the second being the Jubilation casino (the
"Jubilation Casino"), located in Lakeshore, Mississippi, which is operated by
the Company's subsidiary Jubilation Lakeshore, Inc. ("Jubilation Lakeshore"),
formerly known as the Cotton Club of Greenville, Inc. (the "Cotton Club")], (ii)
the pursuit of gaming licenses for additional casinos in various states (which
is accomplished through the Company's subsidiaries Alpha Missouri, Inc. ("Alpha
Missouri"), Alpha Monticello, Inc. ("Alpha Monticello"), Alpha Rising Sun, Inc.
("Alpha Rising Sun") and Alpha St. Regis, Inc. ("Alpha St. Regis"), and (iii)
the provision of management services to hotels owned by third-parties (which is
conducted through the Company's subsidiary Alpha Hotel Management Company, Inc.
("Alpha Hotel")).
The Company was incorporated in Delaware on March 19, 1993, Alpha Gulf was
incorporated in Delaware on May 4, 1993, Jubilation Lakeshore was incorporated
in Mississippi on December 8, 1992, Alpha Missouri was incorporated in Delaware
in Delaware on March 17, 1995, Alpha Monticello was incorporated in Delaware on
May 30, 1996, Alpha Rising Sun was incorporated in Delaware on August 6, 1993,
Alpha St. Regis was incorporated in Delaware on June 24, 1994, and Alpha Hotel
was incorporated in Delaware on March 19, 1993. The Company's principal
executive offices are located at 12 East 49th Street, New York, New York, 10017
and its telephone number is 212-750-3500.
CASINO OPERATIONS
CURRENT OPERATIONS
THE JUBILATION CASINO
The Jubilation Casino, located in Lakeshore, near Waveland, Hancock County,
Mississippi on the Gulf of Mexico, is owned and operated by the Company's
wholly-owned subsidiary, Jubilation Lakeshore. In October 1995, the Company
consummated the Cotton Club Acquisition through which it acquired the Jubilation
Casino and certain additional assets that support its operation, including
leasehold interests incidental to the ownership of the Jubilation Casino
relating to its original location in Greenville, Mississippi. Specifically, the
Company acquired 100% of the outstanding stock of Cotton Club, existing
shareholder notes in the amount of approximately $8 million and certain
additional assets of affiliates of Cotton Club, which support its current casino
operation. The Company paid to the shareholders of Cotton Club $2,404,898 in
cash and $3,293,020 in notes and transferred $4,500,000 worth of its Common
Stock, consisting of 782,609 shares valued at $5.75 per share, as determined by
the closing bid price of the Common Stock as of the day prior to the closing of
the transaction. Prior to the Cotton Club Acquisition, the Company applied for
and received the required license renewals and approvals from the Mississippi
Commission. The operation of the Jubilation Casino is subject to state and local
regulation. See "Business - Government Regulation - Licensing - Mississippi."
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Following the consummation of the Cotton Club Acquisition, the Jubilation Casino
was moved from Greenville to Lakeshore, where it reopened on December 21, 1995.
The Jubilation Casino operates Las Vegas-style gambling with a variety of slot
machines, craps, roulette, blackjack and other table games. The Jubilation
Casino is an ocean-going vessel that was renovated for gaming purposes in 1993
and currently has 550 slot machines and 11 table games. The Jubilation Casino is
located within a 300-mile radius of approximately 3,300,000 people and is the
closest Mississippi dockside gaming establishment to the New Orleans
metropolitan area, being approximately 50 miles from the center of New Orleans.
A substantial portion of the New Orleans target population is located in its
eastern suburbs which are considerably closer to the Jubilation Casino than
central New Orleans.
Management believes that the Cotton Club Acquisition and the subsequent
relocation of the Jubilation Casino to Lakeshore were consistent with its
strategy to maximize the profitability of its gaming assets. In particular,
management believed that the smaller Jubilation Casino can adequately service
the existing Lakeshore market with substantially reduced cost of operations.
However, based upon the Jubilation Casino's limited capacity, remote location
and the increasing casino development in the Biloxi and Gulfport markets
(which have proven more attractive to casino patrons), it is uncertain that
the casino will be able to overcome current operating deficits. To overcome
such operating deficits, the Company would have to construct additional
amenities which would require a substantial investment of funds. If such
operating deficits continue, as is expected by management, the Company may
close or sell the Jubilation Casino. The Company has had preliminary
discussions with potential purchasers of the Jubilation Casino but has not
entered into any verbal or written definitive agreements. These discussions
are ongoing and no assurance can be given that such discussions will be
successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THE JUBILEE CASINO
The Jubilee Casino, located in Greenville, Mississippi, is owned and operated by
the Company's wholly-owned subsidiary Alpha Gulf. On May 14, 1993, pursuant to
an asset purchase agreement among Alpha Gulf, B.C. of Mississippi, Inc. ("B.C.")
(formerly known as Bayou Caddy, Inc.), and certain shareholders of B.C., the
Company acquired B.C.'s leasehold interests under certain lease agreements and
certain other assets incidental to the development and ownership of the Jubilee
Casino. The Company proceeded with this acquisition because it gave the Company
the opportunity to enter the casino business in Lakeshore, Mississippi, the
original site of the Jubilee Casino. Moreover, B.C. had already initiated the
process of obtaining requisite approvals for casino operation in Lakeshore,
thereby expediting the Company's ability to conduct casino operations in
Mississippi. See "Certain Transactions - Bayou Caddy Acquisition."
The Company initiated the Jubilee Casino's gaming operations on January 12,
1994, subsequent to its construction on a marine vessel in 1993, which
construction received the requisite approvals from the U.S. Army Corps of
Engineers and the Mississippi Department of Natural Resources. Prior to the
initiation of the Jubilee Casino's gaming operations, the Company applied for
and received the required license renewals and approvals from the Mississippi
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Commission. See "Business - Government Regulation - Licensing - Mississippi."
Following the Cotton Club Acquisition, the Company transferred the Jubilee
Casino from Lakeshore to Greenville. The Jubilee Casino reopened in Greenville
on November 17, 1995. The movement of the Jubilee Casino to Greenville increased
the capacity at Greenville and brought an upscale facility to the Greenville
market. Management believed that the relocation of the Jubilee Casino to
Greenville was an appropriate action designed to increase the return on the
Company's gaming assets in Mississippi.
The Jubilee Casino has 838 slot machines and 29 table games. In addition to its
gaming activities, the Jubilee Casino includes a 175 seat buffet, a 350 seat
showroom, a 98 seat restaurant and parking to accommodate 950 customer vehicles.
In January 1996, the Company completed renovation of its leased restaurant
facility at Greenville in order to give customers a dining alternative, offering
fine dining in an elegant setting. Management believes that the Jubilee Casino,
which offers an attractive casino environment and significant casino capacity,
will be able to capture a significant portion of the Greenville market. In
addition, the Company believes that its management's experience, together with
ongoing entertainment and promotional efforts, will enable it to expand the
market for the Jubilee Casino to areas outside of Greenville.
DEVELOPMENT ACTIVITIES
NEW YORK
In March 1994, the Company entered into a joint venture agreement relating to
the operation and development of a gaming facility located on the reservation of
the St. Regis Mohawk Tribe of Hogansburg, New York (the "Tribe"). The Company
does not intend to proceed with the project at Hogansburg, New York since the
Company and the Tribe are exploring a more suitable arrangement relating to the
development of a casino in Sullivan County, New York, as discussed below.
On January 19, 1996, the Company, through its subsidiary, Alpha St. Regis,
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 the Company's subsidiary,
Alpha Monticello. It is intended that the casino will be owned by the Tribe and
will be located on land to be placed in trust for the benefit of the Tribe. The
Monticello Raceway is located 90 miles from New York City. The projected casino
would be the closest casino to the metropolitan New York City area.
The casino project is subject to approval by the U.S. Department of the Interior
and its Bureau of Indian Affairs, the National Indian Gaming Commission and the
Governor of the State of New York, as well as the execution of definitive
agreements with the Tribe. It is contemplated that the Company will be required
to contribute an amount preliminarily estimated at $250,000 toward the design,
architectural and other costs of developing plans for the casino. Under the
memorandum of understanding, Catskill and the Company commit to enter into a
definitive agreement on the terms established in the memorandum, but there can
be no assurance that such
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an agreement will ever be consummated. Bryanston is a 25% member of Catskill.
The casino project is also subject to Catskill, the prospective purchaser of the
225 acre Monticello Raceway, consummating the acquisition of the raceway. If the
acquisition is consummated, Catskill plans to continue Monticello's racing
program and to explore other development at the site in addition to the St.
Regis Mohawk Casino.
MISSOURI
In February 1995, the City of Louisiana, Missouri, designated the Company as the
exclusive designee to enter into negotiations with the city to develop a
riverboat gaming facility at the city's Mississippi River shoreline. The City of
Louisiana is currently competing with other cities in Missouri for the next
gaming license to be granted in the state. In the event that the state gaming
authorities select Louisiana, Missouri as the locality to receive the next
gaming license to be granted, the Company, as the city's exclusive designee,
would be the recipient of such license. Consequently, the Company's wholly-owned
subsidiary Alpha Missouri entered into a lease agreement with the City of
Louisiana relating to certain city-owned riverfront property required for the
project. Except for certain preliminary payments to the city, the Company's
obligation under the lease are conditioned on the grant a gaming license by the
Missouri gaming authorities.
Alpha Missouri has submitted to the Missouri Commission the initial applications
for site approval and a gaming license. The Missouri Commission conducted
meetings with the Company in the first quarter of 1996 at which time the Company
presented its project for priority consideration. There are no objective
criteria which the Missouri Commission is required to follow in making its
determinations. However, based upon discussions with the Missouri Commission,
the Company does not anticipate receiving a final determination with respect to
its license application within the next twelve months. See "Risk Factors -
Licensing and Regulation."
The City of Louisiana is located approximately 60 miles north of metropolitan
St. Louis and 70 miles from Springfield, Illinois, that state's capital.
The Company anticipates that it will provide a gaming vessel with a capacity of
approximately 750 gaming positions. The project cost is presently expected to be
approximately $20 million.
COLORADO
On January 25, 1995, the Company entered into an agreement to acquire all of the
outstanding common stock of Doc Holliday, Inc. ("Doc Holliday"), the owner and
operator of an 18,000 square foot casino in Central City, Colorado. In the fall
of 1995, the Company filed the requisite forms with the Colorado Division of
Gaming for approval of the Company's operation of Doc Holliday's casino in
Central City, Colorado. Since the Company's due diligence investigation revealed
that the acquisition was not in the best interests of the Company, in early 1996
the Company decided not to proceed with the acquisition and exercised its
contractual right to terminate the agreement.
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INDIANA
In February 1995, Alpha Rising Sun entered into two letters of intent with
subsidiaries of Bally Entertainment Corporation ("Bally") to develop and manage
a proposed casino and related upland development at the City of Rising Sun.
Therefore, the Company, through its subsidiary Alpha Rising Sun, filed an
application for a riverboat gaming license for the County of Ohio, City of
Rising Sun, with the Indiana Gaming Commission in the first quarter of 1994.
Since the license was awarded to another entity, the Company has discontinued
its efforts to expand its casino operations in Indiana. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MARKETING
The Company concentrates its sales, marketing and promotional activities for the
Jubilee Casino and the Jubilation Casino in target markets within 50 mile radii
of each casino. Target markets (such as New Orleans, the communities on the
north shore of Lake Pontchartrain, Baton Rouge, the Gulf Coast and central
Mississippi for the Jubilation Casino) are reached through a combination of
billboards, radio, television, newspaper advertising, and direct mail. Also,
casino brochures are placed in tourist information areas, local and regional
hotels, restaurants and bars.
The Company has developed an in-house mailing list in excess of 225,000 casino
customers. These customers are made up of table game players and "Slot Club"
members. Table game customers are identified through the casino's marketing
representatives and their play is monitored to evaluate whether the customer
warrants complimentary services provided by the casino. The award of
complimentary services is consistent with standard industry practices and is
based upon a customer's duration of play and average amount wagered. The "Slot
Club" is an operation which allows the casino's computerized tracking system to
identify customers, amount of play and other pertinent characteristics. The
"Slot Club" is an ongoing promotion where members are issued cards and
accumulate points based on the amount of their play. Such points are redeemable
for food, beverages or merchandise. Tournaments for blackjack, craps and poker
are held, along with other special events and promotions.
The Company has established a bus program at the Jubilee Casino in order to
facilitate travel to the casino from areas within a reasonable distance from the
casino. The Company markets its bus program to generate business in areas
extending both within and beyond the 150-mile radius of concentrated
advertising. The marketing department coordinates with various tour groups,
travel agencies and junket representatives who develop regular scheduled and
chartered bus service to bring customers to the Jubilee Casino on a 24-hour
basis.
In addition, the Company has erected a 100-foot Las Vegas-style sign on leased
property fronting Highway 90 in Hancock County, Mississippi, directing customers
to the Jubilation Casino.
The Company has made ongoing efforts to maintain and upgrade its gaming vessels
so that the vessels are competitive in the industry. See "Business - Current
Operations."
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COMPETITION
The Company believes that the sources of the Jubilation Casino's primary
competition are the numerous existing gaming operations on the Gulf Coast of
Mississippi and various operations established in Louisiana. Many of these
competitors are larger in terms of their size and number of gaming facilities
and are located in more advantageous sites than the Company's Jubilation Casino.
Secondary riverboat competition exists from current gaming operations in
Natchez, Vicksburg, Greenville, Coahoma County and Tunica, Mississippi. Gaming
has also been established on Indian reservations in Louisiana and Mississippi.
The Choctaw Indians in late summer of 1994, opened a land-based casino located
on their reservation near Philadelphia, Mississippi, which is approximately 200
miles north of the Gulf Coast. In early 1995, the Grand Casino Coushatta near
Lake Charles, Louisiana opened with full scale Las Vegas-style gaming.
There are currently 12 dockside gaming operations on the Mississippi Gulf Coast.
Eight of these operations -- Isle of Capri, President, Casino Magic Biloxi, Lady
Luck, Grand Casino Biloxi, Palace, Treasure Bay Biloxi and Boomtown -- are
located in Biloxi, approximately 30 miles east of the Jubilation Casino. Grand
Casino Gulfport and Copa Casino are located in Gulfport which is approximately
22 miles east of the Jubilation Casino. Approximately 10 miles east of the
Jubilation Casino is Bay St. Louis where the Casino Magic is located. The
casinos located on the Mississippi River are at least 150 miles from the
Jubilation Casino and are not considered direct competition to the Jubilation
Casino.
There are currently 16 casinos located on the Mississippi River. Next to the
Jubilee Casino is the Las Vegas Casino. Currently, there is a proposed casino
project which will be located north of the Jubilee Casino. This proposed casino
project has not at this time received the necessary governmental approvals.
Management believes that if this project is completed it will impact current
revenue levels being realized at the Jubilee Casino. Approximately 90 miles
south of Jubilee Casino is Vicksburg. Vicksburg has four casinos: the Isle of
Capri, Harrahs Vicksburg, Ameristar, and Rainbow Casino. Approximately 90 miles
north of the Jubilee Casino is Coahoma County with the Lady Luck Coahoma Casino.
Tunica County is approximately 180 miles north of the Jubilee Casino and has
eight casinos - Harrahs Tunica, Sams Town, Fitzgeralds, Sheraton, Hollywood
Casino, Circus Circus, Horseshoe Casino and Ballys. Since casinos within a 90 or
180 mile radius of the Jubilee Casino are not considered by the Company to be
within its competitive market, the Company does not deem the casinos in
Vicksburg, Coahoma County, or Tunica County to be among its competitors.
The Company remains competitive in the markets affecting the Jubilee Casino and
the Jubilation Casino by keeping its gaming vessels well-maintained and by
offering superior accommodations, entertainment programs and special events. In
addition, the Company's advertising and marketing efforts help maintain the
Company's presence in each of such markets.
The Mississippi Gaming Control Act (the "Mississippi Act") does not limit the
number of licenses that may be granted for an area, however, development
throughout the state has slowed considerably. The Company believes that few, if
any, new casinos will open on the Mississippi Coast, or if they do, such casinos
will open in the Biloxi area since historically, casino development on the
Mississippi Coast occurs in the Biloxi Coast, which is not in the Company's
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primary market. Although any increase in supply in the general area dilutes the
market, the Company believes that only two of the proposed New Orleans area
facilities provide competition in the Company's primary target market.
Louisiana approved unlimited stakes riverboat gaming in 1993 and set aside up to
15 licenses for issuance. The first of the New Orleans area riverboats opened in
December 1993. A land-based casino in downtown New Orleans was also approved and
its temporary facility opened in May 1995. That casino closed in December 1995
and filed for protection from creditors under Chapter 11 of the Bankruptcy Act.
The Company understands that there are on-going discussions between the owner of
the New Orleans casino, the State of Louisiana, City of New Orleans, and the
casino's bondholders concerning the possible reorganization of that casino.
SEASONAL FLUCTUATIONS
The results of the casinos' operations have been seasonal, with the greatest
activity occurring during the fair weather months of May through September.
Consequently, the Company's operating results during the calendar quarters ended
in December and March are not as profitable as those quarters ending in June and
September, and losses result from time to time. The seasonal nature of the
casinos' operations increases the risk that natural disasters or the loss of the
casinos for any other reason during the May through September period would have
a material adverse effect on the Company's financial condition and results of
operations.
GOVERNMENT REGULATION
GENERAL
The Company's ownership and operation of its properties are subject to
regulation by federal, state and local governmental and regulatory authorities,
including regulation relating to environmental protection. While the Company has
not been the subject of any complaints or other formal or informal proceedings
alleging any violations of government regulations, no assurance can be given
that the Company is, or in the future will be, able to comply with, or continue
to comply with current or future governmental regulations in every jurisdiction
in which it conducts or will conduct its business operations without substantial
cost or interruption of its operations, or that any present or future federal,
state or local regulations may not restrict the Company's present and possible
future activities. In the event that the Company is unable to comply with any
such requirements, the Company could be subject to sanctions, which could have a
materially adverse effect upon the Company's business. See "Business -
Government Regulation - General," and "Business - Casino Operations - Current
Operations."
LICENSING
The gaming industry is highly regulated by each of the states in which gaming is
legal. The regulations vary on a state by state basis, but generally require the
operator, each owner of a substantial interest (usually 5% or more) in the
operator, members of the Board of Directors, each officer and all key personnel
found suitable, and be approved, by the applicable governing body. The failure
of any present, or future, person required to be approved to be, and remain
qualified to hold a license could result in the loss of license.
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MISSISSIPPI
GENERAL
The ownership and operation of casino facilities in Mississippi are subject to
extensive state and local regulation, primarily the licensing and regulatory
control of the Mississippi Commission and the Mississippi State Tax Commission
(collectively, the "Mississippi Authorities").
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Authorities; (iv) prevent cheating
and fraudulent practices; (v) provide a source of state and local revenues
through taxation and licensing fees; and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and to extensive interpretation by the Mississippi
Commission in view of their recent adoption. Changes in Mississippi law or
regulations may limit or otherwise materially affect the types of gaming that
may be conducted and could have an adverse effect on the Company and the
Company's Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the 14 counties that either border the Mississippi Gulf Coast or the Mississippi
River, but only if the voters in such counties have not voted to prohibit gaming
in that county. As of January 1, 1996, dockside gaming was permissible in 9 of
the 14 eligible counties in the state and gaming operations had commenced in
Adams, Hancock, Harrison, Tunica and Warren counties. The law permits unlimited
stakes gaming on permanently moored vessels on a 24-hour basis and does not
restrict the percentage of space that may be utilized for gaming. There are no
limitations on the number of gaming licenses that may be issued in Mississippi.
REGISTRATION AND LICENSING
The Company, a registered publicly-traded holding company under the Mississippi
Act, is required periodically to submit detailed financial and operating reports
to the Mississippi Authorities and to furnish any other information that the
Mississippi Authorities may require. The Company and any subsidiary of the
Company that operates a casino in Mississippi (a "Gaming Subsidiary"), is
subject to the licensing and regulatory control of the Mississippi Commission.
If the Company is unable to continue to satisfy the registration requirements of
the Mississippi Act, the Company and its Gaming Subsidiaries cannot own or
operate gaming facilities in Mississippi. Each Gaming Subsidiary must obtain
gaming licenses from the Mississippi Commission to operate casinos in
Mississippi. A gaming license is issued by the Mississippi Commission subject
to certain conditions, including continued compliance with all applicable state
laws and regulations and physical inspection of casinos prior to opening. A
license for the operation of each of the casinos was granted by the Mississippi
Commission.
Gaming licenses are not transferable, are initially issued for a two-year period
and are subject
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to periodic renewal. No person may receive any percentage of profits from a
gaming subsidiary of a holding company without first obtaining licenses and
approvals from the Mississippi Commission.
LICENSING OF OFFICERS, DIRECTORS AND EMPLOYEES
Officers, directors and certain key employees of the Company and its Gaming
Subsidiaries must be found suitable or be licensed by the Mississippi
Commission, and employees associated with gaming must obtain work permits that
are subject to immediate suspension under certain circumstances. In addition,
any person having a material relationship or involvement with the Company may be
required to be found suitable or be licensed, in which case those persons must
pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a license for any cause that it deems
reasonable. Changes in licensed positions must be reported to the Mississippi
Commission. In addition to its authority to deny an application for a license,
the Mississippi Commission has jurisdiction to disapprove a change in corporate
officers. The Mississippi Commission has the power to require any Gaming
Subsidiary and the Company to suspend or dismiss officers, directors and other
key employees or sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities.
INVESTIGATION OF HOLDERS OF SECURITIES AND OTHERS
Mississippi law requires any person who acquires beneficial ownership of more
than 5% of the Common Stock to report the acquisition to the Mississippi
Commission, and such person may be required to be found suitable. Also, any
person who becomes a beneficial owner of more than 10% of the Common Stock, as
reported in filings under the Exchange Act, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a company's
stock. If a stockholder who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial
information, including a list of beneficial owners. Representatives of the
Mississippi Commission have indicated that institutional investors may only be
required to file summary information in lieu of a suitability finding.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Any person found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the securities of the
Company beyond such time as the Mississippi Commission prescribes, may be guilty
of a misdemeanor. The Company is subject to disciplinary action if, after
receiving notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its Gaming Subsidiaries, the Company:
(i) pays the unsuitable person any dividend or other distribution upon the
voting securities of the Company; (ii) recognizes the exercise, directly or
indirectly, of any voting rights conferred by securities held by the unsuitable
person; (iii) pays the unsuitable person any remuneration in any form for
services rendered or otherwise, except in certain limited and specific
circumstances; or (iv) fails to pursue all lawful efforts to require the
unsuitable person to divest himself of the securities, including, if necessary,
the
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immediate purchase of the securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any debt securities. In addition, the
Mississippi Commission under the Mississippi Act may, in its discretion, (i)
require disclosure of holders of debt securities of corporations registered with
the Mississippi Commission, (ii) investigate such holders, and (iii) require
such holders to be found suitable to own such debt securities. Although the
Mississippi Commission generally does not require the individual holders of
obligations such as notes to be investigated and found suitable, the Mississippi
Commission retains the discretion to do so for any reason, including but not
limited to a default, or where the holder of the debt instrument exercises a
material influence over the gaming operations of the entity in question. Any
holder of debt securities required to apply for a finding of suitability must
pay all investigative fees and costs of the Mississippi Commission in connection
with such an investigation.
REQUIRED RECORDS
The Company must maintain a current stock ledger in Mississippi that the
Mississippi Commission may examine at any time. If any securities of the
Company are held in trust by an agent or by a nominee, the record holder may be
required to disclose the identity of the beneficial owner to the Mississippi
Commission. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company must also render maximum assistance in
determining the identity of the beneficial owner.
The Mississippi Act requires that the certificates representing securities of a
publicly-traded corporation (as defined in the Mississippi Act) bear a legend to
the general effect that such securities are subject to the Mississippi Act and
the regulations of the Mississippi Commission. The Mississippi Commission has
the power to impose additional restrictions on the holders of the Company's
securities at any time.
APPROVAL OF CORPORATE MATTERS AND FOREIGN GAMING OPERATIONS
Substantially all loans, leases, sales of securities and similar financing
transactions by a Gaming Subsidiary must be reported to or approved by the
Mississippi Commission. Changes in control of the Company through merger,
consolidation, acquisition of assets, management or consulting agreements or any
form of takeover cannot occur without the prior approval of the Mississippi
Commission.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other takeover
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly-traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company
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may make exceptional repurchases of voting securities above the current market
price of its Common Stock (commonly called "greenmail") or before a corporate
acquisition opposed by management may be consummated. Mississippi's gaming
regulations will also require prior approval by the Mississippi Commission if
the Company adopts a plan of recapitalization proposed by its Board of Directors
opposing a tender offer made directly to the stockholders for the purpose of
acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Authorities to have access to information concerning the out-of-
state gaming operations of the Company and its affiliates.
SANCTIONS
If the Mississippi Commission were to decide that a Gaming Subsidiary had
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Gaming Subsidiary. In addition,
the Gaming Subsidiary, the Company and the persons involved could be subject to
substantial fines for each separate violation. Because of such violation, the
Mississippi Commission could appoint a supervisor to operate the casino
facilities, and, under certain circumstances, earnings generated during the
supervisor's appointment (except the reasonable rental value of the casino
facilities) could be forfeited to the State of Mississippi. Limitations,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company's and the Gaming Subsidiary's gaming operations.
FEES AND TAXES
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which a Gaming Subsidiary's operations will be conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon (i) a percentage of the gross gaming
revenues received by the casino operation, (ii) the number of slot machines
operated by the casino or (iii) the number of tables games operated by the
casino. The license fee payable to the State of Mississippi based upon "gaming
receipts" (generally defined as gross receipts less payouts to customers as
winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6% of
gaming receipts over $50,000 and less than $134,000 per month, and 8% of gaming
receipts over $134,000. The foregoing license fees are allowed as a credit
against the Company's Mississippi income tax liability for the year paid.
MISSOURI AND NEW YORK
Missouri law and the Federal Indian Gaming Law (as it relates to the Company's
proposed operation in New York), each provide for a comprehensive, detailed
scheme for the control of gaming operations in the state and the issuance of
licenses for gaming, both to gaming facilities and to persons involved in
certain gaming related activities. With respect to the Company's compact with
the Tribe relating to the proposed casino to be built in Sullivan County, New
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York, the State of New York has provided for regulation of Indian gaming casinos
through the New York State Racing and Wagering Board. Each of the supervising
governmental agencies is authorized to promulgate rules and regulations
applicable to the administration of gaming related laws.
In connection with its proposed operations in Missouri, the Company has
commenced the application and approval process with the Missouri Gaming
Commission. The Company does not anticipate receiving a final determination
with respect to its license application within the next twelve months. In
connection with its proposed operations in New York, the Company is preparing
the documentation required to be filed with the National Indian Gaming
Commission.
HOTEL OPERATIONS
GENERAL
Through Alpha Hotel, the Company provides Management Services to sixteen (16)
hotels or motels. The Company provides Management Services to fourteen (14) of
such hotels or motels primarily under Service Agreements with Bryanston. The
Company provides Management Services to these fourteen (14) hotels on behalf of
Bryanston (which is 50% owned by Mrs. Beatrice Tollman, the spouse of the
Company's Chairman and co-Chief Executive Officer, and 50% owned by a trust for
the benefit of a child of Mr. Monty D. Hundley, the Company's former President
and co-Chief Executive Officer), pursuant to individual Management Agreements.
The rights to provide the Management Services were acquired by the Company in
partial consideration for the issuance of the Company's Common Stock to
Bryanston. Such rights were recorded by the Company at no cost to the Company
based on its predecessor's cost, which was $0. Pursuant to the Service
Agreement, the Company is the sole provider to such hotels of Management
Services required of Bryanston, and receives substantially all fees due to
Bryanston under the Management Agreements. In addition, the Company provides
Management Services to two (2) hotels located in Myrtle Beach, South Carolina
and Branson, Missouri, respectively, under agreements with the hotel's
respective owners. All of the sixteen (16) hotels are "mid-priced," ranging
between $40 and $70 per night, and all but two are operated as Days Inns.
The Company and Bryanston have designed a financial management system whereby
all accounting information is processed in a centralized accounting office in
Hopewell Junction, New York. The system includes management of all cash,
accounts payable and receivable, and generates detailed monthly financial
statements. The Company provides each property with standardized forms and
procedures in order that all accounting in the management system is uniform. In
connection with the Service Agreement, effective September 1, 1993, the Company
entered into an expense reimbursement agreement (the "Expense Reimbursement
Agreement") with Bryanston for the use of certain office space at its Hopewell
Junction, New York facility in connection with the Company's hotel management
operations. Pursuant to the terms of the Expense Reimbursement Agreement, the
Company reimburses Bryanston on a monthly basis for its share of rent, office
expenses and direct payroll. The Expense Reimbursement Agreement allows for
cost-effective centralization and management of the Company's operations, partly
based on the Service Agreement and partly based on the fact that Bryanston,
which employs some of the Company's employees, is also based at the Hopewell
Junction office. See "Certain
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Transactions" and "Management."
Under the Service Agreement, the Company is compensated for its services in an
amount equal to a percentage of total net revenues of the managed hotels (net of
1% of aggregate revenue retained by Bryanston). Such percentages range from 2%
to 5%. Additional fees are earned from various incentive agreements and
accounting fees. The Management Agreements typically have a term of 10 years
and most have specified renewal terms. The majority of the initial terms expire
between 1996 and the year 2000, four of which expire in 1996 (one in June, two
in October and one in December). The Company is currently negotiating the
renewal of the agreement that expires in June, which the Company expects will be
renewed. The Company has not yet initiated negotiations regarding the renewal
of the remaining three agreements that expire in the fall of 1996. The
Management Agreements contain termination provisions that are consistent with
hotel industry practice and may be terminated by either party due to an uncured
default by the other party. One of the Management Agreements is terminable at
the discretion of the hotel owner and others are terminable if there is a
material decrease in the hotel operating results or upon sale of the property.
Management Agreements may also be terminated upon the sale of the managed
hotels. Since January 1, 1991, eight Management Agreements have been
terminated, six of which were terminated due to the sale of the subject hotels
and two of which were terminated due to the conversion of the subject hotels to
different hotels. In all eight cases the new owners exercised their rights to
terminate the agreements upon the occurrence of the above-stated events.
As indicated above, many of the managed hotels are operated as Days Inns by
arrangement with Bryanston, which is a Days Inns licensee. The terms of
Bryanston's license provide for a special, partial exemption from the Days Inns
license fees, which is ordinarily 8% of total net revenue for each of the hotels
for which the Company provides management services. Each of the managed hotels
is charged applicable fees for marketing and reservation service, but is exempt
from the so-called "basic fee" of 5% since the elimination of the "basic fee"
reduces the license fee to 3%, such reduction is economically significant to
such hotels, and is favorable to the Company since the arrangement acts is an
incentive for Days Inn licensees to enter into management agreements with the
Company. The term of the special exemption is equal to the term of the related
Management Agreement, including any extensions for which provision is made
therein, plus a further five-year term (intended to cover a possible future
extension). The discount is not available, however, for any hotels other than
those hotels currently operated by Bryanston. There is no discretion in the
licenser, absent breach, to eliminate or modify the discount.
The Company's hotel management operations are organized under a regional
management structure. The overall hotel operation is supervised by the
president of Alpha Hotel and regional executives are utilized to oversee and
monitor the operations. The Company believes this type of organization, coupled
with extensive operational systems and procedures, is the most effective way to
provide management services for the hotels. In addition to the regional
managers, the Company has a support staff comprised of accounting, marketing,
sales and supervisory personnel. This comprehensive support staff helps ensure
that all of the managed hotels maximize potential revenue and profit
opportunities by implementing financial controls, marketing the Company's
services to existing and potential clients, and advising on programs related to
hotel management services.
35
<PAGE>
The fifteen hotels for which the Company currently provides Management Services
are:
<TABLE>
<CAPTION>
MANAGEMENT
NUMBER AGREEMENT RENEWAL
OF TERMINATION TERMINATION
NAME AND LOCATION ROOMS DATE DATE
----------------- ----- ------- ---------
<S> <C> <C> <C>
Days Inn-Scottsdale, Scottsdale, AZ 167 2001 None
Days Inn-Clearwater, Clearwater, FL 117 2001 None
Days Inn-Buena Vista, Orlando, FL 245 1996 2001
Days Inn-Downtown, Atlanta, GA 262 2012 2022
Days Inn-Savannah, Savannah Bay, GA 253 1996 2001
Days Inn-Lakeshore, Chicago, IL 580 2006 2021
Days Inn-Kankakee, Kankakee, IL 98 2007 None
Days Inn-Henderson, Henderson, KY 115 2002 None
Days Inn-Inner Harbor, Baltimore, MD 251 1996 2016
Days Inn-University, Minneapolis, MN 130 2001 None
Days Inn-Roseville, Roseville, MN 114 2001 None
Days Inn-Plymouth, Plymouth, MN 113 2001 None
Days Inn-Butler, Butler, PA 133 1996 2011
Days Inn-Madisonville, Madisonville, KY 141 2002 None
Sheraton - Myrtle Beach, SC 219 2004 None
Peachtree Inn - Branson, MO 65 2001 2006
-----
3,003
-----
-----
</TABLE>
The Company is seeking additional management contracts directly with hotel
owners who own properties in appropriate locations, allowing the Company to
expand and benefit from the limited incremental costs of adding additional
management activities. To date, the Company has only engaged in preliminary
negotiations with such hotel owners.
36
<PAGE>
SIGNIFICANT CLIENTS
Fourteen of the hotels for which the Company provides Management Services are
owned by five companies. These five companies accounted for 22.6%, 18.5%,
17.1%, 17.0% and 12.7% of Alpha Hotel's revenues in its most recent fiscal year.
The Management Agreements contain termination provisions which are consistent
with hotel industry practice and may be terminated by either party due to an
uncured default by the other party. One of the management agreements relating
to five hotels, which accounted for 17.0% of Alpha Hotel's 1995 revenues, was
terminated in 1995 due to the sale of the subject hotel and the new owner's
termination of the agreement, as permitted by the terms of the agreement. The
remaining Management Agreements are terminable if there is a material decrease
in the hotel's operating results and are all terminable on a sale of the
property. In the first quarter of 1996, the Company entered into Management
Agreement to manage a hotel in Branson, Missouri. If additional management
agreements are not obtained during the remainder of 1996, future revenues of
Alpha Hotel will be impacted adversely. In addition, because substantially all
of the Company's current hotel management clients are sub-contracted through
Bryanston, any failure on the part of Bryanston to continue its business
operations or to maintain its Management Agreements would adversely affect the
business, financial condition and results of operations of the Company.
COMPETITION
There are many hotel management companies that provide management services to
hotels similar to the services provided by the Company. Many of such companies
are larger and better capitalized and have more experience in the management of
hotels. However, the Company believes that its expertise in operating major
mid-market hotel licensees, economies of scale, its innovative marketing
strategies and favorable arrangements between Bryanston and the Days Inn
licensee will enable it to maintain a competitive position. The favorable
arrangements with Days Inn extend for the duration of the Service Agreement,
plus five years, and, absent breach, there is no discretion in the licenser to
eliminate or to modify the discount. The discount is not available, however,
for any hotels other than those hotels currently operated by Bryanston, which
may inhibit the Company's ability to attract additional management clients. See
"Business - Hotel Operations - General."
The Company's advertising and marketing strategies enable the Company to remain
competitive in the markets affecting its hotel operations. In addition, the
Company's reputation of providing competent management services help maintain
the Company's presence in this market. The terms of the Service Agreement also
enable the Company to offer competitive rates for its services. See "Business -
Hotel Operations - General".
MARKETING
The Company engages in marketing efforts at a national level and directs such
marketing activities toward a wide range of affiliated and non-affiliated hotel
facilities. The Company's marketing efforts for its hotel operations are
focussed on maintaining and expanding its existing client base. In order to
further develop existing accounts, as well as procure additional accounts, the
Company works to maintain and improve its relationships with its existing
clients. Besides actively soliciting business from these sources, the Company
makes efforts to maintain
37
<PAGE>
a public awareness of its management services.
SEASONAL FLUCTUATIONS
The hotel industry in general seasonal. Though the hotels that receive
Management Services from the Company are distributed through various regions of
the country, the revenues generated by such hotels are anticipated to be
typically lower in the first and fourth quarters of each year. Since fees
received by the Company are based on a percentage of the total net revenues
generated by such hotels, the Company's operations are susceptible to seasonal
variations.
EMPLOYEES
In connection with its casino operations, the Company employs approximately
1,065 employees, of which 908 are full-time employees. Management considers its
employment relations to be satisfactory.
In connection with its hotel operations, although not directly employed by the
Company, 1,030 individuals engaged in the operations of managed hotels are
employed by Bryanston and Atlantic Shore Resort, the owner of the hotel located
in Myrtle Beach, South Carolina, and are supervised by the Company.
Approximately 15% of the 951 Bryanston employees are unionized. The Company
believes that Bryanston's relations with its unions are satisfactory.
PROPERTIES
The Company maintains its executive office at leased premises located at 12 East
49th Street, New York, New York, 10017. This lease expires December 31, 2004.
38
<PAGE>
<TABLE>
<CAPTION>
CASINO OPERATIONS
LOCATION PRINCIPLE USE APPROXIMATE OWNED/LEASED EXPIRES
AREA
<S> <C> <C> <C> <C>
Hancock County Mooring site of 25 acres Leased July 21, 2001
Waveland, MS casino vessel with option to
extend 2 five
year terms
Hancock County Rights to 1,250 waterfront Leased December 31, 2003
Waveland, MS adjoining waters feet with option to
to the mooring extend five years
site of casino
vessel
Hancock County Sign location, 3 acres Leased April 30, 2003
Waveland, MS warehousing and with option to
parking purchase
Hancock County Accounting 1 acre Leased June 30, 1998
Waveland, MS office with option to
extend 3 five
year terms and
right of first
refusal to
purchase
Washington County Customer 2.0 acres Owned ----
Greenville, MS parking
Washington County Mooring site of 1,000 Leased December 29, 1997
Greenville, MS casino vessel waterfront feet with 3 extensions
of five years
each
Washington County Accounting 10,000 square Leased December 1, 1996
Greenville, MS offices and feet with option to
warehouse extend two
years
</TABLE>
The Company considers its property to be suitable and adequate for its present
needs. Although the terms and extensions of the lease relating to the mooring
site of the casino vessel in Waveland do not coincide with the lease relating to
the adjoining waters, the Company believes that it will be able to negotiate the
renewal of the lease relating to the adjoining waters with the State of
Mississippi, the lessor of such rights. See "Management's Discussion and
Analysis of
39
<PAGE>
Financial Condition and Results of Operations."
LEGAL PROCEEDINGS
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 with the Plaintiff. 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 under the same theory of liability. The Plaintiff is seeking
$20,000,000. 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 and the declaratory judgment action
instituted by the primary insurance carrier is subject to dismissal. In
addition, 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 $5,125,000, subject to completion of the settlement documents and
the approval of the court. However, a dispute remains between the Company and
the principal insurance carrier over payment of settlement amount, which dispute
may be litigated. Accordingly, no provision for any liability to the Company
that may result upon adjudication has been made in the accompanying consolidated
financial statements.
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 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.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CASINO OPERATIONS
MISSISSIPPI
On May 14, 1993, the Company acquired certain of the assets of B.C., including
B.C.'s leasehold interests under certain lease agreements, certain other assets
incidental to the development and ownership of the Jubilee Casino, and B.C.'s
interest in certain related license applications, approvals and permits. The
Jubilee Casino commenced gaming operations in Lakeshore, near Waveland, Hancock
County, Mississippi, on January 12, 1994. In October 1995, the Company
consummated the Cotton Club Acquisition, through which it acquired the
Jubilation Casino in its original location in Greenville, Mississippi.
Immediately following the Cotton Club Acquisition, the Company relocated the
Jubilee Casino to Greenville, and the Jubilation Casino to Lakeshore.
Management believed that these relocations were appropriate in order to increase
the return on the Company's gaming assets, since management believed that the
Jubilee Casino would better serve the larger Greenville market, and that the
Jubilation Casino would adequately serve the smaller Lakeshore market. The
Jubilee Casino reopened in Greenville on November 17, 1995, and the Jubilation
Casino reopened in Lakeshore on December 21, 1995.
RESULTS OF OPERATIONS - ALPHA GULF
The following table sets forth the statement of operations for the Alpha Gulf's
Jubilee Casino's operations before income taxes for the three months ended March
31, 1996 and for the years ended December 31, 1995 and 1994 and the period May
3, 1993 (date of inception) to December 31, 1993 (in thousands):
41
<PAGE>
<TABLE>
<CAPTION>
Period May 3, 1993
Year Ended (Date of Inception)
Three Months December 31,
ended March 31, -------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Casino $ 9,562 $25,713 $ 41,344 $ --
Food, beverage and other 276 1,122 1,921 19
------- ------ ------ -----
Total revenues 9,838 26,835 43,265 19
------- ------ ------ -----
Operating expenses:
Casino 3,227 14,933 20,989
Food, beverage and other 181 729 1,223
Selling, general and
administration 4,534 15,190 20,769 --
------- ------ ------ -----
Total operation expenses 7,942 30,852 42,981 --
------- ------ ------ -----
Income (loss) from
operations 1,896 (4,017) 284 19
------- ------ ------ -----
Other expenses:
Interest 510 2,178 2,317 375
Other non-operating 2,620 1,535 5,439
Depreciation and
amortization 1,229 4,161 3,763 -----
------- ------ ------ -----
Total other expense 1,739 8,959 7,615 5,814
------- ------ ------ -----
Loss before intercompany
charges and deferred
income tax credit $157 $ (12,976) $(7,331) $(5,795)
------- -------- ------ ---------
------- -------- ------ ---------
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1994:
Alpha Gulf generated revenues of $26,835,000 and $43,265,000 in 1995 and 1994,
respectively. The Jubilee Casino revenues were $25,713,000 and $41,344,000 in
1995 and 1994, respectively. Food, beverage, retail and other revenues were
$1,122,000 and $1,921,000 in 1995 and 1994, respectively. The Company
experienced declining revenues during the year ended December 31, 1995. To
overcome such declining revenues, management attempted many different marketing
programs, some of which showed moderate results. However, upon the acquisition
of the Jubilation Casino, and the leasehold interests incidental to the
ownership of the Jubilation Casino relating to its original location in
Greenville, Mississippi, the Company announced plans to relocate the Jubilee
Casino to Greenville so that the larger Jubilee Casino could better serve the
larger Greenville market, and thereby combat the declining revenues. This
relocation caused the Jubilee Casino to close for four weeks, reopening on
November 17, 1995 in Greenville. During its first six weeks of operations in
Greenville, the Jubilee Casino had casino revenues of $5,270,000 compared to
$3,787,000 of gaming revenue achieved by its predecessor's gaming
42
<PAGE>
vessel at this site during the same period in 1994.
Alpha Gulf's casino operating expenses were $14,933,000 and $20,989,000, for the
fiscal years ended December 31, 1995 and 1994, respectively, which amounts,
constituted 58% and 51% of casino revenues during each respective period. The
increase in casino expenses as a percentage of revenue (7%) was due to the
combination of the cost, payroll and overhead of food and beverage, provided
gratuitously to customers, not decreasing at the same rate as revenues (4%) and
other operating expenses not decreasing at the same rate as revenues (3%).
Food, beverage, retail and other expenses were $729,000 and $1,223,000 for the
fiscal years ended December 31, 1995 and 1994, respectively, which amounts
constituted 65% and 64% of food, beverage, retail and other revenues during each
respective period. Food and beverage revenue does not include the retail value
of food and beverage of approximately $3,514,000 and $4,884,000 provided
gratuitously to customers for the fiscal years ended December 31, 1995 and 1994,
respectively. The reduced casino expenses incurred in 1995 when compared to
1994 of approximately $6,000,000 was the results of the following factors, (i)
reduced gaming taxes of $1,876,000 due to reduced gaming revenue, and (ii)
management's reduction of staffing levels to more closely match the volume of
business. The reduction of food, beverage and other costs are directly related
to the reduced volume of business.
Selling, general and administrative expenses consists primarily of payroll and
related benefits of approximately $5,700,000 and $7,300,000, marketing and
advertising of approximately $4,200,000 and $6,200,000, and occupancy costs of
approximately $1,100,000 and $3,500,000 for the fiscal years ended December 31,
1995 and 1994, respectively. The reduced payroll and related costs of
$1,600,000 was a direct result of management's cost cutting measures instituted
during the first quarter of 1995. The $2,000,000 reduction in marketing and
advertising was principally the result of management focusing on marketing
programs that had previously demonstrated successful results and elimination of
unsuccessful programs. The reduction of occupancy costs of $2,400,000 is
primarily due to the renegotiated terms of the Lakeshore ground lease and
reduced insurance costs. Other non-operative expenses of $2,620,000, $1,535,000
and $5,439,000 for the fiscal years ended December 31, 1995, 1994, and 1993,
respectively, consist primarily of pre-opening and development costs.
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $4,161,000 and $3,763,000 in 1995 and 1994,
respectively. The increase was directly related to a corresponding increase in
capital expenditures.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995:
Alpha Gulf generated revenues of $9,838,000 and $6,553,000 in 1996 and 1995,
respectively. Casino revenues were $9,562,000 and $6,233,000 in 1996 and
1995, respectively. Food, beverage and other revenues were $276,000 and
$320,000 in 1996 and 1995, respectively. This 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 15% over
the same period last year.
43
<PAGE>
At the locations referred to above, Alpha Gulf's casino operating expenses were
$3,227,000 and $3,230,000, (34% and 52% of Casino revenues) in 1996 and 1995,
respectively. Food, beverage, retail and other expenses were $181,000 and
$197,000 (66% and 62% of food, beverage, retail and other revenues) in 1996
and 1995, respectively.
Food and beverage revenue does not include the retail value of food and
beverage of approximately $1,066,000 and $917,000 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 business.
Selling, general and administrative expenses consists primarily of payroll
and related benefits of approximately $2,900,000 and $3,300,000, marketing
and advertising of approximately $1,500,000 and $800,000, and occupancy costs
of approximately $150,000 and $275,000 in 1996 and 1995, respectively. The
reduced payroll and related costs of $400,000 was a direct result of
management's cost-cutting measures instituted during the first quarter of
1995. The $700,000 increase in marketing and advertising was principally the
result of management focusing on marketing programs that continue to
demonstrate successful results and elimination of unsuccessful programs. The
reduction of occupancy costs of $125,000 is primarily due to less ground
lease costs assumed in Greenville and reduced insurance costs.
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $1,200,000 and $1,000,000 in 1996 and 1995,
respectively. The increases was directly related to a corresponding increase in
capital expenditures.
FUTURE OPERATIONS - ALPHA GULF
Alpha Gulf's Jubilee Casino's operating results have improved since its
relocation to Greenville. During January, February and March of 1996, the
Jubilee Casino obtained gaming revenues of $2,733,000, $3,132,000 and
$3,600,000, respectively. The gaming revenues achieved to date by the Jubilee
Casino in Greenville exceeded the revenues of the operations of the prior vessel
by its then owners as reported to the Mississippi Gaming Commission for the same
period in the prior year by 26.5%. Alpha Gulf's casino operations in Greenville
have increased its market share to approximately 51% from approximately 36% for
the prior owner's vessel, while the market itself has shown an increase of
approximately 15%. The Company attributes the increase in its market share, in
part, to the Jubilee Casino's attractive casino environment and significant
casino capacity. Based upon the operations in fiscal 1996 to date, the Company
projects that Alpha Gulf will earn income before taxes and intercompany charges
of approximately $4,000,000 for the year ending December 31, 1996.
RESULTS OF OPERATIONS - JUBILATION LAKESHORE
The Company acquired the Jubilation Casino on October 26, 1995. The Jubilation
Casino's operations in Greenville was terminated on October 30, 1995. After its
relocation to Lakeshore, the Jubilation Casino reopened for business on December
21, 1995. The following table sets
44
<PAGE>
forth the statement of operations for the Company's Jubilation Casino
operations before intercompany charges and deferred tax credits for the three
months ended March 31, 1996 and for the period October 26, 1995 (date of
acquisition) to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
October 26,
1995
(date of
Three Months inception)
ended March 31, to December
1996 31,1995
---- -------
<S> <C> <C>
Revenues:
Casino $3,276 $ 806
Food, beverage and other 101 16
------- --------
Total revenues 3,377 822
------- --------
Expenses:
Casino 1,986 797
Food, beverage and other 84 89
Selling, general and administrative 2,554 1,718
------- --------
Total operating expenses 4,624 2,604
------- --------
Loss from operations (1,247) (1,782)
------- --------
Other expenses (Income):
Interest 245 120
Other non-operating (344) 223
Depreciation and amortization 574 333
------- --------
Total other expenses 475 676
------- --------
Loss before intercompany charges
and deferred tax credit $(1,722) $(2,458)
------- --------
------- --------
</TABLE>
At this time management is uncertain that the Jubilation Casino can be
profitable during the remainder of fiscal 1996. Management has reduced
operating costs and is monitoring 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. If
such decline continues, as is expected by management, the Company may close or
sell the Jubilation Casino. The Company has had preliminary discussions with
potential purchasers of the Jubilation Casino but has not entered into verbal or
written definitive agreements. These discussions are ongoing and no assurance
can be given that such discussions will be successful.
THREE MONTHS ENDED MARCH 31, 1996
The Jubilation Casino experienced a loss from operations of $1,247,000 during
the three month period ended March 31, 1996. Due to the seasonal nature of
the Mississippi Gulf Coast gaming market the Company anticipates improvement
in its gaming revenues, during the quarters ending in June and September.
Although management has significantly reduced its operating costs
45 <PAGE>
during this period, management continues to be uncertain as to the profitability
of the Jubilation Casino, on an annual basis. The seasonal nature of the
Lakeshore site increases the risk of natural disasters or the loss of the
Jubilation Casino from service for any other reason during the May through
September period ("Hurricane Season"), which would have a material averse effect
on the Company's financial condition. The Company continues to have discussions
with potential purchasers of the Jubilation Casino. These discussions are
ongoing and no assurance can be given that such discussions will be successful.
CASINO DEVELOPMENT
INDIANA - ALPHA RISING SUN
Alpha Rising Sun proposed to build a destination resort hotel, entertainment and
riverboat casino facility located in Rising Sun, Ohio County, Indiana. This
project was awarded to another developer in 2nd quarter 1995.
During 1994, $260,000 preopening costs were incurred in this project.
During 1995, Alpha Rising Sun was not selected to be the casino developer on its
proposed site in Indiana. Accordingly, all costs (approximately $914,000 in
1995) associated with this project has been expensed.
NEW YORK - ALPHA ST. REGIS
In March 1996, the Company entered into a joint venture agreement relating to
the operation and development of a gaming facility located on the reservation of
the St. Regis Mohawk Tribe of Hogansburg, New York. Upon formation of the joint
venture, the Company paid $485,000 for the reimbursement of certain expenses and
will be obligated for an additional $400,000 upon approval by the Tribe. The
Company believes that upon receiving the Class 3 gaming license, there will be
funds available through the public debt or equity markets to complete this
project, however, there can be no assurance that such funds will be available
or, if available, will be on terms acceptable to the Company. However, the
Company does not intend to proceed with the project at Hogansburg, New York,
since the Company and the tribe are exploring a more suitable arrangement
relating to the development of a casino in Sullivan County, New York, as
discussed below.
In 1994, St. Regis incurred $509,000 in expenses related to a proposed Class 3
casino located on the St. Regis Mohawk Reservation in Hogansburg, New York.
NEW YORK - ALPHA MONTICELLO
On January 19, 1996, the Company, through its subsidiary, Alpha St. Regis,
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 the Company's
subsidiary, Alpha Monticello. It is intended that the casino will be owned by
the Tribe and will be located on land to be placed in trust for the benefit of
the
46
<PAGE>
Tribe.
During 1996 and 1995, Alpha St. Regis incurred approximately $189,000 and
$197,000, respectively, of costs primarily associated with its participation
with Catskill to develop a casino adjacent to the Monticello Raceway in Sullivan
County, New York. Upon completion of the project, and subject to governmental
and Tribal approvals, Alpha Monticello will be the operator of the casino.
Pursuant to an agreement with Catskill Alpha Monticello will receive 50% of all
management fees plus certain administrative fees related to management of the
casino.
MISSOURI - ALPHA MISSOURI
Alpha Missouri has not commenced operations. It has incurred development costs
of approximately $68,000 and $179,000 in 1996 and 1995, respectively, related to
its proposed development of a riverboat casino in Louisiana, Missouri.
HOTEL MANAGEMENT - ALPHA HOTEL
The following table sets forth selected financial data of Alpha Hotel for the
three months ended March 31, 1996 and for the years ended December 31, 1995,
1994 and 1993 (1993 includes eight months of the Company's predecessor Bryanston
Group, Inc.) (in thousands).
<TABLE>
<CAPTION>
Three Months
Ended YEAR ENDED DECEMBER 31,
March 31, ------------------------------------
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income Statement Data:
Management fees $ 450 $2,863 $2,835 $3,091
------ ------ ------ ------
Operating expenses:
Direct payroll and related
expenses 308 1,236 1,474 1,291
Selling, general and
administrative 23 276 236 550
------ ------ ------ ------
331 1,512 1,710 1,841
------ ------ ------ ------
Income from management fees
before intercompany charges
and income taxes $ 119 $1,351 $1,125 $1,250
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
RESULTS OF OPERATIONS
GENERAL
Effective as of September 1, 1993, the Company, through its subsidiary Alpha
Hotel, entered into a Service Agreement with respect to hotels managed by
Bryanston Group, Inc. Hotel
47
<PAGE>
Division.
DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994:
Total management fees increased during the year ended December 31, 1995 compared
to the twelve months ended December 31, 1994 by approximately $28,000 (1.0%).
The increase was principally 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 16.1% to $1,236,000 for the year
ended December 31, 1995 from $1,474,000 for the year ended December 31, 1994.
The decrease was the result of reduced central office staff due to operating
efficiencies achieved.
Selling, general and administrative expenses increased to $276,000 for the year
ended December 31, 1995 from $236,000 for the year ended December 31, 1994.
This increase is a result of travel to the managed hotels by regional and
corporate management and costs incurred to obtain additional management
contracts.
In 1995, Alpha Hotel entered into a management agreement for a Sheraton Hotel in
Myrtle Beach, South Carolina directly with the hotel owner.
DECEMBER 31, 1994 COMPARED TO DECEMBER 31, 1993:
Total management fees decreased during the year ended December 31, 1994 compared
to the twelve months ended December 31, 1993 by approximately $256,000 (8.3%).
This net decrease in total hotel management fees was the result of a decrease in
revenues due to the loss of three management agreements during 1993 and one
during 1994 (all of which related to the hotels) and the addition of a
management agreement for a property under receivership for the first three
months of 1993, and the increase in management fees of $156,000 from the hotels
subject to ongoing management agreements. This increase in management fee
revenues of $156,000 resulted from 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 increased 14.1% to $1,473,666 for the year
ended December 31, 1994 from $1,291,582 for the year ended December 31, 1993.
The increase was the result of a mid-year increase in salaries and wages of 3%
to 4% for the office personnel.
Selling, general and administrative expenses decreased to $235,238 for the year
ended December 31, 1994 from $549,917 for the year ended December 31, 1993.
This decrease is a result of the office rent allocation, increase in reserve for
bad debt and travel to the managed hotels by regional and corporate management.
48
<PAGE>
MARCH 31, 1996 COMPARED TO MARCH 31, 1995
Total management fees decreased during the three months ended March 31, 1996
compared to the three months ended March 31, 1995 by approximately $95,000
(17.49%). The decrease was principally from the net result of $24,000 increase
in fees from continuing management agreements and a decrease of $119,000 related
to the loss of five management agreements (which related to hotels whose
ownership changed). 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 U.S. dollar, the price of gasoline, air fares and general
weather conditions.
Direct payroll and related costs decreased 6.7% to $308,000 for the three
months ended March 31, 1996 from $330,000 for the three months ended March
31, 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 $23,000 for the
three months ended March 31, 1996 from $69,000 for the three months ended
March 31, 1995. This decrease is a result of office relocation to a less
expensive area.
RESULTS OF OPERATIONS - GENERAL
The Company complies with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. At December 31, 1993 the
Company recorded a deferred tax asset of $1,716,000. During the Company's first
years of operation, it experienced a volatile and competitive market on the Gulf
Coast of Mississippi that was not anticipated. As a result, the Company
experienced a significant net loss and has established a valuation reserve
(approximately $12,671,000) equal to the deferred tax asset as of December 31,
1995. (See Notes to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
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 plans include continuing to
operate the Greenville Casino profitably (See Future Operations - Alpha Gulf),
selling certain assets located in Lakeshore (for which the Company is currently
holding discussions with secured and unsecured creditors of such assets),
developing future casino locations in Missouri and New York and continuing to
reduce and monitor operating expenses.
During the three months ended March 31, 1996 cash used in operations of $171,182
was primarily attributable to the net loss of $2,827,505, less depreciation and
amortization of $1,802,582 a decrease in prepaid insurance of $716,993, an
increase in accrued payroll and related liabilities of $773,147 and a decrease
in accounts payable and accrued expenses of $709,149.
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<PAGE>
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 with the Plaintiff. 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 under the same theory of liability. The Plaintiff is seeking
$20,000,000. 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 and the declaratory judgment action
instituted by the primary insurance carrier is subject to dismissal. In
addition, 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 $5,125,000, subject to completion of the settlement documents and
the approval of the court. However, a dispute remains between the Company and
the principal insurance carrier over payment of settlement amount, which dispute
may be litigated. Accordingly, no provision for any liability to the Company
that may result upon adjudication has been made in the accompanying consolidated
financial statements.
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 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.
50
<PAGE>
The Company is obligated under a $20,000,000 non-revolving promissory note
($19,413,856 and $17,360,861 outstanding at March 31, 1996 and December 31,
1995, respectively) with Bryanston. The note, which bears interest at prime
rate (8.25% at March 31, 1996) plus 2%, is payable at the lesser of the
outstanding principal amount of $2,000,000 per annum through December 31, 1999.
Beginning 1996, interest accrued monthly shall be due and payable by the
following month. All remaining principal and accrued interest (approximately
$437,000 and $503,000 at March 31, 1996 and December 31, 1995, respectively)
shall be due December 31, 2000. Additionally, commencing May 1, 1996 and for
each of the next succeeding three years thereafter, the Company will be required
to make additional principal payments equal to "Available Cash Flow of Maker" as
defined in the note.
At March 31, 1996, the Company was in default of (i) its mortgage notes
payable for non-payment, (ii) the equipment notes relating to the Jubilation
Casino aggregating approximately $3,433,000 for the breach of several loan
covenants and certain loans payable aggregating approximately $3,655,000 for
non-payment. The Company received a waiver of the defaults of the loan
payable and mortgage note payable to Bryanston. Accordingly, the mortgage
note payable ($3,656.000), and the equipment notes payable ($3,433,000)
relating to the Jubilation Casino in addition to another certain loan payable
($1,181,000) are reflected in current liabilities at March 31, 1996.
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<PAGE>
MANAGEMENT
The table below sets forth certain information with respect to the directors and
executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Stanley S. Tollman 64 Chairman of the Board, President and Chief
Executive Officer
Sanford Freedman 59 Vice President, Secretary and Director
Howard D. Zukerman 50 Vice President and Assistant Secretary
Thomas W. Aro 52 Vice President and Director
Brett G. Tollman 33 Vice President and Director
James A. Cutler 44 Treasurer, Chief Financial Officer and
Director
Patricia Cohen 41 Director
Matthew B. Walker 46 Director
STANLEY S. TOLLMAN has served as Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company since its formation. Since March 1995 Mr.
Tollman has served as President and Chief Executive Officer. He served as
Chairman of the Tollman-Hundley Hotel Group from 1979 to June 1996. He currently
serves as Chairman of Bryanston Group, Inc., a hotel management company, and of
Trafalgar Tours International, a tour operator. He has also served as Chairman
of the Board of Directors of Buckhead America Corporation, which was formerly
the franchiser of Days Inns hotels.
SANFORD FREEDMAN has served as a Director, Vice President and Secretary of the
Company from its formation until October 29, 1993 and was re-elected to those
positions on February 1, 1994. He has served as Executive Vice President of the
Tollman-Hundley Hotel Group since 1983, and served as a Director, Executive Vice
President and Secretary of Bryanston Group, Inc. from 1983 through March 1996.
HOWARD D. ZUKERMAN currently serves as the Company's Vice President and
Assistant Secretary, positions he held from March 1993 through October 1993, and
from February 1994 to date. Mr. Zukerman serves as the Senior Vice President of
the Tollman-Hundley Hotel Group, a position he has held since 1985.
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<PAGE>
THOMAS W. ARO has served as a Director of the Company since February 1, 1994 and
a Vice President of the Company since its formation. Mr. Aro also serves as
Chairman of the Board of Directors and Chief Executive Officer of the Company's
subsidiary Alpha Gulf Coast, Inc. He has served as Executive Vice President of
the Tollman-Hundley Hotel Group since 1982, and Executive Vice President of the
Bryanston Group, Inc.
BRETT G. TOLLMAN served as a Vice President of the Company from its formation
until October 29, 1993 and was re-elected to that position and was elected a
Director of the Company on February 1, 1994. Mr. Tollman also serves as
President of the Company's subsidiary, Alpha Hotel Management Company, Inc.
He has served as Executive Vice President of the Tollman-Hundley Hotel Group
from 1984 to June 1996 and currently serves as Executive Vice President and
Secretary of Bryanston Group, Inc. He is also a Director of HMG Worldwide
Corporation, a publicly held corporation. Mr. Tollman is the son of Stanley
S. Tollman, the Chairman and Chief Executive Officer of the Company.
JAMES A. CUTLER has served as Treasurer and Chief Financial Officer of the
Company since its formation. He also served as Secretary of the Company from
October 29, 1993 to February 1, 1994. Mr. Cutler was elected a Director of the
Company on June 12, 1995. He served as Senior Vice President and Treasurer of
the Tollman-Hundley Hotel Group until June 1996 and currently serves as
Executive Vice President and Chief Financial Officer of Bryanston Group, Inc.
PATRICIA COHEN was elected a Director of the Company on February 1, 1994. She
is a principal shareholder of Westfield Financial Corporation, one of the
underwriters of the Company's initial public offering and has been engaged for
more than the past five years as a private investor. Westfield Financial
Corporation is no longer operating as a broker-dealer.
MATTHEW WALKER has served as a director of the Company since December 4, 1995,
when he was elected by the Board to fill the vacancy resulting from the
resignation of Charles Gargano in September 1995. He is an independent
businessman involved in international business ventures including the Brazilian
based Walker Marine Oil Supply Business, which he has been a consultant to since
1988. Mr. Walker co-founded the Splash Casino in Tunica, Mississippi in February
1993, where he remained employed until October 1995. In February 1994, he co-
founded the Cotton Club Casino in Greenville, Mississippi, where he remained
employed and a shareholder of until October 1995. In addition, since 1972, Mr.
Walker has been involved in numerous real-estate transactions in the capacity of
consultant, and has managed E.B. Walker & Son Lumber Company, a family-owned
lumber business based in Alabama, since such time.
Each Director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until his/her successor is duly elected by
the Stockholders. Vacancies and newly created directorships resulting from any
increase in the number of authorized directors may be filled by a majority vote
of Directors then in office. Officers are elected by and serve at the pleasure
of the Board of Directors. Directors are reimbursed for expenses incurred in
connection with the performance of their duties.
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<PAGE>
CERTAIN PROCEEDINGS INVOLVING MANAGEMENT
Bryanston Group, Inc. was formerly known as Buckhead Hotel Management Company,
Inc. ("BHMC"), and prior to February 1, 1992, BHMC was known as Days Inns
Management Company, Inc. BHMC was formerly a subsidiary of Buckhead America
Corp. ("BAC") which, prior to February 1, 1992, was known as Days Inn of
America, Inc. Messrs. Stanley S. Tollman, Thomas W. Aro, Brett G. Tollman,
Sanford Freedman and James A. Cutler, each directors and/or officers of the
Company, were officers and/or directors of BAC and certain of its subsidiaries.
On September 27, 1991, BAC, BHMC and certain affiliates and subsidiaries thereof
filed petitions for protection from creditors under the Bankruptcy Code,
commencing proceedings in the United States Bankruptcy Court, in the District of
Delaware (the Bankruptcy Court). ("In re Buckhead America Corporation, et al.,
f/k/a Days Inn of America Inc. et al., Debtors"-case numbers 91-978
through 91-986.)
The Plan of Reorganization for BAC and its subsidiaries was filed and approved
in December 1992 and became effective on December 28, 1992. Under the Plan of
Reorganization, BHMC was relieved of certain obligations (and assigned certain
assets) not related to its business of hotel management.
Messrs. Stanley S. Tollman and Sanford Freedman are limited partners in and
directors and officers of the corporate general partner of Pacific Shore
Associates Limited Partnership ("Pacific Shore"). Messrs. Brett G. Tollman and
James A. Cutler are officers of the corporate general partner of Pacific Shore.
In connection with and in response to a foreclosure proceeding instituted by the
first deed of trust holder of the hotel owned by Pacific Shore, it filed a
voluntary petition under the Bankruptcy Code, Case No. La-91-81347-KL in the
United States Bankruptcy Court for the Central District of California.
Subsequently, the Bankruptcy Court lifted the automatic stay in the proceeding,
thereby allowing foreclosure, and dismissed the Chapter 11 proceeding.
Messrs. Stanley S. Tollman, Brett G. Tollman and Sanford Freedman were limited
partners of six limited partnerships, each of which was the owner of an
individual hotel, which filed Chapter 11 proceedings in 1991. Mr. Stanley S.
Tollman was the stockholder of the corporate general partners of the limited
partnerships. Messrs. Stanley S. Tollman, Brett G. Tollman, Sanford Freedman,
James A. Cutler and Howard Zukerman were directors and/or officers of such
corporate general partners. The six hotels, together with a seventh which is
the subject of a pending foreclosure proceeding in the state courts of Florida,
received mortgage financing from Security Pacific Commercial Mortgage Trust VII
(the Trust) which was formed for the purpose of financing the seven hotels. The
Trust defaulted on its debt obligations and Financial Security Assurance (FSA),
which had guaranteed the obligations of the Trust, proceeded to initiate
foreclosure proceedings against the seven hotels. Faced with the threat of
foreclosure, the six limited partnerships filed for protection under the
Bankruptcy Code.
Kissimmee Lodge, Ltd. ("KLL"), a Florida limited partnership, filed a Chapter 11
proceeding in the United States Bankruptcy Court for the Middle District of
Florida. The proceeding was filed to prevent the imminent foreclosure of the
Days Suites hotel owned by KLL. Messrs.
54
<PAGE>
Stanley S. Tollman, Brett G. Tollman and Sanford Freedman hold limited
partnership interests in KLL and Mr. Stanley S. Tollman is a stockholder of
the corporate general partner of KLL. Messrs. Stanley S. Tollman, Howard
Zukerman and James A. Cutler were directors and or officers of such corporate
general partner. The Plan of Reorganization was confirmed by the Bankruptcy
Court and has been declared effective.
Emeryville Days Limited Partnership ("Emeryville"), a California limited
partnership filed a Chapter 11 proceeding in the United States Bankruptcy Court
for the Eastern District of California in May 1996. The proceeding was filed to
prevent the imminent foreclosure of the Days Inn hotel owned by Emeryville.
Messrs. Stanley S. Tollman, Brett G. Tollman and Sanford Freedman hold limited
partnership interests in Emeryville and Mr. Stanley S. Tollman is a stockholder
of the corporate general partner of Emeryville. Messrs. Stanley S. Tollman,
Howard Zukerman and James A. Cutler were directors and/or officers of such
corporate general partner.
55
<PAGE>
EXECUTIVE COMPENSATION
EMPLOYMENT AGREEMENTS
The Company and Mr. Stanley S. Tollman entered into an employment agreement
dated June 1, 1993, whereby Mr. Stanley S. Tollman agreed to serve as Chairman
of the Board and Co-Chief Executive Officer of the Company for a term of three
years from the date of the agreement. Thereafter, the agreement is
automatically renewable for successive 12 month periods, unless either party
shall advise the other on 90 days written notice of his or its intention not to
extend the term of the employment. Mr. Stanley S. Tollman's employment
agreement provides for a salary in the amount of $250,000 per year, none of
which has been paid under the agreement since the date thereof. The agreement
provides for Mr. Stanley S. Tollman to devote no less than 20% of his business
time to the affairs of the Company and its subsidiaries. The agreement contains
a non-disclosure provision pursuant to which Mr. Stanley S. Tollman agrees not
to use or disclose any information, knowledge or data relating to or concerning
the Company's operations, sales, business or affairs to any individual or
entity, other than the Company or its designees, except as required in
connection with the business and affairs of the Company. The agreement also
contains a limited non-competition clause pursuant to which Mr. Stanley S.
Tollman has agreed not to own, manage, operate, or otherwise be connected with
any entity or person (other than Bryanston or Alpha Hotel) (i) that renders
management services to hotels of the same kind, class and character, as the
hotels for which Alpha Hotel provides management services or (ii) that owns,
manages or operates a gaming casino within a 100 mile radius of the Jubilation
Casino.
CONSULTING AGREEMENTS
The Company and Mr. Sanford Freedman entered into a consulting agreement
dated March 1, 1996, whereby Mr. Freedman agreed to render consulting
services to the Company. Mr. Freedman's services as Director of the Company
will not be compensated under the consulting agreement. Mr. Freedman serves
as an independent contractor at will pursuant to the agreement and will be
compensated at the rate of $300 - $350 per hour. The agreement may be
terminated at any time by either party. The Company has indemnified Mr.
Freedman against any claims, losses, expenses or liabilities, including
reasonable attorney fees, Mr. Freedman may incur arising out of the
performance of any services rendered by Mr. Freedman pursuant to the
agreement.
56
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation for services rendered in
all capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1995, December 31, 1994, and December 31, 1993, paid to the
Company's Chief Executive Officer, the four other most highly compensated
executive officers (the "Named Executive Officers") at the end of the above
fiscal years whose total compensation exceeded $100,000 per annum, and up to two
persons whose compensation exceeded $100,000 during the above fiscal years,
although they were not executive officers at the end of such years.
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND PRINCIPAL STOCK COMPEN-
POSITION YEAR SALARY(1) BONUS AWARDS OPTIONS/SARS SATION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stanley S. Tollman, 1995 $250,000 -- -- -- --
Chairman of the Board of 1994 $250,000 -- -- -- --
Directors, Co-Chief 1993 $250,000 -- -- -- $31,250(2)
Executive Officer
Monty D. Hundley, 1995 $ 62,500 -- -- -- --
President and Co-Chief 1994 $250,000 -- -- -- --
Executive Officer 1993 $250,000 -- -- -- $31,250(2)
</TABLE>
(1) No portions of the cash salaries to which each of the Co-Chief Executive
Officers were entitled were paid during the periods indicated; the expense,
and liability, have been accrued, without interest.
(2) Represents shares of the Company's Common Stock equal to $31,250 issued as
additional compensation.
(3) As of March 23, 1995, Mr. Hundley resigned as an officer and director of
the Company as which time Mr. Hundley waived any present or future claim to
all accrued and unpaid salaries.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the last completed fiscal year, the Company did not grant any options or
stock appreciation rights to any Named Executive Officers.
1993 STOCK OPTION PLAN
The purpose of the 1993 Stock Option Plan is to provide additional incentive to
the officers and employees of the Company who are primarily responsible for the
management and growth of the Company. Each option granted pursuant to the 1993
Stock Option Plan shall be designated at the time of grant as either an
"incentive stock option" or as a "non-qualified stock option." The following
description of the 1993 Stock Option Plan is qualified in its entirety by
reference to the 1993 Stock Option Plan.
ADMINISTRATION OF THE PLAN
The 1993 Stock Option Plan is administered by a Stock Option Committee
consisting of Messrs. Freedman and Walker and Ms. Cohen which determines whom
among those eligible will be granted options, the time or times at which options
will be granted, the number of shares to be subject to options, the durations of
options, any conditions to the exercise of options and the manner in and price
at which options may be exercised. The Stock Option Committee is authorized to
amend, suspend or terminate the 1993 Stock Option Plan, except that it cannot
without stockholder approval (except with regard to adjustments resulting from
changes in capitalization) (i) increase the maximum number of shares that may be
issued pursuant to the exercise of options granted under the 1993 Stock Option
Plan; (ii) permit the grant of a stock option under the 1993 Stock Option Plan
with an option price less than 100% of the fair market value of the shares at
the time such option is granted; (iii) change the eligibility requirements for
participation in the 1993 Stock Option Plan; (iv) extend the term of any option
or the period during which any option may be granted under the 1993 Stock Option
Plan; or (v) decrease an option exercise price (although an option may be
canceled and new option granted at a lower exercise price).
SHARES SUBJECT TO THE PLAN
The 1993 Stock Option Plan provides that options may be granted with respect to
a total of 900,000 shares of Common Stock, subject to adjustment upon certain
changes in capitalization without receipt of consideration by the Company. In
addition, if the Company is involved in a merger, consolidation, dissolution or
liquidation, the options granted under the 1993 Stock Option Plan will be
adjusted or, under certain conditions, will terminate, subject to the right of
each option holder to exercise his option or a comparable option substituted at
the discretion of the Company prior to such event. If any option expires or
terminates for any reason, without having been exercised in full, the
unpurchased shares subject to such option will be available again for the
purposes of the 1993 Stock Option Plan. All of the 409,000 shares of Common
Stock underlying options granted pursuant to the 1993 Stock Option Plan are
being registered in this Registration Statement.
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<PAGE>
PARTICIPATION
Any employee is eligible to receive incentive stock options or non-qualified
stock options granted under the 1993 Stock Option Plan. Non-employee directors
may not receive stock options.
OPTION PRICE
The exercise price of each option will be determined by the Stock Option
Committee, or the Board of Directors until such committee is constituted, but
may not be less than 100% of the fair market value of the shares of Common Stock
covered by the option on the date the option is granted. If an incentive stock
option is to be granted to an employee who owns over 10% of the total combined
voting power of all classes of the Company's stock, then the exercise price may
not be less than 110% of the fair market value of the Common Stock covered by
the option on the date the option is granted.
TERMS OF OPTIONS
The Stock Option Committee, or the Board of Directors until such committee is
constituted, shall, in its discretion, fix the term of each option, provided
that the maximum term of each option shall be 10 years. Incentive stock options
granted to an employee who owns over 10% of the total combined voting power of
all classes of stock of the Company shall expire not more than five years after
the date of grant. The 1993 Stock Option Plan provides for the earlier
expiration of options of a participant in the event of certain terminations of
employment.
RESTRICTIONS ON GRANT AND EXERCISE
An option may not be transferred other than by will or the laws of descent and
distribution and, during the lifetime of the option holder, may be exercised
solely by him. The aggregate fair market value (determined at the time the
option is granted) of the shares as to which an employee may first exercise
incentive stock options in any one calendar year may not exceed $100,000. The
Stock Option Committee, or the Board of Directors until such committee is
constituted, may impose other conditions to exercise as it deems appropriate.
OPTION GRANTS
There were no options granted to either of the named executive officers in the
fiscal year ended December 1, 1995. Options to purchase 409,000 shares of
Common Stock have been granted to employees to date.
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<PAGE>
CERTAIN TRANSACTIONS
BAYOU CADDY ACQUISITION
Pursuant to an asset purchase agreement (the "B.C. Agreement") dated as of May
14, 1993 among Alpha Gulf, B.C. of Mississippi, Inc. ("B.C.") (formerly known as
Bayou Caddy, Inc.) and certain stockholders of B.C., the Company acquired
certain of the assets of B.C., including B.C.'s leasehold interests under
certain lease agreements, certain other assets incidental to the development and
ownership of the Jubilee Casino, and B.C.'s interest in certain related license
applications, approvals and permits. As part of the purchase, the Company
assumed liabilities aggregating approximately $1,100,000. The purchase price
was $3,500,000, which was evidenced by a convertible promissory note that bore
interest at the rate of 10% per annum (the "B.C. Note"). Effective February 1,
1994 the Company notified B.C. of its election to convert the B.C. Note into
791,880 shares of the Company's Common Stock, and pursuant to a subsequent
agreement among the Company, Alpha Gulf and B.C., B.C. and its shareholders have
received rights which, upon the effective date of the Registration Statement of
which this Prospectus is a part, entitle them to receive, in the aggregate, such
791,880 shares. The conversion of the B.C. Note into 791,880 shares was
determined in accordance with a formula contained in the B.C. Agreement that
allowed for a conversion into such number of shares equal to 12% of the shares
of the Company's Common Stock held by Messrs. Stanley S. Tollman and Monty D.
Hundley at the time the Company notified B.C. of its election to convert. In
order to avoid further dilution to the Company's stockholders, and to enhance
its position in the Company, Bryanston agreed to contribute a number of its
shares of the Company's Common Stock to the Company in order to help satisfy the
number of shares of Common Stock into which the B.C. Note converted. In
accordance therewith, Bryanston made a capital contribution to the Company of
716,881 shares of Common Stock of the Company owned by Bryanston, which the
Company is currently holding as treasury stock until the issuance to B.C. and
certain B.C. shareholders, promptly after the effective date of the Registration
Statement.
BRYANSTON
In connection with the formation of the Company and the initial capitalization
of the Company, Bryanston (i) contributed $626,004 in cash to the Company in
exchange for 3,564,987 shares of the Company's Common Stock, valued at 17.6
CENTS per share, (ii) entered into the Service Agreements, and (iii) loaned the
Company $4,009,740 (the "Bryanston Loan"). The Company utilized the $626,004
and the proceeds of the Bryanston Loan for the development and construction of
the Jubilee Casino.
Under the Service Agreement, effective as of September 1, 1993, between Alpha
Hotel and Bryanston, the Company provides Management Services to hotels and
motels on behalf of Bryanston. Bryanston is an affiliate of the Company, and
Beatrice Tollman, Mr. Stanley S. Tollman's spouse, is a 50% stockholder of
Bryanston. The Service Agreement, which is co-terminus with the last to expire
of the Bryanston Management Agreements, states that the Company will provide
certain management services for hotels managed by Bryanston for certain
unaffiliated owners. Pursuant to the Service Agreement, Bryanston receives a
fee of 1% of the aggregate compensation paid to the Company pursuant to the
Management Agreements. The
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Bryanston Hotel Division is the provider of direct services to all managed
hotels pursuant to the Management Agreements with the individual hotels.
Through its subsidiary Alpha Hotel, the Company provides management, financial,
administrative and marketing services on behalf of Bryanston. Pursuant to the
Management Agreements, the Company is compensated for its services in an amount
equal to a percentage of total net revenues of the managed hotels, ranging
between 2% and 5%. In connection with the Service Agreement, effective
September 1, 1993, the Company entered into an expense reimbursement agreement
(the "Expense Reimbursement Agreement") with Bryanston for the use of certain
office space at its Hopewell Junction, New York facility in connection with the
Company's hotel management operations. Pursuant to the terms of the Expense
Reimbursement Agreement, the Company reimburses Bryanston on a monthly basis for
its share of rent, office expenses and direct payroll.
The Bryanston Loan had an initial interest rate of 12% per annum and payment is
subordinated to payment of the Term Loan, described below. A portion of
principal and accrued interest in the aggregate amount of $1,012,500 was repaid
from the proceeds of the Company's initial public offering (the "IPO") and
principal and accrued interest in the aggregate amount of $1,206,355 was repaid
from the proceeds of the underwriters' over-allotment option exercised in
connection with the IPO. The balance of the Bryanston Loan ($1,972,532) accrued
interest at the rate of 12% per annum, which accrued until the second
anniversary of the opening of the Jubilee Casino, and thereafter, together with
such accrued interest amount ($501,294), interest accrues at the rate of 9% per
annum, payable quarterly in equal installments over a 10-year period, and will
be prepaid pro rata with the BP Loan, described below, from the proceeds of the
exercise, if any, of the Company's outstanding warrants and the HFS Options,
described below, provided the Company is current under the Term Loan. At March
31, 1996 and December 31, 1995, the principal balance (which includes accrued
interest through the second anniversary) was $2,473,826 and accrued interest at
March 31, 1996 was $59,176.
In August and October 1993, Bryanston advanced a bridge loan (the "Bryanston
Bridge Loan"), in the aggregate amount of $7,419,000, which was also applied to
the development and construction of the Jubilee Casino. The Bryanston Bridge
Loan bore interest at the rate of 10% per annum from the date advanced and was
originally due and payable on the earlier of October 31, 1993 or the closing of
the IPO. A portion of the principal and accrued interest on the Bryanston
Bridge Loan, in the aggregate amount of $3,625,000, was repaid from the proceeds
of the Term Loan and a $4,000,000 bridge loan (the "HFS Bridge Loan") from HFS
Gaming Corp. ("HFS") (which was repaid from the proceeds of the IPO), and the
balance was repaid from the proceeds of the IPO.
As of January 1, 1994, Bryanston agreed to loan the Company up to $9,000,000
(the "Working Capital Loan") to meet working capital requirements of the
Company. The note bore interest at price rate plus 2%, per annum, and had a
maturity date of December 31, 1995. On December 31, 1994 the Company authorized
the issuance of 625,222 shares of its preferred stock, valued at $6.625 per
common share, in settlement of $8,284,196 due Bryanston, which amount includes
approximately $349,000 of accrued interest.
In February 1994, at which time the Company notified B.C. of its election to
convert the B.C. Note into 791,880 shares of the Company's Common Stock,
Bryanston agreed to contribute 716,881 shares of Common Stock of the Company
owned by Bryanston, in order to help satisfy
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<PAGE>
the number of shares of Common Stock into which the B.C. Note converted.
Bryanston agreed to make this capital contribution to the Company in order to
avoid further dilution to the Company's stockholders and to enhance its position
in the Company.
As of January 5, 1995, Bryanston agreed to loan the Company up to $20,000,000
(the "Working Capital Loan") to meet the working capital requirements of the
Company. Therefore, the Company is obligated under a $20,000,000 non-revolving
promissory note ($19,413,856 and $17,360,861 outstanding at March 31, 1996 and
December 31, 1995, respectively) with Bryanston. The note, which bears interest
at prime rate (8.5% at March 31, 1996 and December 31, 1995) plus 2%, is payable
at the lesser of the outstanding principal amount or $2,000,000 per annum
through December 31, 1999. Beginning 1996, interest accrued monthly is due and
payable by the following month. All remaining principal and accrued interest
(approximately $437,000 and $503,000 at March 31, 1996 and December 31, 1995,
respectively) shall be due on December 31, 2000. Additionally, commencing May
1, 1996 and for each of the next succeeding three years thereafter, the Company
will be required to make additional principal payments equal to "Available Cash
Flow of Maker" as defined in the note to mean an amount equal to the
consolidated annual net income of the Company before depreciation but after
provision for taxes and principal payments on account of all debt, less an
amount equal to the sum of (a) an annual replacement reserve equal to 3% of the
consolidated revenues of the Company and its subsidiaries, excluding Alpha
Hotel, and (b) $1,000,000.
On September 22, 1995, Bryanston purchased an outstanding loan to the Company
(the "Term Loan") which was then held by HFS, having a balance of $7,816,000
from HFS, which was in default at such time. The Company received the Term Loan
from HFS in the original principal amount of $8,000,000 for a five-year term, in
October 1993. The Term Loan bears interest at a rate of 10% per annum and
requires monthly payments of principal and interest through November 1998. The
Term Loan is secured by a first preferred ship mortgage on the Jubilee Casino.
As consideration for Bryanston purchasing the Term Loan (which was then in
default), and for Bryanston agreeing to make the Working Capital Loan, in
October 1995, the Company issued 347,826 shares of Common Stock, valued at $4.50
per share, and an option to purchase 347,826 shares of Common Stock at an
exercise price of $4.50 per share, to Bryanston. In addition, Bryanston
acquired 96,429 shares of the Company's Common Stock from an affiliate of HFS.
At March 31, 1996 and December 31, 1995, the balance due on the Term Loan is
$7,8000,000 and accrued interest is $640,724 and $446,789, respectively.
As of November 1, 1995, Bryanston had sold all of the Common Stock of the
Company it had previously held.
BP GROUP
BP Group, Ltd. ("BP"), a corporation wholly-owned by Ms. Patricia Cohen, a
director of the Company, advanced $1,927,759 to the Company, representing the
proceeds of the BP loan (the "BP Loan"). The BP Loan had an initial interest
rate of 12% per annum and payment is subordinated to payment of the Term Loan.
Principal and accrued interest in the aggregate amount of $487,500 was repaid
from the proceeds of the Company's IPO and principal and accrued interest in the
aggregate amount of $575,560 was repaid from the proceeds of the underwriters'
over-allotment option. The balance of the BP Loan, $864,699, accrues interest at
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<PAGE>
the rate of 12% per annum, which shall accrue until the second anniversary of
the opening of the Jubilee Casino, and thereafter, together with such accrued
interest, at the rate of 9% per annum, payable quarterly in equal installments
over a 10-year period, and will be prepaid, pro rata with the Bryanston Loan,
from the proceeds of the exercise, if any, of the Company's outstanding warrants
and the HFS Options, provided the Company is current under the Term Loan.
BP also advanced a bridge loan (the "BP Bridge Loan") in the amount of
$2,200,000, which was applied to the development of the Casino. The BP Bridge
Loan bore interest at the rate of 10% per annum from the date advanced and was
originally due and payable on the earlier of October 31, 1993 or the closing of
the Offering. The BP Bridge Loan was repaid in full, from the proceeds of the
Term Loan and the HFS Bridge Loan, which was repaid by the Company from the
proceeds of the IPO.
Ms. Cohen, a director of the Company and the sole stockholder of BP, has
contributed $511,961 to the capital of the Company for which she was issued
1,544,182 shares of Common Stock valued at 33.2 CENTS per share.
Ms. Cohen was also a principal stockholder of Westfield Financial Corporation,
one of the underwriters of the Company's IPO. Westfield Financial Corporation
is no longer operating as a broker-dealer.
All current transactions between the Company, and its officers, directors and
principal stockholders or any affiliates thereof are, and in the future such
transactions will be, on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
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<PAGE>
OWNERSHIP OF SECURITIES
The following table sets forth certain information as of March 29, 1996 with
respect to each beneficial owner of five percent (5%) or more of the outstanding
shares of Common Stock of the Company, each officer and director of the Company
and all officers and directors as a group. Unless otherwise indicated, the
address of each such person or entity is c/o Alpha Hospitality Corporation, 12
East 49th Street, New York, New York, 10017.
<TABLE>
<CAPTION>
Percent of
Number of Percent of Class Class After
Name and Address Shares (1)(11) Before Offering Offering
- ---------------- -------------- --------------- --------
<S> <C> <C> <C>
Stanley S. Tollman(2)(3)(5) 498,975 3.72 3.59
Beatrice Tollman(4)(5) 1,852,890 13.82 13.34
Sanford Freedman(6) 271,158 2.02 1.95
Thomas W. Aro(7) 100,200 .75 .72
Brett G. Tollman(8) 493,078 3.68 3.55
James A. Cutler(9) 116,000 .86 .84
Howard Zukerman(10) 90,908 .68 .65
Patricia Cohen 1,544,182 11.52 11.12
Bally Gaming, Inc. 701,017 5.23 5.05
6601 South Bermuda Road
Las Vegas, Nevada
All officers and
directors as a group
(7 persons)(2)(3)(6)(7)(8)(9)(10) 3,114,501 23.24 22.43
</TABLE>
- ----------------------------
(1) Each person exercises sole voting and dispositive power with respect to the
shares reflected in the table, except for those shares issuable upon the
exercise of options, which shares cannot be voted until the options are
exercised by the holders.
(2) Includes 498,975 shares owned by the Tyler Windfield Hundley Living Trust
of which trust Mr. Tollman is the sole trustee. Mr. Tollman exercises
voting power with respect to such shares. Tyler Windfield Hundley is the
son of Monty D. Hundley, a former officer and director of the Company who
resigned from such positions as of March 23, 1995.
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<PAGE>
(3) Does not include 1,852,890 shares of Common Stock owned by Mr. Stanley
S. Tollman's spouse, Beatrice Tollman. Mr. Stanley S. Tollman disclaims
beneficial ownership of the shares held by his spouse.
(4) Beatrice Tollman is the wife of Stanley S. Tollman. Mrs. Tollman disclaims
beneficial ownership of the shares held by Stanley S. Tollman.
(5) Mr. Stanley S. Tollman and Mrs. Beatrice Tollman, in the aggregate,
beneficially own 2,351,865 shares of Common Stock, which constitutes
18.01% of the class outstanding. Mr. and Mrs. Tollman each disclaim
beneficial ownership of one another's shares.
(6) Includes options granted to Mr. Freedman to purchase 60,000 shares of the
Company's Common Stock, all of which have vested and none of which have
been exercised.
(7) Includes options granted to Mr. Aro to purchase 60,000 shares of the
Company's Common Stock, all of which have vested and none of which have
been exercised.
(8) Includes options granted to Mr. Tollman to purchase 60,000 shares of the
Company's Common Stock, all of which have vested and none of which have
been exercised.
(9) Includes options granted to Mr. Cutler to purchase 40,000 shares of the
Company's Common Stock, all of which have vested and none of which have
been exercised. Does not include 4,000 shares owned by Mr. Cutler's
children of which he disclaims beneficial ownership.
(10) Includes options granted to Mr. Zukerman to purchase 35,000 shares of the
Company's Common Stock, all of which have vested and none of which have
been exercised.
(11) Due to certain distributions of the 3,564,987 shares of the Company's
Common Stock owned by it, Bryanston no longer owns any shares of the
Company's Common Stock. See "Certain Transactions - Bayou Caddy
Acquisition." The Company has converted the 625,222 shares of Preferred
Stock into 1,250,444 shares of Common Stock and has distributed these
shares and all other shares previously held of the Company as of November
1, 1995.
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<PAGE>
SELLING STOCKHOLDERS
The 1,892,626 of the Selling Stockholders' Shares to which this Prospectus
relates may be sold by the Selling Stockholders who have acquired or will
acquire such shares from the Company (i) upon the exercise of issued and
outstanding options granted pursuant to the Company's 1993 Stock Option Plan
(the "Plan"), or (ii) in connection with acquisition agreements or debt
restructuring agreements. The Company will not receive any of the proceeds sum
the sales of the Selling Stockholder's Shares, but will receive the exercise
price upon the exercise of options by certain Selling Stockholders. There can
be no assurance that any or all of such options will be exercised. Pursuant to
the Plan, options for up to 900,000 shares of Common Stock may be granted, of
which options to purchase 409,000 shares have been issued to date, all of which
are being offered hereby. Of such 409,000 options, 385,000 options have an
exercise price of $3.25 per share and 24,000 options have an exercise price of
$11.50 per share.
The Selling Stockholders received registration rights with respect to the shares
offered hereunder pursuant to verbal or written agreements with the Company.
All costs, expenses and fees in connection with the registration of the Selling
Stockholders' Shares will be borne by the Company. All brokerage commission, if
any, attributable to the sale of Selling Stockholders' Shares by Selling
Stockholders will be borne by such Selling Stockholders.
The following table sets forth (a) the name of Selling Stockholder and
relationship to the Company (b) the number of shares of Common Stock
beneficially owned by each Selling Stockholder at the time of this offering; (c)
the number of shares to be acquired by each Selling Stockholder that are being
acquired or registered hereunder and may be sold pursuant to this Prospectus;
and (d) the number of shares of Common Stock and the percentage of the total
class of Common Stock outstanding to be beneficially owned by each Selling
Stockholder following this offering, assuming the sale of all of the Selling
Stockholders' Shares.
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<PAGE>
<TABLE>
<CAPTION>
Selling Stockholder and Number of Shares Number of Shares of Common
Relationship of Common Stock Stock Beneficially Owned After
Company Beneficially This Offering
----------- Owned Before -------------------
This Offering(1)
-------------
Offered
Hereby Number Percent
-------- ------ -------
<S> <C> <C> <C> <C>
Sanford Freedman(2) 271,158 60,000 211,158 1.6%
(Vice President, Secretary
and Director)
Brett G. Tollman(2) 458,973 60,000 398,973 1.0%
(Vice President and
Director)
Howard D. Zukerman(2) 90,908 35,000 55,908 *
(Vice President and
Assistant Secretary)
Thomas W. Aro(2) 100,200 60,000 40,200 *
(Vice President and
Director)
James A. Cutler(2) 116,000 40,000 76,000 *
(Chief Financial Officer)
Victor Appleby(2) 28,400 18,000 10,400 *
(Employee)
Charlie Goldman(2) 18,000 18,000 0 *
(Employee)
Gavin Tollman(2) 18,300 18,000 300 *
(Employee)
Thomas Wilson(2) 18,000 18,000 0 *
(Employee)
Craig Kendziera(2) 12,300 12,000 300 *
(Employee)
Jeffrey Crowley(2) 54,500 10,000 44,500 *
(Employee)
Robert Steenhuisen(2) 8,000 8,000 0 *
(Employee)
Thomas Damewood(2) 8,000 8,000 0 *
(Employee)
Peter Rost(2) 5,000 5,000 0 *
(Employee)
Alice Abalos(2) 5,300 5,000 300 *
(Employee)
Betty Drake(2) 6,300 5,000 1,300 *
(Employee)
Margaret O. Young(2) 5,000 5,000 0 *
(Employee)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Selling Stockholder and Number of Shares Number of Shares of Common
Relationship of Common Stock Stock Beneficially Owned After
Company Beneficially This Offering
----------- Owned Before -------------------
This Offering(1)
-------------
Offered
Hereby Number Percent
-------- ------ -------
<S> <C> <C> <C> <C>
Paul Hitselberger(3) 3,334 5,000 0 *
(Employee)
Kevin Kurpick(3) 3,334 5,000 0 *
(Employee)
Thaddeus Rickards(3) 3,334 5,000 0 *
(Employee)
Ann Williams(3) 1,667 2,500 0 *
(Employee)
Sherry Kosack(3) 1,667 2,500 0 *
(Employee)
Danka Maricic(3) 1,733 2,000 400 *
(Employee)
Kenneth Terry(3) 1,300 1,500 300 *
(Employee)
Claudia Bowman(3)
(Employee) 333 500 0 *
Escrow Agent for Cotton
Club Shareholders(4) 782,609 782,609 0 *
Bally Gaming, Inc.(5) 701,017 701,017 0 *
</TABLE>
- -------------------------
* represents less than 1% of the total outstanding shares of Common Stock.
1. Includes all shares of Common Stock obtainable by the Selling Stockholder
upon exercise of options granted pursuant to the Plan. Such options are
exercisable as set forth in footnotes 2 and 3 below.
2. Includes the shares of Common Stock issuable upon the exercise of options.
One-third of such Selling Stockholders' options vested on June 10, 1994,
one-third vested on December 10, 1994 and the remainder vested on June 10,
1995.
3. Includes the shares of Common Stock issuable upon the exercise of options.
One- third of such Selling Stockholders' options vested on December 10,
1994, one- third vested on June 10, 1995 and the remainder vested on
December 10, 1995.
4. Represents 782,609 shares issued to an escrow agent on behalf of the former
shareholders of the Cotton Club in connection with the Cotton Club
Acquisition.
5. Represents shares issued to an escrow agent on behalf of Bally Gaming, Inc.
in connection with the restructuring of the mortgage on the Jubilee Casino.
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<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby are the 791,880 Company Shares and the 1,892,626
Selling Stockholders' Shares.
COMPANY SHARES
The 791,880 of the Company Shares are to be issued by the Company to B.C.
and certain shareholders of B.C. pursuant to the terms of the B.C. Agreement.
Bryanston made a capital contribution to the company of 716,881 shares of
Common Stock owned by Bryanston to help satisfy the 791,880 shares the
Company is to issue to B.C. and certain B.C. shareholders. The 716,881 shares
are currently held as treasury stock and will be issued to B.C. shareholders
promptly after the effective date of the Registration Statement. See "Certain
Transactions - Bayou Caddy Acquisition" and "Use of Proceeds."
SELLING STOCKHOLDERS' SHARES
The 1,892,626 of the Selling Stockholders' Shares to which this Prospectus
relates may be sold by the Selling Stockholders who have acquired or will
acquire such shares from the Company (i) upon the exercise of issued and
outstanding options granted pursuant to the Company's 1993 Stock Option Plan
(the "Plan"), or (ii) in connection with acquisition agreements or debt
restructuring agreements. The Company will not receive any of the proceeds from
any sales by Selling Stockholders of Selling Stockholders' Shares, but will
receive the exercise price upon the exercise of options by the Selling
Stockholders. See "Selling Stockholders."
The Selling Stockholders' sales of shares of Common Stock may be effected from
time to time in transactions (which may include block transactions) in the
over-the-counter market or the Boston Stock Exchange, in negotiated
transactions, through the writing of options on the Common Stock, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Stockholders' may effect such transactions by selling Common Stock
directly to purchasers or to or through broker-dealers which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or the
purchasers of Common Stock for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Selling
Stockholders and any broker-dealers that act in connection with the sale of the
Common Stock might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act. The Selling Stockholders may agree to indemnify
any agent, dealer or broker-dealer that participates in transactions involving
sales of the shares against certain liabilities, including liabilities arising
under the Securities Act.
Because the Selling Stockholders may each be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act, the Selling
Stockholders will be subject to prospectus delivery requirements under the
Securities Act. Furthermore, in the event of a "distribution" of its shares,
the Selling Stockholders, any selling broker or dealer and any "affiliated
purchasers" may be subject to Rule 10b-6 under the Exchange Act until its
participation in that distribution is completed.
At the time a particular offer of Selling Stockholders' Shares, made by or on
behalf of any of the Selling Stockholders, to the extent such offer constitutes
as distribution under the Securities
69
<PAGE>
Act, a supplement to this Prospectus will be distributed which will set forth
the type and number of securities being offered by such Selling Stockholders and
the terms of such offering, including the name or names and addresses of any
underwriters, dealers or agents, the purchase price paid by any underwriter for
securities purchased from the Selling Stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the Selling Stockholders'
Shares. However, all brokerage commissions, if any, attributable to the sale of
such shares by holders thereof will be borne by such holders.
70
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company includes 17,000,000 shares of Common
Stock, $.01 par value per share. The holders of Common Stock (i) have equal
ratable rights to dividends from funds legally available therefor, when, as and
if declared by the Board of Directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions applicable
thereto; and (iv) are entitled to one vote per share on all matters on which
stockholders may vote at all meetings of stockholders. All shares of Common
Stock now outstanding are fully paid and non-assessable, and all shares of
Common Stock offered hereby and underlying the Warrants and Options, when
issued, will be fully paid and non-assessable.
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, voting for the election of Directors, can elect all of the Directors to
be elected, if they so choose and in such event, the holders of the remaining
shares will not be able to elect any of the Company's Directors.
WARRANTS
The Company has issued 862,500 warrants, each of which entitles its holder,
commencing on November 4, 1993, to purchase one share of Common Stock at an
exercise price of $12.00 per share and expires November 3, 1998 (the
"Warrants").
The Warrants may be redeemed by the Company at any time prior to their
expiration, at a redemption price of $.10 per Warrant, on not less than 30 days'
prior written notice to the holders of such Warrants, provided that the average
closing bid price per share of the Common Stock, for a period of 20 consecutive
trading days ending on the third day prior to the date of any redemption notice
equals or exceeds 150% of the then effective exercise price (initially $18.00,
subject to adjustment) of the Warrants. Warrantholders shall have exercise
rights until the close of the business day preceding the date fixed for
redemption.
The exercise price of the Warrants is subject to adjustment upon the occurrence
of certain events, including the issuance of dividends payable in Common Stock
and subdivisions or combinations of the Common Stock.
OPTIONS
The Company is authorized to issue options to purchase up to 900,000 shares of
Common Stock pursuant to its 1993 Stock Option Plan. To date, options to
purchase 409,000 shares have been issued. Of such 409,000 options, 385,000
options have an exercise price of $3.25 per share, and 24,000 options have an
exercise price of $11.50 per share. The 409,000 options granted to
71
<PAGE>
date are currently exercisable. Of such 409,000 options, 385,000 expire
on June 9, 2003, and 24,000 expire on December 8, 2003. (See "Executive
Compensation - 1993 Stock Option Plan").
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares, $.01 par value, of
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. The Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. On December 31, 1994, the Company issued 625,222 of its
Preferred Stock in settlement of $8,284,196 due to Bryanston, which includes
approximately $349,000 of accrued interest. The Company has no present
intention to issue any additional shares of its Preferred Stock.
TRANSFER AND WARRANT AGENT
The Company's transfer agent for the Common Stock and warrant agent for the
Warrants is Continental Stock Transfer & Trust Company, Two Broadway, New York,
New York 10007.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 17,000,000 shares of Common Stock authorized, 13,403,275 of
which are issued and outstanding. Of such 13,403,275 shares, 716,881 shares are
being held as treasury shares in connection with the B.C. Agreement. In
addition, 409,000 shares may be issued upon the exercise of outstanding and
currently exercisable options.
Of the 13,403,275 shares of Common Stock currently issued and outstanding,
9,384,205 shares of Common Stock are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act, in that such shares
were issued and sold by the Company in transactions not involving a public
offering and are, as of November 5, 1995, eligible for sale under Rule 144. In
general, under Rule 144 as currently in effect, subject to the satisfaction of
certain other conditions, a person, including an affiliate of the Company, after
at least two years have elapsed from the sale by the Company or any affiliate of
the restricted securities, can (along with any person with whom such individual
is required to aggregate sales) sell, within any three-month period, a number of
shares of restricted securities that does not exceed the greater of 1% of the
total number of outstanding shares of the same class, or, if the Common Stock is
quoted on NASDAQ or a national securities exchange, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least three months, after at least three
years have elapsed from the sale by the Company or an affiliate of the
restricted securities, is entitled to sell such restricted shares under Rule 144
without regard to any of the limitations described above. Of such 9,384,205
shares, 3,467,827 Common Stock are eligible for sale pursuant to Rule 144 by
affiliates and non-affiliates of the Company who are restricted as to the number
of securities they can sell during any three-month period and 5,916,378 shares
are eligible for sale pursuant to Rule 144 by non-affiliates without regard to
any restrictions on the number of shares to be sold. Possible or actual sales
of such Common Stock by stockholders of the Company under Rule 144 may have a
depressive effect upon the price of the Common Stock currently outstanding, and
could also render difficult the sales of Common Stock and Warrants by investors.
73
<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation of the Company provides that no director of the
Company shall be liable to the Company for monetary damages for breach of
fiduciary duty or care as a director except for liability for breach of the
director's duty of loyalty, for acts not in good faith, intentional misconduct
or knowing violations of law, for unlawful payment of dividends or stock
purchases or redemptions or for transactions in which the directors derived an
improper personal benefit. The By-Laws of the Company provide for the
indemnification of officers and directors to the fullest extent permitted by
Delaware law. The Company does not have directors' and officers' liability
insurance but may secure such insurance in the future.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
74
<PAGE>
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the Company
Shares and the Selling Stockholders' Shares being offered hereby, are being
passed upon for the Company by Gersten, Savage, Kaplowitz, & Curtin, LLP, 575
Lexington Avenue, New York, New York 10022, special counsel to the Company.
EXPERTS
The financial statements included in this Prospectus have been audited by
Rothstein, Kass & Company, P.C., independent certified public accountants,
Roseland, New Jersey, to the extent and for the periods set forth in their
reports appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission ("Commission")
a registration statement (as amended, the "Registration Statement") under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith, which may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, NW,
Washington, DC, 20549, and copies of the material contained therein may be
obtained from the Commission upon payment of applicable copying charges.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the reporting and other informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at the offices of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661-2511, and at 7 World Trade Center,
New York, New York, 10048. Copies of such materials can also be obtained by
written request to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, NW, Washington, DC, 20549, at prescribed rates.
The Company's Common Stock is listed on NASDAQ and the BSE at the offices of
NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at
1 Boston Place,
75
<PAGE>
Boston, Massachusetts, 02108, and the Company's periodic reports, proxy
statements, and other information can be inspected at NASDAQ and the BSE at the
offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of
the BSE at 1 Boston Place, Boston, Massachusetts, 02108.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
Independent Auditors' Report...............................................F-1-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity............................F-5-6
Consolidated Statements of Cash Flows......................................F-7-9
Notes to Consolidated Financial Statements...............................F-10-28
BRYANSTON GROUP, INC.
Independent Auditors' Report................................................F-29
Statement of Income Before Taxes............................................F-30
Notes to Financial Statement.............................................F-31-33
COTTON CLUB OF GREENVILLE, INC.
Independent Auditors' Report................................................F-34
Balance Sheets...........................................................F-35-36
Statements of Operations....................................................F-37
Statements of Shareholders' Deficit.........................................F-38
Statements of Cash Flows....................................................F-39
Notes to Financial Statements............................................F-40-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Alpha Hospitality Corporation and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Alpha
Hospitality Corporation and Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended and the period March 19, 1993 (date of inception)
to December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alpha Hospitality
Corporation and Subsidiaries as of December 31, 1995 and 1994 and the results of
their operations and their cash flows for the years then ended and the period
March 19, 1993 (date of inception) to December 31, 1993, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the financial statements, the Company has suffered significant losses from
operations and has a working capital deficit and an accumulated deficit at
December 31, 1995. In addition, the Company was not in compliance with certain
long-term debt which is included in current liabilities. Management's plans in
regard to these matters are also described in Note 14. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-1
<PAGE>
-2
As discussed in Note 9 to the consolidated financial statements, the Company is
a defendant in lawsuits involving automobile accidents, wherein plaintiffs are
seeking compensatory and punitive damages. The ultimate outcome of such
litigation cannot presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been made in the accompanying
consolidated financial statements.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
on Page S-1 is presented for purposes of complying with the Securities and
Exchange Commissions's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Rothstein, Kass & Company, P.C.
- -----------------------------------
Roseland, New Jersey
February 16, 1996, except for Note 15 as
to which the date is March 29, 1996
F-2
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------------
1996 1995 1994
-------------- -------------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash, including restricted cash of $50,000 and $63,837
in 1996 and 1995, respectively $ 2,605,204 $ 2,315,719 $ 1,179,605
Accounts receivable, less allowance for doubtful accounts
of $353,708 in 1996 and 1995 and $35,000 in 1994 631,093 702,800 1,091,594
Inventories 492,037 536,221 671,151
Prepaid insurance 1,079,139 1,796,132 1,044,139
Other current assets 1,048,547 1,349,535 380,777
------------- ------------- -------------
Total current assets 5,856,020 6,700,407 4,367,266
PROPERTY AND EQUIPMENT, less accumulated depreciation and
amortization of $15,187,624, $13,385,041 and $3,765,486
in 1996, 1995 and 1994, respectively 58,538,550 59,254,914 40,069,549
OTHER ASSETS, deposits and other 856,833 818,171 1,053,490
------------- ------------- -------------
$ 65,251,403 $ 66,773,492 $ 45,490,305
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11,910,435 $ 27,319,666 $ 10,026,377
Notes payable 3,838,843 3,815,887 880,051
Accounts payable and other accrued expenses 9,879,776 10,709,533 8,097,396
Accrued payroll and related liabilities 3,622,023 2,848,876 2,705,197
Due to affiliate, current maturity 2,000,000 2,000,000
------------- ------------- -------------
Total current liabilities 31,251,077 46,693,962 21,709,021
------------- ------------- -------------
LONG-TERM DEBT, less current maturities 14,507,463 2,311,751 10,073,870
------------- ------------- -------------
DUE TO AFFILIATE, less current maturity, including
accrued interest of $436,715 and $503,138 in 1996
and 1995, respectively 17,850,571 15,863,999
------------- ------------- -------------
AMOUNT DUE UNDER REDEMPTION AGREEMENT, including accrued
interest of $112,456 462,965
------------- ------------- -------------
MANDATORILY REDEEMABLE COMMON STOCK,
$.01 par value, 96,429 shares issued in 1994 564,910
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized
1,000,000 shares, 625,222 issued in 1994 6,252
Common stock, $.01 par value, authorized 17,000,000
shares, 13,403,325, 12,354,482 and 10,225,000
shares issued in 1996, 1995 and 1994, respectively 134,032 123,544 102,250
Capital in excess of par value 36,471,681 32,779,117 27,639,250
Common stock subscribed 1,600,000
Accumulated deficit (35,426,386) (32,598,881) (14,605,248)
------------- ------------- -------------
Total stockholders' equity 1,179,327 1,903,780 13,142,504
------------- ------------- -------------
$ 65,251,403 $ 66,773,492 $ 45,490,305
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three March 19,
Months 1993 (Date of
Ended Years Ended December 31, Inception) to
March 31, ------------------------ December 31,
1996 1995 1994 1993
---------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Casino $ 12,837,494 $ 26,518,657 $ 41,343,854 $ -
Food and beverage 347,297 1,008,940 1,713,057
Hotel management fees 449,733 2,863,345 2,835,234 858,500
Retail and other 33,205 129,334 208,296 18,477
------------ ------------ ------------ ------------
Total revenues 13,667,729 30,520,276 46,100,441 876,977
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Casino 5,213,494 15,034,903 20,994,854
Food and beverage 264,171 789,086 1,113,093
Hotel management costs 319,794 1,511,786 1,710,060 633,315
Retail and other 21,101 103,276
Selling, general and administration 7,598,513 17,610,997 21,269,076 44,894
Interest expense 1,372,544 3,213,228 3,014,989 375,335
Depreciation and amortization 1,802,582 4,508,947 3,776,262
Pre-opening and development costs 268,265 1,290,312 2,303,365 5,394,147
Financial advisory services fees 1,690,000
Relocation expense 412,492
Buy-out of marketing agreement 1,500,000
Write-off of unamortized discount 931,057
Compensation to stockholders 500,000
Settlement of assumed liabilities 350,000
------------ ------------ ------------ ------------
Total costs and expenses 16,839,363 48,513,909 54,284,975 7,297,691
------------ ------------ ------------ ------------
NET LOSS FROM OPERATIONS (3,171,634) (17,993,663) (8,184,534) (6,420,714)
CAPITAL LEASE RESTRUCTURING 344,129
------------ ------------ ------------ ------------
LOSS BEFORE DEFERRED INCOME
TAX EXPENSE (CREDIT) (2,827,505) (17,993,633) (8,184,534) (6,420,714)
DEFERRED INCOME TAX EXPENSE
(CREDIT) 1,716,000 (1,716,000)
------------ ------------ ------------ ------------
NET LOSS $ (2,827,505) $(17,993,633) $ (9,900,534) $ (4,704,714)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN THOUSANDS) 13,055 10,617 10,225 8,833
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LOSS PER COMMON SHARE $ (0.22) $ (1.69) $ (.97) $ (.53)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in Common
-------------------- -------------------- Excess of Stock Accumulated
Shares Amount Shares Amount Par Value Subscribed Deficit
-------- -------- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of common
stock - $ - 4,250,000 $ 42,500 $ 1,720,001 $ - $ -
Stock exchanged for
services 540,000
Issuance of shares in
connection with
2 for 1 stock split 4,250,000 42,500 (42,500)
Sales of common stock 1,725,000 17,250 12,811,499
Sale of options 1,455,005
Net loss (4,704,714)
-------- -------- ---------- -------- ---------- ---------- -----------
Balances,
December 31, 1993 10,225,000 102,250 16,484,005 (4,704,714)
Conversion of long-term
debt 2,882,926
Stock issued for settlement
of note payable and
accrued interest payable 625,222 6,252 8,277,944
Mandatorily redeemable
common stock accretion (5,625)
Net loss (9,900,534)
-------- -------- ---------- -------- ---------- ---------- -----------
Balances,
December 31, 1994 625,222 6,252 10,225,000 102,250 27,639,250 (14,605,248)
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in Common
-------------------- -------------------- Excess of Stock Accumulated
Shares Amount Shares Amount Par Value Subscribed Deficit
-------- -------- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Conversion of preferred
stock to common stock (625,222) (6,252) 1,250,444 12,504 (6,252)
Common stock issued
pursuant to acquisition 782,609 7,826 4,492,174
Common stock exchanged
for financial advisory
services 90,000 1,600,000
Mandatorily redeemable
common stock accretion (50,805)
Exercise of options 96,429 964 614,750
Net loss (17,993,633)
-------- -------- ---------- -------- ----------- ---------- ----------
Balances,
December 31, 1995 12,354,482 123,544 32,779,117 1,600,000 (32,598,881)
Common stock issued
for payment of
long-term debt 701,017 7,010 2,446,551
Issuance of subscribed
common stock 347,826 3,478 1,596,522 (1,600,000)
Amount due under
redemption agreement (350,509)
Net loss (2,827,505)
-------- -------- ---------- -------- ----------- ---------- ----------
Balances, March 31,
1996 (unaudited) - $ - 13,403,325 $ 134,032 $36,471,681 $ - $ (35,426,386)
-------- -------- ---------- -------- ----------- ---------- ----------
-------- -------- ---------- -------- ----------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three March 19,
Months 1993 (Date of
Ended Years Ended December 31, Inception) to
March 31, ---------------------------- December 31,
1996 1995 1994 1993
------------ ------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,827,505) $ (17,993,633) $ (9,900,534) $ (4,704,714)
------------ ------------- ------------- -------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Brokerage commission 40,000
Common stock issued in exchange for financial
advisory services 1,690,000 500,000
Depreciation and amortization 1,802,582 4,508,947 3,776,262
Write-off of deferred costs, Rising Sun 459,928
Provision for losses on accounts receivable 255,000 35,000
Imputed interest on long-term debt 336,920 505,680
Capital lease restructuring (344,129)
Deferred income tax expense (credit) 1,716,000 (1,716,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 71,707 248,368 (886,034) (240,560)
(Increase) decrease in inventories 44,184 200,799 (488,479) (182,672)
(Increase) decrease in prepaid insurance 716,993 (230,850) 968,514
(Increase) decrease in other current assets 300,988 (813,736) 514,715 (750,032)
Increase (decrease) in accounts payable and
other accrued expenses (709,149) 1,527,398 3,893,329 7,418,525
Increase (decrease) in accrued payroll and
related liabilities 773,147 (186,474) 2,431,108 274,089
------------ ------------- ------------- -------------
Total adjustments 2,656,323 7,659,380 12,297,335 5,849,030
------------ ------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (171,182) (10,334,253) 2,396,801 1,144,316
------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,086,222) (3,716,978) (3,139,651) (27,886,679)
Cash acquired in connection with purchase of
leasehold interest 11,041
Cash acquired in connection with purchase of
Cotton Club 543,100
Proceeds from and payments for deposits and
other assets (38,662) 300,258 (713,039) (291,227)
------------ ------------- ------------- -------------
NET CASH USED IN INVESTING
ACTIVITIES (1,124,884) (2,873,620) (3,852,690) (28,166,865)
------------ ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three March 19,
Months 1993 (Date of
Ended Years Ended December 31, Inception) to
March 31, ---------------------------- December 31,
1996 1995 1994 1993
------------ ------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate 2,052,995 17,863,999
Payments on construction and equipment
notes payable (280,452) (4,845,810)
Proceeds from sales of common stock 14,241,250
Proceeds from sale of options 1,455,005
Proceeds from notes payable 157,702 248,181 12,279,232 29,967,521
Payments on notes payable (134,746) (857,399) (3,994,904)
Proceeds from long-term debt 8,190,632
Payments on long-term debt (490,400) (10,820,974) (1,998,939) (17,445,312)
------------ ------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,585,551 14,343,987 1,439,579 28,218,464
------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 289,485 1,136,114 (16,310) 1,195,915
CASH, beginning of period 2,315,719 1,179,605 1,195,915 -
------------ ------------- ------------- -------------
CASH, end of period $ 2,605,204 $ 2,315,719 $ 1,179,605 $ 1,195,915
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION, cash paid for interest
during the period $ 1,063,508 $ 1,035,498 $ 1,889,212 $ 623,024
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease restructuring, includes accrued
interest of $74,571 $ 344,129
------------
------------
Common stock issued for payment of
long-term debt $ 2,453,561
------------
------------
Amount due under redemption agreement,
includes accrued interest of $112,456 $ 462,965
------------
------------
Accrued interest capitalized to debt $ 1,765,005 $ 213,802
------------- -------------
------------- -------------
Common stock exchanged for financial
advisory services $ 1,690,000 $ 540,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three March 19,
Months 1993 (Date of
Ended Years Ended December 31, Inception) to
March 31, ---------------------------- December 31,
1996 1995 1994 1993
------------ ------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Acquisition of casino:
Fair value of net assets acquired $ 21,880,810
Fair value of liabilities assumed 17,380,810
-------------
Equity investment $ 4,500,000
-------------
-------------
Convertible debt exercised $ 2,882,926
-------------
-------------
Capitalization of accounts payable for
common stock $ 559,286
-------------
-------------
Note payable and accrued interest exchanged for
preferred stock $ 8,284,196
-------------
-------------
Equipment recorded pursuant to obligations under
capital lease and financing agreements $ 89,000 $ 8,998,000
------------- -------------
------------- -------------
Liabilities assumed in connection with purchase
of leasehold interest:
Fair value of net assets acquired $ 3,844,786
Convertible note payable issued, less discount
of $1,166,097 (2,333,903)
Equity investment by certain stockholders (350,000)
-------------
Liabilities assumed $ 1,160,883
-------------
-------------
Capitalization of interest during construction $ 900,000
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Alpha Hospitality Corporation and Subsidiaries (the Company) was
incorporated in Delaware on March 19, 1993 and has adopted a December
year end. The Company owns and operates dockside casinos located in
Lakeshore and Greenville, Mississippi. In addition, the Company
provides services for the management of hotels and motels located
nation-wide.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS AND PRINCIPLES OF CONSOLIDATION - In 1993, the Company
formed three wholly-owned subsidiaries, Alpha Gulf Coast, Inc. (Alpha
Gulf), which commenced operations in January 1994 to own and operate
the Lakeshore casino (SEE NOTE 3), Alpha Hotel Management Company,
Inc. (Alpha Hotel), which commenced operations in September 1993 to
provide hotel management services, and Alpha Rising Sun, Inc. (Alpha
Rising Sun), which has not commenced operations. In 1994 and 1995,
the Company formed Alpha St. Regis, Inc. (St. Regis) and Alpha
Missouri, Inc. (Missouri), wholly-owned subsidiaries, respectively,
which both have not commenced operations. Additionally, the Company
acquired Cotton Club of Greenville, Inc. (subsequently renamed
Jubilation Lakeshore, Inc. (Lakeshore) (SEE NOTE 3)) in November 1995,
which owned and operated a casino located in Greenville, Mississippi.
The accompanying consolidated financial statements include the
accounts of the Company and all of its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.
CASH - The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not
incurred any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash.
INVENTORIES - Inventories, which primarily consist of food and
beverage and uniforms, are stated at the lower of cost or market, with
cost being determined on the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost,
less accumulated depreciation and amortization. The Company provides
for depreciation and amortization using the straight-line method over
the following estimated useful lives:
ESTIMATED
ASSETS USEFUL LIVES
Barge and improvements 20 years
Leasehold and improvements 10-20 years
Gaming equipment 5-7 years
Furniture, fixtures and equipment 5-7 years
Transportation equipment 3 years
PRE-OPENING AND DEVELOPMENT COSTS - The Company incurs start-up costs
in connection with start-up casino operations and joint ventures. The
Company's policy is to expense pre-opening and development costs as
incurred.
F-10
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LOSS PER COMMON SHARE - Loss per common share is based on the weighted
average number of common shares outstanding. In 1993, weighted
average common shares outstanding include 8,500,000 shares issued
within one year of the Company's initial public offering (IPO), with
an issue price less than the IPO price. The Company's common stock
subscribed is included in the computation and the outstanding stock
options and warrants are excluded from the computation since they
would have an antidilutive effect on loss per common share. All
references to the number of shares and per share amounts have been
adjusted for the stock split (SEE NOTE 11).
INCOME TAXES - The Company complies with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between
financial statement and tax basis of assets and liabilities that will
result in future taxable or deductible amounts, and based on enacted
tax laws and rates to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
The Company does not provide for deferred taxes on the unremitted
earnings of its wholly-owned subsidiaries since, under existing tax
laws, its investment could be liquidated tax-free. As a result, any
excess outside financial basis over tax basis will not be expected to
result in taxable income upon reversal and thus will not be a
temporary difference.
CASINO REVENUE - Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses.
PROMOTIONAL ALLOWANCES - Promotional allowances primarily consist of
food and beverage furnished gratuitously to customers. Revenues do
not include the retail amount of food and beverage of approximately
$1,066,000 (unaudited), $3,514,000 and $4,884,000 for the three months
ended March 31, 1996 and the years ended 1995 and 1994, respectively,
provided gratuitously to customers. The cost of these items of
$1,184,000 (unaudited), $4,308,000 and $5,138,000 for the three months
ended March 31, 1996 and the years ended 1995 and 1994, respectively,
are included in casino expenses.
AMORTIZATION OF DEBT DISCOUNT - The Company amortizes the debt
discount on the mortgage note using the interest method, which yields
a constant rate of interest over the life of the note (NOTE 6).
INTEREST CAPITALIZATION - Interest costs incurred during the
construction and development of the dockside casino and related
facilities is capitalized as part of the cost of such assets.
LOAN FEES - Loan fees included in other assets are being amortized
over the life of the equipment notes payable.
F-11
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the
Company's assets and liabilities which qualify as financial
instruments under SFAS No. 107 approximate their fair values at March
31, 1996 (unaudited) and December 31, 1995.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts have been reclassified in 1994 to
conform to the 1995 presentation.
NOTE 3 - BUSINESS COMBINATION:
Effective October 30, 1995, the Company acquired all of the
outstanding stock of Cotton Club of Greenville, Inc. ("CCG"), the
owner and operator of a dockside gaming casino in Greenville,
Mississippi in a business combination accounted for as a purchase.
Accordingly, the results of operations of CCG are included in the
accompanying financial statements from the date of acquisition. In
addition to its dockside gaming vessel, CCG owned interests in certain
real estate in Greenville, which was primarily used for automobile
parking, and certain rights granted by the City of Greenville and the
Greenville Yacht Club to locate its vessel at its present site on Lake
Ferguson which is an inlet of the Mississippi River.
The stock was acquired from a group of sixteen stockholders (former
CCG stockholders) none of whom had any material relationship to the
Company or any of its affiliates, directors or officers.
Consideration for the acquisition consisted of: (a) cash at closing of
$2,404,148; (b) notes due six months after closing of $1,396,510,
bearing interest at 10% per annum; (c) notes due nine months after
closing of $1,896,510, bearing interest at 10% per annum; and (d)
782,609 shares of the common stock of the Company valued at $5.75 per
share. The cash paid at the closing was borrowed by the Company from
Bryanston Group, Inc. (Bryanston), an affiliate.
As part of the acquisition, all debt and accrued interest owed by CCG
to its former stockholders, of approximately $9,600,000, is included
in the consideration above and has been assigned to the Company.
Subsequent to the sale and pursuant to approvals granted by the
Mississippi Gaming Commission, certain lenders to CCG and to Alpha
Gulf, Alpha Gulf transferred its casino gaming barge and its related
operations to the CCG site in Greenville, Mississippi, and CCG
transferred its riverboat casino to Alpha Gulf's former site at
Lakeshore, Mississippi on the Gulf Coast. The casinos commenced
operations at their new sites in November and December 1995.
F-12
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BUSINESS COMBINATION (CONTINUED):
The excess of the purchase price over the net assets of CCG of
approximately $3,043,000 was allocated to property and equipment and
will be depreciated and amortized over the estimated remaining useful
lives of the assets.
The following summarized pro forma information assumes the acquisition
had occurred on January 1, 1994 (in thousands):
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
Total revenues $ 55,927 $ 83,432
--------- ---------
--------- ---------
Net loss $ (18,518) $ (8,561)
--------- ---------
--------- ---------
Loss per common share $ (1.64) $ (.78)
--------- ---------
--------- ---------
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the CCG acquisition had been in effect
for the periods presented. Further, the pro forma results are not
intended to be a projection of future results and do not reflect any
integration costs, cost savings resulting from synergistic
opportunities or the results of operations of other business acquired
or disposed of in 1995 and 1994.
The above amounts reflect adjustments for interest on notes payable
issued as part of the purchase price and depreciation and amortization
on revalued property and equipment.
NOTE 4 - PROPERTY AND EQUIPMENT:
Details of property and equipment at March 31, 1996 and December 31,
1995 and 1994 are as follows:
1996 1995 1994
------------ ------------ ------------
(Unaudited)
Land and building $ 214,068 $ 214,068 $ -
Boat, barge and improvements 24,230,240 23,589,464 16,300,132
Leasehold and improvements 30,313,755 30,000,654 14,026,624
Gaming equipment 10,060,817 10,041,722 6,572,884
Furniture, fixtures and equipment 7,374,362 7,264,414 5,375,674
Transportation equipment 1,037,760 1,034,461 547,514
Construction in progress 495,172 495,172 1,012,207
------------ ------------ ------------
73,726,174 72,639,955 43,835,035
Less accumulated depreciation
and amortization (15,187,624) (13,385,041) (3,765,486)
------------ ------------ ------------
$ 58,538,550 $ 59,254,914 $ 40,069,549
------------ ------------ ------------
------------ ------------ ------------
F-13
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT (CONTINUED):
Included in equipment at March 31, 1996 (unaudited) and December 31,
1995 and 1994 was approximately $1,319,000 related to assets recorded
under capital leases. Included in accumulated depreciation and
amortization at March 31, 1996 (unaudited) and December 31, 1995 and
1994 was approximately $585,000, $422,000 and $208,000, respectively,
of amortization related to assets recorded under capital leases.
In 1993, the Company capitalized approximately $900,000 of interest,
of which approximately $327,000 is included in barge and improvements
and $573,000 is included in leasehold and improvements.
NOTE 5 - LEASEHOLD INTEREST:
On May 14, 1993, in connection with the development of a dockside
casino in Lakeshore, Mississippi, Alpha Gulf acquired from an
unrelated third party (Seller), a leasehold interest (the leasehold)
and certain other assets, net of assumption of certain liabilities.
The net purchase price was $3,500,000 and the Company issued a
convertible promissory note with a stated interest rate of 10% and an
effective rate of 30%. The difference in the interest rates
represents the implicit economic risks inherent in the transaction.
In addition, the Company charged approximately $350,000, resulting
from the settlement of assumed liabilities, to operations in
connection with the acquisition of the leasehold.
Effective February 1, 1994, the Company exercised its right to convert
the Seller's note and accrued interest (carrying amount of $2,882,926)
to 791,880 shares of its outstanding common stock, of which 716,880
shares were contributed to the Company by a stockholder and the
additional 75,000 shares will be issued in 1996.
NOTE 6 - NOTES PAYABLE:
Notes payable at March 31, 1996 and December 31, 1995 and 1994 are
comprised of the following:
<TABLE>
<CAPTION>
Interest
Rate 1996 1995 1994
------ ------------ ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Note payable to third party 12% $ - $ - $ 153,332
Revolving line of credit with payments
of principal and interest due monthly,
collateralized by funds held at the
Company's casino and guaranteed by Prime
an affiliate + 2% 97,510 144,699 685,719
Notes payable to former CCG
stockholders (SEE NOTE 3) 10% 3,293,020 3,293,020
</TABLE>
F-14
<PAGE>
NOTE 6 - NOTES PAYABLE (CONTINUED):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Revolving line of credit of $500,000, with
payments of principal and interest due
March 1, 1996, collateralized by cash
advances (SEE NOTE 16) 357,917 200,215
Note payable to third party with payments
of principal and interest due monthly,
collateralized by certain vehicles 11% 69,152 102,796
Unsecured note payable 53,221
Employee loans Various 21,244 21,936 41,000
----------- --------- ---------
$ 3,838,843 $ 3,815,887 $ 880,051
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
NOTE 7 - LONG-TERM DEBT:
Long-term debt at March 31, 1996 and December 31, 1995 and 1994 is
comprised of the following:
<TABLE>
<CAPTION>
Interest
Rate 1996 1995 1994
------ --------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Mortgage note payable, Bryanston, principal
and interest due monthly through November
1998, collateralized by the barge currently
located in Greenville, Mississippi, and
certain other assets 10% $ 7,800,000 $ 7,800,000 $ -
Mortgage note payable, Hospitality Franchise
Systems, Inc. (HFS), less unamortized
discount based on imputed interest rate
of 10%, paid in 1995 (see disclosure
below) 6% 6,721,908
Mortgage note payable in monthly installments
of $70,000 plus interest at 30-day commercial
paper rate (5.83% at December 31, 1995) plus
3.5%, adjusted quarterly, funded with
weekly deposits of $25,000 into a restricted
cash account, collateralized by the barge
and improvements currently located in
Lakeshore, Mississippi 9% 3,656,272 3,736,383
</TABLE>
F-15
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT (CONTINUED):
<TABLE>
<CAPTION>
Interest
Rate 1996 1995 1994
(Unaudited) ------ -------
--------- -------------
<S> <C> <C> <C> <C>
Equipment notes payable monthly through
November 1999 and collateralized by certain
assets 11-14% 10,616,199 13,431,813 9,282,986
Capitalized lease obligations, payable monthly,
expiring in various years through 2000 10-15% 616,100 924,764 1,106,225
Loans payable, no interest or principal due
until January 1996, except for proceeds from
exercise of warrants and options (NOTE 9).
Remaining balance of loans are payable in
equal quarterly installments over 10 years
with interest at 9% per annum, commencing
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 $2,474,000 and $1,973,000
is owed to Bryanston at December 31, 1995
and 1994, respectively 12% 3,654,973 3,654,973 2,914,333
Bank notes, payable monthly through 1997,
collateralized by certain equipment 8-10% 74,354 83,484 74,795
----------- ----------- -----------
26,417,898 29,631,417 20,100,247
Less current portion 11,910,435 27,319,666 10,026,377
----------- ----------- -----------
$14,507,463 $ 2,311,751 $10,073,870
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Aggregate future required principal payments are approximately as follows:
Year ending December 31:
1996 $ 27,320,000
1997 210,000
1998 189,000
1999 206,000
2000 226,000
Thereafter 1,480,000
------------
$ 29,631,000
------------
------------
F-16
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT (CONTINUED):
In August 1995, Bryanston purchased the mortgage on the Lakeshore
barge from HFS for $7,816,667. This transaction resulted in a write-
off on the unamortized discount on the original note of approximately
$930,000. In connection with agreement, Bryanston also acquired
96,429 shares of common stock owned by HFS (NOTE 14).
At March 31, 1996 (unaudited), the Company was in default of (i) its
mortgage notes payable for non-payment, (ii) the Lakeshore equipment
notes aggregating approximately $3,433,000 for the breach of several
loan covenants and certain loans payable aggregating approximately
$3,655,000 for non-payment. The Company received a waiver of the
defaults of the loan payable and mortgage note payable to Bryanston.
Accordingly, the Lakeshore mortgage note payable ($3,656,000), the
Lakeshore equipment notes payable ($3,433,000) and a certain loan
payable ($1,181,000) are reflected in current liabilities at March 31,
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 $13,432,000 for the breach of several loan covenants and
(iii) a capital lease of approximately $745,000 for non-payment.
Subsequently, the Company has restructured the aforementioned capital
lease (SEE NOTE 16). Certain loans payable aggregating approximately
$3,655,000 went into default in 1996 due to non-payment. The Company
received a waiver on the default with the loan payable to Bryanston
(NOTE 16). Accordingly, the mortgage notes payable ($11,356,000),
equipment notes payable ($13,432,000), capital lease ($745,000) and a
certain loan payable ($1,181,000) are reflected in current liabilities
at December 31, 1995.
At December 31, 1994, the Company was not in compliance with several
covenants under its lakeshore mortgage note payable for the
encumbrance of the Company's barge, and for the default in payment of
a capital lease. The Company had not received a notice of default
under this capital lease, and believed that it will be able to cure
the default within the permitted grace period. The default under the
mortgage note payable resulted in a cross-default of a certain
equipment note. Accordingly, both the mortgage note ($6,722,000) and
the equipment note ($1,102,000) were reflected in current liabilities
at December 31, 1994.
Effective October 24, 1995, the Company restructured a certain
equipment note of approximately $800,000 with an unrelated party. The
amended terms call for 36 monthly installments of $26,000, which
includes interest at 11.5% per annum, commencing November 24, 1995.
F-17
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES:
At March 31, 1996 and December 31, 1995 and 1994, accounts payable and
other accrued expenses are comprised of the following:
1996 1995 1994
----------- ------------ -----------
(Unaudited)
Construction $ 1,425,000 $ 1,218,000 $ 1,498,000
Insurance financing 986,000 1,585,000 984,000
Accrued professional fees 903,000 851,000 375,000
Accrued property taxes 463,000 843,000 200,000
Accrued interest 1,169,000 974,000 561,000
Other 4,934,000 5,239,000 4,479,000
----------- ------------ -----------
$ 9,880,000 $ 10,710,000 $ 8,097,000
----------- ------------ -----------
----------- ------------ -----------
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
Effective September 1, 1993, Alpha Hotel entered into a Service
Agreement and an Expense Reimbursement Agreement with Bryanston.
Under the Service Agreement, Alpha Hotel supplies services for the
management of hotels and motels. Service fees are generated based
upon a percentage of hotel and motel revenues, as defined in the
respective agreements. At December 31, 1995 and 1994 Alpha Hotel
managed 15 and 20 hotels and motels, respectively. Pursuant to the
terms of the Expense Reimbursement Agreement, the Company will
reimburse Bryanston, as the case may be, for direct payroll and
related costs for use of certain office space (approximately $15,000
per month) and its share of office expenses.
In 1993, the Company entered into an agreement with HFS, under which
HFS will provide marketing services. The agreement was for ten years
and could be canceled by the Company after five years. Prior to the
finding of suitability of HFS by the Mississippi Gaming Commission,
the marketing fees were set at $162,834 per month. In June 1994, the
Mississippi Gaming Commission found HFS suitable and the marketing
fees were changed to the greater of 3% of Alpha Gulf's Gaming Revenue
or $1,650,000 per year, computed monthly, commencing July 1, 1994. On
September 22, 1995, the Company arranged for the termination of the
marketing agreement. The funds required to terminate this agreement
($1,500,000) and to pay amounts due under the agreement through the
date of the termination were paid by Bryanston. Marketing services
incurred under this agreement were $564,000 and $1,665,000 for the
years ended December 31, 1995 and 1994, respectively.
F-18
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED):
The Company is obligated under a $20,000,000 non-revolving promissory
note ($19,413,856 and $17,360,861 outstanding at March 31, 1996
(unaudited) and December 31, 1995, respectively) with Bryanston. The
note, which bears interest at prime rate (8.5% at March 31, 1996 and
December 31, 1995) plus 2%, is payable at the lesser of the
outstanding principal amount or $2,000,000 per annum through December
31, 1999. Beginning 1996, interest accrued monthly is due and payable
by the following month. All remaining principal and accrued interest
(approximately $437,000 and $503,000 at March 31, 1996 (unaudited) and
December 31, 1995, respectively) shall be due on December 31, 2000.
Additionally, commencing May 1, 1996 and for each of the next
succeeding three years thereafter, the Company will be required to
make additional principal payments equal to "Available Cash Flow of
Maker" as defined in the note.
The Company is obligated under three property leases at their dockside
casino located in Lakeshore, Mississippi. Two of these leases provide
for changes in the minimum annual rent based on the Consumer Price
Index. One of the leases provides for percentage rent of up to 6% of
gross gaming revenue, as defined in the agreement. The leases expire
between the years 2001 and 2003 and two of the leases have renewal
options for two additional five year terms. The Company has options
to purchase the leased properties for an amount not to exceed
$10,200,000. Rent expense for the three months ended March 31, 1996
and the years ended 1995 and 1994 and the period March 19, 1993 (date
of inception) to December 31, 1993 approximated $148,000 (unaudited),
$576,000 (which has been reduced by approximately $500,000 as a result
of renegotiated terms of the lease), $2,030,000 and $100,000,
respectively.
On October 13, 1995, the Company amended its ground lease at
Lakeshore, Mississippi. The amended lease provides for rent of up to
4.5% of gross gaming revenue, as defined in the agreement, for the
Company's vessel located on that leased property in Lakeshore,
Mississippi and one quarter of one (0.25%) of gross gaming revenues of
the Company's vessel which originally operated in Lakeshore,
Mississippi, with a minimum annual rental of $800,000 per annum
through March 31, 2000 and $950,000 per annum until the termination
date of July 31, 2011.
Effective January 1, 1994, the Company entered into a tideland lease
which provides for an initial term of ten years expiring on December
31, 2003. Subject to certain conditions, the Company has the option
to renew the lease for an additional five year term. Rent expense in
1995 and 1994 was $200,000 under this lease. In September 1995, the
charter and lease agreement was extended on a month to month basis at
the same terms.
The Company entered into a charter and lease agreement in September
1994 with Bryanston Marine, Inc., a related party, to charter a vessel
to be used for dining. The agreement provides for monthly rent of
$9,250, expired in September 1995 and had a purchase option of
$800,000 which expired July 1995. In September 1995, the charter and
lease agreement was extended on a month to month basis at the same
terms.
F-19
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED):
Approximate future aggregate minimum annual rental payments under
these leases are as follows:
Year ending December 31:
1996 $ 2,092,000
1997 1,813,000
1998 1,369,000
1999 1,157,000
2000 1,269,000
Thereafter 11,401,000
-------------
$ 19,101,000
-------------
-------------
On January 19, 1995, the Company, through its subsidiary, St. Regis,
entered into a memorandum of understanding with Catskill Development,
L.L.C. ("Catskill") pursuant to which St. Regis is to participate in
the development of, and thereafter manage, a casino to be built
adjacent to the Monticello Raceway in Sullivan County, New York. It
is intended that the casino will be owned by the St. Regis Mohawk
Indican Tribe (the "Tribe") and will be located on land to be placed
in trust for the benefit of the Tribe. The casino project is subject
to approval by the U.S. Department of Interior, the National Indian
Gaming Commission and the State of New York, as well as the execution
of definitive agreements with the Tribe. It is contemplated that the
Company will be required to contribute an amount preliminarily
estimated at $250,000 toward the design, architectural and other costs
of development plans for the casino. Under the memorandum of
understanding, Catskill and St. Regis commit to enter into a
definitive agreement on the terms established in the memorandum, but
there can be no assurance that such an agreement will ever be
consummated. Bryanston is a 25% member of Catskill.
The Company is obligated under a three year employment contract with a
principal stockholder/officer. Under this agreement, the Company will
accrue deferred compensation of $250,000 per year. In the event of
termination of employment, the terminated officer will be retained to
provide consulting services for two years at $175,000 per annum.
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. Failure to retain the licenses could
have a material adverse effect on the Company's operations.
F-20
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED):
The Company has been named as an additional 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.)
The Plaintiff is seeking $20,000,000. However, in recent settlement
discussions between the Plaintiff and the Company's insurance company,
the Plaintiff has offered a settlement of $7,500,000. The Plaintiff
has initiated a declaratory judgment action (Southern Division)
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. Subsequent to the initiation of the declaratory judgment
action, the Company's primary insurance carrier initiated its own
declaratory action to determine its liability under its insurance
policy. 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 Company has moved to intervene in the declaratory
judgment action brought by the Plaintiff. In both declaratory
judgment actions, Alpha Gulf and the Company are asserting either
cross claims or counterclaims against the insurance carriers involved.
Alpha Gulf and the Company have also moved to consolidate the two
declaratory judgment actions with the Plaintiff's original personal
injury action. The ultimate outcome of this litigation cannot
presently be determined. Accordingly, no provision for any liability
to the Company that may result upon adjudication has been made in the
accompanying consolidated financial statements. The Plaintiff and the
Company's insurance carrier are currently conducting settlement
negotiations, although there can be no assurance that a settlement
will be reached. An unfavorable outcome of this matter will result in
a material adverse effect on the Company's financial position and
results of operations.
As of March 31, 1996 (unaudited), a settlement has been reached
between the Plaintiff and the Company's insurance carrier, in the
amount of $5,125,000, subject to completion of the settlement
documents and the approval of the court. The Plaintiff had brought a
declaratory judgment action against the insurance carrier seeking a
determination of the carrier's liability under the Company's insurance
policies. Subsequently, the primary insurance carrier initiated a
declaratory judgment action against Alpha Gulf and the Company
(Commerce & Industry Company vs. 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 entitled to reimbursement from Alpha Gulf
Coast, Inc. and the Company. 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. The Company has moved to intervene in the
declaratory judgment action brought by the Plaintiff and has moved to
dismiss the insurance carrier's declaratory judgment action on
jurisdictional grounds. In both declaratory judgment actions, Alpha
Gulf and the Company are asserting either cross claims or
counterclaims against the insurance carriers involved. The ultimate
outcome of the declaratory judgment litigation cannot presently be
determined. Accordingly, no provision for any liability to the
Company that may result upon adjudication has been made in the
accompanying consolidated financial statements. However, the
liability under the underlying personal liability action has been set
by settlement at $5,125,000 subject to documentation and court
approval.
F-21
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED):
In January 1996, the Company has been named as a defendant in an
action brought in the Circuit Court of Hynds County, Mississippi (Amos
vs Alpha Gulf Coast, Inc.; Batiste vs Alpha Gulf Coast, Inc.; Ducie vs
Alpha Gulf Coast, Inc.; Johnson vs Alpha Gulf Coast, Inc.; Ramez vs
Alpha Gulf Coast, Inc.). Mr. Amos alleges that on January 16, 1995, a
vehicle operated by him collided with a vehicle negligently operated
by an individual that was served alcoholic beverages by the Company.
The defendant seeks compensating damages of $1,800,000 and punitive
damages of $7,500,000. The remaining defendants allege that they were
passengers in the vehicle operated by Mr. Amos and that they suffered
personal injuries. They seek compensating damages of $1,800,000 each
and punitive damages of $7,500,000 each. The ultimate outcome of this
litigation cannot presently be determined. 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 and, therefore, will not have a
material adverse effect on the Company's financial position and
results of operations.
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.
On January 25, 1995, the Company entered into an agreement to acquire
all the outstanding common stock of Doc Holliday, Inc. ("Doc
Holliday"), the owner and operator of an 18,000 square foot casino in
Central City, Colorado. The Company will issue 92,000 shares of its
common stock and a five year option to purchase up to 500,000 shares
of common stock at an exercise price of $3.50 per share in payment for
the Doc Holliday stock. The agreement may be terminated by the
Company at any time prior to closing for any reason and by any of the
parties upon written notice if the transaction is not consummated by
March 31, 1996. The transaction will be accounted for as a purchase.
The acquisition would not be material to the Company's consolidated
financial statements and, therefore, pro forma information is not
provided (Note 16).
NOTE 10 - AMOUNT DUE UNDER REDEMPTION AGREEMENT (UNAUDITED):
Effective October 15, 1995, the Company restructured certain equipment
notes, aggregating approximately $9,000,000 with unrelated parties.
Pursuant to the restructuring requirements, the Company will repay
approximately $6,500,000 in 48 monthly installments of $166,000, which
includes interest of 10% per annum, commencing December 15, 1995. The
balance of $2,500,000 bears interest at 10% per annum, is due on
November 15, 1999, and my either be partially or fully repaid,
pursuant to an escrow agreement, from the net proceeds from the sale
of approximately 701,000 shares of the Company's common stock held in
escrow. To the extent that the net proceeds exceeds $2,500,000 plus
accrued interest, the excess will be applied to the $6,500,000 portion
of the debt. However, if the net proceeds are less than the
$2,500,000 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.
F-22
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - AMOUNT DUE UNDER REDEMPTION AGREEMENT (UNAUDITED) (CONTINUED):
As of March 1996 (unaudited), the shares were issued and transferred
into escrow and the related debt was reclassified to stockholders'
equity. Stockholders' equity is adjusted for changes in the market
value of the underlying common stock, not to exceed the original debt
incurred under the common stock is sold by the unrelated party.
At March 31, 1996 (unaudited), the amount due under the redemption
agreement is $462,965, which includes $112,456 of accrued interest,
resulting from the decrease in the fair market value of the stock at
March 31, 1996 ($3.00) and the price at the date of the agreement
($3.50).
NOTE 11 - STOCKHOLDERS' EQUITY:
In May 1993, the Company sold to certain of its founding stockholders
4,935,013 shares of its common stock for an aggregate of approximately
$1,136,000. Included in compensation and related expenses in 1993 is
$500,000 relating to this transaction. In addition, the Company sold
to Bryanston 3,564,987 shares of its common stock at approximately
$.18 per share plus the rights to provide management services pursuant
to the Service Agreement (NOTE 9). The rights under the Service
Agreement are recorded at Bryanston's cost, which is zero.
The Company issued 175,000 shares of its common stock in payment of
the brokerage commission related to the purchase of the leasehold
interest (NOTE 5). Included in other expenses in 1993 is $40,000
which is the amount management has ascribed to these shares.
On June 3, 1993, the Company's Board of Directors adopted the 1993
Stock Option Plan (Plan) providing for incentive stock options
("ISO's") and non-qualified stock options (NQSO's). The Company has
reserved 900,000 shares of common stock for issuance upon the exercise
of options to be granted under the plan. The exercise price of an ISO
or NQSO will not be less than 100% of the fair market value of the
Company's common stock at the date of the grant. The Company granted
options to purchase an aggregate of 384,500 shares of common stock at
an exercise price of $3.25 through December 31, 1995. In addition,
effective December 8, 1993, the Company granted options to purchase an
aggregate of 24,000 shares of common stock at an exercise price of
$11.50. The maximum term of each option granted under the plan is ten
years, however, options granted to an employee owning greater then 10%
of the Company's common stock will have a maximum term of five years.
No options under this plan were exercised in 1996 (unaudited), 1995,
1994 and 1993.
On August 20, 1993, the Company's stockholders and the Board of
Directors authorized a 2 for 1 common stock split. As a result of the
split, 4,250,000 additional shares were issued and capital in excess
of par value was reduced by $42,500.
On October 26, 1993, the Company entered into an option agreement with
HFS for which the Company received $600. The agreement provides for
HFS to receive an option, expiring on October 31, 1998, to purchase
600,000 shares of the Company's common stock at an exercise price of
$14 per share. The value ascribed to the option and credited to
capital in excess of par value was $1,455,005, which was the amount of
the discount on the mortgage note payable to HFS (NOTE 7).
F-23
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCKHOLDERS' EQUITY (CONTINUED):
On November 5, 1993, the Company completed its public offering for the
sale of 1,500,000 shares of common stock at $9.00 per share and
750,000 redeemable common stock purchase warrants at $.10 per warrant.
Each warrant entitles the holder to purchase one share of common stock
at the exercise price of $12.00, commencing November 5, 1993 until
November 4, 1998. On November 18, 1993, the underwriter exercised its
option to purchase 225,000 shares of the Company's common stock at
$9.00 per share and 112,500 warrants at $.10 per warrant. As of
December 31, 1995, no warrants were exercised.
Effective December 31, 1994, the Company issued 625,222 shares of its
preferred stock in settlement of $8,284,196 due to Bryanston, which
includes approximately $349,000 of accrued interest. Effective
November 1, 1995, the Company converted 625,222 shares of preferred
stock to 1,250,444 shares of common stock in a 2 for 1 exchange.
In consideration for services provided to the Company in the
acquisition of the CCG (NOTE 3), the Company intends to issue 347,826
shares to Bryanston with a fair value of $1,600,000 and options to a
third party with a fair value of $90,000. The Bryanston shares are
included in common stock subscribed at December 31, 1995. In
addition, the Company granted to Bryanston an option to acquire
347,826 shares of the Company's common stock at an exercise price per
share equal to the closing NASDAQ bid price at of December 4, 1995
($5.375 per share). The option expires on December 4, 2000.
In 1996 (unaudited), the Company issued the 347,826 shares to
Bryanston for services provided to the Company in the acquisition of
the CCG.
In 1996 (unaudited), the Company issued 701,017 shares, to be held in
escrow, related to certain restructured equipment notes (SEE NOTE 10).
F-24
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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 March 31, 1996 and
December 31, 1995 and 1994, 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):
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ---------
(Unaudited)
<S> <C> <C> <C>
Pre-opening costs currently deducted for financial
reporting and amortized over 5 years for tax purposes $ 1,754 $ 1,788 $ 2,238
Net operating loss carryforward 13,108 11,524 3,368
Differences between financial and tax depreciation methods (1,862) (2,077) (150)
Differences in basis of HFS debt due to discount for
warrants received (403)
Differences between financial and tax basis of assets
and liabilities 1,756 1,737 573
Interest capitalized for financial reporting and expensed
for tax purposes (221) (224) (234)
Other (77) (77)
--------- --------- -------
Deferred tax asset 14,458 12,671 5,392
Valuation allowance on deferred tax asset (14,458) (12,671) (5,392)
--------- --------- -------
$ - $ - $ -
--------- --------- -------
--------- --------- -------
</TABLE>
For the year ended December 31, 1994, the Federal statutory tax rate
and the Company's effective rate differs due to recording a valuation
allowance for the entire deferred tax asset which includes the
reversal of $1,716,000 recorded at December 31, 1993.
The Company has available for federal income tax purposes, a net
operating loss carryover of approximately $32,927,000 of which
$883,000, $7,407,000 and $24,637,000 will expire in the years 2008,
2009 and 2010, respectively.
At March 31, 1996 (unaudited), the Company has available for federal
income tax purposes, a net operating loss carryover of approximately
$37,450,000 of which $883,000, $7,407,000, $24,637,000 and $4,523,000
will expire in the years 2008, 2009, 2010 and 2011, respectively.
F-25
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SEGMENT INFORMATION:
The Company's two business segments are operating casinos in Lakeshore
and Greenville, Mississippi and hotel management services to hotels
located in the United States. The following financial data is
presented for the business segments of the Company for the years ended
December 31, 1995, 1994 and 1993 (includes eight months of the
Company's predecessor, Bryanston). Operating profit (loss) by segment
is total revenue less operating expenses. In computing operating
profit (loss) by business segment, casino revenue includes casino,
food and beverage, and retail and other revenue and casino expenses
include casino, food and beverage, retail and other, selling, general
and administrative, depreciation and financial advisory services fees.
Identifiable assets by business segment are those assets used in
Company operations in each segment. Corporate assets are included in
casino identifiable assets because they are principally utilized in
casino operations. Capital expenditures include acquisitions of
property and equipment.
Hotel
Casino Management
-------- ----------
(in thousands)
1993:
Total revenue $ - $ 3,092 (1) (2)
Operating profit - 883 (1)
Identifiable assets 45,241 242
Depreciation and amortization - 83 (1)
Capital expenditures 40,607 -
1994:
Total revenue $ 43,265 $ 2,835 (3)
Operating profit (3,991) 1,125
Identifiable assets 44,812 678
Depreciation and amortization 3,776 -
Capital expenditures 3,140 -
1995:
Total revenue $ 27,657 $ 2,863 (4)
Operating profit (loss) (11,998) 1,351
Identifiable assets 66,353 420
Depreciation and amortization 4,509 -
Capital expenditures 23,680 - (5)
(1) Total revenue, operating profit and depreciation and amortization in
1993 includes eight months of activity for Bryanston.
(2) The Company and Bryanston had five major customers in the hotel
operations segment which accounted for 21%, 18% 16%, 12% and 12% of
revenue, respectively, in 1993.
(3) The Company had five major customers in the hotel operations segment
which accounted for 24%, 23%, 18%, 15% and 13% of revenue,
respectively, in 1994.
F-26
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SEGMENT INFORMATION (CONTINUED):
(4) The Company had five major customers in the hotel operations
segment which accounted for 23%, 19%, 17%, 17% and 13% of
revenue, respectively, in 1995.
(5) Includes $19,963 of capital expenditures relating to the
acquisition of CCG (NOTE 3).
NOTE 14 - MANDATORILY REDEEMABLE COMMON STOCK:
In November 1994, the Company entered into an agreement with HFS to
settle approximately $559,000 owed pursuant to the marketing agreement
(NOTE 9) by issuing 96,429 shares of its common stock. HFS was given
a put option which is exercisable during the thirty day period
commencing one year from the date of the agreement at $6.50 per share.
The common stock was recorded at its fair value at the issuance date
($5.80 per share). The carrying amount was periodically increased for
the amount which will be payable upon redemption. The accretion to
the carrying amount ($50,805 and $5,625 in 1995 and 1994,
respectively) was determined using the straight-line method (which did
not materially differ from the interest method) and resulted in a
corresponding decrease to capital in excess of par value. In October
1995, HFS exercised their put option, purchased 96,429 shares of
common stock for approximately $616,000, and subsequently sold the
shares to Bryanston.
NOTE 15 - CONTINUING OPERATIONS:
The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered
significant losses from operations and has a working capital deficit
of $25,395,057 (unaudited) and $39,993,555 and an accumulated deficit
of $35,426,386 (unaudited) and $32,598,881 at March 31, 1996 and
December 31, 1995, respectively.
Management of the Company recognizes that these conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans include continuing to operate the
Greenville Casino profitably, sell certain assets located in
Lakeshore, develop future casino locations in Missouri and New York,
and continue to reduce and monitor operating expenses. Accordingly,
the Company's ability to continue as a going concern is dependent upon
its ability to develop working capital, attain future profitable
operations and meet its creditors' demands. The financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 16 - SUBSEQUENT EVENTS:
As of March 29, 1996, Bryanston has advanced approximately $1,275,000
to the Company pursuant to a non-revolving promissory note effective
January 5, 1995 (NOTE 9).
On March 29, 1996, the Company received a waiver of default on the
Bryanston note payable of $2,474,000. The waiver provides for the
Company to cure the default by March 31, 1997.
F-27
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS (CONTINUED):
Effective April 12, 1996 (unaudited), the Company restructured its
capital sign lease of approximately $745,000 with an unrelated party.
The terms of this restructure reduces the lease principal amount to
$475,000 and forgives approximately $74,000 of accrued interest. The
effective rate of the restructured lease is 10% per annum, with a four
year term.
Effective May 1, 1996 (unaudited), the Company terminated its stock
acquisition agreement with Doc Holliday, Inc., which owns an operates
Doc Holliday Casino located in Central City, Colorado.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bryanston Group, Inc.
f/k/a Buckhead Hotel Management Company, Inc.-
Hotel Management Division
Valhalla, New York
We have audited the accompanying statement of income before income taxes for the
eight months ended August 31, 1993 of the Hotel Division of Bryanston Group,
Inc. f/k/a Buckhead Hotel Management Company, Inc. - Hotel Management Division
(the Business). This financial statement is the responsibility of the
management of the Business. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations before income taxes for the
eight months ended August 31, 1993 of the business in conformity with generally
accepted accounting principles.
As more fully described in the notes to the financial statement, the Business
was part of Bryanston Group, Inc., f/k/a Buckhead Hotel Management Company, Inc.
and had no separate legal status. The method of determining the portion of the
income and expenses of Buckhead included in the accompanying financial statement
of the Business is described in Note 1. Accordingly, the accompanying financial
statement is not indicative of the operating results of the Business as if it
were on a stand-alone basis.
/s/ Rothstein, Kass & company, P.C.
Roseland, New Jersey
February 1, 1994
F-29
<PAGE>
BRYANSTON GROUP, INC.
F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.-
HOTEL MANAGEMENT DIVISION
STATEMENT OF INCOME BEFORE INCOME TAXES
Eight Months Ended August 31, 1993
REVENUES:
Management fees $2,232,721
Interest 17,797
----------
Total revenues $ 2,250,518
COSTS AND EXPENSES:
Direct payroll and related items 868,933
Selling, general and administrative 457,435
Depreciation and amortization 82,930
----------
Total costs and expenses 1,409,298
------------
INCOME BEFORE INCOME TAXES $ 841,220
------------
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENT
F-30
<PAGE>
BRYANSTON GROUP, INC.
f/k/a BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.
HOTEL MANAGEMENT DIVISION
NOTES TO FINANCIAL STATEMENT
NOTE 1 - BASIS OF PRESENTATION:
On May 17, 1993, Buckhead Hotel Management Company, Inc. (Buckhead)
changed its name to Bryanston Group, Inc. (Bryanston).
Effective September 1, 1993, Bryanston entered into a Service
Agreement and an Expense Reimbursement Agreement with Alpha Hotel
Management Company, Inc., (Alpha Hotel), a related party, whereby
Alpha Hotel will supply services for the management of 21 hotels and
motels (the Business) (NOTE 7). Tollman Hundley Hotel Group is also a
party to the Expense Reimbursement Agreement. Service fees are
generated based upon a percentage of hotel and motel revenues, as
defined in the respective agreements. Pursuant to the terms of the
Expense Reimbursement Agreement, Bryanston and Tollman Hundley Hotel
Group, as the base may be, will be reimbursed by Alpha Hotel for
direct payroll and related costs, use of certain office space
(approximately $15,000 per month), and its share of office expenses.
The Business, on a historical basis, had no separate legal status
since it was a division of Bryanston. The accompanying financial
statement has been prepared from the records of Bryanston and include
only the operating results of the Business.
The operating results of the Business do not include a provision for
income taxes. However, the statement of income includes an allocation
of selling, general and administrative expenses from Buckhead America
Corporation (BAC), formerly the parent of Bryanston, (SEE NOTE 5).
The statement of income excludes hotel and motel payroll and related
costs, which are paid by Bryanston and reimbursed by the respective
managed hotels and motels.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEPRECIATION AND AMORTIZATION - The Company provides for depreciation
and amortization as follows:
ESTIMATED
ASSET USEFUL LIVES
Computer equipment 5 Years
Furniture and fixtures 7 Years
Leasehold improvements 12 Years
AMORTIZATION OF ASSUMED MANAGEMENT CONTRACTS - The cost of assuming
management contracts is being amortized on the straight-line basis
over a 5 year term.
F-31
<PAGE>
BRYANSTON GROUP, INC.
F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.-
HOTEL MANAGEMENT DIVISION
NOTES TO FINANCIAL STATEMENT
NOTE 3 - MANAGEMENT CONTRACTS AND CONTINGENCIES:
Bryanston managed 24 hotels and motels during the eight months ended
August 31, 1993, principally in the northeastern and southeastern
parts of the United States. Management fees are based on a percentage
of managed property revenues, as defined in the respective management
agreements, and range between 2% and 5%. In addition, certain
agreements provide for incentive fees which can be earned based on
operating results. During the eight months ended August 31, 1993,
management fee revenues included approximately $187,000 earned under
incentive fee provisions.
At August 31, 1993, the contracts, excluding extension options
contained in certain agreements, expire as follows:
ESTIMATED
PERCENTAGE
NUMBER OF OF ANNUAL
CONTRACTS TERM REMAINING FEE REVENUES
15 1-5 Years 54%
3 6-10 Years 6%
3 Over 10 Years 40%
Six contracts contain provisions whereby the owner may terminate the
contract if certain performances are not met.
NOTE 4 - FRANCHISE AGREEMENTS:
At August 31, 1993, twenty of the twenty-one hotels managed by
Bryanston are subject to franchise agreements. Pursuant to the
franchise agreements, Bryanston is responsible for collecting
reservation and other fees from the managed properties and remitting
them to the franchisor. These franchise agreements expire
simultaneously with the management contracts.
NOTE 5 - RELATED PARTY TRANSACTIONS:
BAC allocated selling, general and administrative expenses based upon
(i) estimates of the time devoted to the Business by certain BAC
employees, (ii) estimated occupancy of the buildings, (iii) sales, or
(iv) a combination of these methods. BAC allocated costs and expenses
to the business of approximately $175,000 in 1993.
F-32
<PAGE>
BRYANSTON GROUP, INC.
F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.-
HOTEL MANAGEMENT DIVISION
NOTES TO FINANCIAL STATEMENT
NOTE 6 - MAJOR CUSTOMERS:
In 1993, management fees included revenues earned from each of three
major customers in amounts ranging from $328,000 to $432,000 and
aggregating $1,128,000.
NOTE 7 - SUBSEQUENT EVENT:
In October 1993, one of the management agreements was terminated.
This contract generated management fees of approximately $256,000 for
the eight months ended August 31, 1993.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cotton Club of Greenville, Inc.
We have audited the accompanying balance sheets of Cotton Club of Greenville,
Inc. as of May 31, 1995 and December 31, 1994 and 1993, and the related
statements of operations, shareholders' deficit, and cash flows for the five
month period ended May 31, 1995, for the year ended December 31, 1994, and for
the period from December 21, 1992 (inception) through December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 Cotton Club of Greenville, Inc.
at May 31, 1995 and December 31, 1994 and 1993, and the results of its
operations and its cash flows for the five month period ended May 31, 1995, for
the year ended December 31, 1994, and for the period from December 21, 1992
(inception) through December 31, 1993, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Cotton
Club of Greenville, Inc. will continue as a going concern. As more fully
described in Note 2, the Company's working capital deficiency raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
- ---------------------
New Orleans, Louisiana
July 7, 1995
F-34
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
BALANCE SHEETS
MAY 31 DECEMBER 31
1995 1994 1993
--------- -------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 572 $ 831 $ 1,728
Restricted cash 101 - -
Inventories 94 58 69
Prepaid expenses 448 574 360
Other current assets 2 10 47
--------- --------- --------
Total current assets 1,217 1,473 2,204
PROPERTY AND EQUIPMENT:
Land 140 140 140
Parking lot improvements 1,379 1,379 1,350
Riverboat and related improvements 12,420 12,168 11,037
Gaming equipment 5,269 5,220 3,863
Furniture and fixtures 2,204 2,105 1,686
Vehicles 517 543 493
--------- --------- --------
21,929 21,555 18,569
Less accumulated depreciation 3,921 2,716 193
--------- --------- --------
18,008 18,839 18,376
--------- --------- --------
OTHER ASSETS:
Land deposits 220 174 50
Deposits 267 265 512
Deferred licensing costs, net of
accumulated amortization of $79,000
at May 31, 1995 and $60,000 at
December 31, 1994 36 55 115
--------- --------- --------
523 494 677
--------- --------- --------
$ 19,748 $ 20,806 $ 21,257
--------- --------- --------
--------- --------- --------
SEE ACCOMPANYING NOTES
F-35
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
BALANCE SHEETS (CONTINUED)
MAY 31 DECEMBER 31
1995 1994 1993
--------- --------- --------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,808 $ 2,213 $ 2,703
Conversion contract payable - - 1,268
Accrued expenses 1,586 1,838 965
Current portion of accrued interest
to related parties 1,289 130 230
Current portion of notes payable
to related parties 7,892 130 5,378
Current portion of long-term debt 3,404 2,454 4,040
--------- --------- --------
Total current liabilities 15,979 6,765 14,584
Accrued expenses 20 - -
Accrued interest to related parties,
less current portion - 701 -
Notes payable to related parties,
less current portion 256 7,972 2,000
Long-term debt, less current portion 5,604 6,939 7,070
--------- --------- --------
5,880 15,612 9,070
--------- --------- --------
SHAREHOLDERS' DEFICIT:
Common stock, no par value,
authorized, issued and outstanding
10,000 shares 2,000 2,000 2,000
Accumulated deficit (4,100) (3,484) (4,310)
--------- --------- --------
(2,100) (1,484) (2,310)
Note receivable from shareholder (11) (87) (87)
--------- --------- --------
Total shareholders' deficit (2,111) (1,571) (2,397)
--------- --------- --------
Total liabilities and
shareholders' deficit $ 19,748 $ 20,806 $ 21,257
--------- --------- --------
--------- --------- --------
SEE ACCOMPANYING NOTES
F-36
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 21,
1992
FIVE MONTH (INCEPTION)
PERIOD ENDED YEAR ENDED THROUGH
MAY 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ---------- -------------
(IN THOUSANDS)
REVENUE:
Casino $ 12,258 $ 37,332 $ 2,076
Food and beverage 1,158 3,110 262
Other 24 350 382
----------- --------- --------
13,440 40,792 2,720
Less promotional allowances 878 3,060 456
----------- --------- --------
12,562 37,732 2,264
----------- --------- --------
COSTS AND EXPENSES:
Casino 5,033 14,012 1,057
Food and beverage 360 1,434 165
Other operating expenses 1,172 4,029 448
Selling, general and administrative 4,415 12,360 1,055
Depreciation 1,211 2,527 193
Preopening costs - - 3,432
----------- --------- --------
12,191 34,362 6,350
----------- --------- --------
INCOME (LOSS) FROM OPERATIONS 371 3,370 (4,086)
----------- --------- --------
OTHER INCOME (EXPENSE):
Interest income 3 10 8
Interest expense, net of capitalized
interest of $304,000 in 1993 (990) (1,729) (232)
Loss on restaurant advances - (600) -
----------- --------- --------
(987) (2,319) (224)
----------- --------- --------
NET INCOME (LOSS) $ (616) $ 1,051 $ (4,310)
----------- --------- --------
----------- --------- --------
SEE ACCOMPANYING NOTES
F-37
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
NOTE
RECEIVABLE
COMMON ACCUMULATED FROM
STOCK DEFICIT SHAREHOLDER TOTAL
------- --------- ----------- ------
(IN THOUSANDS)
Issuance of 10,000 shares of common
stock at $200 per share $2,000 $ - $ - $2,000
Note receivable from shareholder for
purchase of common stock - - (87) (87)
Net loss from December 21, 1992
through December 31, 1993 - (4,310) - (4,310)
------ ------- ------ -------
BALANCE AT DECEMBER 31, 1993 2,000 (4,310) (87) (2,397)
Net income - 1,051 - 1,051
Cash dividends - (225) - (225)
------ ------- ------ -------
BALANCE AT DECEMBER 31, 1994 2,000 (3,484) (87) (1,571)
Net loss - (616) - (616)
Payments on note receivable - - 76 76
------ ------- ------ -------
BALANCE AT MAY 31, 1995 $2,000 $(4,100) $ (11) $(2,111)
------ ------- ------ -------
------ ------- ------ -------
SEE ACCOMPANYING NOTES
F-38
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 21,
1992
FIVE MONTH (INCEPTION)
PERIOD ENDED YEAR ENDED THROUGH
MAY 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
--------- ------------- --------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATION ACTIVITIES:
Net income (loss) $ (616) $ 1,051 $ (4,310)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,270 2,652 193
Loss on disposal of fixed assets -- 3 --
Changes in operating assets
and liabilities:
Inventories (36) 11 (69)
Prepaid expenses (199) 92 (109)
Other current assets 8 37 (47)
Deposits (2) 297 (512)
Other assets -- -- (115)
Accounts payable (157) 351 1,709
Accrued expenses (83) 591 714
Accrued interest, related parties 458 601 230
-------- --------- --------
Net cash provided by (used in)
operating activities 643 5,686 (2,316)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (139) (3,883) (14,454)
Land deposits (46) (174) (50)
-------- --------- --------
Net cash used in investing activities (185) (4,057) (14,504)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock -- -- 1,913
Proceeds from long-term debt - 606 11,635
Proceeds from notes payable to
related parties 216 1,075 9,249
Payments of long-term debt (757) (3,630) (2,378)
Payments of notes payable to
related parties (151) (352) (1,871)
Dividend paid to shareholder -- (225) --
Proceeds from payment of note
receivable from shareholder 76 -- --
Restricted cash (101) -- --
-------- --------- --------
Net cash provided by (used in)
financing activities (717) (2,526) 18,548
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (259) (897) 1,728
CASH AND CASH EQUIVALENTS,
beginning of period 831 1,728 --
-------- --------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 572 $ 831 $ 1,728
-------- --------- --------
-------- --------- --------
SEE ACCOMPANYING NOTES
F-39
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 1 -ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS - Cotton Club of Greenville, Inc. (the
"Company") was organized on December 21, 1992 and commenced operations
in December 1993. The Company owns and operates a dock-side gaming,
restaurant and lounge facility located on the Mississippi River in
Greenville, Mississippi known as the Cotton Club Casino.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with original maturities of three months or less when
purchased to be cash equivalents.
INVENTORIES - Inventories, which consist principally of food, beverage
and operating supplies, are stated at the lower of cost or market using
the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed on a straight-line basis over the following
estimated useful lives:
Parking lost improvements 15-30 years
Riverboat and related improvements 10 years
Gaming equipment 5 years
Furniture and fixtures 7 years
Vehicles 5 years
INCOME TAXES - The Company has elected "S" Corporation status under the
provisions of the Internal Revenue Code; accordingly, the Company's
taxable income (loss) is included in the federal income tax returns of
its shareholders. "S" Corporation status is also applicable to the
Mississippi jurisdiction where the Company operates.
DEFERRED LICENSING COSTS - Deferred licensing costs include costs
incurred to obtain the Company's initial Mississippi gaming license.
These costs are being amortized using the straight-line method over a
two-year period.
REVENUE RECOGNITION - The Company recognizes as casino revenue the net
win from gaming activities, which is the difference between gaming wins
and losses.
PROMOTIONAL ALLOWANCES - Promotional allowances consist of food and
beverage furnished gratuitously to customers. The retail value of such
goods and services are included in the respective revenue
classifications and then deducted as promotional allowances. The
estimated costs of providing such promotional allowances of
approximately $758,000 for the five month period ended May 31, 1995 and
$818,000 in 1994 are included in casino expenses.
PREOPENING COSTS - Operating costs and expenses incurred prior to the
opening of the gaming facility were capitalized as preopening costs.
These costs were charged to expense at the commencement of operations in
December 1993.
RECLASSIFICATION - Certain amounts in 1993 and 1994 have been
reclassified to conform to the May 31, 1995 presentation.
F-40
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 2 -BASIS OF PRESENTATION:
The Company's working capital deficiency of approximately $14,762,000
includes approximately $9,181,000 of obligations to related parties.
The Company's current financial resources are insufficient to repay
these obligations. As a result, substantial doubt exists as to whether
the Company will be able to generate sufficient cash flow from
operations to repay these obligations without restructuring or obtaining
substantial additional financing. There can be no assurance that the
Company will be able to restructure these obligations or obtain
substantial additional financing on terms favorable to the Company. The
accompanying financial statements have been prepared assuming the
Company will continue as a going concern; however, the uncertainty
related to the matters described above raises substantial doubt about
the Company's ability to continue as a going concern.
The Company has entered into a letter of intent with an unrelated entity
for the proposed sale of the Company in 1995. See Note 7 for
information related to the proposed sale transaction. Management's
intentions are to repay these obligations from the proceeds obtained
from the planned sale of the Company. However, there can be no
assurance that the proposed sale of the Company can be successfully
accomplished on terms acceptable to the Company.
NOTE 3 -LONG-TERM DEBT:
<TABLE>
<CAPTION>
MAY 31 DECEMBER 31
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
9.58% note (30-day commercial paper rate plus
3.5%, adjusted quarterly), payable in monthly
installments of $70,000 plus interest, funded
by weekly deposits of $25,000 into a restricted
cash account commencing May 8, 1995,
collateralized by first preferred ship mortgage
on the gaming vessel, net of unamortized loan
fees of $61,000 in 1995, $64,000 in 1994 and
$80,000 in 1993 $4,169,000 $4,336,000 $5,420,000
12.68% note, payable in monthly installments,
including interest, of $90,000, collateralized
by certain gaming equipment 1,832,000 1,966,000 2,453,000
13.52% note, payable in monthly installments,
including interest, of $77,000, collateralized
by first preferred ship mortgage on barge, net
of unamortized loan fees of $37,000 in 1994 and
$86,000 in 1993 1,391,000 1,476,000 1,861,000
12.68% note, payable in monthly installments,
including interest, of $46,000, collateralized
by slot machines 1,182,000 1,243,000 -
</TABLE>
F-41
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 3 -LONG-TERM DEBT (CONTINUED):
<TABLE>
MAY 31 DECEMBER 31
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
10.25% note (prime plus 1.75%), payable in monthly
installments, including interest, of $17,000, with
a final payment of remaining principal and interest
due July 1995, collateralized by vehicles 268,000 342,000 -
9% unsecured note, payable in monthly installments,
including interest, of $29,000 158,000 - -
8% note (prime plus 2%), $250,000 due on demand
with remaining principal and interest due April
1994, collateralized by restricted cash of
$255,000 - - 500,000
13.5% note (prime plus 5%), payable in monthly
principal payments of $22,000 with a final payment
of remaining principal and interest due December
1994, collateralized by certain gaming equipment - 22,000 325,000
8% note, payable in monthly installments of $100
including interest, collateralized by certain
property 8,000 8,000 8,000
10% note, due January 1994, collateralized by
parking lot improvements - - 293,000
8.75% note (prime plus 2.75%), due July 1994,
collateralized by vehicles - - 200,000
12% note, payable in monthly installments of
$17,000 including interest, unsecured - - 50,000
---------- ---------- ----------
9,008,000 9,393,000 11,110,000
Less current portion 3,404,000 2,454,000 4,040,000
---------- ---------- ----------
$5,604,000 $6,939,000 $7,070,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-42
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 3 -LONG-TERM DEBT (CONTINUED):
Maturities of long-term debt for the twelve month periods following May
31, 1995 are as follows:
1996 $ 3,404,000
1997 2,794,000
1998 1,112,000
1999 847,000
2000 847,000
Thereafter 4,000
-----------
$ 9,008,000
-----------
-----------
See Note 4 for information regarding notes payable.
NOTE 4 - RELATED PARTY TRANSACTIONS:
The capitalization of the Company consists of 10,000 shares of
authorized common stock issued to the shareholder at an agreed upon
purchase price of $2,000,000. A note receivable in the amount of
$87,000 was given to the Company by the shareholder in February 1993 for
the balance due on such purchase. The note has been offset against
shareholders' equity to reflect total consideration paid of $1,913,000.
The note receivable is unsecured and bears annual interest at 8%.
In February 1993, an agreement (the "Option Agreement") was entered into
between the original shareholder and a group of individuals (the
"Optionees") whereby the original shareholder received $1,653,000 in
return for certain stock options granted to the Optionees. The terms of
the Option Agreement grant the Optionees the right to acquire from the
shareholder a portion of his common stock in the Company, contingent
upon certain factors which include compliance with any law, rule or
regulation imposed or enforced by the Mississippi Gaming commission
which are applicable to owners of securities issued by an entity which
holds a state gaming license. If all the Optionees fully exercise their
rights under the terms of the Option Agreement, the shareholder will
retain a 13% ownership interest in the Company with the remaining 87%
held by the Optionees, with no one Optionee owning more than 18%. In
March 1995, all but one of the Optionees exercised their options.
In conjunction with the execution of the Option Agreement, certain
Optionees advanced to the Company cash of $2,000,000 in 1993 in return
for unsecured subordinated promissory notes which originally bore an
annual interest rate of 8.5%. The terms of these notes provide for an
escalated interest rate of 12.5% in the event the notes were not paid on
the original maturity date of January 15, 1995. Additional cash
advances of $250,000 were made during 1994 in return for unsecured
subordinated promissory notes which bear an annual interest rate of 8.5%
and mature in December 1995. In March 1995, additional cash advances of
$142,000 were received from certain Optionees, in return for unsecured
subordinated promissory notes which bear an annual interest rate of 10%
and mature in March 1996. While the terms of these notes provide for
the payment of accrued interest on July 15 and January 15 of each year,
no interest has been paid to date and the Optionees have agreed not to
demand repayment of any principal prior to January 1996 and certain
Optionees have agreed not to demand repayment of the interest accrued
thereon prior to January 1996.
F-43
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 4 -RELATED PARTY TRANSACTIONS (CONTINUED):
Further, as a condition precedent to the Option Agreement, the original
shareholder and each of the Optionees agreed to guarantee the repayment
of one or more loans by institutional lenders to the Company up to an
aggregate principal sum of $4,000,000. As of May 31, 1995 and December
31, 1994 and 1993, loans totaling $2,530,000 have been guaranteed by the
Optionees.
During 1995, the original shareholder advanced a total of $74,000 in
exchange for one unsecured subordinated promissory note bearing an
annual interest rate of 10%. During 1995, the original shareholder
advanced a total of $825,000 in exchange for one note in the amount of
$400,000, secured by certain real property, bearing an annual interest
rate of 10% and payable in monthly principal payments of $10,000 plus
interest, and various other unsecured promissory notes, each bearing an
annual interest rate of 8% with interest and principal due on various
dates in 1995. During 1993, the original shareholder advanced to the
Company $7,245,000 in exchange for various unsecured promissory notes,
each bearing an annual interest rate of 8% with interest and principal
due in August 1996. In 1995, 1994 and 1993, $145,000, $352,000 and
$1,871,000, respectively, of principal and $10,000 of interest had been
paid to the shareholder. Included in the 1995 principal payments is the
book value of a vehicle in the amount of $19,000, the title of which was
transferred to the shareholder. Further, with respect to the various
unsecured promissory notes, the shareholder has agreed not to demand
repayment of any principal or interest accrued thereon prior to January
1996.
The balance of unpaid principal and interest due the shareholder and
optionees is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
MAY 31, 1995 1994 1993
-------------------- -------------------- --------------------
ACCRUED ACCRUED ACCRUED
PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST
----------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Notes payable to
shareholder $5,781,000 $ 685,000 $5,852,000 $492,000 $5,378,000 $ 75,000
Notes payable to
optionees 2,367,000 604,000 2,250,000 339,000 2,000,000 155,000
Less current portion 7,892,000 1,289,000 130,000 130,000 5,378,000 230,000
----------- --------- ---------- -------- ---------- --------
Noncurrent $ 256,000 $ - $7,972,000 $701,000 $2,000,000 $ -
----------- --------- ---------- -------- ---------- --------
----------- --------- ---------- -------- ---------- --------
</TABLE>
In March 1994, management began operating an adjacent restaurant facility owned
by an affiliated entity. During 1994, the Company has included in casino
expense in the statements of operations $368,000 paid to this entity for food
and beverage services. Additionally, net advances totaling $750,000 were
provided to this entity to meet working capital needs during 1994. In September
1994, this entity ceased its operations and transferred certain leasehold
improvements and furniture with a net book value of $90,000 and $60,000,
respectively, to the Company as partial repayment of these advances. In 1994,
the remaining unpaid balance of $600,000 was classified in the accompanying
statements of operations as loss on restaurant advances.
F-44
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 4 -RELATED PARTY TRANSACTIONS (CONTINUED):
The Company advanced $46,000 in 1995, $124,000 in 1994 and $50,000 in
1993 to an affiliated company formed for the acquisition of certain real
property considered to be competitively beneficial to the Company. The
uncollected balance of these unsecured, noninterest-bearing advances was
$220,000 at May 31, 1995, $174,000 at December 31, 1994 and $50,000 at
December 31, 1993, and are classified as land deposits in the
accompanying balance sheets.
In May 1993, the Company entered into an agreement with a shipbuilding
and repair company, whose principal shareholder is an Optionee, for the
conversion and refurbishment of the Company's riverboat vessel, the
refurbishment and acquisition of a riverboat barge, and the purchase of
a diesel generator. Total consideration under the terms of such
agreement, including change orders, was $9,414,000 in 1993, of which
$1,268,000 was paid in 1994 and $8,146,000 in 1993. The balance of
$1,268,000 was reported as a conversion contract payable as of December
31, 1993. Further, the terms of the original contract provided for
additional interest in the event of untimely payments. Consistent with
this provision, additional interest in the amount of $50,000 and an
additional amount of $25,000 relative to the original conversion, which
had been previously unbilled, was billed to the Company in 1995.
NOTE 5 -LEASES:
The Company leases various real property and equipment under operating
leases. The rental expense was approximately $337,000 for the five
month period ended May 31, 1995, $744,000 in 1994 and $328,000 for the
period ended December 31, 1993. Future minimum payments for
noncancelable operating leases with initial terms of one year or more
for the twelve month periods following May 31, 1995 are:
1996 $ 389,000
1997 305,000
1998 178,000
---------
$ 872,000
---------
---------
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
The Company is a defendant in a lawsuit arising out of the conduct of
its business. Management believes the lawsuit is without merit and is
vigorously defending the lawsuit. Management does not believe that the
outcome of this matter will have a material adverse effect on the
Company's financial position or results of operations.
In 1994, the Mississippi State Tax commission completed its examination
of the sales and use tax paid on items purchased in connection with the
conversion of the gaming vessel to a dockside gaming facility. As a
result, the Commission assessed additional taxes of approximately
$330,000. The Company paid approximately $82,000 of this assessment in
1994 and agreed in 1995 to pay approximately $203,000 in twelve monthly
installments, plus interest, beginning July 15, 1995.
F-45
<PAGE>
COTTON CLUB OF GREENVILLE, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 7 -PROPOSED SALE OF COMPANY:
On June 23, 1995, the Company entered into a letter of intent with Alpha
Hospitality Corporation (Alpha) for the proposed acquisition of all of
the outstanding stock of the Company and certain promissory notes issued
by the Company. The purchase price of approximately $10.3 million will
be funded through cash, various notes receivable and the transfer of
common stock of Alpha. The letter of intent is subject to due diligence
procedures, negotiation of a definitive agreement, completion of
financing for the acquisition by Alpha and approval of the Mississippi
Gaming Commission. There can be no assurance that this transaction can
be successfully accomplished on terms acceptable to the Company.
NOTE 8 -SUPPLEMENTAL CASH FLOW INFORMATION:
Included in accounts payable, long-term debt, and accrued expenses are
purchases of property, plant and equipment and prepaid maintenance
financed of approximately $391,000 for 1995, $1,434,000 for 1994 and
$4,115,000 in 1993. Interest paid was approximately $362,000 in 1995,
$1,140,000 in 1994 and $173,000, net of amounts capitalized of $304,000,
in 1993. In 1995, long-term debt increased by approximately $333,000
due to the financing of accrued interest and certain accounts payable,
and decreased by approximately $38,000 in 1994 in connection with the
return of certain equipment. Notes payable to related parties was
reduced by approximately $19,000 in 1995 in connection with the transfer
of a vehicle to the shareholder.
F-46
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
No underwriter, dealer, salesman or
other person has been authorized to
give any information or to make any
representations other than those con-
tained in this Prospectus, and, if
given or made, such information or
representation must not be relied
upon as having been authorized by
the Company. This Prospectus does
not constitute an offer or solici-
tation to any person in any juris- ALPHA HOSPITALITY
diction where such offer or solici- CORPORATION
tation would be unlawful. Neither
delivery of this Prospectus nor any
sale hereunder shall, under any
circumstances, create any implica-
tion that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
PAGE
Prospectus Summary.................... 5
Risk Factors.......................... 10
Use of Proceeds....................... 18
Certain Market Information............ 19
Capitalization........................ 20
Dividends Policy...................... 21
Selected Financial Data............... 22
Business.............................. 23
Management's Discussion and
Analysis of Financial
Condition and Results of Operations. 41 PROSPECTUS
Management............................ 52
Certain Transactions.................. 60
Ownership of Securities............... 64
Selling Stockholders.................. 66
Plan of Distribution.................. 69
Description of Securities............. 71
Legal Matters......................... 75
Experts............................... 75 ___________, 1996
Additional Information................ 75
Financial Statements.................. F-1
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by the Company
in connection with the issuance and distribution of the securities being
registered:
SEC Registration Fee $3,908.45
NASDAQ Filing Fee 7,500.00
Printing Engraving Expenses 3,500.00*
Legal Fees and Expenses 50,000.00*
Accounting Fees and Expenses -0-
Blue Sky Fees and Expenses 5,000.00*
Transfer Agent and Registrar Fees and Expenses 500.00*
Miscellaneous 5,000.00*
----------
Total $75,408.45
----------
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The Certificate of Incorporation and By-Laws of the Company provide
for indemnification of its officers and directors to the full extent authorized
by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold securities to a limited number
of persons, as described below. There were no underwriters involved in the
transactions and there were no underwriting discounts or commissions paid in
connection therewith, except as disclosed below. The issuances of these
securities were considered to be exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and the regulations promulgated
thereunder. The purchasers of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the certificates for the securities issued in such
transactions. All purchasers of securities in each such transaction had
adequate access to information about the Registrant.
COMMON STOCK
Date of Purchase
Name Shares Purchase Price Per Share
- ----- ------ -------- ---------------
HFS Gaming Corp.(1) 96,429 11/94 $5.75
Bryanston Group, Inc.(2) 1,250,444 10/95 6.625
Cotton Club of
Greenville, Inc.(3) 782,609 10/95 5.75
Bally Gaming, Inc. 701,017 02/96 (4)
<PAGE>
- -------------------------------
(1) Issued in settlement of $559,285.59 owed by the Company to HFS.
(2) Issued in settlement of $8,284,196.13 owed by the Company to Bryanston.
(3) Issued in connection with the Cotton Club Acquisition.
(4) Issued in settlement of $2,500,000 owed by the Company to Bally.
PREFERRED STOCK
Date of Purchase
Name Shares Purchase Price Per Share
- ---- ------ -------- ---------------
Bryanston Group, Inc. 625,222 10/94 (1)
- -----------------------------
(1) Issued in settlement of $8,284,196 owed by the Company to Bryanston.
STOCK OPTIONS
1993 STOCK OPTION PLAN
Date Exercis Exercised
Name Options Issued Price or Expired
- ----- ------- ------ ---- ----------
Sanford Freedman 60,000 06/93 $3.25 None
Brett G. Tollman 60,000 06/93 $3.25 None
Howard D. Zukerman 35,000 06/93 $3.25 None
Thomas W. Aro 60,000 06/93 3.25 None
James A. Cutler 40,000 06/93 3.25 None
Victor Appleby 18,000 06/93 3.25 None
Charlie Goldman 18,000 06/93 3.25 None
Gavin Tollman 18,000 06/93 3.25 None
Thomas Wilson 18,000 06/93 3.25 None
Craig Kendziera 12,000 06/93 3.25 None
Jeffrey Crowley 10,000 06/93 3.25 None
Robert Steenhuisen 8,000 06/93 3.25 None
Thomas Damewood 8,000 06/93 3.25 None
Peter Rost 5,000 06/93 3.25 None
Alice Abalos 5,000 06/93 3.25 None
Betty Drake 5,000 06/93 3.25 None
Margaret O. Young 5,000 06/93 3.25 None
Paul Hitselberger 5,000 12/93 11.50 None
Kevin Kurpick 5,000 12/93 11.50 None
Thaddeus Rickards 5,000 12/93 11.50 None
Ann Williams 2,500 12/93 11.50 None
Sherry Kosack 2,500 12/93 11.50 None
Danka Maricic 2,000 12/93 11.50 None
Kenneth Terry 1,500 12/93 11.50 None
Claudia Bowman 500 12/93 11.50 None
II-2
<PAGE>
OTHER OPTIONS
Date Exercise Exercised
Name Options Issued Price or Expired
- ---- ------- ------ ----- ----------
Bryanston Group, Inc. 347,826 10/95 4.50 None
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
2.1 Bryanston Third Amended Joint Plan of Reorganization*
3.1 Certificate of Incorporation*
3.2 Form of Certificate of Amendment to Certificate of Incorporation*
3.3 By-Laws, as amended*
4.1 Form of Common Stock Certificate*
4.2 Form of Warrant Certificate*
5.1 Opinion of Gersten, Savage, Kaplowitz & Curtin, LLP
10.1 Form of Employment Agreement between the Company and Stanley S. Tollman*
10.2 Form of Employment Agreement between the Company and Monty D. Hundley*
10.3 Form of Indemnification Agreement between the Company and directors and
executive officers of the Company*
10.4 1993 Stock Option Plan*
10.5 Form of Service Agreement between the Company and Bryanston*
10.6 Expense Reimbursement Agreement effective as of September 1, 1993, by and
between the Company and Tollman-Hundley Hotel Group and Bryanston Group,
Inc.*
10.7 Agreement of Purchase and Sale of Assets by and among BCI and Alpha Gulf,
George Baxter, John Kingsbury, Jon Turner and Robert James, dated as of
May 14, 1993*
10.8 Non-negotiable convertible Promissory Note of Alpha Gulf payable to BCI
in the principal amount of $3,500,000, dated May 14, 1993*
10.9 Shareholders Agreement, dated as of May 14, 1993, between BCI, Alpha
Gulf, the Company and Stanley S. Tollman and Monty D. Hundley.*
10.10 Form of Warrant Agreement among the Company, the Transfer Agent and the
Underwriters*
10.11 Work Order, dated June 7, 1993, of American Marine Corporation*
10.12 Amended Sales and Security Agreement, dated July 8, 1993, between Bally
Gaming, Inc. and Alpha Gulf d/b/a/ Bayou Caddy Casino*
10.13 Agreement, dated May 11, 1993, between Twenty Grand Marine Service, Inc.
and BCI*
10.14 Agreement, dated as of June, 1993 between Alpha Gulf d/b/a Bayou Caddy
Casino and Benchmark and Trustmark National Bank*
10.15 Lease Agreement, dated June 2, 1992, between Joseph E. Cure, Jr., Joseph
R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott
and BCI*
10.16 Development Agreement, dated September 17, 1992, between Joseph E. Cure,
Jr., Joseph R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure
Gollott and BCI*
10.17 Contract for First Right to Buy and Right of First Refusal for the Sale
and Purchase of Real Estate, dated September 17, 1992, between Joseph E.
Cure, Jr., Joseph R. Cure,
II-3
<PAGE>
Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott and BCI*
10.18 Lease Agreement, dated September 17, 1992, between Joseph E. Cure, Jr.,
Joseph R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure
Gollott and BCI*
10.19 Lease, dated November 12, 1992, between Dallas Goodwin and BCI*
10.20 Form of Limited Standstill Agreement of the Existing Stockholders f/b/o
the Underwriters*
10.21 Promissory Note reflecting the Bryanston Bridge Loan, dated July 27,
1993, of the Company payable to Bryanston in the amount of $6,555,000;
Amendment to the Note dated September 29, 1993*
10.22 Promissory Note reflecting the BP Bridge Loan dated July 27, 1993 of the
Company payable to BP in the amount of $2,200,000*
10.23 Amendment to the BP Bridge Note dated September 29, 1993*
10.24 Amendment to the Bryanston Bridge Note dated October 29, 1993*
10.25 Agreement between BP and the Company dated May 12, 1993, relating to the
BP Loan, Amendments thereto dated August 5, 1993 and September 10, 1993*
10.26 HFS marketing Agreement dated October 27, 1993*
10.27 Amended Sales and Security Agreement between Bally and the Company dated
July 8, 1993
10.28 Documents related to HFS Loans dated October 27, 1993:*
(i) Loan Agreement among the Company Alpha Gulf and HFS
(ii) Leasehold Deed of Trust (form)
(iii) First Preferred Ship Mortgage from Alpha Gulf to HFS
(iv) Security Agreement between Alpha Gulf and HFS
(v) Pledge and Security Agreement between Bryanston and HFS
(vi) $8,000,000 Series A Secured Note
(vii) $4,000,000 Series B Secured Note
(viii) Guarantee Agreement of Bryanston in favor of HFS
(ix) Guarantee Agreement of the Company in favor of HFS
(x) HFS Option Agreement: HFS Option Certificate
(xi) Bryanston Subordination Agreement
(xii) BP Subordination Agreement
(xiii) Bryanston Subordinated Promissory Note dated as of
August 5, 1993 (Bryanston Loan)
10.29 Form of Underwriters' Warrant*
10.30 Amended Cure Lease**
10.31 Peoples Bank Loan Agreement**
10.32 Non-Revolving Promissory Note with Bryanston Group, Inc.**
10.33 $20,000,000 Non-Revolving Promissory Note dated January 5, 1995***
10.34 Stock Purchase Agreement dated October 20, 1995***
10.35 Agreement dated October, 1995 by and among Alpha Hospitality Corporation,
Alpha Gulf Coast, Inc. and B.C. of Mississippi, Inc.***
10.36 Stock Acquisition Agreement dated January 25, 1995***
10.37 Form 8-K dated October 31, 1995***
10.38 Restructure of Debt of Alpha Gulf Coast, Inc. with Bally Gaming, Inc.***
10.39 Consulting Agreement dated March 1, 1996 between Sanford Freedman and the
Company
II-4
<PAGE>
11.1 Statement Re: Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of Rothstein Kass & Company, P.C.
23.2 Consent of Ernst & Young, LLP
24.1 Consent of Gersten, Savage, Kaplowitz & Curtin, LLP counsel for the
Registrant, (included in Exhibit 5.1)
* Incorporated by reference; filed with the Company s Registration
Statement filed on Form SB-2 (File No. 33-64236) with the Commission on
June 10, 1993 and as amended on September 30, 1993, October 25, 1993,
November 2, 1993 and November 5, 1993.
** Incorporated by reference; filed with the Company s Form 10-KSB for the
year ended December 31, 1994.
*** Incorporated by reference; filed with the Company s 10-KSB for the year
ended December 31, 1995
(b) Financial Statements and Schedules:
The Financial Statements are included in the Prospectus and Schedule VIII
is included at the end of this Part II. All other Schedules are omitted
for the reason that they are not required or are not applicable or the
required information is shown in the financial statements or notes
thereto.
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
issuer pursuant to any charter provision, by-law contract arrangements statute,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
II-5
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to suit information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) For determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement, relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering hereof
II-6
<PAGE>
SCHEDULE VIII
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
VALUATION ACCOUNTS
Years Ended December 31, 1995 and 1994 and the Period
March 19, 1993 (Date of Inception) to December 31, 1993
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
MARCH 19, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993:
Allowance for doubtful
accounts - - - - -
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts - $ 35,000 - - $ 35,000
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts $ 35,000 $ 255,000 $ 63,708 (A) - $ 353,708
</TABLE>
(A) Assumed in conjunction with the October 1995 acquisition of the Cotton Club
of Greenville, Inc.
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirement for filing on Form S-1 and has duly caused this Pre-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on June 19, 1996.
ALPHA HOSPITALITY CORPORATION
By: /s/ Stanley S. Tollman
----------------------------------
Stanley S. Tollman, President,
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Stanley S. Tollman
- ------------------------------- President, Chief Executive Officer June 19, 1996
Stanley S. Tollman and Chairman
/s/ Sanford Freedman
- ------------------------------- Vice President, Secretary June 19, 1996
Sanford Freedman and Director
/s/ Thomas W. Aro
- ------------------------------- Vice President and Director June 19, 1996
Thomas W. Aro
/s/ Brett G. Tollman
- ------------------------------- Vice President and Director June 19, 1996
Brett G. Tollman
/s/ James A. Cutler
- ------------------------------- Treasurer, Chief Financial Officer June 19, 1996
James A. Cutler and Director
- ------------------------------- Director June 19, 1996
Patricia Cohen
- ------------------------------- Director June 19, 1996
Matthew W. Walker
* By: /s/ Stanley S. Tollman
---------------------------------
Stanley S. Tollman
Attorney-in-fact
** By: /s/ James A. Cutler
--------------------------------
James A. Cutler
Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT 5.1
[GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP LETTERHEAD]
June 19, 1996
Alpha Hospitality Corporation
12 East 49th Street, 24th Floor
New York, New York 10017
Gentlemen:
You have requested our opinion, as counsel for Alpha Hospitality Corporation, a
Delaware corporation (the "Company"), in connection with pre-effective amendment
no. 1 to the registration statement on Form S-1 (the "Registration Statement"),
under the Securities Act of 1933 (the "Act"), File No. 333-3606 being filed by
the Company with the Securities and Exchange Commission.
The Registration Statement relates to an offer by the Company of (i) 791,880
shares (the "Company Shares") of the Company's common stock, $.01 par value (the
"Common Stock"), to be issued by the Company to certain shareholders of B.C. of
Mississippi, Inc., and (ii) 1,892,626 shares of Common Stock (the "Selling
Stockholders' Shares") which may be sold by certain stockholders who have
acquired or will acquire such shares from the Company as follows: (a) 782,609
shares of Common Stock issued to an escrow agent on behalf of shareholders of
the Cotton Club of Greenville, Inc. in connection with the acquisition of all of
the issued and outstanding shares of Cotton Club of Greenville, Inc., (b)
409,000 shares of Common Stock to be issued upon the exercise of options granted
pursuant to the Company's 1993 Stock Option Plan, and (c) 701,017 shares of
Common Stock issued to an escrow agent on behalf of Bally Gaming, Inc. in
connection with the restructuring of the mortgage on the Company's gaming
vessel, the Bayou Caddy's Jubilee Casino.
We have examined such records and documents and made such examinations of law as
we have deemed relevant in connection with this opinion. It is our opinion that
when there has been compliance with the Act, the Company Shares and the Selling
Stockholders' Shares, when issued, delivered, and paid for, will be fully paid,
validly issued and nonassessable.
<PAGE>
Alpha Hospitality Corporation
June 19, 1996
Page 2
No opinion is expressed herein as to any laws other than the laws of the State
of New York, of the United States and the corporate laws of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Act of the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
/s/ GERSTEN, SAVAGE, KUPLOWITZ
& CURTIN, LLP
------------------------------
GERSTEN, SAVAGE, KAPLOWITZ &
CURTIN, LLP
<PAGE>
EXHIBIT 10.39
[ALPHA HOSPITALITY CORPORATION LETTERHEAD]
March 1, 1996
Mr. Sanford Freedman
3616 Henry Hudson Parkway
Bronx, New York 10463
Dear Sandy:
This is to confirm and outline the terms of our agreement pursuant to which
you will act as a consultant to Alpha Hospitality Corporation ("Alpha").
We engage you to render services as a consultant, which services shall be
similar to the services which you had been heretofore performing on our behalf.
It is understood that you will not be called upon to render any legal
services of nature presently handled by our outside legal counsel.
You shall make yourself available to render consulting services to us
and/or on our behalf for no less than twenty (20) hours per week, which time
commitment on your part shall be inclusive of any time you may be called upon to
devote to the affairs of the Tollman-Hundley Hotel Group ("Tollman-Hundley"),
pursuant to the Consulting Agreement you are also entering into with that
organization. You shall use your best efforts to allocate your time between the
affairs of Alpha and Tollman-Hundley in the light of the then current needs of
each. Part of your responsibilities under this agreement shall be to effectuate
a proper turnover of your present duties to officers and employees of Alpha.
We are under no obligation to call upon your service as consultant, nor do
we guarantee that you will be engaged for any minimum number of hours per week
during any week or on the average over a period of time.
We shall permit you to use the office in the Alpha premises in 12 East 49th
Street, New York, New York 10017, you presently utilize during the Spring of
1996. During
<PAGE>
such time we will compensate you for your services at the rate of $300 per hour.
After you vacate your office at Alpha, we will compensate you for your services
at the rate of $350 per hour. Payment for your services will be made on a
monthly basis within five days after receipt of your bill. You will be
permitted to utilize our secretarial staff in connection with any services
rendered to us or Tollman-Hundley during the continuance of your engagement. We
will reimburse you for out-of-pocket expenses incurred by you in connection with
any services rendered to us.
We both acknowledge and agree that you are engaged as an independent
contractor not as an employee. Our engagement of your services is on a non-
exclusive basis and you are expressly permitted to engage in such other business
as you may determine provided that such other engagement does not conflict with
the services to be rendered to us. We understand that you may be rendering
consulting services to other organizations that are engaged in commercial
activities similar to Alpha's. You agree, however, not to render consulting
services to others with regard to specific projects where the interest of Alpha
and such other organizations are in direct conflict.
You shall be responsible for the payment of all Federal, State and local
taxes, including Social Security and unemployment insurance taxes, required to
be paid upon the compensation you are to receive for the services you will
render pursuant to this agreement.
The offices of Alpha with whom you will deal and take assignments from in
connection with your services hereunder are Stanley S. Tollman, Brett Tollman
and James Cutler.
Your engagement hereunder is at will and may be terminated by either party
at any time. Notwithstanding, you agree that if you elect to terminate the
engagement, you will do so upon such notice as shall reasonably enable us to
provide for continuity in the matters in which you have been rendering services.
Alpha shall indemnify and hold you harmless against any claims, loss,
expense and liability (including reasonable attorney's fees) which you may incur
arising out of the performance of your services hereunder.
You shall have the right to assign this agreement, upon written notice to
Alpha, to any entity which you may form for the purpose of rendering the
services referred to herein, provided that such entity has the exclusive right
to call upon your services.
<PAGE>
Please signify your acceptance of an agreement to the foregoing by signing
and returning the enclosed copy of this letter.
Very truly yours,
ALPHA HOSPITALITY CORPORATION
By:/s/ Stanley S. Tollman
--------------------------------------
Stanley S. Tollman
Chief Executive Officer
ACCEPTED AND AGREED TO:
/s/ Sanford Freedman
- --------------------------
Sanford Freedman
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
NAME STATE OF INCORPORATION
Alpha Gulf Coast, Inc. Delaware
Alpha Hotel Management, Inc. Delaware
Alpha St. Regis, Inc. Delaware
Alpha Missouri, Inc. Delaware
Alpha Rising Sun, Inc. Delaware
Jubilation Lakeshore, Inc. Mississippi
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated February 16, 1996 (except with respect
to Note 15 as to which the date is March 29, 1996) of Alpha Hospitality
Corporation and our report dated February 4, 1994 of Bryanston Group, Inc. in
the Registration Statement of Alpha Hospitality Corporation (Registration No.
333-3606) on Form S-1 appearing in the Prospectus.
We also consent to the reference to our Firm under the heading "Experts" in such
Prospectus.
/S/ ROTHSTEIN, KASS & COMPANY, P.C.
- -----------------------------------
Roseland, New Jersey
June 17, 1996
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the use of our report dated July 7, 1995, with respect to the
financial statements of Cotton Club of Greenville, Inc. included in the
registration statement (Form S-1 No. 333-3606) of Alpha Hospitality Corporation
for the registration of 2,684,506 shares of its common stock.
/S/ ERNST & YOUNG LLP
- -----------------------
New Orleans, Louisiana
June 17, 1996
