<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-64236
ALPHA HOSPITALITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3714474
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
--------------------------
12 EAST 49TH STREET, NEW YORK, NY 10017
(Address of principal executive offices)
--------------------------
(212) 750-3500
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: August 13, 1996.
Class
Common Stock, $0.01 par value 13,887,325 shares
<PAGE>
ALPHA HOSPITALITY CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1996 (Unaudited) and
December 31, 1995....................................... 1
Consolidated Statements of Operations Six Months Ended
June 30, 1996 and 1995 (Unaudited)...................... 2
Consolidated Statements of Operations Three Months Ended
June 30, 1996 and 1995 (Unaudited)...................... 3
Consolidated Statements of Cash Flows Six Months Ended
June 30, 1996 and 1995 (Unaudited)...................... 4-5
Notes to Consolidated Financial Statements................ 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14-20
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 21
Item 3. Default upon Senior Securities............................ 21
Signatures................................................ 22
All items which are not applicable or to which the answer is negative have
been omitted from this report.
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, including restricted cash of $270 and $330 in 1996
and 1995, respectively.................................. $ 1,626 $ 2,316
Accounts receivable, less allowance for doubtful accounts
of $319 and $354 in 1996 and 1995, respectively......... 532 703
Inventories............................................... 433 536
Prepaid insurance......................................... 843 1,977
Other current assets...................................... 532 1,168
--------- ---------
Total current assets.................................... 3,966 6,700
--------- ---------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization of $15,053 and
$13,385 in 1996 and 1995, respectively.................... 42,211 59,255
--------- ---------
OTHER ASSETS, deposits and other............................ 1,462 831
--------- ---------
$ 47,639 $66,786
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $10,368 $27,319
Notes payable............................................. 2,173 3,816
Accounts payable and other accrued expenses............... 10,340 10,709
Accrued payroll and related liabilities................... 3,961 2,862
Due to affiliate, current maturity........................ 931 2,000
--------- ---------
Total current liabilities............................... 27,773 46,706
--------- ---------
LONG-TERM DEBT, less current maturities..................... 14,348 2,312
--------- ---------
DUE TO AFFILIATE, less current maturity, including
accrued interest of $503.................................. 503 15,864
--------- ---------
AMOUNT DUE UNDER REDEMPTION AGREEMENT,
including accrued interest of $174........................ 174 --
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
1,000 shares, 738 issued................................ 7 --
Common stock, $.01 par value, authorized
17,000 shares, 13,478 and 12,354 shares
issued in 1996 and 1995, respectively................... 135 124
Capital in excess of par value............................ 58,221 32,779
Common stock subscribed................................... 1,600
Accumulated deficit....................................... (53,522) (32,599)
--------- ---------
Total stockholders' equity.............................. 4,841 1,904
--------- ---------
$47,639 $66,786
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
-------- --------
REVENUES:
Casino............................................. $25,321 $12,647
Food and beverage.................................. 641 580
Hotel management fees.............................. 1,049 1,338
Retail and other................................... 163 58
-------- --------
Total revenues................................... 27,174 14,623
-------- --------
COSTS AND EXPENSES:
Casino............................................. 10,074 6,848
Food and beverage.................................. 1,109 862
Hotel management costs............................. 619 741
Selling, general and administration................ 14,526 7,178
Interest........................................... 2,643 1,340
Depreciation and amortization...................... 3,445 1,955
Development costs.................................. 156 88
Debt conversion fee................................ 1,019
Write-off of Lakeshore leasehold and improvements.. 14,507
Write-off of capitalized costs related to Indiana.. 858
-------- --------
Total costs and expenses......................... 48,098 19,870
-------- --------
NET LOSS............................................. $(20,924) $(5,247)
-------- --------
-------- --------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................................ 13,201 10,947
-------- --------
-------- --------
LOSS PER COMMON SHARE................................ $ (1.59) $ (0.48)
-------- --------
-------- --------
See accompanying notes to consolidated financial statements
2
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
--------------------
1996 1995
-------- --------
REVENUES:
Casino............................................. $12,484 $6,414
Food and beverage.................................. 294 283
Hotel management fees.............................. 600 793
Retail and other................................... 130 36
-------- --------
Total revenues................................... 13,508 7,526
-------- --------
COSTS AND EXPENSES:
Casino............................................. 4,949 3,230
Food and beverage.................................. 456 432
Hotel management costs............................. 299 358
Selling, general and administration................ 7,401 3,371
Interest........................................... 1,270 739
Depreciation and amortization...................... 1,642 978
Development costs.................................. 61 48
Debt conversion fee................................ 1,019
Write-off of Lakeshore leasehold and improvements.. 14,507
Write-off of capitalized costs related to Indiana.. 810
-------- --------
Total costs and expenses......................... 31,604 9,996
-------- --------
NET LOSS............................................. $(18,096) $(2,440)
-------- --------
-------- --------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................................ 13,440 10,947
-------- --------
-------- --------
LOSS PER COMMON SHARE................................ $ (1.35) $ (0.22)
-------- --------
-------- --------
See accompanying notes to consolidated financial statements
3
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss..................................................... $(20,924) $(5,247)
--------- ---------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization...................... 3,445 1,955
Capital lease restructuring........................ (268)
Debt conversion fee................................ 1,019
Write-off of Lakeshore leasehold and improvements.. 14,507
Amortization of deferred finance costs............. 35
Imputed interest on long-term debt................. 141
Gains on sales of property and equipment........... (7)
Write-off of capitalized costs related to Indiana.. 858
Changes in operating assets and liabilities:
Decrease in accounts receivable............... 171 199
(Increase) decrease in inventories............ 103 (66)
Decrease in prepaid insurance................. 1,134 422
(Increase) decrease in other current assets... 636 (120)
Decrease in accounts payable and other
accrued expenses........................... (80) (393)
Increase in accrued payroll and related liabilities 1,099 857
---------- ---------
Total adjustments.......................... 21,766 3,881
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................................... 842 (1,366)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (1,358) (622)
Proceeds from sales of property and equipment................ 24
Payments for deposits and other assets....................... (707) (470)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES.......................... (2,065) (1,068)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate...................................... 2,736 3,031
Proceeds from notes payable.................................. 22
Proceeds from long-term debt................................. 38
Payments on notes payable.................................... (1,215) (344)
Payments on long-term debt................................... (1,048) (573)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 533 2,114
---------- ---------
NET DECREASE IN CASH........................................... (690) (320)
CASH, beginning of period...................................... 2,316 1,180
---------- ---------
CASH, end of period............................................ $ 1,626 $ 860
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash paid for interest during
the period........................................ $ 1,222 $ 835
-------- ---------
-------- ---------
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Amount due under redemption agreement,
includes accrued interest of $174................. $ 174 $ --
-------- ---------
-------- ---------
Capital lease restructuring, includes $74 of accrued
interest........................................ $ 268 $ --
-------- ---------
-------- ---------
Common stock issued for payment of long-term debt. $ 2,454 $ --
-------- ---------
-------- ---------
Preferred stock issued in settlement of long-term
debt, includes $41 of accrued interest and $1,019
of debt conversion fee........................... $ 21,407 $ --
-------- ---------
-------- ---------
Write-off of Indiana capitalized costs........... $ -- $ 592
-------- ---------
-------- ---------
See accompanying notes to consolidated financial statements
5
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 1 - NATURE OF BUSINESS
Alpha Hospitality Corporation (the "Company") was incorporated in
Delaware on March 19, 1993 and has adopted a December 31 year end. The Company
owns and operates a dockside casino located in Greenville, Mississippi. The
Company also is pursuing casino development and management opportunities in
Missouri and New York. In addition, the Company provides services for the
management of hotels and motels located in ten states.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES
FINANCIAL STATEMENTS - The accompanying unaudited consolidated financial
statements of Alpha Hospitality Corporation and subsidiaries have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principals.
All adjustments which are of a normal and recurring nature and, in the opinion
of management, necessary for a fair presentation have been included. The
unaudited financial statements should be read in conjunction with the audited
financial statements of December 31, 1995, included in the 10-K.
OPERATIONS AND PRINCIPLES OF CONSOLIDATION - The accompanying statements
include the accounts of the company and all of its wholly-owned subsidiaries.
All intercompany transactions and balances have been eliminated in
consolidation.
LOSS PER COMMON SHARE - Loss per common share is based on the weighted
average number of shares outstanding. The Company's outstanding stock options
and warrants are excluded in the computation since they would have an
antidilutive effect on loss per common share. Bally's 701 shares being held in
escrow are included in this calculation (See Note 8).
PROMOTIONAL ALLOWANCES - Revenues do not include the retail amount of
food and beverage of approximately $2,152, $1,786, $1,086 and $869 provided
gratuitously to customers, for the six months and three months ended June 30,
1996 and 1995, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS - In March 1995, Statement of Financial
Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of
Long-lived Assets and for the Long-lived Assets to be Disposed of" was issued.
The Company has adopted SFAS 121 in the first quarter of 1996.
Statement No. 121 requires that long-lived assets (and certain
intangibles) to be held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
The Company periodically reviews the carrying value of certain of its
assets in relation to historical results, as well as management's best estimate
of future trends, events and overall business climate on the Gulf Coast.
If such reviews indicate that the carrying value of such assets may not
be recoverable, the Company would then estimate the future cash flows
(undiscounted and without interest charges). If such future cash flows are
insufficient to recover the carrying amount of the assets, then impairment is
triggered and the carrying value of any impaired assets would then be reduced to
fair value.
6
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES - (CONTINUED)
RECLASSIFICATIONS - Certain amounts have been reclassified in 1995 to
conform to the 1996 presentation.
NOTE 3 - PROPERTY AND EQUIPMENT
Details of property and equipment at June 30, 1996 and December 31, 1995
are as follows:
1996 1995
-------- --------
Land and building............................. $ 214 $ 214
Boat, barge and improvements.................. 23,875 23,590
Leasehold and improvements.................... 14,536 30,001
Gaming equipment.............................. 10,178 10,042
Furniture, fixtures and equipment............. 7,379 7,264
Transportation equipment...................... 1,038 1,034
Construction in progress...................... 44 495
-------- --------
57,264 72,640
Less accumulated depreciation
and amortization.............................. 15,053 13,385
-------- --------
$42,211 $59,255
-------- --------
-------- --------
Included in property and equipment at June 30, 1996 and December 31, 1995 was
approximately $1,319 related to assets recorded under capital leases. Included
in accumulated depreciation and amortization at June 30, 1996 and December 31,
1995 was approximately $459 and $422, respectively, of amortization related to
assets recorded under capital leases.
In accordance with its policy on impaired long-lived assets, effective
June 30, 1996, the Company recorded an impairment loss of $14,507, representing
the leasehold and improvements from the Company's Lakeshore casino of $16,284
and accumulated amortization of $1,777.
NOTE 4 - NOTES PAYABLE
Notes payable at June 30, 1996 and December 31, 1995 are comprised of the
following:
<TABLE>
<CAPTION>
INTEREST JUNE 30 DECEMBER 31
RATE 1996 1995
-------- ------- -----------
<S> <C> <C> <C>
Revolving line of credit with payments of principal
and interest due monthly, collateralized by funds held
at the Company's casino and guaranteed by an
affiliate................................................... Prime +2% $ 34 $ 145
Notes payable to former Cotton Club stockholders................ 10% 1,897 3,293
Revolving line of credit of $500 with payments of principal
and interest due September 1, 1996, collateralized by cash
advances.................................................... 222 200
</TABLE>
7
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 4 - NOTES PAYABLE - (CONTINUED)
<TABLE>
<CAPTION>
INTEREST JUNE 30 DECEMBER 31
RATE 1996 1995
--------- -----------
<S> <C> <C> <C>
Note payable to third party with payments of principal and
interest due monthly, collateralized by certain vehicles.... 11% 103
Unsecured note payable.......................................... 53
Employee loans.................................................. Various 20 22
--------- ---------
$2,173 $ 3,816
--------- ---------
--------- ---------
NOTE 5 - LONG-TERM DEBT
Long-term debt at June 30, 1996 and December 31, 1995 are comprised of the following:
INTEREST JUNE 30 DECEMBER 31
RATE 1996 1995
--------- -------- -----------
Mortgage note payable, Bryanston, principal and interest
due monthly through November 1998, collateralized by the
barge located in Greenville, Mississippi, and certain other
assets...................................................... 10% $ 7,800 $ 7,800
Mortgage note payable in monthly installments of $70 plus
interest at 30-day commercial paper rate (5.52% at
June 30, 1996) plus 3.5% adjusted quarterly, funded with
weekly deposits of $25 into a restricted cash account,
collateralized by the barge and improvements located
in Lakeshore, Mississippi................................... 9% 3,656 3,736
Equipment notes payable monthly through November 1999
and collateralized by certain assets........................ 11-14% 10,184 13,432
Capitalized lease obligations, payable monthly, expiring
in various years through 2001............................... 10-15% 498 925
Loans payable in equal quarterly installments
of principal and interest over 10 years , 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 is owed to Bryanston at June 30, 1996
and December 31, 1995, respectively......................... 9% $2,474 $ 3,655
Line of credit of $49, principal and interest due monthly
through April 1999, collateralized by certain equipment..... 10.75% 36
Bank notes, payable monthly through 1997, collateralized
by certain equipment........................................ 8-10% 68 83
-------- ---------
24,716 29,631
Less current portion 10,368 27,319
-------- ---------
$14,348 $ 2,312
-------- ---------
-------- ---------
</TABLE>
8
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 5 - LONG-TERM DEBT - (CONTINUED)
Aggregate future required principal payments are approximately as follows:
Year ending June 30:
1997......................................$10,368
1998...................................... 3,083
1999...................................... 8,401
2000...................................... 1,197
2001...................................... 304
Thereafter................................ 1,363
------
$24,716
------
------
Effective April 12, 1996, the Company restructured its capital sign lease
of approximately $745 with an unrelated party. The terms of the restructure
reduces the lease principal amount to $475 and forgives approximately $74 of
accrued interest. The effective rate of the restructured lease is 10% per
annum, with a four-year term.
Effective June 26, 1996, the Company issued 44 shares of its preferred
stock in settlement of a certain loan payable of $1,181, accrued interest of $41
and a five percent transaction fee of $61.
At June 30, 1996, the Company was in default of (i) its mortgage notes
payable for non-payment, (ii) the Lakeshore equipment notes aggregating
approximately $3,433 for the breach of several loan covenants and the loan
payable to Bryanston of approximately $2,474 for non-payment. The Company
received a waiver of the defaults of the loan payable and mortgage note payable
to Bryanston through December 31, 1997. Accordingly, the Lakeshore mortgage
note payable ($3,656) and the Lakeshore equipment notes payable ($3,433) are
reflected in current liabilities at June 30, 1996.
At December 31, 1995, the Company was in default of (i) its mortgage
notes payable for non-payment, (ii) the equipment notes aggregating
approximately $13,432 for the breach of several loan covenants and (iii) a
capital lease of approximately $745 for non-payment and certain loans payable
aggregating approximately $3,655 went into default in 1996 due to non-payment.
The Company received a waiver of the default of the loan payable to Bryanston.
Accordingly, the mortgage notes payable ($11,536), equipment notes payable
($13,432), capital lease ($745) and a certain loan payable ($1,181) were
reflected in current liabilities at December 31, 1995.
NOTE 6 - ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses are comprised of the
following:
June 30 December 31
1996 1995
-------- -----------
Construction.............................. $ 1,326 $ 1,218
Insurance financing....................... 581 1,585
Accrued professional fees................. 667 851
Accrued property taxes.................... 610 843
Accrued interest.......................... 1,928 974
Other..................................... 5,228 5,238
-------- ----------
$10,340 $10,709
-------- ----------
-------- ----------
9
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company is obligated under a $20,000 non-revolving promissory note
with Bryanston. Effective June 26, 1996, the Company issued 694 shares of its
preferred stock in settlement of $19,165 of its note and a five percent
transaction fee of $958. The outstanding balance at June 30, 1996 and December
31, 1995 is $931 and $17,361, respectively. The note, which bears interest at
prime rate (8.25% at June 30, 1996) plus 2%, is payable at the lesser of the
outstanding principal amount or $2,000 per annum through December 31, 1999.
Beginning 1996, interest accrued monthly is due and payable by the following
month. All remaining principal and accrued interest (approximately $503) shall
be due on December 31, 2000. Additionally, commencing May 1, 1996 and for each
of the next succeeding three years thereafter, the Company will be required to
make additional principal payments equal to "Available Cash Flow of Maker" as
defined in the note.
In accordance with Mississippi law, the Company's casino licenses have
initial terms of two years and will be subject to periodic renewal. In October
1995, the Company received renewals of their casino licenses through October
1997.
In July 1996 the Company closed its Lakeshore Casino. (See Note 11)
Failure to retain the Greenville license could have a material adverse
effect on the Company's operations.
In October 1994, Alpha Gulf was named as a defendant in an action brought
in the United States District Court for the Southern District of Mississippi
(Susan E. Wolff, et al v. James C. Zamecnik, et al.) on the theory of "liquor
liability" for the service of alcohol to a customer, who subsequently was
involved in an automobile collision 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 based primarily on the allegation that it is the alter-ego
of its subsidiary, and secondarily on the theory of liquor liability. The
Plaintiff initially sought $20,000. Early in the litigation, Plaintiff sought a
default judgment against Alpha Gulf relating to evidence that was destroyed.
The court denied the action, but granted Plaintiff's attorney fees in an amount
to be determined, but to date not yet determined. The Plaintiff also initiated
a declaratory judgment action in the same court against Alpha Gulf and its
insurance carriers seeking a determination as to the liability of such carriers
under the insurance policies issued by the carriers to Alpha Gulf and the
Company for any damages found against Alpha Gulf in the primary litigation up to
the policy limits. The declaratory judgment action appears to have been brought
in response to issues raised by the primary insurance carrier as to timely
notice of the incident and possible spoilation of evidence. Subsequently, the
primary insurance carrier initiated its own declaratory judgment action against
Alpha Gulf and the Company (Commerce & Industry Company v. Alpha Gulf Coast,
Inc. and Alpha Hospitality Corporation, Inc.: United States District Court for
10
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 7 - COMMITMENTS, CONTINGENCIES AND RELATED
PARTY TRANSACTIONS - (CONTINUED)
the Southern for 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, with respect to
all issues relating to the underlying personal liability action, subject to
completion of the settlement documents and the approval of the court. The
principal insurance carrier which will pay the settlement may attempt to
assert that the Company and Alpha Gulf have an obligation to reimburse it for
payment of the 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.
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.
NOTE 8 - AMOUNT DUE UNDER REDEMPTION AGREEMENT
Effective October 15, 1995, the Company restructured certain equipment
notes, aggregating approximately $9,000, with unrelated parties. Pursuant to
the restructuring requirements, the Company will repay approximately $6,500 in
48 monthly installments of $166, which includes interest of 10% per annum,
commencing December 15, 1995. The balance of $2,500 bears interest at 10% per
annum, is due on November 15, 1999, and may either be partially or fully repaid,
pursuant to an escrow agreement, from the net proceeds from the sale of
approximately 701 shares of the Company's common stock held in escrow. To the
extent that the net proceeds exceeds $2,500 plus accrued interest, the excess
will be applied to the $6,500 portion of the debt. However, if the net proceeds
are less than the $2,500 plus accrued interest, then the Company will be
required to remit the balance due at maturity. The escrow agreement provides
for the unrelated party to have full voting rights pertaining to the escrowed
shares and the right to sell any or all of the shares. The Company has the
right of first refusal to purchase the shares that the unrelated party desires
to sell. The debt is collateralized by the Company's barge and certain gaming
equipment.
11
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 8 - AMOUNT DUE UNDER REDEMPTION AGREEMENT - (CONTINUED)
At June 30, 1996, the amount due under the redemption agreement is $174
of accrued interest only, since the fair market value of the stock at June 30,
1996 ($3.8125) exceeded the price at the date of the agreement ($3.50).
NOTE 9 - STOCKHOLDERS' EQUITY
Effective June 26, 1996, the Company issued 694 and 44 shares,
respectively, of its preferred stock, in settlement of $19,165 and $1,222,
respectively, of their unsecured debt with Bryanston and an unrelated third
party (see Notes 5 and 7). The Company was charged a five percent transaction
fee of approximately $1,020, which was also converted into shares of the
Company's preferred stock. The conversion rate was based on the fair market
value of the Company's common stock at the date of conversion ($3.625). Each
preferred share is convertible into eight shares of the Company's common stock
after December 31, 1996 and carries voting rights of one vote per preferred
share. The preferred stock also carries a dividend of $3.05 per share, payable
quarterly.
Changes in stockholders' equity during the six months ended June 30, 1996
include the net loss of $20,924, common stock with a value of $2,454 issued to a
creditor and placed in escrow, pursuant to the October 15, 1995 restructuring of
certain equipment notes and preferred stock issued in settlement of unsecured
debt aggregating $21,406.
NOTE 10 - INCOME TAXES
The Company and all of its subsidiaries file a consolidated federal
income tax return. Income tax expense is allocated pursuant to the separate tax
attributes of each subsidiary. At June 30, 1996 and December 31, 1995, the
Company's deferred federal tax asset is comprised of the tax benefit (cost)
associated with the following items based on the 35% tax rate currently in
effect (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
-------- -----------
<S> <C> <C>
Pre-opening costs currently deducted for financial
reporting and amortized over 5 years for tax purposes........... $ 1,579 $1,788
Net operating loss carry forward.................................... 18,413 11,524
Differences between financial and tax depreciation methods.......... (1,862) (2,077)
Differences between financial and tax basis of assets and
liabilities..................................................... 1,776 1,737
Interest capitalized for financial reporting and expensed
for tax purposes................................................ (218) (224)
Other............................................................... (89) (77)
-------- -----------
Deferred tax asset.................................................. 19,599 12,671
Valuation allowance on deferred tax asset........................... (19,599) (12,671)
-------- -----------
$ -- $ --
-------- -----------
-------- -----------
</TABLE>
12
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 10 - INCOME TAXES - (CONTINUED)
The Company has available for federal income tax purposes, a net
operating loss carryover of approximately $37,450 of which $883, $7,407, $24,637
and $19,682 will expire in the years 2008, 2009, 2010, and 2011 respectively.
NOTE 11 - SUBSEQUENT EVENT
On July 2, 1996 the Company notified the Mississippi Gaming Commission
(the "Commission") and the employees of the Jubilation Casino of its plans to
close the Jubilation Casino by the end of August 1996. On July 16, 1996,
operation of the Jubilation Casino was suspended in compliance with a directive
of the Commission which raised that its working capital available to the
Jubilation Casino was not sufficient. The Commission required that the
Jubilation Casino's working capital be increased. This working capital
requirement was reviewed by Jubilation Lakeshore in light of its previously
announced plan to close the Jubilation Casino during August 1996 and the costs
which would be incurred to reopen the Jubilation Casino. Based on this review,
Jubilation Lakeshore decided not to reopen the Jubilation Casino and
surrendered its gaming license for the Lakeshore site.
On July 26, 1996, the Company was in default of its notes payable to
former Cotton Club stockholders in the amount of $1,897 (See Note 4), for
non-payment.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS - CASINOS
RESULTS OF OPERATIONS - ALPHA GULF
The following table sets forth the statement of operations for the Alpha
Gulf's casino operations before income taxes for the six months and three months
ended June 30, 1996 and 1995 (in thousands):
SIX MONTHS THREE MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
Revenues:
Casino.......................... $18,921 $12,647 $9,360 $ 6,414
Food, beverage and other........ 569 638 293 319
------- ------- ------- -------
Total revenues............... 19,490 13,285 9,653 6,733
------- ------- ------- -------
Operating expenses:
Casino.......................... 6,596 6,473 3,346 3,112
Food, beverage and other........ 763 862 305 432
Selling, general and administration 8,763 6,789 4,529 3,119
------- ------- ------- -------
Total operating expenses.... 16,122 14,124 8,180 6,663
------- ------- ------- -------
Income (loss) from operations.... 3,368 (839) 1,473 70
------- ------- ------- -------
Other expenses:
Interest....................... 1,035 1,084 525 586
Depreciation and amortization.. 2,384 1,955 1,156 978
------- ------- ------- -------
Total other expense......... 3,419 3,039 1,681 1,564
------- ------- ------- -------
Loss before intercompany charges and
deferred income tax credit..... $ (51) $(3,878) $ (208) $(1,494)
------- ------- ------- -------
------- ------- ------- -------
SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
Alpha Gulf generated revenues of $19,490 and $13,285 in 1996 and 1995,
respectively. Casino revenues were $18,921 and $12,647 in 1996 and 1995,
respectively. Food, beverage and other revenues were $569 and $638 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 7.5% over the same period last year.
At the locations referred to above, Alpha Gulf's casino operating
expenses were $6,596 and $6,848, (35% and 54% of casino revenues) in 1996 and
1995, respectively. Food, beverage and other expenses were $763 and $862 (134%
and 135% of food, beverage and other revenues) in 1996 and 1995, respectively.
The reduced casino expenses in 1996 when compared to 1995 of $252 was the
net result of reduced staffing levels ($91), the decrease in the costs related
to food and beverages provided gratuitously to customers ($590), which is the
direct result of the reduction of gratuitous food and beverages provided to
casino customers and the related costs thereto, an increase in gaming taxes
($712), which is directly related to increased revenues and a decrease in
operating expenses ($283), which is the result of management operating more
efficiently.
14
<PAGE>
Food and beverage revenue does not include the retail value of food and
beverage of approximately $1,492 and $1,787 provided gratuitously to customers
in 1996 and 1995, respectively.
The reduction of food, beverage and other costs are directly related to
the reduced volume of food and beverage revenues.
Selling, general and administrative expenses consists of payroll and
related benefits of approximately $2,827 and $2,975, marketing and advertising
of approximately $3,503 and $1,617, occupancy costs of approximately $871 and
$1,024, and operating expenses of approximately $1,563 and $1,173 in 1996 and
1995, respectively. The reduced payroll and related costs of $148 was a direct
result of management's cost-cutting measures instituted during the first quarter
of 1995. The $1,886 increase in marketing and advertising is directly related
to the increased volume of business and management's introduction of marketing
programs focused on identifying new customers. The reduction of occupancy costs
of $153 is primarily due to reduced insurance costs. The increase in operating
expenses of $390 was directly related to the increased volume of business.
Interest expense was primarily related to the first mortgage on the
gaming vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $2,384 and $1,955 in 1996 and 1995,
respectively. The increase was the direct result of an increase in capital
expenditures related to the relocation of the gaming vessel to Greenville,
Mississippi and the purchase of equipment and fixtures.
THREE MONTHS ENDED JUNE 30, 1996 AND 1995:
Alpha Gulf generated revenues of $9,653 and $6,733 in 1996 and 1995,
respectively. Casino revenues were $9,360 and $6,414 in 1996 and 1995,
respectively. Food, beverage and other revenues were $293 and $319 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.
At the locations referred to above, Alpha Gulf's casino operating
expenses were $3,346 and $3,112, (36% and 49% of casino revenues) in 1996 and
1995, respectively. Food, beverage and other expenses were $305 and $432 (104%
and 135% of food, beverage and other revenues) in 1996 and 1995, respectively.
The increased casino expenses in 1996, when compared to 1995 of $234, is
the net result of increased staffing levels ($63), due to the increased volume
of business, the decrease in the costs related to food and beverages provided
gratuitously to customers ($177), which is a direct result of the reduction of
gratuitous food and beverages provided to casino customers and the related costs
thereto and an increase in gaming taxes ($345), which is the direct result of
increased revenues.
Food and beverage revenue does not include the retail value of food and
beverage of approximately $748 and $869 provided gratuitously to customers in
1996 and 1995, respectively.
The reduction of food, beverage and other costs are directly related to
the reduced volume of food and beverage revenues.
Selling, general and administrative expenses consists of payroll and
related benefits of approximately $1,423 and $1,447, marketing and advertising
of approximately $1,621 and $626, occupancy costs of approximately $427 and $517
and operating expenses of $763 and $529 in 1996 and 1995, respectively. The
reduced payroll and related costs of $24 was a direct result of management's
cost-cutting measures instituted during the first quarter of 1995. The $995
increase in marketing and advertising is directly related to the increased
volume of business and management's introduction of marketing programs focused
on identifying new customers. The reduction of occupancy costs of $90 is
primarily due to reduced insurance costs. The increase in operating expenses of
$144 was the direct result of the increase in volume of business.
15
<PAGE>
Interest expense was primarily related to the first mortgage on the
gaming vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $1,156 and $978 in 1996 and 1995,
respectively. The increase was a direct result of an increase in capital
expenditures related to the relocation of the gaming vessel to Greenville,
Mississippi and the purchase of equipment and fixtures.
FUTURE OPERATIONS - ALPHA GULF
Alpha Gulf's Bayou Caddy's Jubilee Casino operating results have improved
since its relocation to Greenville. The gaming revenues achieved to date by the
Jubilee Casino in Greenville far exceed the revenues of its predecessor gaming
vessel at that site. Alpha Gulf's casino operations in Greenville have become a
major factor in the Greenville market and has helped to expand that market.
A third gaming vessel has announced that it will be opening in the last
quarter of this year in Greenville. It is unknown at this time what impact this
third gaming vessel will have on the Greenville casino market. Management
believes that this third gaming vessel will negatively impact Alpha Gulf's
current market achievement but to what extent this act will have on future
revenues is uncertain at this time.
RESULTS OF OPERATIONS - JUBILATION
The Company acquired the Jubilation gaming vessel (formerly known as the
Cotton Club) on October 26, 1995. The vessel's operations in Greenville was
terminated on October 30, 1995. After its relocation to Lakeshore, Mississippi
the Jubilation reopened for business December 21, 1995. The following table
sets forth the statement of operations for the Jubilation casino operations
before income taxes and intercompany charges for the six months and three months
ended June 30, 1996 (in thousands):
SIX MONTHS THREE MONTHS
ENDED JUNE 30, 1996 ENDED JUNE 30, 1996
------------------- -------------------
Revenues:
Casino.......................... $ 6,400 $ 3,124
Food, beverage and other........ 236 131
-------- --------
Total revenues........... 6,636 3,255
-------- --------
Expenses:
Casino.......................... 3,478 1,603
Food, beverage and other........ 346 151
Selling, general and administrative 5,070 2,591
-------- --------
Total operating expenses. 8,894 4,345
-------- --------
Loss from operations............... (2,258) (1,090)
-------- --------
Other expenses:
Interest........................ 514 268
Capital lease restructuring..... (268)
Write-off of leasehold and
improvements............. 14,507 14,507
Depreciation and amortization... 1,060 486
-------- --------
Total and other expenses. 15,813 15,261
-------- --------
Loss before intercompany charges and
deferred income tax credit..... $(18,071) $(16,351)
-------- --------
-------- --------
16
<PAGE>
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
The Jubilation experienced a loss from operations of $2,258 and $1,090
during the six months and three months ended June 30, 1996, respectively.
During the second quarter of 1996, management became uncertain as to whether the
Jubilation Casino would be profitable during the remainder of fiscal 1996.
Management reduced operating costs and monitored the operation very closely. To
overcome the Jubilation Casino's declining revenues, the Company would have to
construct additional amenities which would require a substantial investment of
funds. Since revenues did not improve during May and June 1996, which are part
of the peak season, a continued decline was expected by management in the third
quarter. Therefore, on July 2, 1996, the Company notified the Mississippi
Gaming Commission (the "Commission") and the employees of the Jubilation Casino
of its plans to close the Jubilation Casino by the end of August 1996. In
connection with the plan to close the Jubilation Casino, the realizability of
the capital leasehold and improvements related to the Jubilation Casino were
reassessed. Effective for the second quarter ended June 30, 1996, management
recorded an impairment loss of $14,507 to property and equipment, representing
the unamortized balance of these leasehold improvements.
On July 16, 1996, operation of the Jubilation Casino was suspended in
compliance with a directive of the Commission which raised that the working
capital available to the Jubilation Casino was not sufficient. The Commission
required that the Jubilation Casino's working capital be increased. This
working capital requirement was reviewed by Jubilation Lakeshore in light of its
previously announced plan to close the Jubilation Casino during August 1996 and
the costs which would be incurred to reopen the Jubilation Casino. Based on
this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino.
CASINO DEVELOPMENT
NEW YORK - ALPHA MONTICELLO
On January 19, 1996, the Company, through its 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 Mohawk
Management L.L.C., of which the Company's wholly-owned subsidiary, Alpha
Monticello, owns 50%, and will be responsible for the day-to-day operations. It
is intended that the casino will be owned by the St. Regis Mohawk Tribe and will
be located on land to be placed in trust for the benefit of the Tribe.
On August 2, 1996, Mohawk Management L.L.C. executed an agreement with
the St. Regis Mohawk Tribe for the management of the proposed casino referred to
above. The Tribe has submitted this agreement to the National Indian Gaming
Commission for its approval.
During 1996 and 1995, Alpha Monticello incurred approximately $490 and
$20, respectively, of costs primarily associated with its participation with
Catskill.
NEW YORK - ALPHA ST. REGIS
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 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 above.
17
<PAGE>
NEW YORK - ALPHA ST. REGIS - (CONTINUED)
During 1995 Alpha St. Regis incurred costs of approximately $177 relating
to its proposed development of a gaming facility in Hogansburg, New York.
MISSOURI - ALPHA MISSOURI
Alpha Missouri has not commenced operations. Alpha Missouri has
applications pending for site approval and a gaming license with respect to the
development of a riverboat gaming facility in Louisiana, Missouri. It has
incurred development costs of approximately $87 and $179 in 1996 and 1995,
respectively, related to its proposed development of a riverboat casino in
Louisiana, Missouri.
COLORADO
Effective May 1, 1996, the Company terminated its stock acquisition
agreement with Doc Holliday, Inc., which owns and operates Doc Holliday Casino,
located in Central City, Colorado.
HOTEL MANAGEMENT - ALPHA HOTEL MANAGEMENT COMPANY, INC. ("ALPHA HOTEL")
The following table sets forth selected financial data of Alpha Hotel
Management Company, Inc. (Alpha Hotel) for the six months and three months
ended June 30, 1996 and 1995 (in thousands):
SIX MONTHS THREE MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------- --------------
1996 1995 1996 1995
------- ------- ------ ------
Income Statement Data:
Management fees................ $1,049 $1,338 $599 $793
------- ------- ------ ------
Operating expenses:
Direct payroll and related expenses 597 636 289 306
Selling, general and administrative 39 123 16 54
------- ------- ------ ------
Total operating expenses..... 636 759 305 360
------- ------- ------ ------
Income from management fees before
intercompany charges and income taxes $ 413 $ 579 $294 $433
------- ------- ------ ------
------- ------- ------ ------
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
Total management fees decreased during the six months ended June 30, 1996
compared to the six months ended June 30, 1995 by approximately $289 (21.6%).
The decrease was principally from the net result of $83 increase in fees from
continuing management agreements and a decrease of $372 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 6.1% to $59 for the six months
ended June 30, 1996 from $636 for the six months ended June 30, 1995. The
decrease was the result of a reduction in staffing to accommodate the decrease
in management contracts being serviced.
Selling, general and administrative expenses decreased to $39 for the six
months ended June 30, 1996 from $123 for the six months ended June 30, 1995.
This decrease is a result of office relocation to a less expensive area.
18
<PAGE>
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Total management fees decreased during the three months ended June 30,
1996 compared to the three months ended June 30, 1995 by approximately $194
(24.5%). The decrease was principally from the net result of $64 increase in
fees from continuing management agreements and a decrease of $258 related to the
loss of five management agreements (which related to hotels whose ownership
changed).
Direct payroll and related costs decreased 5.6% to $289 for the three
months ended June 30, 1996 from $306 for the three months ended June 30, 1995.
The decrease was the result of a reduction in staffing to accommodate the
decrease in management contracts being serviced.
Selling, general and administrative expenses decreased to $16 for the
three months ended June 30, 1996 from $54 for the three months ended June 30,
1995. This decrease is a result of office relocation to a less expensive area.
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 Jubilee Casino profitability (see Future Operations Alpha
Gulf), developing future casino locations in Missouri and New York and
continuing to reduce and monitor operating expenses. In early July 1996 the
Company began implementation of a plan to close the Jubilation Casino in August
1996. On July 16, 1996, operation of the Jubilation Casino was suspended in
compliance with a directive of the Mississippi Gaming Commission which raised
that its working capital available to the Jubilation Casino was not sufficient.
The Commission required that the Jubilation Casino's working capital be
increased. This working capital requirement was reviewed by Jubilation
Lakeshore in light of its previously announced plan to close the Jubilation
Casino during August 1996 and the costs which would be incurred to reopen the
Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to
reopen the Jubilation Casino.
Although the Company experienced a net loss of $20,924, for the six
months ended June 30, 1996, there was cash provided by operating activities
of $852. The inflow of cash from operating activities resulted from non-cash
expenses of $18,703 and a positive net change in operating assets and
liabilities of $3,063. Non-cash expenses primarily consisted of depreciation
are amortization of $3,445, debt conversion fee of $1,019 and the write-off
of the Lakeshore leasehold improvements of $14,507. The change in operating
assets and liabilities primarily consisted of a decrease in prepaid insurance
of $1,134, a decrease in other current assets of $636 and an increase in
accrued payroll and related liabilities of $1,099.
Although the Company experienced a net loss of $5,247, for the six
months ended June 30, 1995, net cash used in operating activities was only
$1,366. The inflow of cash from operating activities resulted from non-cash
expenses of $2,982 and a positive net change in operating assets and
liabilities $899. Non-cash expenses primarily consisted of depreciation and
amortization of $1,955 and the write-off of capitalized costs related to
Indians of $858. The change in operating assets and liabilities primarily
consisted of an increase in accrued payroll and related liabilities of $857.
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 based primarily on the allegation that it is the alter-ego
of its subsidiary, and secondarily on the theory of liquor liability. The
Plaintiff initially sought $20,000. Early in the litigation, Plaintiff sought a
default judgment against Alpha Gulf relating to evidence that was destroyed.
The court denied the motion, but granted Plaintiff's attorney fees in an amount
to be determined, but to date not yet determined. The Plaintiff also initiated
a declaratory judgment action in the same court against Alpha Gulf
19
<PAGE>
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,
with respect to all issues relating to the underlying personal liability action,
subject to completion of the settlement documents and the approval of the court.
The principal insurance carrier which will pay the settlement may attempt to
assert that the Company and Alpha Gulf have an obligation to reimburse provision
it for payment of the 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 refereed
to in this paragraph is adequately covered by insurance.
The Company is obligated under a $20,000 non-revolving promissory note
with Bryanston. Effective June 26, 1996, the Company issued 694 shares of its
preferred stock in settlement of $19,165 of its note and a five percent
transaction fee of $958. The outstanding balance at June 30, 1996 and December
31, 1995 is $931 and $17,361, respectively. The note, which bears interest at
prime rate (8.25% at June 30, 1996) plus 2%, is payable at the lesser of the
outstanding principal amount or $2,000 per annum through December 31, 1999.
Beginning 1996, interest accrued monthly is due and payable by the following
month. All remaining principal and accrued interest (approximately $503) shall
be due on December 31, 2000. Additionally, commencing May 1, 1996 and for each
of the next succeeding three years thereafter, the Company will be required to
make additional principal payments equal to "Available Cash Flow of Maker" as
defined in the note.
Effective June 26, 1996, the Company issued 44 shares of its preferred
stock in settlement of a certain loan payable of $1,181, accrued interest of $41
and a five percent transaction fee of $61.
At June 30, 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 for the breach of several loan covenants
and a loan payable to Bryanston of approximately $2,474 for non-payment. The
Company received a waiver of the defaults of the loan payable and mortgage note
payable to Bryanston. Accordingly, the mortgage note payable ($3,656) and the
equipment notes payable ($3,433), relating to the Jubilation Casino, are
reflected in current liabilities at June 30, 1996.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 on file with the Securities and Exchange
Commission. During the quarter ended June 30, 1996, the Company was not a party
to any material, newly instituted legal proceedings except those legal
proceedings which are covered by insurance. There have been no other material
developments during such period to any existing legal proceeding.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of August 12, 1996, the Company was in default of its Lakeshore
mortgage note payable of approximately $3,656,000 and its Lakeshore equipment
notes payable aggregating approximately $3,433,000, for non-payment. The total
arrearage of principal and interest payments on the aforementioned debt is
approximately $2,573,000.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on behalf by the undersigned, thereunto duly
authorized.
Dated: August 12, 1996 /s/ STANLEY S. TOLLMAN
Stanley S. Tollman
President and Chief Executive Officer
Dated: August 12, 1996 /s/ JAMES A. CUTLER
James A. Cutler
Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALPHA
HOSPITALITY CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,626
<SECURITIES> 0
<RECEIVABLES> 851
<ALLOWANCES> 319
<INVENTORY> 433
<CURRENT-ASSETS> 3,966
<PP&E> 57,264
<DEPRECIATION> 15,053
<TOTAL-ASSETS> 47,639
<CURRENT-LIABILITIES> 27,773
<BONDS> 26,889
0
7
<COMMON> 135
<OTHER-SE> 4,699
<TOTAL-LIABILITY-AND-EQUITY> 47,639
<SALES> 0
<TOTAL-REVENUES> 27,174
<CGS> 0
<TOTAL-COSTS> 26,328
<OTHER-EXPENSES> 19,127<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,643
<INCOME-PRETAX> (20,924)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,924)
<EPS-PRIMARY> 1.585
<EPS-DILUTED> 0
<FN>
<F1> AMOUNT INCLUDES DEPRECIATION AND AMORTIZATION OF $3,445,
DEVELOPMENT COSTS OF $156, DEBT CONVERSION FEE OF $1,019 AND
WRITE-OFF OF LAKESHORE LEASEHOLD AND IMPROVEMENTS OF $14,507.
</FN>
</TABLE>