U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the year ended December 31, 1996.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from_______________________to____________________
Commission file number 33-64236
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Alpha Hospitality Corporation
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(Name of small business issuer in its charter)
Delaware 13-3714474
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East 49th Street, New York, N.Y. 10017
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 750-3500
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Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value per share Boston Stock Exchange
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Redeemable Common Stock Purchase Warrants
each redeemable common stock purchase
warrant entitling the holder to purchase
one share of common stock
Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The issuer's revenues for the year ended December 31, 1996 were
approximately $44,520,000.
The aggregate market value on March 25, 1997 of the voting stock held by
non-affiliates computed based on the average bid and asked prices of such stock
on that date was approximately $27,143,000 (including value of shares of certain
spouses as described in Item 5).
As of March 25, 1997, 14,049,753 shares of Common Stock, $.01 par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format:
Yes ___________ No X
The Exhibit Index is located on Page 53.
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ITEM 1. BUSINESS
The Company
Alpha Hospitality Corporation (the "Company"), through its six
subsidiaries, is engaged in (i) the ownership and operation of a gaming
vessel, 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 (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"), Jubilation Lakeshore, Inc. ("Jubilation
Lakeshore") and Alpha St. Regis, Inc. ("Alpha St. Regis"). From September
1993 through December 1996, the Company, through its former subsidiary,
Alpha Hotel Management Company, Inc. (Alpha Hotel), provided management
services to hotels and motels owned by third-parties. Additionally, from
December 1995 to July 16, 1996, the Company, through its subsidiary
Jubilation Lakeshore, formerly known as the Cotton Club of Greenville Inc.
(the "Cotton Club"), operated a second gaming vessel, the Jubilation
Casino.
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 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 Company currently operates the Jubilee Casino in Greenville,
Mississippi. In addition, from December 1995 through July 16, 1996, the
Company operated a casino located in Lakeshore, Mississippi. Although
management is satisfied with the results of operation of the Jubilee Casino
(located in Greenville, Mississippi), the Jubilation Casino (located in
Lakeshore, Mississippi) continued to operate at a deficit. As a result, in
July 1996, management began to implement its plans to close the Jubilation
Casino during August 1996. On July 16, 1996, operation of the Jubilation
Casino was suspended in compliance with a directive of the Mississippi
Gaming Commission (the "Mississippi Commission") which asserted that the
working capital of the Jubilation Casino was not sufficient. The
Mississippi 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. See "The Jubilation Casino."
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The Jubilation Casino
Upon the acquisition of the Cotton Club casino, this casino was renamed
the Jubilation Casino and relocated from Greenville to Lakeshore,
Mississippi, where it reopened on December 21, 1995. Management believed
that the smaller Jubilation Casino could 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), the Jubilation
Casino was unable to overcome operating deficits. As a result, in July
1996 management began to implement its plans to close the Jubilation
Casino during August 1996. On July 16, 1996, operation of the Jubilation
Casino was suspended in compliance with a directive of the Mississippi
Commission which asserted that the working capital of the Jubilation
Casino was not sufficient. The Mississippi 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.
In connection with the plan to close the Jubilation Casino, management
believes it has taken all appropriate action required by federal law
with respect to providing notice of such closing to its employees. In
connection with the closing of the Jubilation Casino, management updated
its assessment of the realizability of the leasehold improvements and
related assets of the Jubilation Casino. Since this would have resulted in
an impairment loss of approximately $14,507,000 and stockholders' equity
below the requirements for continued listing of the Company's securities
on NASDAQ, the Company accepted proposals by Bryanston and BP to convert
approximately $19,165,000 and $1,222,000, respectively, of debt to 693,905
and 44,258 shares of Series B Preferred Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Certain Transactions - Bryanston" and "Certain Transactions - BP Group."
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 Commission. See "Business - Government Regulation -
Licensing Mississippi."
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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 844 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 continue to at least
capture its fair market share of the Greenville gaming market.
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. This memorandum of understanding was assigned to Alpha Monticello.
The development and management of this casino will be undertaken by Mohawk
Management L.L.C., a company of which the Company's subsidiary Alpha
Monticello owns 50%. Alpha Monticello will be responsible for the
day-to-day operations of the casino. 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. 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. Bryanston is a 25% member of
Catskill.
Catskill purchased the 225 acre Monticello Raceway in June 1996. Catskill
plans to continue Monticello's racing program and to explore other
development at the site in addition to the St. Regis Mohawk Casino.
On August 2, 1996, Mohawk Management L.L.C. executed an agreement with the
Tribe for the management of the proposed casino. The Tribe has submitted
the agreement to the National Indian Gaming Commission for its approval.
There can be no assurance that the project will receive all requisite
approvals.
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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. 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 $30 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.
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."
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Marketing
The Company concentrates its sales, marketing and promotional activities
for the Jubilee Casino in its principal target market within a 50 mile
radius of the casino. The target markets 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 130,000
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 seeks to maintain and upgrade its gaming vessel so that it is
competitive in the industry. With the closing of the Jubilation Casino the
Company has discontinued its marketing activities relating to the
Jubilation Casino. See "Business - Current Operations."
Competition
There are currently 19 casinos located on the Mississippi River. In the
Greenville market, the Company's Jubilee Casino competes with the Las
Vegas Casino and the Lighthouse Point Casino, which opened in November
1996. The opening of the Lighthouse Point Casino resulted in a decrease in
the gaming revenues of the Jubilee Casino which is expected to be
corrected as the marketing programs of the new Lighthouse Point Casino
help to increase the total Greenville market. Since the opening of the new
casino, the Jubilee Casino's fair share of the market, based on the number
of player positions in the market, has improved. The Company believes that
the Jubilee Casino is well-positioned to compete successfully with the two
other casinos in the Greenville market. Approximately 60 miles south of
Jubilee Casino is Vicksburg. Vicksburg has four casinos: the Isle of
Capri, Harrahs Vicksburg, Ameristar, and Rainbow Casino. Approximately 110
miles south of Jubilee Casino is Natchez with the Lady Luck Natchez
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 ten casinos - Harrahs (2
casinos), Sams Town, Fitzgeralds, Sheraton, Hollywood Casino, Circus
Circus, Horseshoe Casino, Grand Casino and Ballys. Since casinos within a
60 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 has remained competitive in the markets affecting the Jubilee
Casino by keeping its gaming vessel well-maintained and by offering
superior accommodations, entertainment programs and special events. In
addition, the Company's advertising and marketing efforts have focused on
maintaining the Company's presence in its market.
Although the Jubilee Casino has remained competitive, the Jubilation
Casino, located on the Mississippi Gulf Coast, was unable to compete
satisfactory with the major casino developments in the Biloxi and Gulfport
markets. This resulted in management's decision to close the Jubilation
Casino during August 1996. See "Casino Operations - Current Operations -
The Jubilation Casino."
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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.
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").
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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, Washington 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.
Gaming licenses are not transferable, are initially issued for a two-year
period and are subject 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.
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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 immediate
purchase of the securities for cash at a fair market value.
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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
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.
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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.
On July 16, 1996, operation of the Jubilation Casino was suspended in
compliance with a directive of the Mississippi Commission which raised
certain issues with regard to the operation of the Jubilation Casino and
asserted that the working capital available to the Jubilation Casino was
not sufficient. The Mississippi 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. The
Company does not believe that the issues raised by the Mississippi
Commission regarding the operation of the Jubilation Casino will adversely
affect the license to operate the Jubilee Casino since the Jubilee Casino
is operating in compliance with applicable regulations, including
regulations relating to issues raised by the Mississippi Commission
regarding the operation of the Jubilation Casino. There can be no
assurance, however, that the issues raised by the Mississippi Commission
will not adversely affect the license, or the renewal of the license, to
operate the Jubilee Casino, or any future licenses for which applications
may be submitted in Mississippi.
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.
10
<PAGE>
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 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
required documentation has been filed with the National Indian Gaming
Commission.
Hotel Operations
As of December 31, 1996, the Company sold 100% of the stock of its
subsidiary, Alpha Hotel Management Company, Inc., to Bryanston Group, Inc.
for consideration of $3,000,000.
Through Alpha Hotel, the Company provided Management Services to fourteen
(14) hotels or motels. The Company provided Management Services to
thirteen (13) of such hotels or motels primarily under Service Agreements
with Bryanston. The Company provided Management Services to these thirteen
(13) hotels on behalf of Bryanston (which was 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 was the sole provider to such hotels of Management
Services required of Bryanston, and received substantially all fees due to
Bryanston under the Management Agreements. In addition, the Company
provided Management Services to one hotel located in Myrtle Beach, South
Carolina under an agreement with the hotel's owner. All of the fourteen
(14) hotels were "mid-priced," ranging between $40 and $70 per night, and
all but one were operated as Days Inns.
11
<PAGE>
The Company and Bryanston had designed a financial management system
whereby all accounting information was processed in a centralized
accounting office in Hopewell Junction, New York. The system included
management of all cash, accounts payable and receivable, and generated
detailed monthly financial statements. The Company provided each property
with standardized forms and procedures in order that all accounting in the
management system was 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 reimbursed Bryanston on a monthly basis for its share of rent,
office expenses and direct payroll. The Expense Reimbursement Agreement
allowed 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 employed some of the Company's employees, was
also based at the Hopewell Junction office. See "Certain Transactions" and
"Management."
Under the Service Agreement, the Company was 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 ranged from 2% to 5%. Additional fees were earned from various
incentive agreements and accounting fees. The Management Agreements
typically had a term of 10 years and most have specified renewal terms.
The majority of the initial terms expired in the years 2001 and 2002. The
Management Agreements contained termination provisions that were
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 was terminable at the discretion of the hotel owner and others
were terminable if there was 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.
As indicated above, many of the managed hotels were operated as Days Inns
by arrangement with Bryanston, which was a Days Inns licensee. The terms
of Bryanston's license provided for a special, partial exemption from the
Days Inns license fees, which was ordinarily 8% of total net revenue for
each of the hotels for which the Company provided management services.
Each of the managed hotels was charged applicable fees for marketing and
reservation service, but was exempt from the so-called "basic fee" of 5%
since the elimination of the "basic fee" reduced the license fee to 3%,
such reduction was economically significant to such hotels, and was
favorable to the Company since the arrangement acts was an incentive for
Days Inn licensees to enter into management agreements with the Company.
The term of the special exemption was equal to the term of the related
Management Agreement, including any extensions for which provision was
made therein, plus a further five-year term (intended to cover a possible
future extension). The discount was not available, however, for any hotels
other than those hotels currently operated by Bryanston. There was no
discretion in the licenser, absent breach, to eliminate or modify the
discount.
The Company's hotel management operations were organized under a regional
management structure. The overall hotel operation was supervised by the
president of Alpha Hotel and regional executives were utilized to oversee
and monitor the operations. The Company believed this type of
organization, coupled with extensive operational systems and procedures,
was the most effective way to provide management services for the hotels.
In addition to the regional managers, the Company had a support staff
comprised of accounting, marketing, sales and supervisory personnel. This
comprehensive support staff helped ensure that all of the managed hotels
maximized 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.
12
<PAGE>
The hotels for which the Company provided management services were:
Management
Number Agreement Renewal
of Termination Termination
Name and Location Rooms Date Date
----------------- ----- ----------- -----------
Days Inn-Scottsdale, Scottsdale, AZ 167 2001 None
Days Inn-Clearwater, Clearwater, FL 117 2001 None
Days Inn-Buena Vista, Orlando, FL 245 2002 None
Days Inn-Downtown, Atlanta, GA 262 2012 2022
Days Inn-Savannah, Savannah Bay, GA 253 2001 None
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-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 2001 None
Days Inn-Madisonville, Madisonville, KY 141 2002 None
Sheraton - Myrtle Beach, SC 219 2004 None
---
2,687
=====
Employees
In connection with its casino operations, as of December 31, 1996, the
Company employed approximately 553 employees, of which 500 are full-time
employees. Management considers its employment relations to be
satisfactory. In connection with the closing of the Jubilation Casino and
pursuant to the Workers Adjustment and Retraining Notification Act, the
Company provided the 320 employees of the Jubilation Casino with notice of
its plans to close the Jubilation Casino within 60 days of the anticipated
closing date, as required under the act. Therefore, management believes it
has taken all appropriate action required by federal law with respect to
providing notice of the closing of the Jubilation Casino to the employees
of the Jubilation Casino. See "Casino Operations."
In connection with its hotel operations, although not directly employed by
the Company, 941 individuals engaged in the operations of managed hotels
were employed by Bryanston and Atlantic Shore Resort, the owner of the
hotel located in Myrtle Beach, South Carolina, and were supervised by the
Company. Approximately 23% of the 809 Bryanston employees were unionized.
The Company believes that Bryanston's relations with its unions were
satisfactory.
13
<PAGE>
ITEM 2. 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.
Casino Operations
<TABLE>
<CAPTION>
Location Principle Use Approximate Owned/Leased Expires
Area
<S> <C> <C> <C> <C>
Hancock County Mooring site of 25 acres Leased (1)
Waveland, MS casino vessel
Hancock County Rights to 1,250 Leased (2)
Waveland, MS adjoining waterfront feet
waters to
mooring site of
casino vessel
Hancock County Sign location, 3 acres Leased April 30, 2003
Waveland, MS warehousing with option to
and 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,
Greenville, MS casino vessel waterfront feet 1997 with
option to extend
3 five year
terms
Washington County Accounting 10,000 square Leased December 1,
Greenville, MS offices and feet 1998 with
warehouse option to extend
two years
</TABLE>
14
<PAGE>
(1) In August 1996, the Company was named as a defendant in an action
brought in the United States District Court for the Southern District of
Mississippi (Joseph R. Cure, Jr., Cynthia Cure Rutherford, Michael Cure and
Susan Cure Gollot v. Alpha Gulf Coast, Inc.) for alleged past due and
future accelerated rentals and other costs under this lease. In March 1997,
the Company reached settlement terms in the action. In the settlement, the
lease terminates and the Company will pay $500,000 at closing and
$1,200,000 in the form of a three year, note payable quarterly bearing
interest at 10% per annum. The note will be secured by assignment of an
interest in the mortgage note payable to Bryanston. Additionally, the
Company will have the option to buy out the remaining obligations at
reduced principal amounts at accelerated dates, as specified in the
settlement agreement.
(2) In December 1996, the State of Mississippi (State) terminated the lease
for nonpayment of rent and agreed to allow the Company until March 31, 1997
to remove the Jubilation Casino from the mooring site. Subsequently, the
State has agreed to allow the Company to continue to keep the boat at the
site on a month to month arrangement.
The Company considers its property to be suitable and adequate for its
present needs. In connection with the closing of the Jubilation Casino, the
realizability of the capital leasehold and improvements related to the
Jubilation Casino was reassessed. Since this would have resulted in an
impairment loss of approximately $14,507,000 and stockholders' equity below
the requirements for continued listing of the Company's securities on
NASDAQ, the Company accepted proposals from Bryanston and BP to convert
certain debt owed to such entities into equity in the Company. See
"Business - Casino Operations," "Certain Transactions - Bryanston,"
"Certain Transactions - BP Group," "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
15
<PAGE>
ITEM 3. 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 was based on its
service of alcohol to a customer who it knew, or should have known, 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 $20,000,000. Early in the litigation Plaintiff sought a default
judgment against Alpha Gulf relating to certain alledged evidence that was
destroyed. The court denied the motion, but granted Plaintiff attorney's
fees, in an amount to be determined. That issue was resolved in the
settlement referred to below. 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 Company has been dismissed from this
litigation and the declaratory judgment action instituted by Plaintiff was
dismissed in June 1996. 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, with
respect to all issues relating to the underlying personal liability
action. The principal insurance carrier which paid the settlement asserted
in the declaratory judgment action that Alpha Gulf has an obligation to
reimburse it for payment of the settlement amount, which dispute is being
litigated. The parties to this remaining litigation have agreed to settle
all matters by mutual exchange of releases to each party.
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.
16
<PAGE>
In August 1996, Alpha Gulf was named as a defendant in an action brought
in the United States District Court for the Southern District of
Mississippi (Joseph R. Cure, Joseph E. Cure, Jr., Cynthia Cure Rutherford,
Michael Cure and Susan Cure Gollot vs. Alpha Gulf Coast, Inc.) for alleged
past due and future accelerated rentals and other costs under an operating
lease relative to real property located in Lakeshore, Mississippi. In
March 1997, the parties agreed to a settlement of the action. Under the
settlement, the lease will terminate and the Company will pay $500,000 at
closing and $1,200,000 in the form of a three year, note payable quarterly
bearing interest at 10% per annum. The note will be secured by assignment
of an interest in the mortgage note payable to Bryanston. Additionally,
the Company will have the option to prepay its remaining obligation at a
reduced principal amount, as specified in the settlement agreement. The
settlement and early termination of the operating lease resulted in a
$541,000 charge to operations for the year ended December 31, 1996.
In September 1996, the Company and Alpha Gulf were named as defendants in
an action brought in the Circuit Court of Hancock County, Mississippi
(Durward Dunn, Inc. vs. Alpha Hospitality Corporation; Durward Dunn, Inc.
vs. Alpha Gulf Coast, Inc.) for alleged failure to make payments pursuant
to a construction contract. Plaintiff seeks actual and compensatory
damages of approximately $1,200,000. The consolidated financial statements
include a provision for the liability of $928,000 for this contract at
December 31, 1996. The ultimate outcome of this litigation cannot
presently be determined as this case is presently in the early phases of
discovery. Accordingly, no provision for liability to the Company, except
as mentioned above, that may result upon adjudication has been made in the
accompanying consolidated financial statements.
In December 1996, the Company, Jubilation Lakeshore and Alpha Gulf were
named as defendants in an action brought in the United States District
Court for the Southern District of New York (Bally Gaming, Inc. v. Alpha
Hospitality Corp., Jubilation Lakeshore, Inc. and Alpha Gulf Coast, Inc.)
for allegedly engaging in conduct which would impair the collateral held
as security for certain financial obligations. Such conduct includes the
failure to pay certain monetary obligations unrelated to the obligations
secured by the collateral. Plaintiffs seek specific performance of
particular actions defendants believe are necessary to protect the
collateral that secures the financial obligations, unspecified damages and
attorney's fees, among other things. The Company believes the action is
without merit and plans to move to dismiss this action.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) On December 12, 1996, the Company had its annual meeting.
(b) The following Directors were elected:
Stanley S. Tollman
Sanford Freedman
Thomas W. Aro
Brett G. Tollman
James A. Cutler
Patricia Cohen
Matthew B. Walker
(c) The first order of business was the election of Directors of the
Company as follows:
For Withheld Against
--- -------- -------
Stanley S. Tollman 9,515,880 16,578 0
Sanford Freedman 9,515,880 16,578 0
Thomas W. Aro 9,515,880 16,578 0
Brett G. Tollman 9,515,880 16,578 0
James A. Cutler 9,515,880 16,578 0
Patricia Cohen 9,515,880 16,578 0
Matthew B. Walker 9,515,880 16,578 0
The second order of business was to approve an amendment to the
Corporation's amended Certificate of Incorporation to increase the
number of authorized shares of the Corporation's common stock, $.01
par value per share, from 17,000,000 to 25,000,000 as follows:
For Withheld Against
--- -------- -------
9,433,538 45,520 900
The third order of business was the approval of the appointment of
Rothstein, Kass & Company, P.C. as the Corporation's independent
certified public accountants for the ensuring year, as follows:
For Withheld Against
--- -------- -------
9,498,860 8,120 25,478
18
<PAGE>
PART II
ITEM 5. MARKET INFORMATION
Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock and its Redeemable Common Stock Purchase
Warrants (the "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
---------------- ------------------
High Low High Low
------- ------- -------- --------
1996 Quarters:
First $ 3.25 $ 2.375 $ .438 $ .125
Second 4.75 2.00 .875 .344
Third 4.125 2.00 .594 .25
Fourth 2.375 1.25 .563 .25
1995 Quarters:
First $ 6.875 $ 3.375 $ .563 $ .516
Second 4.250 2.250 .375 .188
Third 4.375 2.215 .438 .156
Fourth 6.125 4.00 .563 .313
1994 Quarters
First $ 18.251 $11.75 $ 7.00 $ 4.00
Second 13.325 5.265 4.125 1.25
Third 6.75 5.50 2.125 .875
Fourth 7.50 4.625 1.25 .625
As of March 25, 1997, 14,049,753 shares of Common Stock and 738,163
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.
19
<PAGE>
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.
Two additional debt instruments are subordinate to the Term Loan and
also prohibit the payment of cash dividends until paid in full. These
are: (i) equipment leases originally held by Bally and subsequently sold
to General Electric Credit Corp. which had an aggregate balance of
approximately $3,433,000 at December 31, 1996, accrues interest at rates
of 12% and 12.75%, and mature in 1997 and (ii) a mortgage held by
Caterpillar on the Jubilation Casino which had an outstanding balance of
approximately $3,656,000 at December 31, 1996, accrues interest based
upon the 30 day commercial paper rate and matures at May 1, 2000. See
"Certain Transactions-Bryanston" and "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and
Capital Resources."
The Company has 738,163 shares of Series B Preferred Stock outstanding,
which (i) entitles the holders to one vote per share; (ii) has a
liquidation value of $29.00 per share; (iii) has a cash dividend rate of
10% of liquidation value, payable quarterly, which increases to 13% of
liquidation value if the cash dividend is not paid within 30 days at the
end of each fiscal year and in such event is payable in Common Stock at
the then market price and (iv) is convertible into eight shares of
Common Stock. Since there are three debt instruments which prohibit the
payment of cash dividends, the Company will be required to pay a 13%
Series B Preferred Stock dividend in Common Stock. Accordingly, as of
December 31, 1996, the Company is obligated to declare a stock dividend
of approximately 968,000 shares. See "Description of Securities."
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
Years ended December 31, 1996, 1995, 1994 and the period March 19, 1993
(date of inception) to December 31, 1993
1996 1995 1994 1993
-------- --------- --------- ---------
Revenues $ 44,520 $ 27,639 $ 43,265 $ 18
Loss from continuing operations $(26,309) $ (19,344) $ (11,026) $ (4,931)
Loss per common share from
continuing operations $ (1.99) $ (1.82) $ (1.08) $ (.56)
December 31,
------------------------------------------
1996 1995 1994 1993
-------- --------- --------- ----------
Total assets $ 43,954 $ 66,774 $ 45,490 $ 47,201
Long-term debt $ 21,194 $ 29,632 $ 20,100 $ 24,874
Redeemable preferred stock $ - $ - $ 565 $ -
Stockholders' equity $ 1,506 $ 1,904 $ 13,143 $ 11,882
Prior year income statement amounts have been restated to reflect the 1996
disposition of the Company's hotel management subsidiary, Alpha Hotel.
See Management's Discussion and Analysis of Financial Condition and
Resulsts of Operations and Consolidated Financial Statements.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in thousands)
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 Cotton Club Casino (subsequently renamed
Jubiliation 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.
In July 1996, the Company began to implement its plans to close the
Jubilation Casino during August 1996 due to the Jubilation Casino being
unable to overcome operating deficits. Considering the impact of the
aforementioned factor, management updated its assessment of the
realizability of the leasehold improvements and related assets of the
Jubilation Casino. In accordance with its accounting policy for long-lived
assets, effective for the second quarter ended June 30, 1996, management
recorded an impairment loss of $14,507 to property and equipment. Since
this recordation would have resulted in the reduction of stockholders'
equity to a level below the requirements for continued listing of the
Company's securities on NASDAQ, the Company accepted proposals by Bryanston
and BP to convert an aggregate of $20,387 of debt owed by the Company to
Bryanston and BP into shares of the Company's Series B Preferred Stock.
Thereafter, on July 16, 1996, operation of the Jubilation Casino was
suspended in compliance with a directive of the Mississippi Commission
which asserted that the working capital of the Jubilation Casino was not
sufficient. The Mississippi 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. See
"Certain Transactions - Bryanston" and "Certain Transactions - BP Group."
22
<PAGE>
Results of Operations - Alpha Gulf:
The following table sets forth the statements of operations for Alpha
Gulf's Jubilee Casino before intercompany charges and deferred income tax
for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------- -------- -------
Revenues:
Casino $36,340 $ 25,623 $41,344
Food and beverage, retail and other 947 1,194 1,921
------- -------- -------
Total revenues 37,287 26,817 43,265
------- -------- -------
Operating expenses:
Casino 12,619 12,779 19,011
Food and beverage, retail and other 1,282 1,785 2,270
Selling, general and administrative 17,125 16,270 22,200
------- -------- -------
Total operating expenses 31,026 30,834 43,481
------- -------- -------
Income (loss) from operations 6,261 (4,017) (216)
------- -------- -------
Other expenses:
Depreciation and amortization 4,874 4,161 3,763
Interest 2,031 2,178 2,317
Other non-operating 2,620 1,535
------- -------- -------
Total other expenses 6,905 8,959 7,615
------- -------- -------
Loss before intercompany charges and
deferred income tax $ (644) $(12,976) $(7,831)
======= ======== =======
Years Ended December 31, 1996 and 1995:
Alpha Gulf generated revenues of $37,287 and $26,817 in 1996 and 1995,
respectively. Casino revenues were $36,340 and $25,623 in 1996 and 1995,
respectively. Food and beverage, retail and other revenues were $947 and
$1,194 in 1996 and 1995, respectively. This increase in casino revenues is
primarily due to the relocation of the 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 approximately 5% over the same
period last year.
23
<PAGE>
At the locations referred to above, Alpha Gulf's casino operating expenses
were $12,619 and $12,779 (35% and 50% of casino revenues) in 1996 and 1995,
respectively. Food and beverage, retail and other expenses were $1,282 and
$1,785 (136% and 150% of food and beverage, retail and other revenues) in
1996 and 1995, respectively.
The reduced casino expenses in 1996 when compared to 1995 of $160 was the
net result of reduced staffing levels ($379), the decrease in the costs
related to food and beverages provided gratuitously to customers ($842),
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 ($1,200) and an increase in customer slot payouts ($304), which
are directly related to increased revenues and a decrease in operating
expenses ($448), which is the result of management operating more
efficiently.
Food and beverage revenue does not include the retail value of food and
beverage of approximately $3,011 and $3,446 provided gratuitously to
customers in 1996 and 1995, respectively.
The reduction of food and beverage, retail 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
costs of approximately $5,494 and $6,231, marketing and advertising of
approximately $6,746 and $4,572, occupancy costs of approximately $2,751 and
$3,030, and operating expenses of approximately $2,134 and $2,436 in 1996
and 1995, respectively. The reduced payroll and related costs of $737 was a
direct result of management's cost-cutting measures instituted during the
first quarter of 1995. The $2,174 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 $279 is primarily due to reduced insurance
costs. The decrease in operating expenses of $302 was primarily due to the
restructuring of capital lease ($268).
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $4,874 and $4,161 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.
24
<PAGE>
Years Ended December 31, 1995 and 1994:
Alpha Gulf generated revenues of $26,817 and $43,265 in 1995 and 1994,
respectively. Casino revenues were $25,623 and $41,344 in 1995 and 1994,
respectively. Food and beverage, retail and other revenues were $1,194 and
$1,921 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 compared to
$3,787 of gaming revenue achieved by its predecessor's gaming vessel at this
site during the same period in 1994.
Alpha Gulf's casino operating expenses were $12,779 and $19,011, for the
years ended December 31, 1995 and 1994, respectively, which amounts,
constituted 50% and 46% of casino revenues during each respective period.
Food and beverage, retail and other expenses were $1,785 and $2,270 for the
years ended December 31, 1995 and 1994, respectively, which amounts
constituted 149% and 118% of food, beverage, retail and other revenues
during each respective period.
The reduced casino expenses in 1995 when compared to 1994 of $6,232 was the
net result of reduced staffing levels ($3,650), the decrease in the costs
related to food and beverages provided gratuitously to customers ($646),
which is the direct result of the reduction of gratuitous food and beverages
provided to casino customers and the related costs thereto, a decrease in
gaming taxes ($1,777) which is directly related to decreased revenues and a
decrease in operating expenses ($159), which is the result of management
operating more efficiently.
Food and beverage revenue does not include the retail value of food and
beverage of approximately $3,446 and $4,833 provided gratuitously to
customers in 1995 and 1994, respectively.
The reduction of food and beverage, retail and other costs are directly
related to the reduced volume of food and beverage revenues.
Future Operations - Alpha Gulf:
Alpha Gulf's Jubilee Casino operating results have improved since its
relocation to Greenville. The gaming revenues achieved to date by the
Jubilee Casino in Greenville far exceed the revenues of its predecessor
gaming vessel at that site. Alpha Gulf's casino operations in Greenville
have become a major factor in the Greenville market and has helped to expand
that market.
A third gaming vessel opened November 6, 1996 in Greenville. Historically,
addition of gaming facilities expand local gaming markets in Mississippi. It
is unknown at this time what impact this third gaming vessel will have on
the Greenville casino market. Management believes that this third gaming
vessel may negatively impact Alpha Gulf's current market achievement but to
what extent this act will have on future revenues is uncertain at this time.
25
<PAGE>
Results of Operations - Jubilation Lakeshore:
The Company acquired the Cotton Club of Greenville, Inc. (d/b/a Cotton Club
Casino) on October 26, 1995. The Cotton Club Casino's operations in
Greenville was terminated on October 30, 1995. After its relocation to
Lakeshore, the Cotton Club, renamed Jubilation Casino, reopened for business
on December 21, 1995. The following table sets forth the statement of
operations for the Jubilation Casino before intercompany charges for the
year ended December 31, 1996 and for the period October 26, 1995 (date of
acquisition) to December 31, 1995:
1996 1995
-------- --------
Revenues:
Casino $ 6,913 $ 806
Food and beverage, retail and other 313 16
-------- --------
Total revenues 7,226 822
-------- --------
Operating expenses:
Casino 3,564 797
Food and beverage, retail and other 376 89
Selling, general and administrative 7,419 1,718
-------- --------
Total operating expenses 11,359 2,604
-------- --------
Loss from operations (4,133) (1,782)
-------- --------
Other expenses:
Depreciation and amortization 1,166 333
Interest 977 120
Other non-operating 223
Write-off of leasehold and improvements 14,507
-------- --------
Total other expenses 16,650 676
-------- --------
Loss before intercompany charges $(20,783) $ (2,458)
======== ========
26
<PAGE>
Year Ended December 31, 1996:
The Jubilation Casino experienced a loss from operations of $4,133 during
the year ended December 31, 1996. 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
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. As such,
management recorded an impairment loss of $14,507 to property and equipment,
representing the unamortized balance of these leasehold and improvements.
On July 16, 1996, operation of the Jubilation Casino was suspended in
compliance with a directive of the Commission which raised certain issues
with regard to the operation of the Jubilation Casino and asserted that the
working capital of Jubilation Casino was not sufficient. On July 17, 1996,
representatives of Jubilation Lakeshore met with the Commission. As a result
of that meeting, the non-working capital issues raised by the Commission
have been resolved to the Commission's satisfaction. However, 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
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 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 in
1995) associated with this project has been expensed.
New York - Alpha St. Regis:
In 1994, Alpha St. Regis incurred $509 in expenses related to a proposed
Class 3 casino located on the St. Regis Mohawk Reservation in Hogansburg,
New York. Management does not believe that the project in Hogensburg, New
York will go forward.
27
<PAGE>
New York - Alpha Monticello:
On January 19, 1996, the Company, through one of its subsidiaries, entered
into a memorandum of understanding with Catskill Development, L.L.C.
("Catskill") regarding the development and management of a casino to be
built adjacent to the Monticello Raceway in Sullivan County, New York. 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. The Tribe has
submitted this agreement to the National Indian Gaming Commission for its
approval. 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%. The terms of this proposed management agreement
is for seven years. Alpha Monticello will be responsible for the day-to-day
casino operations. The casino would 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.
During 1996, Alpha Monticello has incurred $1,975 of costs of which $734 has
been capitalized and the remaining $1,241, (which includes $1,112 of general
corporate overhead allocation) relates to expenditures for casino
development.
Missouri - Alpha Missouri:
Alpha Missouri has not commenced casino 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 $239 and $179 in 1996 and
1995, respectively (of these amounts $146 and $42 in 1996, and 1995,
respectively, relates to general corporate overhead allocation), related to
its proposed development of a riverboat casino in Louisiana, Missouri.
28
<PAGE>
Hotel Management - Alpha Hotel
The following table sets forth the statements of income of Alpha Hotel for
the years ended December 31,1996, 1995 and 1994:
1996 1995 1994
------ ------ ------
Management fees $1,992 $2,863 $2,835
------ ------ ------
Operating expenses:
Direct payroll and related expenses 1,285 1,236 1,474
Selling, general and administrative 62 276 236
------ ------ -----
1,347 1,512 1,710
------ ------ -----
Income from management fees before
intercompany charges $ 645 $1,351 $1,125
====== ====== ======
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 Division. As of December 31, 1996, the Company
sold 100% of the stock of Alpha Hotel to Bryanston for consideration of
$3,000.
December 31, 1996 Compared to December 31, 1995:
Total management fees decreased during the year ended December 31, 1996
compared to the year ended December 31, 1995 by approximately $871 (30.4%).
The decrease was principally the result of a $125 decrease in fees from
continuing management agreements and a decrease of $746 related to the loss
of five management agreements (which related to hotels whose ownership
changed) and one management agreement which expired. The decrease in fees
earned from continuing agreements was attributable to an agreement which was
restructured.
Direct payroll and related costs increased 4.0% to $1,285 for the year ended
December 31, 1996 from $1,236 for the year ended December 31, 1995. This
increase was the result of annual salary increases.
Selling, general and administrative expenses decreased to $62 for the year
ended December 31, 1996 from $276 for the year ended December 31, 1995. This
decrease is a result of office relocation to a less expensive area.
29
<PAGE>
December 31, 1995 Compared to December 31, 1994:
Total management fees increased during the year ended December 31, 1995
compared to the year ended December 31, 1994 by approximately $28 (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 for the year
ended December 31, 1995 from $1,474 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 for the year
ended December 31, 1995 from $236 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.
Liquidity and Capital Resources
For the year ended December 31, 1996, the Company had net cash provided by
operating activities of $955. During the year, the Company experienced a net
loss of $22,815. The positive aggregate net cash flow from operating activities
resulted from net non-cash items of $18,346 and a positive net change in
operating assets and liabilities of $5,424. Non-cash expenses primarily
consisted of depreciation and amortization of $6,059, a debt conversion fee of
$1,019 and the write-off of the Lakeshore leasehold and improvements of $14,507.
The change in operating assets and liabilities primarily consisted of a decrease
in prepaid insurance of $1,187, a decrease in other current assets of $975, an
increase in accounts payable and other accrued expenses of $1,805 and an
increase in accrued payroll and related liabilities of $848.
Cash used in investing activities of $2,437 consisted of $1,460 in purchases of
property and equipment primarily related to the relocation of casinos to each of
their current sites and $1,047 in payments for deposits and other assets
primarily attributable to $734 in deferred costs relating to casino development
in Missouri and New York.
Cash provided by financing activities of $516 was attributable primarily to
$3,813 in advances under the $20,000 non-revolving promissory note with
Bryanston and the principal reduction of notes payable and long-term debt of
approximately $3,365.
30
<PAGE>
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.
In August 1996, Alpha Gulf was named as a defendant in an action brought in
the United States District Court for the Southern District of Mississippi
(Joseph R. Cure, Joseph E. Cure, Jr., Cynthia Cure Rutherford, Michael Cure
and Susan Cure Gollot vs. Alpha Gulf Coast, Inc.) for alleged past due and
future accelerated rentals and other costs under an operating lease relative
to real property located in Lakeshore, Mississippi. In March 1997, the
Company reached settlement terms in the action. In the settlement, the Lease
terminates, Company will pay $500 at closing and $1,200 in the form of a
three year, ten percent note payable quarterly. The note will be secured by
assignment of an interest in the mortgage note payable to Bryanston.
Additionally, the Company will have the option to buy out the remaining
obligations at reduced principal amounts at accelerated dates, as specified
in the settlement agreement. The settlement and early termination of the
operating lease resulted in a $541 charge to operations for the year ended
December 31, 1996.
31
<PAGE>
In September 1996, the Company and Alpha Gulf were named as defendants in an
action brought in the Circuit Court of Hancock County, Mississippi (Durward
Dunn, Inc. vs. Alpha Hospitality Corporation; Durward Dunn, Inc. vs. Alpha
Gulf Coast, Inc.) for alleged failure to make payments pursuant to a
construction contract. Plaintiff seeks actual and compensatory damages of
approximately $1,200. The consolidated financial statements include a
provision for the liability of $928 for this contract at December 31, 1996.
The ultimate outcome of this litigation cannot presently be determined as
this case is presently in the early phases of discovery. Accordingly, no
provision for liability to the Company, except as mentioned above, that may
result upon adjudication has been made in the accompanying consolidated
financial statements.
In December 1996 the Company, Jubiliation Lakeshore and Alpha Gulf were
named as defendants in an action brought in the United States District Court
for the Southern District of New York (Bally Gaming, Inc. v. Alpha
Hospitality Corp. and Alpha Gulf Coast, Inc.) for allegedly engaging in
conduct which would impair the collateral held as security for certain
financial obligations. Such conduct includes the failure to pay certain
monetary obligations unrelated to the obligations secured by the collateral.
Plaintiffs seek specific performance of particular actions Plaintiffs
believe are necessary to protect the collateral that secures the financial
obligations, unspecified damages and attorney's fees, among other things.
The Company believes the action is without merit and plans to move to
dismiss this action.
In June 1996, the Company issued 661 and 42 shares, respectively, of its
preferred stock, in settlement of $19,165 and $1,222, respectively, of its
unsecured debt with Bryanston and an unrelated third party. The Company was
charged a five percent transaction fee of $1,019, which was converted into
35 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 $2.90 per share, payable quarterly, which increases to $3.77 per
share if the cash dividend is not paid within 30 days of the end of each
fiscal year. In such event, the dividend will be payable in common stock. As
of March 21, 1997, the dividend has not been paid. Accordingly, the Company
is obligated to declare a stock dividend of approximately 968 shares.
At December 31, 1996, the Company was in default of (i) the mortgage notes
aggregating $11,456 for non-payment, and (ii) the equipment notes
aggregating $9,284 for non-payment and the breach of several loan covenants.
The Company received a waiver of the defaults on the $7,800 mortgage note
payable to Bryanston and on a $257 equipment note, through December 31,
1997. Accordingly, the mortgage note of $3,656 and the equipment notes
aggregating $9,027 are reflected in current liabilities at December 31,
1996.
The Company continues to suffer significant losses from operations and has a
working capital deficit and accumulated deficit. In addition, the Company
was not in compliance with certain long-term debts which are included in
current liabilities. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management has minimized
continuing losses from the Jubilation Casino by closing the operation in
July 1996. Management is currently working with the Jubilation Casino's
unsecured creditors regarding future payment of its obligations. Management
is also in discussion with the Jubilation Casino's secured creditors in an
attempt to settle its outstanding obligations.
32
<PAGE>
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 going
concern is dependent upon its ability to develop working capital, attain
future profitable operations and meet its creditors' demands. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
See Index to Financial Statements attached hereto.
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
35
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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 65 Chairman of the Board, President and Chief
Executive Officer
Sanford Freedman 60 Vice President, Secretary and Director
Thomas W. Aro 53 Vice President and Director
Brett G. Tollman 34 Vice President and Director
James A. Cutler 45 Treasurer, Chief Financial Officer
and Director
Patricia Cohen 43 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 had served as Executive Vice President of the
Tollman-Hundley Hotel Group from 1983 through March 1996, and served as a
Director, Executive Vice President and Secretary of Bryanston Group, Inc. from
1989 through March 1996.
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
President and Director 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 served as Executive Vice President of the Bryanston Group, Inc. from
1989 through March 1996.
36
<PAGE>
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.
CERTAIN PROCEEDINGS INVOLVING MANAGEMENT
Bryanston 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.
37
<PAGE>
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 assigned certain assets related to its business of hotel
management and was relieved of certain obligations 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,
which has been withdrawn, 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, 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. With regard to five of the bankruptcy
proceedings, the Bankruptcy Court lifted the bankruptcy stay and permitted
foreclosure sales of the hotels. With regard to the sixth hotel, a Plan of
Reorganization has been approved by the Bankruptcy Court, which approval has
been appealed by the lender to the U.S. District Court. The U.S. District Court
confirmed the decision below and the lender has further appealed to the U.S.
Appellate Court for the Fifth District.
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. 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.
38
<PAGE>
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. Subsequent to the filing of the proceeding, the
subject hotel property was sold and as a result, funds became available to pay
all creditors in full, other than the holder of the second deed of trust which
agreed to reduce its claim. It is expected that this proceeding will be
dismissed.
T.H. Orlando, Ltd. ("Orlando") and T.H. Resorts Associates, Ltd. ("Resorts"),
filed a Chapter 11 proceeding in the United States Bankruptcy Court for the
Middle District of Florida, Orlando Division in February 1997. The proceeding
was filed to prevent the imminent foreclosure of three Days Inn hotels owned by
Orlando and Resorts. Messrs. Stanley S. Tollman and Sanford Freedman hold
limited partnership interest in Orlando and Resorts and Mr. Stanley S. Tollman
is a stockholder of the corporate general partners of Orlando and Resorts,
Messrs. Stanley S. Tollman, Brett G. Tollman and James A. Cutler were directors
and/or officers of such corporate general partners.
39
<PAGE>
ITEM 11. 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. The agreement has been
renewed until June 1, 1997. 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 unpaid salary
accumulates and the Company does not pay any interest or other penalty
thereon. 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. Prior to the sale of Alpha Hotel to Bryanston, 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 Agreement
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 with respect to development activities relating to
the Company's casino and hotel operations. Mr. Freedman's services as
Secretary and Director of the Company do not relate to the Company's
development activities and are not 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 $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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Patricia
Cohen and Sanford Freedman. There is no insider participation on the
Compensation Committee.
40
<PAGE>
BOARD COMPENSATION REPORT
Executive Compensation Policy
Cash Compensation
The Company's executive officers, other than Stanley S. Tollman and Thomas
W. Aro, are not directly compensated by the Company based upon the
Compensation Committee's determination that compensation is not prudent at
this time given the Company's financial position. When, and if, the
Company's financial position improves, the Compensation Committee would
establish and review the compensation of executive officers and employee
compensation plans.
Equity Compensation
The grant of stock options to executive officers constitutes an important
element of long-term compensation for the executive officers. The grant of
stock options increases management's equity ownership in the Company with
the goal of ensuring that the interests of management remain closely aligned
with those of the Company's stockholders. The Board believes that stock
options in the Company provide a direct link between executive compensation
and stockholder value. By attaching vesting requirements, stock options also
create an incentive for executive officers to remain with the Company for
the long term.
Chief Executive Officer Compensation
The compensation of Stanley S. Tollman, the Chief Executive Officer, is set
forth in an employment agreement between the Company and Mr. Tollman, which
provides for a salary in the amount of $250,000 per year, none of which has
been paid under the agreement. The unpaid salary accumulates and the Company
does not pay any interest or other penalty thereon. The terms of the
employment agreement were determined based upon Stanley S. Tollman's ability
to establish and retain a strong management team and to develop and
implement the Company's business plans. The Company also appraised its
financial position and reviewed compensation levels of chief executive
officers at comparable companies with the Company's industry.
Patricia Cohen
Sanford Freedman
Members of the
Compensation Committee
41
<PAGE>
Corporate Performance Graph
The following graph shows a comparison of cumulative total stockholder
returns from November 5, 1993 through 12/31, 1996 for the Company,
the Russell 2000 Index ("Russell") and the Dow Jones Entertainment and
Leisure - Casino Index ("DJ Casinos").
[The follow table was represented as a line chart in the printed material.]
11/05/93 12/93 12/94 12/95 12/96
-------- ----- ----- ----- -----
ALPHA HOSPITALITY CORPORATION $100 $172 $ 78 $ 47 $ 18
RUSSELL 2000 100 101 98 128 147
DOW JONES CASINOS 100 100 77 103 112
The graph assumes the investment of $100 in the Company's Common Stock on
November 5, 1993 and the investment of $100 in Russell and DJ Casinos on
October 31, 1993, and that all dividends were reinvested. No dividends have
been declared or paid on the Company's Common Stock.
42
<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 three years
ended December 31, 1996 and the period March 19, 1993 (date of inception) to
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
Stock Options/ All Other
Name and Principal Position Year Salary (1) Bonus Awards SARS Compensation
--------------------------- ---- ---------- ------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Stanley S. Tollman 1996 $250,000
Chairman of the Board
of Directors 1995 $250,000 - - - -
Co-Chief Executive Officer 1994 $250,000 - - - -
1993 $250,000 - - - $ 31,250(2)
Monty D. Hundley 1996 $ -
President and Co-Chief 1995 $ 62,500(3) - - - -
Executive Officer 1994 $250,000 - - - -
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.
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.
43
<PAGE>
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.
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.
44
<PAGE>
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.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 25, 1997 with
respect to each beneficial owner of five percent (5%) or more of the
outstanding shares of Common Stock and Series B Preferred 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.
Title of Class Name and Address Number of Percent of
-------------- ---------------- Shares (1) Ownership
---------- ----------
Common Stock Stanley S. Tollman(2)(3). 498,975 3.6%
$.01 Par Value...........
Beatrice Tollman(3)(9)... 1,815,890 12.9%
Sanford Freedman(4)...... 271,158 1.9%
Thomas W. Aro(5)......... 100,200 0.7%
Brett G. Tollman(6)...... 493,078 3.5%
James A. Cutler(7)....... 116,320 0.8%
Patricia Cohen(8)........ 1,483,046 10.6%
Matthew Walker........... 145,632 1.0%
Bryanston Group, Inc.(9). 5,899,066 29.6%
1886 Route 52
Hopewell Junction, NY
All officers and directors
as a group (7 persons)
(2)(4-8)................. 3,108,409 22.1%
Series B Preferred Stock Bryanston Group, Inc.(9). 693,905 94.0%
$.01 Par Value........... 1886 Route 52
Hopewell Junction, NY
BP Group, Ltd.(10)....... 44,258 6.0%
6 Danton Lane South
Lattington, NY
(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. Includes shares of Common Stock
which may be acquired upon exercise of options or conversion of
convertible securities which are presently exercisable or convertible,
or become exercisable or convertible within 60 days.
46
<PAGE>
(2) Represents 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.
(3) As to Stanley S. Tollman, does not include 1,815,890 shares of Common
Stock owned by Stanley S. Tollman's spouse, Beatrice Tollman. As to
Beatrice Tollman, does not include 498,975 shares of Common Stock
beneficially owned by Stanley S. Tollman, her spouse. Stanley S.
Tollman and Beatrice Tollman, in the aggregate, beneficially own
2,314,865 shares of Common Stock, which represents 17.2% of the class
outstanding. Mr. and Mrs. Tollman each disclaim beneficial ownership of
the shares beneficially owned by each other.
(4) Includes options granted to Mr. Freedman to purchase 60,000 shares of
the Company's Common Stock, all of which are currently exercisable and
none of which have been exercised.
(5) Includes options granted to Mr. Aro to purchase 60,000 shares of the
Company's Common Stock, all of which are currently exercisable and none
of which have been exercised.
(6) Includes options granted to Mr. Brett G. Tollman to purchase 60,000
shares of the Company's Common Stock, all of which are currently
exercisable and none of which have been exercised.
(7) Includes options granted to Mr. Cutler to purchase 40,000 shares of the
Company's Common Stock, all of which are currently exercisable 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.
(8) Represents (i) 1,128,982 shares of Common Stock owned by Patricia Cohen
and (ii) 354,064 shares of Common Stock issuable upon conversion of
44,258 shares of Series B Preferred Stock owned by BP, a company of
which Patricia Cohen is the sole stockholder.
(9) As to shares of Common Stock held by Bryanston, includes (i) 5,551,240
shares of Common Stock issuable upon conversion of 693,905 shares of
Series B Preferred Stock and (ii) options granted to Bryanston to
purchase 347,826 shares of Common Stock, all of which are currently
exercisable. Bryanston is an affiliate of the Company, and Beatrice
Tollman, Stanley S. Tollman's spouse, is a 50% stockholder of
Bryanston. Bryanston and Beatrice Tollman each disclaim beneficial
ownership of the shares beneficially owned by each other.
(10) Patricia Cohen, a director of the Company, is the sole stockholder of
BP.
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bayou Caddy Acquisition
Pursuant to an asset purchase 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 promissory note that bore interest
at the rate of 10% per annum and was convertible into shares of Alpha Gulf
(the "B.C. Note"). Pursuant to an agreement also dated May 14, 1993 among
B.C., the Company, Stanley S. Tollman and Monty D. Hundley, the Alpha Gulf
shares into which the B.C. Note was convertible were further convertible into
shares of Company's Common Stock upon the happening of certain events. On
November 15, 1995, the Company, Alpha Gulf and B.C. entered into an agreement
(the "B.C. Agreement") under which (i) the B.C. Note was deemed converted on
February 1, 1994 and (ii) B.C. received rights which, upon the effective date
of the Registration Statement of which this Propsectus is a part, entitle
B.C. to receive 791,880 shares of the Company's Common Stock. As contemplated
by the B.C. Agreement, B.C. subsequently distributed rights to receive
700,000 of the shares of Company Common Stock to its shareholders and
retained rights to receive 91,880 of such shares. The conversion of the B.C.
Note into 791,880 shares was determined in accordance with a formula
contained in the May 14, 1993 agreements that allowed for conversion of the
note into 12% of the shares of the Company's Common Stock held by Messrs.
Tollman and 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 the 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(cent) 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.
48
<PAGE>
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 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 September 30, 1996 and December 31, 1995, the principal balance
(which includes accrued interest through the second anniversary) was
$2,473,826 and accrued interest at September 30, 1996 was $133,104.
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 "Initial 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, pursuant
to the Initial Working Capital Loan, which amount includes approximately
$349,000 of accrued interest. In October 1995, the 625,222 shares of
preferred stock were converted into 1,250,444 shares of the Company's Common
Stock.
49
<PAGE>
On November 15, 1995, the Company, Alpha Gulf and B.C. entered into the B.C.
Agreement under which (i) the B.C. Note was deemed converted on February 1,
1994, and (ii) B.C. received rights which, upon the effective date of the
Registration Statement of which this Prospectus is a part, entitle B.C. to
receive 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 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 ($1,746,182 and $17,360,861 outstanding at
December 31, 1996 and December 31, 1995, respectively) with Bryanston. The
note, which bears interest at prime rate (8.25% at September 30, 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 $503,000) 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 $7,800,000
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 December 31, 1996 and December 31, 1995, the balance
due on the Term Loan is $7,800,000 and accrued interest is $1,226,789 and
$446,789, respectively.
As of November 1, 1995, Bryanston had sold all of the Common Stock of the
Company it had previously held.
50
<PAGE>
Since the Company began to implement its plans to close the Jubilation Casino
in July 1996, the Company updated its assessment of the realizability of the
leasehold improvements and related assets of the Jubilation Casino. This
resulted in an impairment loss of approximately $14,507,000 and would have
reduced stockholders' equity below the requirements for continued listing of
the Company's securities on NASDAQ. In order to avoid the delisting of the
Company's securities from NASDAQ, Bryanston proposed that the Company convert
the Working Capital Loan into Series B Preferred Stock, which would enable
the Company to maintain its NASDAQ listing. Therefore, effective June 26,
1996, Bryanston converted the amount due on the Working Capital Loan
(approximately $19,165,000) into shares of the Company's Preferred Stock. The
Company was charged a 5% transaction fee (approximately $958,000), which was
also converted into shares of the Company's Series B Preferred Stock. The
conversion was effective June 26, 1996 and the total of approximately
$20,123,000 converted into 693,905 shares of Series B Preferred Stock based
on the fair market value of the Company's Common Stock on the date of
conversion ($3.625). Each share of outstanding Series B Preferred Stock (i)
entitles the holder to one vote; (ii) has a liquidation value of $29.00 per
share; (iii) has a cash dividend rate of 10% of liquidation value, which
increases to 13% of liquidation value if the cash dividend is not paid within
30 days of the end of each fiscal year and in such event is payable in Common
Stock valued at the then market price; and (iv) is convertible into eight
shares of Common Stock.
As of December 31, 1996, the Company sold 100% of the stock of Alpha Hotel to
Bryanston for consideration of $3,000,000.
BP Group
BP 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 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.
In July 1993 Ms. Cohen, a director of the Company and the sole stockholder of
BP, 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(cent) 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.
51
<PAGE>
Since the Company began to implement its plans to close the Jubilation Casino
in July 1996, the Company updated its assessment of the realizability of the
leasehold improvements and related assets of the Jubilation Casino. This
resulted in an impairment loss of approximately $14,507,000 and would have
reduced stockholders' equity below the requirements for continued listing of
the Company's securities on NASDAQ. In order to avoid the delisting of the
Company's securities from NASDAQ, BP proposed that the Company convert the BP
Loan into Series B Preferred Stock, which would enable the Company to
maintain its NASDAQ listing. Therefore, effective June 26, 1996, BP converted
the amount due on the BP Loan (approximately $1,222,000) into shares of the
Company's Series B Preferred Stock. The Company was charged a 5% transaction
fee (approximately $61,000), which was also converted into shares of the
Company's Series B Preferred Stock. The conversion was effective June 26,
1996, and the total of approximately $1,283,000 was converted into 44,258
shares of Preferred Stock based on the fair market value of the Company's
Common Stock on the date of conversion $3.625). The terms of the Series B
Preferred Stock issued to BP are identical to those of the Series B Preferred
Stock issued to Bryanston in June 1996.
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.
52
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed or part of this report:
1. 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
Consolidated Statements of Cash Flows F-6-7
Notes to Consolidated Financial Statements F-8-26
2. FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation Accounts for the Years Ended
December 31, 1996, 1995 and 1994 S-1
3. EXHIBITS
*2 Bryanston Third Amended Joint Plan of Reorganization
*3(a)Certificate of Incorporation
*3(b)Form of Certificate of Amendment to Certificate of In
*3(c)By-Laws, as amended
*4(a)Form of Common Stock Certificate
*4(b)Form of Warrant Certificate
*10(a)Form of Employment Agreement between the Company and Stanley
S. Tollman
*10(b)Form of Employment Agreement between the Company and Monty D.
Hundley
*10(c)Form of Indemnification Agreement between the Company and
directors and executive officers of the Company
*10(d)1993 Stock Option Plan
*10(e)Form of Service Agreement between the Company and Bryanston
*10(f)Expense Reimbursement Agreement effective as of September 1,
1993, by and between the Company and Tollman-Hundley Hotel Group
and Bryanston Group, Inc.
53
<PAGE>
*10(g)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(h)Non-negotiable convertible Promissory Note of Alpha Gulf
payable to BCI in the principal amount of $3,500,000, dated May
14, 1993
*10(i)Shareholders Agreement, dated as of May 14, 1993, between BCI,
Alpha Gulf, the Company and Stanley S. Tollman and Monty D.
Hundley.
*10(j)Form of Warrant Agreement among the Company, the Transfer
Agent and the Underwriters
*10(k)Work Order, dated June 7, 1993, of American Marine Corporation
*10(l)Amended Sales and Security Agreement, dated July 8, 1993,
between Bally Gaming, Inc. and Alpha Gulf d/b/a/ Bayou Caddy Casino
*10(m)Agreement, dated May 11, 1993, between Twenty Grand Marine
Service, Inc. and BCI
*10(n)Agreement, dated as of June 1993 between Alpha Gulf d/b/a
Bayou Caddy Casino and Benchmark and Trustmark National Bank
*10(p)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(q)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(r)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, Cynthia Cure
Rutherford, Michael Cure and Susan Cure Gollott and BCI
*10(s)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(t)Lease, dated November 12, 1992, between Dallas Goodwin and BCI
*10(u)Form of Limited Standstill Agreement of the Existing
Stockholders f/b/o the Underwriters
*10(v)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(w)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(x)Amendment to the BP Bridge Note dated September 29, 1993
*10(y)Amendment to the Bryanston Bridge Note dated October 29, 1993
*10(z)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(aa)HFS marketing Agreement dated October 27, 1993
*10(ab)Amended Sales and Security Agreement between Bally and the
Company dated July 8, 1993
*10(ac)Deleted
54
<PAGE>
*10(ad)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(ae) Deleted
*10(af) Form of Underwriters' Warrant
***10(ag) Amended Cure Lease
***10(ah) Peoples Bank Loan Agreement
***10(ai) Non-Revolving Promissory Note with Bryanston Group, Inc.
***10(aj) $20,000,000 Non-Revolving Promissory Note dated January 5,
1995
***10(ak) Stock Purchase Agreement dated October 20, 1995
***10(al) Stock Acquisition Agreement dated January 25, 1995
***10(am) Form 8-K dated October 31, 1995
***10(an) Restructure of Debt of Alpha Gulf Coast, Inc. with Bally
Gaming, Inc.
**11 Statement Re: Computation of Per Share Earnings
12 List of Subsidiaries
(b) Reports on Form 8-K
Date filed - November 13, 1995 - Item 2. Acquisition or Disposition of
Assets
Item 7. Financial Statements and Exhibits
* Incorporated by reference, filed with Company's Registration Statement filed
on Form SB-2 (File No. 33-64236) filed with the Commission on June 10, 1993
and as amended on September 30, 1993, October 25, 1993, November 2, 1993 and
November 4, 1993 which Registration Statement became effective November 5,
1993.
** See Consolidated Financial Statements
55
<PAGE>
*** Incorporated by reference, filed with Company's Form 10-KSB for the year
ended December 31, 1994 or filed with Company's Form 10-K for the year ended
December 31, 1995.
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 Monticello, Inc. Delaware
Alpha Rising Sun, Inc. Delaware
Jubilation Lakeshore, Inc. Mississippi
56
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ALPHA HOSPITALITY CORPORATION
By:_______________________________________
Stanley S. Tollman
Title: Chairman of the Board and
Co-Chief Executive Officer
Date:
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stanley S. Tollmen Chairman of the Board and Co-Chief 3/31/97
- ------------------------ Executive Officer
Stanley S. Tollman
/s/ Thomas W. Aro Vice President and Director 3/31/97
- ------------------------
Thomas W. Aro
/s/ James A. Cutler Chief Financial Officer and Treasurer 3/31/97
- ------------------------ (Principal Financial and Accounting
James A. Cutler Officer)
/s/ Sanford Freedman Vice President, Secretary and Director 3/31/97
- ------------------------
Sanford Freedman
/s/ Brett G. Tollman Vice President and Director 3/31/97
- ------------------------
Brett G. Tollman
57
<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, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1996.
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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1996, 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 15 to
the consolidated financial statements, the Company has suffered significant
losses from operations and has a working capital deficit and an accumulated
deficit at December 31, 1996. In addition, the Company was not in compliance
with certain long-term debt covenants therefore requiring the obligations to be
classified as current liabilities. Management's plans in regard to these matters
are also described in Note 15. 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>
Our audits were made for the purpose of forming an opinion on the basic
consolidated 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
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated 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
consolidated financial statements taken as a whole.
/s/ Rothstein, Kass & Company, P.C
Roseland, New Jersey
February 14, 1997, except for Note 16 as
to which the date is March 21, 1997
F-2
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash, including restricted cash of $270 and $64
in 1996 and 1995, respectively $ 1,350 $ 2,316
Accounts receivable, less allowance for doubtful accounts
of $527 and $354 in 1996 and 1995, respectively 73 703
Inventories 297 536
Prepaid insurance 615 1,796
Other current assets 195 1,350
-------- --------
Total current assets 2,530 6,701
PROPERTY AND EQUIPMENT, less accumulated depreciation and
amortization of $17,475 and $13,385 in 1996 and 1995, respectively 39,660 59,255
DEPOSITS AND OTHER ASSETS 1,764 818
-------- --------
$ 43,954 $ 66,774
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Long-term debt, current maturities $ 14,528 $ 27,320
Notes payable 2,400 3,816
Accounts payable and other accrued expenses 9,911 10,474
Accrued payroll and related liabilities 3,755 2,849
Due to affiliate, current maturity 1,746 2,000
-------- --------
Total current liabilities 32,340 46,459
-------- --------
LONG-TERM DEBT, less current maturities 7,866 2,312
-------- --------
DUE TO AFFILIATE, less current maturity, including
accrued interest of $503 in 1996 and 1995 503 15,864
-------- --------
AMOUNTS DUE UNDER REDEMPTION AGREEMENT, including accrued
interest of $286 and $235 in 1996 and 1995, respectively 1,739 235
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 1,000 shares,
738 shares issued 7
Common stock, $.01 par value, 25,000 and 17,000 shares,
authorized in 1996 and 1995, respectively, 13,478 and
12,354 shares issued in
1996 and 1995, respectively 135 124
Capital in excess of par value 56,778 32,779
Common stock subscribed 1,600
Accumulated deficit (55,414) (32,599)
-------- --------
Total stockholders' equity 1,506 1,904
-------- --------
$ 43,954 $ 66,774
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Casino $ 43,252 $ 26,429 $ 41,344
Food and beverage, retail and other 1,268 1,210 1,921
-------- -------- --------
Total revenues 44,520 27,639 43,265
-------- -------- --------
COSTS AND EXPENSES:
Casino 16,184 13,493 19,011
Food and beverage, retail and other 1,657 1,877 2,270
Selling, general and administrative 24,973 18,069 22,200
Interest 4,421 3,213 3,015
Depreciation and amortization 6,059 4,508 3,776
Pre-opening and development costs 1,468 1,290 2,303
Debt conversion fee 1,019
Write-off of leasehold and improvements 14,507
Settlement and termination of lease agreement 541
Financial advisory services fees 1,690
Relocation expense 412
Buy-out of marketing agreement 1,500
Write-off of unamortized debt discount 931
-------- -------- --------
Total costs and expenses 70,829 46,983 52,575
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
DEFERRED INCOME TAX EXPENSE (26,309) (19,344) (9,310)
DEFERRED INCOME TAX EXPENSE 1,716
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (26,309) (19,344) (11,026)
-------- -------- --------
DISCONTINUED OPERATIONS:
Income from operations of discontinued hotel
management segment 645 1,351 1,125
Gain on disposal of hotel management segment 2,849
-------- -------- --------
Total income from discontinued operations 3,494 1,351 1,125
-------- -------- --------
NET LOSS $(22,815) $(17,993) $ (9,901)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 13,248 10,617 10,225
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ (1.98) $ (1.82) $ (1.08)
From discontinued operations .26 .13 .11
-------- -------- --------
Net loss $ (1.72) $ (1.69) $ (.97)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years
Ended December 31, 1996, 1995 and 1994
(In thousands, except for per share data)
<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>
Balances, January 1, 1994 -- $ -- 10,225 $ 102 $ 16,484 $ -- $ (4,705)
Conversion of long-term debt 2,883
Preferred stock issued in settlement of
note payable and accrued interest 625 6 8,278
Mandatorily redeemable common
stock accretion (6)
Net loss (9,901)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1994 625 6 10,225 102 27,639 (14,606)
Conversion of preferred stock
to common stock (625) (6) 1,250 13 (6)
Common stock issued pursuant
to acquisition 783 8 4,492
Common stock exchanged for
financial advisory services 90 1,600
Mandatorily redeemable common
stock accretion (51)
Exercise of put option 96 1 615
Net loss (17,993)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1995 12,354 124 32,779 1,600 (32,599)
Common stock issued for payment
of long-term debt 701 7 2,446
Issuance of subscribed common stock 348 3 1,597 (1,600)
Issuance of common stock on converted
long-term debt 75 1 (1)
Preferred stock issued in settlement
of long-term debt 42 1,222
Preferred stock issued in settlement
of due to affiliate 661 7 19,158
Preferred stock issued in settlement
of debt conversation fee 35 1,019
Adjustment of amount due under
redemption agreement (1,453)
Stock sold under redemption agreement 11
Net loss (22,815)
-------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1996 738 $ 7 13,478 $ 135 $ 56,778 $ -- $(55,414)
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended
December 31, 1996, 1995 and 1994
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,815) $(17,993) $ (9,901)
-------- -------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,059 4,508 3,776
Provision for losses on accounts receivable 211 255 35
Write-off of deferred costs 460
Common stock/options issued in exchange for
financial advisory services 1,690
Deferred income tax expense 1,716
Imputed interest on long-term debt 337
Gain on disposal of hotel management segment (2,849)
Forgiveness of indebtedness (290)
Debt conversion fee 1,019
Write-off of leasehold and improvements 14,507
Other (301)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 370 248 (886)
(Increase) decrease in inventories 239 201 (488)
(Increase) decrease in prepaid insurance 1,187 (231) 968
(Increase) decrease in other current assets 975 (814) 515
Increase in accounts payable and other
accrued expenses 1,795 2,032 3,893
Increase (decrease) in accrued payroll and
related liabilities 848 (187) 2,431
-------- -------- --------
Total adjustments 23,770 8,162 12,297
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 955 (9,831) 2,396
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,460) (3,717) (3,139)
Cash acquired in connection with business
combination 543
Proceeds from sales of property and equipment 70
Proceeds from (payments for) deposits and
other assets (1,047) 300 (713)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,437) (2,874) (3,852)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate 3,813 21,209
Payments to affiliate (282) (3,848)
Payments on construction and equipment notes payable (281) (4,845)
Proceeds from stock sold pursuant to escrow agreement 11
Proceeds from notes payable 296 248 12,279
Payments on notes payable (1,262) (857) (3,995)
Proceeds from long-term debt 43 8,191
Payments on long-term debt (2,103) (10,821) (1,999)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 516 13,841 1,440
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (966) 1,136 (16)
CASH, beginning of year 2,316 1,180 1,196
-------- -------- --------
CASH, end of year $ 1,350 $ 2,316 $ 1,180
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended
December 31, 1996, 1995 and 1994
(In thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid for interest during the year $ 2,903 $ 1,035 $ 1,889
======= ======= =======
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued in settlement of long-term debt $ 2,453 $ 2,883
======= =======
Amounts due under redemption agreement $ 1,739 $ 235
======= =======
Preferred stock issued in settlement of obligations $21,406 $ 8,284
======= =======
Note payable incurred in connection with lease
settlement arrangement $ 1,200
=======
Accrued interest capitalized to debt $ 1,765 $ 213
======= =======
Common stock/options exchanged for financial
advisory services $ 1,690
=======
Acquisition of casino:
Fair value of net assets acquired $21,881
Fair value of liabilities assumed 17,381
-------
Equity investment $ 4,500
=======
Capitalization of accounts payable for common stock $ 559
=======
Equipment recorded pursuant to obligations under
capital lease and financing agreements $ 89
=======
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 1 - NATURE OF BUSINESS:
Alpha Hospitality Corporation (the Company), incorporated in Delaware on
March 19, 1993, through its subsidiaries, is engaged in (i) the ownership
and operation of a gaming vessel, located in Greenville, Mississippi, which
is operated by the Company's subsidiary Alpha Gulf Coast, Inc. (Alpha Gulf)
and (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), Jubilation Lakeshore, Inc.
(Jubilation Lakeshore) and Alpha St. Regis, Inc. (Alpha St. Regis). From
September 1993 through December 1996, the Company, through its former
subsidiary, Alpha Hotel Management Company, Inc. (Alpha Hotel) (see Note
14), provided management services to hotels owned by third parties.
Additionally, from December 1995 to July 1996, Jubilation Lakeshore,
formerly known as the Cotton Club of Greenville, Inc. (the Cotton Club)
(see Note 3), operated a second gaming vessel located in Lakeshore,
Mississippi.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions 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 and believes it is not exposed to any
significant credit risk on cash.
Inventories - Inventories, which primarily consist of food and beverage,
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
------ ------------
Boat, 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 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-8
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings (Loss) Per Common Share - Earnings (loss) per common share is
based on the weighted average number of common shares outstanding. The
Company's common stock subscribed is included in the computation.
Additionally, in March 1997, the Financial Accounting Standards Board
released Statement No. 128, (SFAS 128), "Earnings Per Share", which
requires dual presentation of basic and diluted earnings per share on the
face of the statements of operations. Basic earnings per share excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per
share pursuant to Accounting Principles Bulletin No. 15. SFAS 128 is
effective for fiscal years ending after December 15, 1997 and, when
adopted, will require restatement of prior years' earnings (loss) per
common share.
Since the effect of outstanding options is antidilutive, they have been
excluded from the Company's computation of earnings (loss) per common
share. Accordingly, management does not believe that SFAS 128 will have an
impact upon historical earnings (loss) per common share as reported.
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 quarterly for differences between financial statement and tax
bases 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 wagers less the amount paid out to
patrons.
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 $3,721, $3,456 and $4,833 for
the years ended December 31, 1996, 1995 and 1994, respectively, provided
gratuitously to customers. The cost of these items of $3,317, $3,410 and
$4,046 for the years ended December 31, 1996, 1995 and 1994, respectively,
are included in casino expenses.
F-9
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Amortization of Debt Discount - The Company amortized the debt discount on
the 1993 convertible promissory note (see Note 5) using the interest
method, which yielded a constant rate of interest over the life of the
note.
Interest Capitalization - Interest costs incurred during the construction
and development of the dockside casino and related facilities was
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.
Fair Value of Financial Instruments - The fair values of the Company's
assets and liabilities which qualify as financial instruments under SFAS
No. 107 approximate their carrying amounts presented in the consolidated
balance sheets at December 31, 1996 and 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.
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets. A loss is
recognized when expected undiscounted future cash flows are less then the
carrying amount of the asset. An impairment loss is the difference by
which the carrying amount of an asset exceeds its fair value.
Reclassifications - Certain amounts have been reclassified in prior years
to conform to the 1996 presentation.
NOTE 3 - BUSINESS COMBINATION:
Effective October 30, 1995, the Company acquired all of the outstanding
capital 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 (an inlet of the Mississippi River).
The capital 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.
F-10
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 3 - BUSINESS COMBINATION (CONTINUED):
Consideration for the acquisition consisted of: (a) cash at closing of
$2,404; (b) notes due six months after closing of $1,397, bearing interest
at 10% per annum; (c) notes due nine months after closing of $1,897,
bearing interest at 10% per annum; and (d) 783 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, 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 and certain lenders to CCG and 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, respectively.
The excess of the purchase price over the net assets of CCG of
approximately $2,593, net of a $450 1996 purchase price adjustment, was
allocated to property and equipment and will be depreciated and amortized
over the estimated remaining useful lives of the assets.
In September 1996, Bryanston purchased the notes aggregating $1,897 from
the former CCG stockholders and assigned its interest in notes aggregating
$475 and $23 (of which $475 and $11 is due at December 31, 1996) to a
director of the Company and an affiliate, respectively.
The following summarized unaudited pro forma information assumes the
acquisition had occurred on January 1, 1994:
Year Ended 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 years 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 businesses 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.
F-11
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 4 - PROPERTY AND EQUIPMENT:
At December 31, 1996 and 1995, property and equipment is comprised of the
following:
1996 1995
-------- --------
Land and building $ 214 $ 214
Boat, barge and improvements 24,261 23,590
Leasehold and improvements 14,215 30,001
Gaming equipment 10,221 10,042
Furniture, fixtures and equipment 7,414 7,264
Transportation equipment 810 1,034
Construction in progress 495
-------- --------
57,135 72,640
Less accumulated depreciation and amortization (17,475) (13,385)
-------- --------
$ 39,660 $ 59,255
======== ========
Included in equipment at December 31, 1996 and 1995 is $1,225 and $1,386,
respectively, related to assets recorded under capital leases. Included in
accumulated depreciation and amortization at December 31, 1996 and 1995 is
$498 and $450, respectively, of amortization related to assets recorded
under capital leases.
In 1993, the Company capitalized approximately $900 of interest, of which
approximately $327 is included in Alpha Gulf's barge and improvements and
$573 is included in Jubilation Lakeshore's leasehold and improvements.
In light of Jubilation Lakeshore's July 1996 closure and in accordance
with its policy on impaired long-lived assets, the Company recorded an
impairment loss of $14,507 representing Jubilation Lakeshore's leasehold
and improvements of $16,284 (which included the $573 of capitalized
interest) and its related accumulated amortization of $1,777.
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 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 represented the implicit economic risks inherent in
the transaction.
Effective in February 1994, the Company exercised its right to convert the
Seller's note and accrued interest (carrying amount of $2,883) into 792
shares of the Company's common stock, of which 717 shares were contributed
to the Company by a stockholder and the remaining 75 shares were issued in
1996.
F-12
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 6 - NOTES PAYABLE:
At December 31, 1996 and 1995, notes payable are comprised of the
following:
<TABLE>
<CAPTION>
Interest
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 Prime
affiliate + 2% $ -- $ 145
Revolving line of credit of $500 with payments
of principal and interest due in March 1997,
collateralized by cash advances 25% 497 200
Note payable to third party with payments of
principal and interest due monthly, collateralized
by certain vehicles 11% 103
Notes payable to Bryanston and former CCG stockholders, of which
$394 and $793 in 1996 and 1995, respectively, are non-interest
bearing (see Note 3) 10% 1,885 3,293
Others Various 18 75
------ ------
$2,400 $3,816
====== ======
</TABLE>
The $500 revolving line of credit, originally due in March 1997, was
extended to June 1997 (see Note 16).
At December 31, 1996, the Company was in default of its notes payable to
affiliates aggregating $1,885. The Company received a waiver through
December 31, 1997 of the default of the Bryanston notes aggregating
$1,399.
F-13
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 7 - LONG-TERM DEBT:
At December 31, 1996 and 1995, long-term debt is comprised of the
following:
<TABLE>
<CAPTION>
Interest
Rate 1996 1995
------- ------- -------
<S> <C> <C> <C>
Mortgage note payable, Bryanston, principal
and interest due monthly through November
1998, collateralized by the barge 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 (5.95% at December 31, 1996)
plus 3.5%, adjusted quarterly, funded with
weekly deposits of $25 into a restricted cash
account, collateralized by the boat and
improvements 9% 3,656 3,736
Equipment notes payable monthly through
November 1999 and collateralized by certain
assets 10-14% 9,284 13,432
Capitalized lease obligations, payable monthly,
expiring in various years through 2001 10-14% 386 925
Loans payable, Bryanston ($2,474) and an
unrelated third party ($1,181) 12% 3,655
Note payable quarterly through March 2000
and secured by assignment of interest in the
mortgage note payable to Bryanston
(see Note 16) 10% 1,200
Other 7-11% 68 84
------- -------
22,394 29,632
Less current portion 14,528 27,320
------- -------
$ 7,866 $ 2,312
======= =======
</TABLE>
F-14
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 7 - LONG-TERM DEBT (CONTINUED):
Aggregate future required principal payments of long-term debt are as
follows:
Years ending December 31:
1997 $14,528
1998 7,155
1999 491
2000 200
2001 18
Thereafter 2
-------
$22,394
=======
In August 1995, Bryanston purchased the mortgage of $7,800 on the
Lakeshore barge from a third party. The transaction resulted in a
write-off on the unamortized discount on the original note of
approximately $931. In connection with the agreement, Bryanston also
acquired 96 shares of common stock owned by the third party (see Note 11).
In October 1995, the Company restructured certain equipment notes,
aggregating approximately $9,000, with unrelated parties, whereby, the
Company will pay approximately $6,500 in forty-eight monthly installments
of $166 (which includes interest of 10% per annum) commencing December 15,
1995. The balance of approximately $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 of the sale of 701
shares of the Company's common stock held in escrow. To the extent that
the net proceeds exceeds $2,500 plus accrued interest ($286 at December
31, 1996), 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 (see Note 10). 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.
In October 1995, the Company restructured a certain equipment note of
approximately $800 with an unrelated party. The amended terms provide for
thirty-six monthly installments of approximately $26 (which includes
interest at 11.5% per annum), commencing November 24, 1995.
F-15
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 7 - LONG-TERM DEBT (CONTINUED):
In April 1996, the Company restructured its capital sign lease of $745
with an unrelated party. The terms of the restructure reduces the lease
principal amount to $475 and forgives $74 of accrued interest. The
effective interest rate of the restructured lease is 10% per annum, with a
four-year term.
In June 1996, the Company issued 42 shares of its preferred stock in
settlement of a certain loan payable of $1,181, plus accrued interest of
$41. As a result, the Company was charged a five percent transaction fee
of $61, which was converted into 2 shares of the Company's preferred
stock.
In December 31, 1996, the Company was relieved of its loan payable to
Bryanston for $2,694 (which includes accrued interest of $270), in partial
consideration for Bryanston's purchase of 100% of Alpha Hotel's common
stock owned by the Company (see Note 14).
At December 31, 1996, the Company was in default of nonpayment of (i) the
mortgage notes aggregating $11,456, and (ii) the equipment notes
aggregating $9,284, as well as the breach of several loan covenants. The
Company received a waiver of the defaults on the $7,800 mortgage note
payable to Bryanston and on a $257 equipment note (see Note 16), through
December 31, 1997. Accordingly, the mortgage note of $3,656 and the
equipment notes aggregating $9,027 are reflected in current liabilities at
December 31, 1996.
At December 31, 1995, the Company was in default of (i) its mortgage notes
aggregating $11,536 for nonpayment, (ii) the equipment notes aggregating
$13,432 for the breach of several loan covenants and (iii) a capital lease
of $745 for nonpayment. Certain loans payable, aggregating $3,655, went
into default in 1996 due to nonpayment. The Company received a waiver of
the default on the loan payable of $2,474 to Bryanston. Accordingly, the
mortgage notes payable, equipment notes payable, capital lease and a
certain loan payable of $1,181 were reflected in current liabilities at
December 31, 1995.
F-16
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 8 - ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES:
At December 31, 1996 and 1995, accounts payable and other accrued
expenses are comprised of the following:
1996 1995
------- -------
Construction $ 1,121 $ 1,218
Insurance financing 585 1,585
Accrued professional fees 983 851
Accrued property taxes 708 843
Accrued interest 2,196 738
Other 4,318 5,239
------- -------
$ 9,911 $10,474
======= =======
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
In September 1993, Alpha Hotel entered into a Service Agreement and an
Expense Reimbursement Agreement with Bryanston. Under the Service
Agreement, Alpha Hotel supplied services for the management of hotels and
motels. Service fees were generated based upon a percentage of hotel and
motel revenues, as defined in the respective agreements. Between 1994 and
1996, Alpha Hotel managed approximately fourteen to twenty hotels and
motels. Pursuant to the terms of the Expense Reimbursement Agreement, the
Company reimbursed Bryanston for direct payroll and related costs for use
of certain office space and its share of office expenses. In December
1996, the Company sold 100% of the common stock of Alpha Hotel to
Bryanston for $3,000 (see Note 14).
In 1993, the Company entered into an agreement with a third party, under
which the third party would provide marketing services. The agreement was
for ten years and could be canceled by the Company after five years. In
September 1995, the Company arranged for the early termination of the
agreement. The funds required to terminate this agreement ($1,500) and to
pay amounts due under the agreement through the date of the termination
were settled by Bryanston and through the issuance of 96 shares of the
Company's stock (see Note 11). Expenses incurred under this marketing
agreement were $564 and $1,665 for the years ended December 31, 1995 and
1994, respectively.
F-17
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED):
The Company is obligated under a $20,000 non-revolving promissory note
with Bryanston. The note, which bears interest at prime (8.25% at December
31, 1996) plus 2%, is payable at the lesser of the outstanding principal
amount or $2,000 per annum through December 31, 1999. Beginning in 1996,
interest is due and payable monthly and the 1995 interest accrued on the
note ($503) is payable on the note's maturity date, December 2000.
Additionally, commencing May 1, 1996 and for each of the next succeeding
three years thereafter, the Company is required to make additional
principal payments equal to "Available Cash Flow of Maker" as defined in
the note. In June 1996, the Company issued 661 shares of its preferred
stock in settlement of $19,165 of the note. As a result, the Company was
charged a five percent transaction fee of $958, which was converted into
33 shares of the Company's preferred stock. Additionally, in December
1996, the Company was relieved of $306 (which includes accrued interest of
$90) of the note, in partial consideration for Bryanston's purchase of
Alpha Hotel (see Note 14). The outstanding principal balance at December
31, 1996 and 1995 is $1,746 and $17,361, respectively.
The Company was obligated under an operating lease relative to real
property located in Lakeshore, Mississippi. In August 1996, the Company
was named as a defendant in an action brought in the United States
District Court for the Southern District of Mississippi (Joseph R. Cure,
Jr., Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollot v. Alpha
Gulf Coast, Inc.) for alleged past due and future accelerated rentals and
other costs under this lease. Subsequent to December 31, 1996, the Company
reached settlement terms with the plaintiffs (see Note 16). Rent expense
under this lease for the years ended December 31, 1996, 1995 and 1994 was
$800 (excluding a $541 settlement and early termination charge), $576
(including a $500 credit as a result of renegotiated lease terms), and
$2,030, respectively.
The Company was obligated under a tideland lease which provided for a
mooring site for the Company's Lakeshore, Mississippi vessel. In December
1996, the State of Mississippi (State) terminated the lease for nonpayment
of rent. The State offered to abate past due rents if the vessel is
removed and the improvements to the leasehold are conveyed to the State.
The State has allowed until March 31, 1997 (subsequently extended on a
month to month basis) for removal of the vessel. Rent expense in 1996 was
$96 and in 1995 and 1994 was $200 under this lease.
The Company is obligated under other operating leases relative to real
property and equipment.
F-18
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED):
Future aggregate minimum annual rental payments under all of these leases
are as follows:
Years ending December 31:
1997 $ 796
1998 385
1999 358
2000 357
2001 362
Thereafter 729
------
$2,987
======
In January 1995, the Company, through its subsidiary, Alpha St. Regis,
entered into a memorandum of understanding with Catskill Development,
L.L.C. (Catskill) pursuant to which Alpha 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 Indian Tribe (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. As of
December 31, 1996, the Company has contributed $734 toward the design,
architecture and other costs of development plans for the casino. Under
the memorandum of understanding, Catskill and Alpha St. Regis committed 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.
In 1996, Alpha St. Regis assigned its interest, under the memorandum of
understanding with Catskill, to Alpha Monticello.
The Company is obligated under an employment contract with a principal
stockholder/officer. Under this agreement, the Company will accrue
deferred compensation of $250 per year. The agreement is automatically
renewable for successive twelve month periods, unless either party shall
advise the other on ninety days written notice of his or its intention not
to extend the term of the employment. In the event of termination of
employment, the terminated officer will be retained to provide consulting
services for two years at $175 per annum.
In accordance with Mississippi law, the Company's casino licenses had
initial terms of two years and would be subject to periodic renewal. In
October 1995, the Company received renewals of their casino licenses
through October 1997. In July 1996, the Company closed its Lakeshore
casino and surrendered its casino license for that location. Failure to
retain the Greenville license could have a material adverse effect on the
Company's operations.
F-19
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED):
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 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 instituted by Plaintiff was
dismissed in June 1996. In addition, a settlement has been reached between
Plaintiff and Alpha Gulf's insurance carrier, with respect to the
underlying personal liability action, in the amount of $5,125. The
principal insurance carrier, which has paid the settlement, has asserted
that Alpha Gulf has an obligation to reimburse it for payment of the
settlement amount. This matter was settled in March 1997 (see Note 16).
In January 1996, Alpha Gulf was named as a defendant in an action brought
in the Circuit Court of Hinds County, Mississippi (Amos v. Alpha Gulf
Coast, Inc.; Batiste v. Alpha Gulf Coast, Inc., Ducre v. Alpha Gulf Coast,
Inc.; Johnston v. Alpha Gulf Coast, Inc,; Rainey v. 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 allegedly served alcoholic beverages
by Alpha Gulf. Plaintiffs alleged that they suffered personal injuries and
seek compensatory damages aggregating $17,100 and punitive damages
aggregating $37,500. The ultimate outcome of this litigation cannot
presently be determined, as this case is presently in the early phases of
discovery. Accordingly, no provision for liability to the Company, that
may result upon adjudication, has been made in the accompanying
consolidated financial statements. The Company believes that the risk
referred to in this paragraph is adequately covered by insurance.
In December 1996, Alpha Gulf and the Company were named as defendants in
an action brought in the United States District Court for the Southern
District of New York (Bally Gaming, Inc. v. Alpha Hospitality Corp. and
Alpha Gulf Coast, Inc.) for allegedly engaging in conduct which would
impair the collateral held as security for certain financial obligations.
Such conduct includes the failure to pay certain monetary obligations
unrelated to the obligations secured by the collateral. Plaintiffs seek
specific performance of particular actions that Plaintiffs believe are
necessary to protect the collateral that secures the financial
obligations, plus unspecified damages and attorney's fees, among other
things. The ultimate outcome of this case cannot presently be determined,
as it is in its preliminary stages.
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.
F-20
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED):
In January 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 a casino in Central City, Colorado. In May 1996, the
Company terminated its stock acquisition agreement with Doc Holliday.
NOTE 10 - AMOUNTS DUE UNDER REDEMPTION AGREEMENT:
The amounts due under redemption agreement (see Note 7) are adjusted for
changes in the market value of the Company's underlying common stock, not
to exceed the original debt incurred, until the common stock is sold by
the unrelated party.
At December 31, 1996, the amounts due under the redemption agreement is
$1,739, which includes $286 of accrued interest, resulting from the
decrease in the fair market value of the 696 shares of the Company's
common stock in escrow at December 31, 1996 ($1.44) and the price at the
date of the escrow agreement ($3.50).
NOTE 11 - STOCKHOLDERS' EQUITY:
In December 1994, the Company issued 625 shares of its preferred stock in
settlement of $8,284 due Bryanston, which included $349 of accrued
interest. In November 1995, the Company converted the 625 shares of
preferred stock to 1,250 shares of common stock in a 2 for 1 exchange.
In November 1994, the Company entered into an agreement with a third party
to settle $559 owed pursuant to a marketing agreement by issuing 96 shares
of its common stock. The third party was given a put option which was
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
$5.80 per share, its fair value at the issuance date. The carrying amount
was periodically increased for the amount which would be payable upon
redemption. The accretion to the carrying amount of $51 and $6 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,
the third party exercised their put option, purchased 96 shares of common
stock for $616, and subsequently sold the shares to Bryanston.
In consideration for 1995 services provided to the Company, the Company
issued options to a third party with a fair value of $90.
In 1995, the Company issued 783 shares related to the CCG acquisition (see
Note 3).
In consideration for 1995 services provided to the Company, the Company
issued 348 shares to Bryanston, with a fair value of $1,600 in 1996 (such
shares are included in common stock subscribed at December 31, 1995).
F-21
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 11 - STOCKHOLDERS' EQUITY (CONTINUED):
In 1996, the Company issued 701 shares, to be held in escrow, related to
certain restructured equipment notes (see Note 7) and 75 shares related to
a convertible promissory note (see Note 5).
In June 1996, the Company issued 661 and 42 shares, respectively, of its
preferred stock, in settlement of $19,165 and $1,222, respectively, of its
unsecured debt with Bryanston and an unrelated third party (see Notes 7
and 9). The Company was charged a five percent transaction fee of $1,019,
which was converted into 35 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 $2.90 per share, payable
quarterly, which increases to $3.77 per share if the cash dividend is not
paid within thirty days of the end of each fiscal year. In such event, the
dividend will be payable in common stock. As of March 21, 1997, the
dividend has not been paid. Accordingly, the Company is obligated to
declare a stock dividend of approximately 968 shares.
In December 1996, the Company's Board of Directors approved to increase
the total number of common stock that the Company shall have the authority
to issue from 17,000 shares to 25,000 shares.
NOTE 12 - STOCK OPTIONS AND WARRANTS:
In June 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 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 385
shares of common stock at an exercise price of $3.25 through December 31,
1995. In addition, effective December 1993, the Company granted options to
purchase an aggregate of 24 shares of common stock at an exercise price of
$11.50. In September 1994, the Company granted to a director, options to
purchase 50 shares of its common stock at an exercise price of $5.00,
which can be exercised any time up to October 1, 1999. The maximum term of
each option granted under the plan is ten years, however, options granted
to an employee owning greater than 10% of the Company's common stock will
have a maximum term of five years. As of December 31, 1996 and 1995, no
options under this plan were exercised.
In October 1993, the Company entered into an option agreement with an
unrelated third party whereby the unrelated third party received an
option, expiring on October 31, 1998, to purchase 600 shares of the
Company's common stock at an exercise price of $14 per share. As of
December 31, 1996 and 1995, the option was not exercised.
F-22
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 12 - STOCK OPTIONS AND WARRANTS (CONTINUED):
In conjunction with its November 1993 initial public offering, the Company
issued 863 redeemable common stock purchase warrants at $.10 per warrant.
Each warrant entitled the holder to purchase one share of common stock at
the exercise price of $12.00, commencing November 1993 until November
1998. As of December 31, 1996 and 1995, no warrants were exercised.
In December 1995, the Company granted to Bryanston an option to acquire
348 shares of the Company's common stock at an exercise price per share
equal to the closing NASDAQ bid price as of December 4, 1995 ($5.375 per
share). The option expires on December 4, 2000. As of December 31, 1996
and 1995, the option was not exercised.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized for the Company's Plan. Had compensation cost for
the Company's Plan been determined based on the fair value at the grant
date of awards in the years ending December 31, 1996 and 1995 consistent
with the provisions of SFAS 123, the Company's net loss from continuing
operations and net loss per common share from continuing operations would
have been increased to the pro forma amounts indicated below:
1996 1995
---------- ----------
Loss from continuing operations, as reported $ (26,309) $ (19,344)
Loss from continuing operations, pro forma (26,634) (19,370)
Loss per common share from continuing
operations, as reported (1.98) (1.82)
Loss per common share from continuing
operations, pro forma (2.01) (1.82)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: risk-free
interest rates of six percent; no dividend yields; option life of five
years; and expected volatility of eighty percent.
F-23
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 13 - 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
return attributes of each subsidiary. At December 31, 1996 and 1995 , the
Company's deferred federal income tax asset is comprised of the tax
benefit (cost) associated with the following items based on the 35% tax
rate currently in effect:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Pre-opening costs expensed for financial reporting
and amortized over five years for tax purposes $ 984 $ 1,477
Net operating loss carryforwards 14,153 10,376
Depreciation (805) 408
Differences between financial and tax bases of assets
and liabilities 990 (3,833)
Other 171 101
-------- --------
Deferred income tax asset 15,493 8,529
Valuation allowance (15,493) (8,529)
-------- --------
$ -- --
======== ========
</TABLE>
For the year ended December 31, 1994, the federal statutory tax rate and
the Company's effective rate differs due to the reversal of the entire
deferred income tax asset recorded at December 31, 1993.
The Company has available for federal income tax purposes, a net operating
loss carryover of approximately $40,438 of which $883, $7,407, $21,354 and
$10,794 will expire in the years 2008, 2009, 2010 and 2011, respectively.
NOTE 14 - DISCONTINUED OPERATIONS:
On December 31, 1996, the Company sold its hotel management subsidiary,
Alpha Hotel, to Bryanston for $3,000 and realized a $2,849 gain after tax.
Such transaction resulted in a reduction of the Company's debts to
Bryanston (see Notes 7 and 9). Summary operating results of discontinued
operations, excluding the above gain, for the three years ended December
31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net sales $1,992 $2,863 $2,835
Cost of sales 1,347 1,512 1,710
------ ------ ------
Income from operations of discontinued hotel
management segment, before intercompany charge $ 645 $1,351 $1,125
====== ====== ======
</TABLE>
F-24
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 14 - DISCONTINUED OPERATIONS: (continued)
The net assets of Alpha Hotel, included in the December 31, 1995
consolidated balance sheet, are summarized as follows:
Current assets $ 419
Current liabilities (20)
Other long-term liabilities, net (219)
-----
Net assets $ 180
=====
NOTE 15 - CONTINUING OPERATIONS:
The consolidated 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
$29,810 and an accumulated deficit of $55,949 at December 31, 1996. In
addition, the Company was not in compliance with certain long-term debt
covenants, therefor require the obligations be classified current
liabilities.
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 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 16 - SUBSEQUENT EVENTS:
In March 1997, the Company received a waiver through December 31, 1997 on
an equipment note of $257 (see Note 7).
On March 12, 1997, the Company sold 571 shares of its $.01 par value
common stock for $1,000.
In March 1997, the Company entered into a renewal and extension agreement
related to its $500 revolving line of credit, whereby the Company received
an extension through June 1997 (see Note 6).
F-25
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 16 - SUBSEQUENT EVENTS (CONTINUED):
In March 1997, the Company reached settlement terms in an action brought
against it for alleged past due and future accelerated rentals (see Note
9). In the settlement, the Company will pay $500 at closing and $1,200 in
the form of a three year, 10% note payable quarterly (see Note 7). The
note will be secured by assignment of an interest in the mortgage note
payable to Bryanston. Additionally, the Company will have the option to
buy out the remaining obligations at reduced principal amounts at
accelerated dates, as specified in the settlement agreement. The
settlement and early termination of the operating lease resulted in a $541
charge to operations for the year ended December 31, 1996.
As of March 21, 1997, the Company and the principal insurance carrier
reached a settlement on the Wolff case whereby each party will give a
general and final release discharging all claims that each may have
against the other.
As of March 21, 1997, Bryanston has advanced $850 to the Company pursuant
to a non-revolving promissory note.
F-26
<PAGE>
SCHEDULE VIII
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
VALUATION ACCOUNTS
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Additions
-----------
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Year Expenses Accounts Deductions of Year
----------- ------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994:
Allowance for doubtful
accounts $-- $ 35 $-- $-- $ 35
Year Ended December 31, 1995:
Allowance for doubtful
accounts $ 35 $255 $ 64(A) $-- $354
Year Ended December 31, 1996
Allowance for doubtful
accounts $354 $211 $-- $ 38 $527
</TABLE>
(A) Assumed in conjunction with the October 1995 acquisition of the Cotton
Club of Greenville, Inc.
S-1
6. The following subsequent events have been properly disclosed in the
consolidated financial statements:
