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
For the year ended December 31, 1997.
( ) 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 1-12522
Alpha Hospitality Corporation
(Name of small business issuer in its charter)
Delaware 13-3714474
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East 49th Street, New York, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 750-3500 Securities registered under Section
12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value per share Boston Stock Exchange
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
(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 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, 1997 were
approximately $ 31,633,000.
The aggregate market value on March 25, 1998 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 $21,000,000.
As of March 25, 1998, 14,406,204 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 44.
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ITEM 1. BUSINESS
General
The Company was incorporated in Delaware on March 19, 1993; Alpha Gulf
Coast, Inc. ("Alpha Gulf" or "Gulf Coast") was incorporated in Delaware on May
4, 1993; Jubilation Lakeshore, Inc. ("Jubilation Lakeshor") was incorporated in
Mississippi on December 8, 1992; Alpha Missouri, Inc. ("Alpha Missouri") was
incorporated in Delaware on March 17, 1995; Alpha Monticello, Inc. ("Alpha
Monticell") was incorporated in Delaware on May 30, 1996; Alpha Rising Sun, Inc.
"Alpha Rising Sun"") was incorporated in Delaware on August 6, 1993; Alpha St.
Regis, Inc. ("Alpha St. Regis") was incorporated in Delaware on June 24, 1994;
Alpha Greenville Hotel, Inc. ("Greenville Hotel") was incorporated in Delaware
on February 27, 1997; and Alpha Entertainment, Inc. ("Alpha Entertainmen") was
incorporated in Delaware on March 12, 1997. 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.
Historically, the Company had been engaged in (i) the ownership and
operation, through Alpha Gulf, of a gaming vessel, in Greenville, Mississippi,
and the construction of an adjacent hotel through its Greenville Hotel
subsidiary, (ii) the pursuit of gaming related and other opportunities through
the Company's other subsidiaries, and (iii) providing management services to
hotels and motels owned by third parties through its former subsidiary, Alpha
Hotel Management Company, Inc. ("Alpha Hotel").
As of December 31, 1996, the Company sold 100% of the stock of its Alpha
Hotel subsidiary in consideration for $3,000,000, in the form of a reduction of
indebtedness to the purchaser. As a result of such sale, the Company ceased its
hotel and motel management business.
Pursuant to an Asset Purchase Agreement dated December 17, 1997, the
Company agreed to sell to Greenville Casino Partner, L.P. (the operator from
another casino barge in Greenville, Mississippi), the Bayou Caddy's Jubilee
Casino and related assets, comprising substantially all the Company's operating
assets, in consideration for (i) approximately $11.8 million dollars in cash,
(ii) 25% limited partnership interest in Greenville Casino Partners, L.P., (iii)
the assumption of approximately $2,000,000 of liabilities of Alpha Gulf, and
(iv) the assumption of an additional approximately $23,900,000 of indebtedness
(inclusive of loan costs and loan discounts aggregating approximately
$6,000,000, which was not received by the Company) owed by Alpha Gulf and
Greenville Hotel to an institutional lender, which indebtedness had been
incurred in anticipation of the proposed sale.
On February 23, 1998, the stockholders of the Company approved the sale
transaction at an Annual and Special Meeting of Stockholders. The sale of the
casino and hotel operations was closed on March 2, 1997. See Item 7, herein, for
a detailed discussion of the sale transaction.
As a results of the Company's sales of its Alpha Hotel and Alpha Gulf
operations, the Company's current operations are limited to the development of
potential new gaming operations in New York and the acquisition or development
of other business operations.
Casino Operations and Gaming Activities
1997 Operations
The Bayou Caddy's Jubilee Casino. The Bayou Caddy's Jubilee Casino, located
in Greenville, Mississippi, was owned and operated by the Company's wholly-owned
subsidiary Gulf Coast. On May 14, 1993, pursuant to an asset purchase agreement
among Gulf Coast, 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 Bayou Caddy's 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 Bayou Caddy's Jubilee Casino. Moreover, B.C. had already initiated
the process of obtaining requisite approvals for a casino operation in
Lakeshore, thereby expediting the Company's ability to conduct casino operations
in Mississippi.
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The Company initiated the Bayou Caddy's 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 Bayou Caddy's Jubilee Casino's gaming operations, the Company
applied for and received the required license renewals and approvals from the
Mississippi Gaming Commission (the "Mississippi Commission"). See "Business --
Government Regulation -- Licensing -- Mississippi."
Following the Company's acquisition (through Jubilation Lakeshore) of the
Cotton Club casino in October 1995 (see "The Company -- Discontinued Activities
- - -- The Jubilation Casino") the Company transferred the Bayou Caddy's Jubilee
Casino from Lakeshore to Greenville. The Bayou Caddy's Jubilee Casino reopened
in Greenville on November 17, 1995. The movement of the Bayou Caddy's 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 Bayou Caddy's Jubilee Casino to Greenville was an appropriate action
designed to increase the return on the Company's gaming assets in Mississippi.
The Bayou Caddy's Jubilee Casino has 844 slot machines and 29 table games.
In addition to its gaming activities, the Bayou Caddy's 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 Bayou Caddy's 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.
In April 1997, Gulf Coast received approval from the Mississippi Commission
for its infrastructure investment requirement to build and operate a hotel on
property adjacent to the Bayou Caddy's Jubilee Casino location. Greenville Hotel
entered into a long term lease with the Board of Mississippi Levee Commissioners
to lease property, including historical landmark buildings, for the development
of a forty-one key single room and suite hotel. Management believes that this
hotel will add a new dimension to the Company's casino patron experience and
will be an added amenity to the Company's player development program. The total
cost of this project including capitalized interest, indirect labor and sundry
costs was to be $3.7 million. Greenville Hotel received interim financing from
Bryanston Group, Inc. ("Bryanston"), an affiliate, to fund construction. In
February 1998, the Company completed consturction of its Greenville Hotel. On
March 2, 1998, through Alpha Gulf and Greenville Hotel, the Company sold the
Bayou Caddy's Jubilee Casino, the Greenville Hotel and other related assets to
Greenville Casion Partners, L.P. (Buyer). (See "Business - General")
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 subsequently decided not to proceed with the project at Hogansburg,
New York, since the Company and the Tribe began 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. Bryanston is a
25% member of Catskill. This memorandum of understanding was assigned to Alpha
Monticello. Mohawk Management L.L.C. (a company of which the Company's
subsidiary Alpha Monticello owns 50%) has executed an agreement with the Tribe
for the management of such proposed casino, and subject to the obtaining of
requisite approvals, it is anticipated that Mohawk Management L.L.C. will
undertake the development and management of this casino and Alpha Monticello
will be responsible for the day-to-day operations of this 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.
This 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. Under the memorandum of
understanding, Catskill and the Company have committed to enter into a
definitive agreement on the terms established in the memorandum.
Catskill purchased the 225 acre Monticello Raceway in June 1996. The
Company is advised that Catskill plans to continue Monticello's racing program
and to explore other developments at the site in addition to the proposed casino
referred to above.
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There can be no assurance that the project will receive all requisite
approvals. However, if such approvals are obtained, it is the Company's current
intention to proceed with the development of this gaming activity.
During 1997 and 1996, Alpha Monticello, Inc. incurred $907,000 and
$1,975,000 of costs, of which $557,000 and $734,000, respectively, has been
capitalized and the remaining $350,000 and $1,241,000, respectively, are for
casino development costs which are substantially comprised of a corporate
overhead allocation.
In March 1998, Catskill completed the State Environmental Quality Review
Act process with the Village of Monticello's Planning Board as Lead Agency.
Discontinued Activities
Missouri. The City of Louisiana is currently competing with other cities in
Missouri for the next gaming license to be granted in that 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 intends to compete
for the license to provide gaming facilities. 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, if the license is granted, 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. Subject to the
Company's receipt of requisite licenses and approvals and the availability of
any necessary financing, it is the Company's current intention, subject to
confirmation of the economic feasibility of this project, to continue with the
development of this project.
Alpha Missouri has applications pending for site approval and a gaming
license with respect to the development of a river boat gaming facility in
Louisiana, Missouri. Although existing law in Missouri does not restrict the
number of licenses the Missouri Gaming Commission may issue, the Commission has
effectively placed a moratorium on any new licenses in the Louisiana market. The
Company believes that such restriction will remain in place for an indeterminant
time. As a consequence, Alpha Missouri and the City of Louisiana agreed to
terminate the lease by Alpha Missouri of city-owned property that was
anticipated to be used for the gaming project. While the Company has not
withdrawn its application for site approval and gaming license, it does not
anticipate any action on the project in the foreseeable future.
The Company has incurred development costs of approximately $318,000,
$239,000 and $179,000 in 1997, 1996 and 1995, respectively, related to its
proposed development, comprised of a general corporate overhead allocation.
The Jubilation Casino. In October 1995 the Company (through its subsidiary
Jubilation Lakeshore) acquired the Cotton Club casino, a gaming vessel then
moored in Greenville, Mississippi. Such casino was renamed the Jubilation Casino
and was 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 proved to be 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
and required that the Jubilation Casino's working capital be increased.
Jubilation Lakeshore reviewed this working capital requirement in light of its
previously announced plan to close the Jubilation Casino during August 1996 and
the costs that 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 that it took 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 in to 693,905 and 44,258 shares of Preferred Stock.
The Company has no current plans to reopen the Jubilation Casino and is
investigating other possible uses, including the possible sale thereof.
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Hotel Operations. As of December 31, 1996, the Company sold 100% of the
stock of its subsidiary, Alpha Hotel to Bryanston for consideration of
$3,000,000 (in the form of a reduction by such amount of the outstanding
indebtedness owed by the Company to Bryanston). Prior to agreeing to such sale,
the Company evaluated the projected cash flow stream from Alpha Hotel's
management contracts at $2.5 million on a present value basis. In light of this
analysis and the uncertainty of maintaining such contracts (as demonstrated by
the subsequent terminations of certain of the management contracts due to change
in ownership) and the increasing competition for additional contracts,
management of the Company determined that the $3.0 million in debt reduction was
a fair value for these assets and that the Company's resources would be better
devoted to the Company's other operations.
Through Alpha Hotel, the Company provided management services to 14 hotels
or motels. The Company provided management services to 13 of such hotels or
motels primarily under a certain Service Agreement with Bryanston. The Company
provided management services to these 13 hotels on behalf of Bryanston (which
was 50% owned by Mrs. Beatrice Tollman, the spouse of the Company's Chairman,
President and 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 Chief
Executive Officer), pursuant to certain individual management agreements. The
rights to provide the management services were acquired by the Company in
partial consideration for the issuance of the shares of 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 above-referenced 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 14 hotels were
"mid-priced," ranging between $40 and $70 per night, and all but one were
operated as Days Inns.
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."
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 had specified renewal terms. The majority of the initial terms were
scheduled to expire in the years 2001 and 2002. The management agreements
contained termination provisions that were consistent with hotel industry
practice and could 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. The
management agreements could also be terminated upon the sale of the managed
hotels.
As indicated above, all but one 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 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 operated by Bryanston. There was no discretion in
the licenser, absent breach, to eliminate or modify the discount.
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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.
Marketing
The Company had concentrated its sales, marketing and promotional
activities for the Bayou Caddy's Jubilee Casino in its principal target market
within a 50-mile radius of the casino. The target market had been reached
through a combination of billboards, radio, television, newspaper advertising
and direct mail.
The Company developed an in-house mailing list of in excess 130,000 casino
customers. These customers are madeup of table game players and "Slot Club"
members. Table game customers had been identified through the casino's marketing
representatives, and their play had been 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 that 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 and merchandise. Tournaments for blackjack, CRAPS and poker
are held, along with other special events and promotions.
Competition
There are currently 19 casinos located on the Mississippi River. In the
Greenville market, the Company's Bayou Caddy's Jubilee Casino had competed 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 Bayou Caddy's 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 Bayou Caddy's 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 Bayou Caddy's Jubilee Casino is
well-positioned to compete successfully with the two other casinos in the
Greenville market, one of which is owned and operated by Greenville Casino
Partners, L.P., the purchaser of Bayou Caddy's Jubilee Casino. As a result of
the sale of the casino, the Company owns a 25% equity interest in Greenville
Casino Partners, L.P. Approximately 60 miles south of the Bayou Caddy's Jubilee
Casino is Vicksburg. Vicksburg has four casinos: the Isle of Capri, Harrahs
Vicksburg, Ameristar and Rainbow Casino. Approximately 110 miles south of the
Bayou Caddy's Jubilee Casino is Natchez with the Lady Luck Natchez Casino.
Approximately 60 miles north of the Bayou Caddy's Jubilee Casino is Coahoma
County with the Lady Luck Coahoma Casino. Tunica County is approximately 150
miles north of the Bayou Caddy's 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 outside a 50-mile
radius of the Bayou Caddy's Jubilee Casino are not considered by the Company to
be within its primary competitive market, the Company does not deem the casinos
in Vicksburg, Natchez or Tunica County to be among its principal competitors.
The Company has remained competitive in the markets affecting the Bayou
Caddy's 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 Bayou Caddy's Jubilee Casino has remained competitive, the
Jubilation Casino, located on the Mississippi Gulf Coast, was unable to compete
satisfactorily 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 and Gaming Activities -- Discontinued
Activities-- 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 (for example, for the quarters ended June and September 1996, gross
revenues from operation of the Bayou Caddy's Jubilee Casino were approximately
$12.9 million and $9.8 million, respectively, as compared to gross revenues from
operation of the Bayou Caddy's Jubilee Casino for the following quarters ended
December 1996 and March 1997 of approximately $8.4 million and $8.3 million,
respectively). Consequently, the Company's operating results during the calendar
quarters ending in December and March are not as successful as those quarters
ending in June and September, and losses result from time to time. The seasonal
nature of a casino's operations increases the risk that natural disasters or the
loss of the casino for any other reason during the May through September period
would have a materially adverse effect on the Company's financial condition and
results of operations.
Government Regulation
The Company's ownership and operation of its gaming 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 "The
Company -- Casino Operations and Gaming Activities -- Current Operations."
Licensing
General. 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 that 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 be 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 the license.
Mississippi. The ownership and operation of casino facilities in
Mississippi are subject to extensive state and local regulation, primarily the
licensing and regulatory control of the Mississippi Commission and the
Mississippi State Tax Commission (collectively, the "Mississippi Authorities").
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity, (ii) establish and maintain responsible accounting practices and
procedures, (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Authorities, (iv) prevent cheating
and fraudulent practices, (v) provide a source of state and local revenues
through taxation and licensing fees and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and to extensive interpretation by the Mississippi
Commission in view of their recent adoption. Changes in Mississippi law or
regulations may limit or otherwise materially affect the types of gaming that
may be conducted and could have an adverse effect on the Company and the
Company's Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the
discretion of the 14 counties that either border the Mississippi Gulf Coast or
the Mississippi River but only if the voters in a county have not voted to
prohibit gaming in that county. 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.
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
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Mississippi Authorities may require. The Company and any subsidiary of the
Company that operates a casino in Mississippi (a "Gaming Subsidiary") are
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.
Licensing of Officers, Directors and Employees
Officers, directors and certain key employees of the Company and its Alpha
Gulf 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 such person must pay the costs and
fees associated with the related 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.
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
7
<PAGE>
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 and/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 some 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 also require prior approval by the Mississippi
Commission if the Company adopts a plan of recapitalization proposed by its
Board of Directors opposing a tender offer made directly to the stockholders for
the purpose of acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Authorities to have access to information concerning the
out-of-state gaming operations of the Company and its affiliates.
Sanctions
If the Mississippi Commission were to decide that a Gaming Subsidiary had
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Gaming Subsidiary. In addition,
the Gaming Subsidiary, the Company and the persons involved could be subject to
substantial fines for each separate violation. Because of such violation, the
Mississippi Commission could appoint a supervisor to operate the casino
facilities, and under certain circumstances, earnings generated during the
supervisor's appointment (except the reasonable rental value of the casino
facilities) could be forfeited to the State of Mississippi. Limitations,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially and
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. See
"The Company -- Casino Operations and Gaming Activities -- Discontinued
Operations -- The Jubilation Casino." The Company does not believe that the
issues raised by the Mississippi
8
<PAGE>
Commission regarding the operation of the Jubilation Casino will adversely
affect the license to operate the Bayou Caddy's Jubilee Casino since the Bayou
Caddy's 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.
On October 23, 1997, the Company received renewal of its casino license
through October 1999, conditioned upon the opening of the Casino Hotel by no
later than February 26, 1998. Such conditions were fulfilled in February 1998
and the Company received its casino license. In connection with the sale of the
casino (see Item 7), the gaming license was surrendered to the Mississippi
Gaming Commission and the Company retained its finding of suitability. During
its compliance review, in connection with the Company's license renewal, the
Mississippi Gaming Commission noted several administrative reporting
deficiencies. A show cause hearing was held on December 2, 1997, at which
management explained its position to the Mississippi Gaming Commission staff.
This issue has been settled by the Company agreeing to address the noted
deficiencies in future reporting and by payment of $40,000 to the Mississippi
Gaming Commission.
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) 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 per month. The foregoing license fees are allowed as a
credit against the Company's Mississippi income tax liability for the year paid.
Missouri and New York
Missouri law and the Federal Indian Gaming Law (as it relates to the
Company's proposed operation in New York State) 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. Each of the supervising
governmental agencies is authorized to promulgate rules and regulations
applicable to the administration of gaming related laws. With respect to the
Company's agreement 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.
Additionally, in connection with its proposed operations in New York State, the
required documentation has been filed with the National Indian Gaming
Commission. In connection with its proposed operations in Missouri, the Company
has commenced the application and approval process with the Missouri Gaming
Commission.
Employees
In connection with its casino operations, as of December 31, 1997, the
Company employed approximately 540 employees, of which 470 were full-time
employees. Management considers its employment relations to be satisfactory. As
a result of the sale of the Company's Bayou Caddy's Jubilee Casino and related
assets in March 1998, the number of the Company's employees was reduced to 10
persons.
9
<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>
<S> <C> <C> <C> <C> <C>
Approximate
Location Principle Use Area Owned/Leased Expires
------------------- -------------------- -------------- ----------- --------------------
Hancock County Sign location, 3 acres Lease 4/30/03 with option
Waveland, MS warehousing and to purchase
parking
Hancock County Accounting office 1 acre Leased 6/30/98 with option
Waveland, MS to extend 3
five-year terms and
right of first
refusal to purchase
*Washington County Customer parking 2 acres Owned --
Greenville, MS
*Washington County Mooring site of 1,000 Leased 12/29/02 with option
Greenville, MS casino vessel waterfront to extend 2
feet five-year terms
Washington County Accounting offices 10,000 Leased 12/1/98 with option
Greenville, MS and warehouse square feet to extend two years
</TABLE>
* These properties or leasehold interests have been transferred to Greenville
Casino Partners in connection with the sale of the casino assets dated March 2,
1998, as part of the Casino Assets.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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.; Ducre 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 who
was allegedly 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, Gulf Coast 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, the
Company will pay $500,000 at closing and $1,200,000 in the form of a three year,
ten percent note payable quarterly. The settlement and early termination of the
operating lease resulted in a $541,000 charge to operations for the year ended
December 31, 1996. The note was secured by assignment of an interest in the
mortgage note payable to Bryanston. Additionally, the Company had as option to
buy out the remaining obligations at reduced principal amounts at accelerated
dates, as specified in the settlement agreement, which option the Company
exercised when it discharged its remaining obligations thereunder with a portion
of the loan proceeds from the Pre-Closing Financing (see Item 7).
In September 1996, the Company and Gulf Coast 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 and September 30,
1997. This litigation was subsequently settled by the payment of $750,000 from
the proceeds of the Pre-Closing Financing (see Item 7).
In December 1996 the Company, Jubilation Lakeshore and Gulf Coast 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 that 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 sought 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. In July 1997, Jubilation Lakeshore, Gulf Coast and the
Company were named as third party defendants in a related action brought in the
United States District Court for the Northern District of Mississippi,
Greenville Division (General Electric Capital Corporation vs. Bally Gaming,
Inc.), wherein Bally Gaming, Inc. alleged the same complaints as it asserted in
the above-mentioned action. As of December 31, 1997, the claims against the
Company and its affiliates in both of these actions have been liquidated and the
actions dismissed.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) On February 23, 1998, the Company had its annual meeting.
(b) The following Directors were elected:
For Against Withheld
Stanley S. Tollman 4,623,016 0 0
Sanford Freedman 4,623,016 0 0
Thomas W. Aro 4,623,016 0 0
Brett G. Tollman 4,623,016 0 0
James A. Cutler 4,623,016 0 0
Matthew B.Walker 4,623,016 0 0
The second 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 ensuing year, as follows:
For Against Withheld
4,622,616 400 0
The third order of business was the proposal to approve the Sale of the
Company's Bayou Caddy's Jubilee Casino and Greenville Hotel, as follows:
For Against Withheld
9,391,991 400 0
12
<PAGE>
ITEM 5. MARKET INFORMATION
Market Prices
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") under the symbols
"ALHY" and "ALHYW" and the Boston Stock Exchange under the symbols "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
1997 Quarters:
Fourth......3.639 $2.000 $.599 $.547
Third.......3.628 3.197 .691 .599
Second......4.045 2.658 .692 .616
First.......2.714 2.207 .563 .474
1996 Quarters:
Fourth.... $2.375 1.25 .563 .25
Third..... 4.125 2.00 .594 .25
Second.... 4.75 2.00 .875 .344
First..... 3.25 2.375 .438 .125
As of March 25, 1998, 14,406,204 shares of Common Stock and 821,496 shares
of Preferred Stock 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.
Dividends
The Company has not, since its inception, declared or paid any dividends on
its shares of Common Stock. Under Section 170(a) of the General Corporation Law
of Delaware (the "GCL"), the Corporation is, and has been, proscribed from
declaring or paying any dividends upon any shares of its capital stock except to
the extent of (1) its surplus (as defined under the GCL) or (2) in the case of
no such surplus, its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. As the Company has no surplus (as
defined under the GCL) or net profits, the Company is foreclosed from declaring
or paying any dividends even if it had otherwise been inclined to do so.
Additionally, the Company is, and since its inception in 1993 has been, subject
to loan covenants that have generally prohibited the declaration or payment of
any cash dividends.
Although proceeds from the Pre-Closing Financing were used to discharge
those loans with respect to which the Company was prohibited from declaring or
paying any cash dividends on its shares of capital stock, such prohibition was
replaced with restrictive covenants with respect to the Pre-Closing Financing
that effectively reinstated such prohibition. Upon consummation of the Sale, the
Pre-Closing Financing is to be assumed by Buyer, effectively relieving the
Company from such prohibition; however, there can be no assurance that the
Company will, following consummation of the Sale, declare or pay any dividends
of the shares of its capital stock. There can be no assurance that the Company
will have any surplus (as defined in the GCL) upon or following consummation of
the Sale or that the Company will achieve any net profits and (b) even if the
Company has such a surplus or achieves net profits, the Company will not
determine to retain all available funds to expand the Company's business or for
other corporate purposes. Management has no current intent to declare or pay any
dividends on the shares of Common Stock.
The Company's preferred stock has voting rights, is convertible to eight
shares of common stock for each share of preferred stock and 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 quarter. In the
event the dividend is not paid at the end of the Company's fiscal year (December
31), the dividend will be payable in common stock. On December 17, 1997, the
Company declared a 1996 dividend of 777 shares. As of December 31, 1997, the
Company is obligated to declare a 1997 dividend of 982 shares As a result of the
dividend not being paid by January 30, 1998, the dividend for the
13
<PAGE>
quarter ended December 31, 1997 increases from $2.90 per share to $3.77 per
share. Accordingly, as of March 25, 1998, the Company's obligation to declare a
stock dividend is increased to 1,071 shares.
Although, the Company is not subject to loan covenants restricting its
right to declare or pay cash dividends on shares of Preferred Stock, there can
be no assurance that the Company will be able to do so or, even if able to do
so, will elect to do so. Management anticipates that, even if the Company has
sufficient surplus and/or net profits to declare and pay a cash dividend on
shares of Preferred Stock, its decision whether to do so will depend upon its
determination as to whether it is in the best interests of the Company to pay,
per share of Preferred Stock, such dividend in cash at $2.90 or in shares of
Common Stock valued at $3.77.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
Years ended December 31, 1997, 1996, 1995, 1994, and the period March 19,
1993 (date of inception to December 31, 1993:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Revenues $ 31,633 $ 44,520 $ 27,639 $ 43,265 $ 18
Loss from Continuing operations (1,774) $ (26,309) $ (19,344) $ (11,026) $ (4,931)
Loss per common share from
continuing operations (.23) $ (1.98) $ (1.82) $ (1.08) $ (.56)
December 31,
1997 1996 1995 1994 1993
Total assets 29,993 $ 43,954 $ 66,774 $ 45,490 $ 47,201
Long-term debt 8,088 $ 22,394 $ 29,632 $ 20,100 $ 24,874
Redeemable preferred stock -- $ -- $ -- $ 565 $ --
Stockholders' equity 8,833 $ 1,506 $ 1,904 $ 13,143 $ 11,882
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Consolidated Financial Statements.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
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 Bayou Caddy's
Jubilee Casino and B.C.'s interest in certain related license applications,
approvals and permits. The Bayou Caddy's Jubilee Casino commenced gaming
operations in Lakeshore, near Waveland, Hancock County, Mississippi on January
12, 1994. In October 1995, the Company consummated the acquisition of The Cotton
Club Casino (subsequently renamed the Jubilation Casino) in its original
location in Greenville, Mississippi. Immediately following such acquisition, the
Company relocated the Bayou Caddy's 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 Bayou Caddy's Jubilee Casino would better
serve the larger Greenville market and that the Jubilation Casino would
adequately serve the smaller Lakeshore market. The Bayou Caddy's 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 $14,507,000 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
$20,387,000 of debt owed by the Company to Bryanston and BP into shares of
Preferred Stock. See "Certain Transactions -- Bryanston" and "Certain
Transactions -- BP Group." Thereafter, on July 16, 1996, operation of the
Jubilation Casino was suspended in compliance with a directive of the
Mississippi Gaming Commission, which asserted that the working capital of the
Jubilation Casino was not sufficient. The Mississippi Gaming 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 or about September 1997, Greenville Casino Partners, L.P. (Buyer)
approached the Company with an offer to purchase the Company's casino operations
and assets in Greenville, Mississippi. During the negotiations of the financial
terms of the transactions it became apparent that it would be impossible for all
conditions precedent to the closing of such transaction to be effected prior to
December 31, 1997 (the expiration of the financing commitment of Buyer's
proposed lender). Therefore the Company and Buyer proceeded to negotiate terms
with the lender to lend funds to both Buyer and the Company on or before
December 31, 1997 in contemplation of the sale taking place thereafter.
On December 30, 1997, Gulf Coast and Greenville Hotel obtained certain
financing (the "Pre-Closing Financing") from Credit Suisse First Boston Mortgage
Capital, L.L.C. (the "Pre-Closing Lender"), pursuant to which Gulf Coast and
Greenville Hotel borrowed $17.9 million ($23.9 million less loan costs and loan
discounts of approximately $6 million), and concurrently therewith Gulf Coast
applied the net proceeds therefrom to the payment and discharge of approximately
$20 million of the Company's indebtedness, including $16 million of secured
debt. Such borrowing is herein referred to as the "Pre-Closing Principal Loan."
Under the terms of the Sale Agreement, (a) Buyer assumed the Pre-Closing
Principal Loan upon closing the sale of the casino assets and (b) the
outstanding principal amount of such Loan was applied and credited against $26.5
million in cash that would otherwise have been payable to Gulf Coast at such
closing.
Additionally, in conjunction with and as part of the Pre-Closing Financing,
Gulf Coast and Greenville Hotel executed and delivered to the Pre-Closing Lender
an unsecured, zero-coupon promissory note (the "Pre-Closing Subordinated Debt")
in the stated principal amount of approximately $4.9 million, representing
additional unfunded financing. Although no proceeds were received by Gulf Coast
or Greenville Hotel in conjunction with such promissory
16
<PAGE>
note, under the terms of the Sale Agreement, Buyer assumed such promissory note
upon closing of the sale of the casinoassets.
On March 2, 1998, the sale of the Bayou Caddy's Jubilee Casino, the
Greenville Hotel and certain related assets including the casino barge, boarding
barge, related gaming and other equipment, furniture and improvement and related
permits, licenses, leases and other agreements, was consummated. In exchange for
such assets, the Company received from the Buyer total consideration of $40.2
million, including approximately 11.8 million in cash, the assumption of $2
million of certain accounts payable, accrued expenses and payroll liabilities, a
25% partnership interest in the Buyer and the assumption of the Company's
obligations to repay the net proceeds form the pre-closing financing of $17.9
million.
Results of Operations -- Gulf Coast:
The following table sets forth the statements of operations for Gulf
Coast's Bayou Caddy's Jubilee Casino before intercompany charges and deferred
income tax for the years ended December 31, 1997, 1996 and 1995 (dollar amounts
in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
Revenues:
Casino.................................. $ 31,048 $ 36,340 $ 25,623
Food and beverage, retail
and other............................... 570 947 1,194
Total revenues....................... 31,618 37,287 26,817
Operating expenses:
Casino.................................. 12,029 12,619 12,779
Food and beverage, retail and
other................................ 569 1,282 1,785
Selling, general and
administrative....................... 16,765 17,125 16,270
Total operating expenses............. 29,363 31,026 30,834
Income (loss) from operations.................... 2,255 6,261 (4,017)
Other expenses:
Depreciation and
amortization......................... 5,076 4,874 4,161
Interest................................ 2,009 2,031 2,178
Other non-operating..................... -- -- 2,620
Total other expenses................. 7,085 6,905 8,959
Income (loss) before intercompany
charges, extraordinary gain
on extinguishment of debt
and deferred income tax benefit......... $ (4,830) $ (644) $(12,976)
</TABLE>
17
<PAGE>
Years Ended December 31, 1997 and 1996:
Gulf Coast generated revenues of $31,618,000 and $37,287,000 in 1997 and
1996, respectively. Casino revenues were $31,048,000 and 36,340,000 in 1997 and
1996, respectively. Food and beverage and other revenues were $570,000 and
$947,000 in 1997 and 1996, respectively. The decrease in casino revenues was
primarily the result of the entry of the third casino vessel to the Greenville
market in November 1996 and high water in the month of April 1997 which had a
significant impact on accessibility to the casinos by their patrons. The entry
of the third casino vessel in the Greenville market to date has not increased
the market volume to absorb the additional player positions. The market growth
during this year was 5.2 % over last year. Gulf Coast continues to achieve
superior market share over its competition at 41 %, with 39 % of the available
player positions in the Greenville market. The food and beverage revenues are
reflective of Gulf Coast's player development program, which focuses on player
parties showcasing the food and entertainment facilities of the Bayou Caddy's
Jubilee Casino. The player parties are by invitation only and are complimentary
to the casino's guests.
Gulf Coast's casino operating expenses were $12,029,000 and $12,619,000
(approximately 39% and 35% of casino revenues for each period) in 1997 and 1996,
respectively. Food, beverage and other expenses were $569,000 and $1,282,000 in
1997 and 1996, respectively. The decrease in casino expenses was due in part to
reduced payroll and related expenses of $406,000 resulting from management's
personnel efficiencies that were implemented during the second quarter of 1996
and a reduction in expenses of $184,000 due to the reduced volume of casino
guests as a result of the opening of the third casino vessel mentioned above.
Food and beverage revenues do not include the retail value of food and
beverage of approximately $3,547,000 and $3,721,000 provided gratuitously to
customers in 1997 and 1996, respectively. This decrease is due to the decreased
casino activity discussed above. The operating costs associated with these
services are allocated to the casino costs, which in turn reduced the food and
beverage costs.
Selling, general and administrative expenses consisted of payroll and
related benefits of approximately $5,370,000 and $5,494,000, marketing and
advertising of approximately $6,809,000 and $6,746,000 occupancy costs of
approximately $2,522,000 and $2,751,000 and operating expenses of $2,064,000 and
$2,134,000 in 1997 and 1996, respectively. The reduced payroll and related costs
of $124,000 and operating expenses of $70,000 were a direct result of
management's cost-cutting measures completed during the second quarter of 1996.
Marketing and advertising expense in 1997 was consistent to 1996 with a 1%
increase of $63,000.
The reduced occupancy costs from 1996 to 1997 of $229,000 were the result
of management's energy reduction and efficiency measures implemented in 1997 and
reduced insurance costs.
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases and were consistent
from 1996 to 1997.
Depreciation and amortization was $5,076,000 and $4,874,000 in 1997 and
1996, respectively. The increase was a direct result of capital expenditures for
the purchase of equipment and fixtures.
Years Ended December 31, 1996 and 1995:
Gulf Coast generated revenues of $37,287,000 and $26,817,000 in 1996 and
1995, respectively. Casino revenues were $36,340,000 and $25,623,000 in 1996 and
1995, respectively. Food and beverage, retail and other revenues were $947,000
and $1,194,000 in 1996 and 1995, respectively. This increase in casino revenues
is primarily due to the relocation of the Bayou Caddy's Jubilee Casino from
Lakeshore, Mississippi to Greenville, Mississippi in November 1995. During this
period the Bayou Caddy's Jubilee Casino achieved 50% market share in the
Greenville market. In addition the Greenville market increased by approximately
5% from 1995 to 1996.
At the locations referred to above, Gulf Coast's casino operating expenses
were $12,619,000 and $12,779,000 (35% and 50% of casino revenues) in 1996 and
1995, respectively. Food and beverage, retail and other expenses were $1,282,000
and $1,785,000 (136% and 150% of food and beverage, retail and other revenues)
in 1996 and 1995, respectively.
18
<PAGE>
The reduced casino expenses in 1996 when compared to 1995 of $160,000 was
the net result of reduced staffing levels ($379,000), the decrease in the costs
related to food and beverages provided gratuitously to customers ($842,000),
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 ($1,200,000) and an increase in customer slot payouts ($304,000),
which are directly related to increased revenues, and a decrease in operating
expenses ($448,000), 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 $3,011,000 and $3,446,000 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 $5,494,000 and $6,231,000, marketing and
advertising expenses of approximately $6,746,000 and $4,572,000, occupancy costs
of approximately $2,751,000 and $3,030,000, and operating expenses of
approximately $2,134,000 and $2,436,000 in 1996 and 1995, respectively. The
reduced payroll and related costs of $737,000 was a direct result of
management's cost-cutting measures instituted during the first quarter of 1995.
The $2,174,000 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
$279,000 is primarily due to reduced insurance costs. The decrease in operating
expenses of $302,000 was primarily due to the restructuring of a capital lease
($268,000).
Interest expense was primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases.
Depreciation and amortization was $4,874,000 and $4,161,000 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.
Future Operations -- Alpha Gulf and Greenville Hotel:
Included in the consideration received in exchange for the sale of the
Bayou Caddy's Jubilee Casino, Gulf Coast received a 25% partnership interest in
the Buyer whose primary assets include: the Las Vegas Casino, the Bayou Caddy's
Jubilee Casino, the Key West Inn and the Greenville Inn and Suites. The combined
complement of gaming devices is 37 table games and 1,427 slots which represents
67.4 % of the devices in the Greenville market. Two hotels offer 56 rooms and 41
rooms and suites, respectively.
In connection with the sale of the hotel on March 2, 1998, the Company
entered into a supervisory management agreement with Buyer for a term of ten
(10) years whereby the Company will receive $100,000 per annum for management
services.
Future Operations - General
In addition to its operation of the Bayou Caddy's Jubilee Casino in
Greenville, Mississippi, which was sold on March 2, 1998, the Company, through
its subsidiary, also owns a casino (the Jubilation Casino) located in Lakeshore,
Mississippi, which casino has been closed since July 1996. The Company does not
currently have plans to re-open or operate the Jubilation Casino.
Through its subsidiary Alpha Monticello, the Company is a fifty percent
owner in a joint venture management company which would operate the prospective
gaming activity in New York State (such prospective gaming activity being
hereinafter sometimes referred to as the "Proposed Gaming Development"). (See
"Business -- Casino Operations and Gaming Activities -- Development
Activities.") Subject to the Company's confirmation that the Proposed Gaming
Development is financially viable, the Company intends to pursue the requisite
licenses and other approvals and the availability of such appropriate financing
(either from the Company's own resources or from third parties) as may be
necessary to further develop the same. There can be no assurance that the joint
venture will elect to pursue further the Proposed Gaming Development. Even if
the joint venture elects to pursue the same, there can be no assurance the
19
<PAGE>
Proposed Gaming Development will be brought to fruition or that, even if brought
to fruition, the Proposed Gaming Development will be successful and profitable.
Additionally, proposals or prospects for new casinos or other gaming
activities may be presented to the Company, or the Company may otherwise become
aware of such opportunities (any such new casino or other gaming activities
being hereinafter sometimes referred to as "New Gaming Opportunities"). The
Company will continue to investigate and evaluate New Gaming Opportunities and,
subject to available resources, may choose to pursue and develop one or more New
Gaming Opportunities if the same is deemed to be in the best interest of the
Company and its stockholders. However, there can be no assurance that any New
Gaming Opportunity will be presented to, or otherwise come to the attention of,
the Company, that the Company will elect to pursue or develop any New Gaming
Opportunity or that any New Gaming Opportunity that the Company may elect to
pursue or develop will actually come to fruition or (even is brought to
fruition) will be profitable.
Except to the extent the Company may pursue the Proposed Gaming Development
or any New Gaming Opportunity, as a result of the sale, the Company has been
effectively transformed to serve as a holding company and a vehicle to effect
acquisitions, whether by merger, exchange of capital stock, acquisition of
assets or other similar business combination (a "Business Combination") with an
operating business (an "Acquired Business"). To the extent the Company's
financial and other resources are not devoted to, or reserved for, the
development of the Proposed Gaming Development and/or any New Gaming
Opportunity, the business objective of the Company will be to effect a Business
Combination with an Acquired Business that the Company believes has significant
growth potential. The Company intends to seek to utilize available cash, equity,
debt or a combination thereof in effecting a Business Combination. While the
Company may, under certain circumstances, explore possible Business Combinations
with more than one prospective Acquired Business, in all likelihood, until other
financing provides additional funds, or its stature matures, the Company may be
able to effect only a single Business Combination in accordance with its
business objective, although there can be no assurance that any such transaction
will be effected.
20
<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 the 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,
1997, 1996 and for the period October 26, 1995 (date of acquisition) to December
31, 1995 (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 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.................. 993 7,419 1,718
Total operating expenses.................... 993 11,359 2,604
(Loss) from operations............................... (993) (4,133) (1,782)
Other expenses:
Depreciation and amortization............... -- 1,166 333
Interest.................................... 870 977 120
Other non-operating......................... -- -- 223
Write-off of leasehold and
improvements................................ -- 14,507 --
Total other.......................................... 870 16,650 676
(Loss) before intercompany charges................... $ (1,863) $(20,783) $(2,458)
</TABLE>
Year Ended December 31, 1997:
The continuing costs incurred during the year ended December 31, 1997 for
administration, insurance and compensation settlements with former employees
were $993,000. Interest expense, primarily related to the debt on the idle
gaming vessel and equipment, amounted to $870,000 for the year ended December
31, 1997.
Year Ended December 31, 1996:
The Jubilation Casino experienced a loss from operations of $4,133,000
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 were part of the peak season, a
continued decline was expected by management in the third quarter. Therefore, on
July 2, 1996, the Company notified the Mississippi Gaming Commission 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 was reassessed. As such, management recorded an impairment
loss of $14,507,000 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 Mississippi Gaming Commission, which raised
certain issues with regard to the operation of the Jubilation Casino and
asserted that the working capital of the Jubilation Casino was not sufficient.
On July 17, 1996, representatives of Jubilation Lakeshore met with the
Mississippi Gaming Commission. As a result of that meeting, the non-working
capital
21
<PAGE>
issues raised by the Mississippi Gaming Commission were resolved to such
Commission's satisfaction, but such 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 that would be
incurred to reopen the Jubilation Casino. Based on this review, Jubilation
Lakeshore decided not to reopen the Jubilation Casino.
Casino Development
New York -- Alpha Monticello and Alpha St. Regis:
In January 1995, 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. In 1996, Alpha
St. Regis assigned its interest to Alpha Monticello. On August 2, 1996, Mohawk
Management L.L.C. executed an agreement with the St. Regis Mohawk Tribe (the
"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, Inc., owns 50%. The terms of the proposed management agreement is
for seven years. Alpha Monticello, Inc. will be responsible for the day-to-day
casino operations. The agreement contemplates 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.
During 1997 and 1996, Alpha Monticello, Inc. incurred $907,000 and
$1,975,000 of costs, of which $557,000 and $734,000, respectively, has been
capitalized and the remaining $350,000 and $1,241,000 were for casino
development costs which are substantially comprised of a corporate overhead
allocation.
In March 1998, Catskill completed the State Environmental Quality Review
Act process with the Village of Monticello's Planning Board as Lead Agency.
Missouri -- Alpha Missouri:
Alpha Missouri, Inc., another wholly-owned subsidiary of the Company, has
not commenced operations. Alpha Missouri, Inc. 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 $318,000, $239,000 and $179,000 for the years ended December 31,
1997, 1996 and 1995, respectively, related to its proposed development of a
riverboat casino in Louisiana, Missouri. These costs are substantially comprised
of a general corporate overhead allocation. Although existing law in Missouri
does not restrict the number of licenses the Missouri Gaming Commission may
issue, that Commission has effectively placed a moratorium on any new licenses
in the Louisiana market area. The Company believes such a restriction will
remain in place for an indeterminate time. As a consequence, Alpha Missouri,
Inc. and the City of Louisiana agreed to terminate the lease by Alpha Missouri,
Inc. of city-owned property that was anticipated to be used for the gaming
project. While the Company has not withdrawn its application for site approval
and gaming license, it does not anticipate any action on the project in the
foreseeable future.
Hotel Management -- Alpha Hotel
The following table sets forth the statements of income of Alpha Hotel for
the years ended December 31, 1996, 1995 and 1994 (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995 1994
Management fees....................................$ 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
</TABLE>
22
<PAGE>
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
the Hotel Division of Bryanston. As of December 31, 1996, the Company sold 100%
of the stock of Alpha Hotel to Bryanston for consideration of $3,000,000.
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 $871,000 (30.4%).
The decrease was principally the result of a $125,000 decrease in fees from
continuing management agreements and a decrease of $746,000 related to the loss
of five management agreements (which related to hotels whose ownership changed)
and one management agreement that expired. The decrease in fees earned from
continuing agreements was attributable to an agreement that was restructured.
Direct payroll and related costs increased 4.0% to $1,285,000 for the year
ended December 31, 1996 from $1,236,000 for the year ended December 31, 1995.
This increase was the result of annual salary increases.
Selling, general and administrative expenses decreased to $62,000 for the
year ended December 31, 1996 from $276,000 for the year ended December 31, 1995.
This decrease is a result of office relocation to a less expensive area.
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 $28,000 (1.0%).
The increase was principally the result of increases in the hotels' gross
revenues on which the management fees are based. The factors that influence such
gross revenues are general economic conditions, competitive changes in
geographic regions, foreign exchange rates relative to the strength of the U.S.
dollar, the price of gasoline, air fares and general weather conditions.
Direct payroll and related costs decreased 16.1% to $1,236,000 for the year
ended December 31, 1995 from $1,474,000 for the year ended December 31, 1994.
The decrease was the result of reduced central office staff due to operating
efficiencies achieved.
Selling, general and administrative expenses increased to $276,000 for the
year ended December 31, 1995 from $236,000 for the year ended December 31, 1994.
This increase is a result of travel to the managed hotels by regional and
corporate management and costs incurred to obtain additional management
contracts.
In 1995, Alpha Hotel entered into a management agreement for a Sheraton
Hotel in Myrtle Beach, South Carolina directly with the hotel owner.
Liquidity and Capital Resources
For the year ended December 31, 1997, the Company had net cash used in
operating activities of $3,269,000. The uses were the result of net income of
$2,835,000 less non-cash items of $5,782,000 and a net decrease in working
capital of $322,000. The non-cash items were $5,094,000 of depreciation and
amortization, a $108,000 provision for losses on accounts receivable, a gain on
extinguishment of debt of $4,609,000 and a $6,375,000 deferred tax benefit. The
decrease in working capital consisted primarily of a decrease in prepaid
expenses of $339,000, an increase in accounts payable and other accrued expenses
of $561,000 and a decrease in payroll and related liabilities of $1,144,000.
Cash used in investing activities of $5,144,000 consisted of $107,000 in
purchases of property and equipment, $2,966,000 of Greenville Hotel construction
costs and deposits, $1,700,000 in cash escrowed for construction and other
assets of $371,000.
23
<PAGE>
Cash provided by financing activities of $9,274,000 was attributable to
$3,984,000 in net advances under the $20,000,000 non-revolving promissory note
with Bryanston, proceeds of $1,000,000 from the sale of Common Stock, net
proceeds from the pre-closing financing of $17,900,000 and a $13,610,000
principal reduction of long term debt and notes payable. $500,000 of the
$1,000,000 proceeds from the sale of Common Stock was used in connection with
the March 1997 settlement of an operating lease relative to the real property
located in Lakeshore. The remaining $500,000 was used for working capital
requirements for development. The $17,900,000 proceeds from the pre-closing were
used to reduce debt and fund the hotel construction.
Although the Company is subject to continuing litigation, the ultimate
outcome of which cannot presently be determined at this time, management
believes any additional liabilities that may result from these cases will not be
in an amount that will materially increase the liabilities of the Company as
presented in the attached financial statements.
At December 31, 1997, the Company was in default of its note payable to
Bryanston of $1,399,000 and $7,800,000, respectively. The Company received a
waiver of default through January 1, 1999 on the Bryanston notes aggregating
$9,199,000.
In June 1996, the Company issued 661,000 and 42,000 shares of Preferred
Stock in settlement of $19,165,000 and $1,222,000, respectively, of its
unsecured debt with Bryanston and an unrelated third party. The Company was
charged a five percent transaction fee of $1,019,000, which was converted into
approximately 35,000 shares of Preferred Stock. The conversion rate was based on
the fair market value of a share of Common Stock at the date of conversion
($3.625). Each share of Preferred Stock is convertible into eight shares of
Common Stock after December 31, 1996 and carries voting rights of one vote per
share. Each share of Preferred Stock also carries a dividend of $2.90, 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 shares of Common Stock.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
See Index to Financial Statements attached hereto.
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
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.... 66 Chairman of the Board and Chief Executive Officer
Sanford Freedman...... 61 Vice President, Secretary and Director
Thomas W. Aro......... 55 Vice President and Director
Brett G. Tollman...... 36 Vice President and Director
James A. Cutler....... 46 Treasurer, Chief Financial Officer and Director
Matthew B. Walker..... 47 Director
Stanley S. Tollman has served as Chairman of the Board of Directors and
Chief or Co-Chief Executive Officer of the Company since its formation. Since
March 1995, Mr. Tollman has served as President. He served as Chairman of the
Tollman-Hundley Hotel Group from 1979 to June 1996. He currently serves as
Chairman of Bryanston Group, Inc. ("Bryanston"), 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 American Corporation, which was
formerly the franchiser of Days Inns Hotels. The business addresses of Bryanston
and Trafalgar Tours International are, respectively, 1886 Route 52, Hopewell
Junction, New York and 5 Reid Street, Hamilton, Bermuda. See "Certain
Proceedings Involving Management".
Sanford Freedman served as a Director, Vice-President and Secretary of the
Company from its formation until October 29, 1993, and was re-elected to those
positions on February 1, 1994. He has served as Executive Vice President of the
Tollman-Hundley Hotel Group since 1993 and served as a Director, Executive Vice
President and Secretary of Bryanston from 1993 through March 1996. See "Certain
Proceedings Involving Management".
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 Chief Operating Officer of the Company's subsidiary Alpha Gulf Coast,
Inc. He has served as Executive Vice President of the Tollman-Hundley Hotel
Group since 1982 and as Executive Vice President of Bryanston from 1989 through
March 1996. See "Certain Proceedings Involving Management".
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. He 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. Mr.
Tollman is the son of Stanley S. Tollman, the Chairman of the Board and Chief
Executive Officer of the Company. See "Certain Proceedings Involving
Management".
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. Effective March 6, 1998, Mr.
Cutler resigned from his positions as Treasurer, Chief Financial Officer and
Secretary of the Company. Mr. Cutler has agreed to continue to serve as a
Director of the Company.
Matthew B. Walker has served as a Director of the Company since
December 1995. He is an independent businessman involved in international
business ventures, including the Brazilian based Walker Marine Oil Supply
Business, to which he has been a consultant 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 as a
shareholder until October 1995. In addition, since 1972, Mr. Walker has been
involved in numerous real-estate transactions as a consultant and has managed
E.B. Walker & Son Lumber Company, a family-owned lumber business in Alabama.
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
27
<PAGE>
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 inconnection with the performance of their duties.
CERTAIN PROCEEDINGS INVOLVING MANAGEMENT
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 and
James A. Cutler were directors and/or officers of such corporate general
partners. 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 appealed to the Court of
Appeals for the Fifth Circuit, which affirmed the decision of the U.S. District
Court. The Plan of Reorganization has been implemented.
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 in June 1994. 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 and James A. Cutler were
directors and/or officers of such corporate general partner. A Plan of
Reorganization for KLL was confirmed by the Bankruptcy Court and has been
declared effective.
Emeryville Days Limited Partnership ("Emeryville"), a California limited
partnership, filed a Chapter 11 proceeding in the United States Bankruptcy Court
for the Eastern District of California in May 1996. The proceeding was filed to
prevent the imminent foreclosure of the Days Inn hotel owned by Emeryville.
Messrs. Stanley S. Tollman, Brett G. Tollman and Sanford Freedman hold limited
partnership interests in Emeryville, and Mr. Stanley S. Tollman is a stockholder
of the corporate general partner of Emeryville. Messrs. Stanley S. Tollman 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, other
than the holder of the second deed of trust, which holder agreed to settle its
claim for a reduced amount, which has been paid. As a consequence of the
foregoing, this proceeding was 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, Mr. Stanley
S. Tollman is a stockholder of the corporate general partners of Orlando and
Resorts, and Messrs. Stanley S. Tollman, Brett G. Tollman and James A. Cutler
were directors and/or officers of such corporate general partners. In August
1997, Orlando and Resorts agreed to a settlement with its secured lender
resulting in the sale of the hotel properties and dismissal of the proceeding.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all cash compensation for services rendered
in all capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1997, December 31, 1996 and December 31, 1995 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>
<S> <C> <C> <C> <C> <C> <C>
Restricted
Stock All Other
Name and Principal Position Year Bonus (1) Awards Option/SARS Compensation
Stanley S. Tollman .............................. 1997 $250,000 -- -- --
Chairman of the Board of Directors,..... 1996 $250,000 -- -- --
Chief Executive Officer and President 1995 $250,000 -- -- --
Monty D. Hundley ............................ 1997 -- -- -- --
President and Co-Chief Executive 1996 -- -- --
--
Officer(2).......................... 1995 $62,500 -- -- --
</TABLE>
(1) No portions of the cash salaries to which either of the above officers
were entitled during the periods indicated have been paid; the expense and
liability have been accrued without interest.
(2) As of March 23, 1995, Mr. Hundley resigned as an officer and Director
of the Company, at which time Mr. Hundley waived any claim for future
compensation under his contract with the Company.
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 Officer.
Compensation of Directors. Directors do not receive compensation for
serving as Directors but are reimbursed for expenses incurred in connection with
the performance of their duties.
Employment Agreements. The Company and Mr. Stanley S. Tollman entered into
an Employment Agreement dated June 1, 1993, whereby Mr. Tollman agreed to serve
as Chairman of the Board and Co-Chief Executive Officer of the Company for a
term of three (3) years from the date of the Agreement. Thereafter, such
Agreement is automatically renewable for successive twelve (12) month periods,
unless either party shall advise the other on ninety (90) days' written notice
of his or its intention not to extend the term of the employment. In the event
of a termination of his employment, under the terms of such Agreement Mr.
Tollman is to be retained for two years to provide consulting services for
$175,000 per year. Such Agreement has been renewed until June 1, 1998. Mr.
Tollman's Employment Agreement provides for a salary in the amount of $250,000
per year, none of which has been paid under such Agreement since the date
thereof. The unpaid salary accumulates, and the Company does not pay any
interest or other penalty thereon. Such Agreement provides for Mr. Tollman to
devote no less than 20% of his business time to the affairs of the Company and
its subsidiaries. Such Agreement contains a non-disclosure provision pursuant to
which Mr. 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, that Agreement also contained a
limited non-competition clause pursuant to which Mr. Tollman 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 provided
management services or (ii) that owns, manages or operates a gaming casino
within a 100 mile radius of the Jubilation Casino. As of December 31, 1997,
accrued consulting fees to Mr. Tollman and Mr. Hundley amounted to $1,029,167
and $341,667, respectively.
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<PAGE>
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 a 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
Consulting Agreement and will be compensated at the rate of $350 per hour. The
Consulting Agreement may be terminated at any time by either party. The Company
has agreed to indemnify Mr. Freedman against any claims, losses, expenses or
liabilities, including reasonable attorneys' fees, Mr. Freedman may incur
arising out of his performance of any services pursuant to the Consulting
Agreement. Mr. Freedman was paid an aggregate of $195,000 of consulting fees
during the year ended December 31, 1997.
BOARD COMPENSATION REPORT
Executive Compensation Policy
Cash Compensation. The Company's executive officers, other than Stanley S.
Tollman, 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. However, all of the
Company's executive officers previously provided management, financial and
administrative services, through the Company's subsidiary Alpha Hotel, on behalf
of Bryanston. Bryanston directly compensated the Company's executive officers
for such services, and pursuant to the terms of an expense reimbursement
agreement between the Company and Bryanston (the "Expense Reimbursement
Agreement"), the Company reimbursed Bryanston on a monthly basis for direct
payroll. The Compensation Committee did not determine the compensation paid by
Bryanston to the Company's executive officers for providing these services on
behalf of Bryanston, as such compensation was solely determined by Bryanston.
Subsequent to the sale of Alpha Hotel to Bryanston in December 1996, Bryanston
has continued directly to provide salaries and benefits to the Company's
executive offices without seeking reimbursement therefor from the Company.
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 interest of management remains
closely aligned with those of the Company's stockholders. The Board of Directors
believes that stock options in the Company provide a direct link between
executive compensation and stockholders' value. By attaching vesting
requirements, stock options also create an incentive for an executive officer 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 such 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 Mr. 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 within the Company's industry.
Corporate Performance Graph. The following graph shows a comparison of
cumulative total stockholders' returns from November 5, 1993 through December
31, 1997 for the Company, the Russell 2000 Index ("Russell") and the Dow Jones
Entertainment and Leisure -- Casino Index ("DJ Casino").
[GRAPH DELETED]
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The graph assumes the investment of $100 in shares of 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 Common Stock.
Section 16(a) Reporting. Under the securities laws of the United States,
the Company's directors, its executive (and certain other) officers, and any
persons holding ten percent or more of the Common Stock must report on their
ownership of the Common Stock and any changes in that ownership to the
Securities and Exchange Commission and to the National Association of Securities
Dealers, Inc. Automated Quotation System. Specific due dates for these reports
have been established. During the year ended December 31, 1997, all reports for
all transactions were filed on a timely basis.
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 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
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 prices 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. 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.
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.
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<PAGE>
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 options, 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 31, 1997. Options to purchase 409,000 shares of
Common Stock have been granted to employees to date.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OWNERSHIP OF SECURITIES
Only stockholders of record at the close of business on March 25, 1998 (the
"Record Date"), the date fixed by the Board of Directors in accordance with the
Company's By-Laws, are entitled to notice of, and to vote at, the Meeting. As of
such date, there were issued and outstanding 14,406,204 shares of Common Stock
and 821,496 shares of Preferred Stock.
Each outstanding share of each class of stock is entitled to one vote on
all matters properly coming before the Meeting. A majority of all outstanding
shares of Common Stock and Preferred Stock, taken together, present in person or
represented by proxy at the Meeting, is necessary to constitute a quorum for the
Meeting.
The following table sets forth certain information as of the Record Date
with respect to each beneficial owner of five (5%) percent or more of the
outstanding shares of Common Stock and Preferred Stock, each officer, director
and nominee for 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, except for Patricia Cohen, whose address is 6 Danton Lane South,
Lattington, NY.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Title of Class Name and Address No. of Shares (1) Percent of Class Percent of Vote (2)
Common Stock Beatrice Tollman(3)(9) 1,815,890 12.6 11.9
$.01 par value Sanford Freedman(4) 271,158 1.9 1.4
Thomas W. Aro(5) 100,000 .7 .3
Brett G. Tollman(6) 1,619,875 11.2 10.2
James A. Cutler(7) 116,000 .8 .7
Patricia Cohen(8) 1,030,146 7.2 4.4
Matthew B. Walker 199,879 1.4 1.3
Bryanston Group(9) 6,565,730 45.6 0.0
1886 Route 52
Hopewell Junction, N.Y.
All Officers and Directors
as a group (6 persons)(4-7) 2,202,512 15.3 6.5
Preferred Stock Bryanston Group, Inc.(9) 777,238 94.6 5.1
$29.00 liquidation BP Group, Ltd.(10) 44,258 5.4 .3
value 6 Danton Lane South
Lattington, N.Y.
</TABLE>
(1) Each person exercises sole voting and dispositive power with respect to
the shares reflected in the table, except for those shares of Common Stock that
are issuable upon the exercise of options or the conversion of Preferred Stock,
which shares cannot be voted until the options are exercised or such Preferred
Stock is converted by the holders thereof. Includes shares of Common Stock that
may be acquired upon exercise of options or conversion of convertible securities
that are presently exercisable or convertible or become exercisable or
convertible within 60 days.
(2) Represents the vote, as a percentage of the total votes that may be
cast at the Meeting by holders of both Common Stock and Preferred Stock, that
may be cast by the holder of the relevant shares. For these purposes, no vote is
attributable to any shares of Common Stock not issued and outstanding as of the
Record Date (e.g., on account of outstanding options having not been exercised
or shares of Preferred Stock having not been converted into shares of Common
Stock).
(3) Stanley S. Tollman, the Chairman of the Board, Chief Executive Officer
and President of the Company, is the spouse of Beatrice Tollman. Stanley S.
Tollman disclaims beneficial ownership of the shares beneficially owned by
Beatrice Tollman.
(4) Includes 60,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Freedman, all of which options are currently exercisable.
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<PAGE>
(5) Includes 60,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Aro, all of which options are currently
exercisable.
(6) Includes 60,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Brett G. Tollman, all of which options are
currently exercisable and 1,000,000 shares held in the Tollman Family
Trust of which Brett G. Tollman is the sole Trustee. Brett G. Tollman
is the son of Stanley S. Tollman and Beatrice Tollman. Each of Brett G.
Tollman, Stanley S. Tollman and Beatrice Tollman disclaims beneficial
ownership of the shares beneficially owned by any of the other of them.
(7) Includes 40,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Cutler, all of which options are currently
exercisable. Does not include 4,000 shares owned by Mr. Cutler's
children, of which shares he disclaims beneficial ownership.
(8) Represents (i) 676,082 shares of Common Stock owned by Patricia Cohen,
who was a Director of the Company during the period February 1, 1994 to
December 12, 1997, and (ii) 354,064 shares of Common Stock issuable
upon conversion of 44,258 shares of Preferred Stock owned by BP Group,
LTD ("BP"), a company of which Patricia Cohen is the sole stockholder.
All of such shares of Preferred Stock are currently convertible into
shares of Common Stock.
(9) Includes (i) 6,217,904 shares of Common issuable upon conversion of
777,238 shares of Preferred Stock owned by Bryanston Group, Inc.
("Bryanston") and (ii) 347,826 shares of Common Stock issuable upon the
exercise of options granted to Bryanston; all of such options are
currently exercisable for, and all of such shares of Preferred Stock
are currently convertible into, shares of Common Stock. On December 17,
1997, the Company declared a dividend of 730,331 shares of Common Stock
to Bryanston with respect to, and in lieu of the cash dividend accrued
on, the outstanding shares of Preferred Stock held by Bryanston in
1996. Additionally, as of January 30, 1998, the Company became
obligated to issue to Bryanston approximately 934,000 additional shares
of Common Stock in lieu of the cash dividend payable with respect to
Bryanston's shares of Preferred Stock for the 1997 calendar year. None
of such shares of Common Stock is included in the table above as they
have not yet been issued. Bryanston is an affiliate of the Company, and
Beatrice Tollman, Stanley S. Tollman's spouse, is a 50% stockholder of
Bryanston. Each of Bryanston and Beatrice Tollman disclaims beneficial
ownership of the shares beneficially owned by the other of them.
(10) Patricia Cohen is the sole stockholder of BP. On December 17, 1997 the
Company declared a dividend of 46,581 shares of Common Stock to BP with
respect to, and in lieu of the cash dividend accrued on, the
outstanding shares of Preferred Stock held by BP in 1996. Additionally,
as of January 30, 1998, the Company became obligated to issue to BP
approximately 55,000 additional shares of Common Stock in lieu of the
cash dividend payable with respect to BP's shares of Preferred Stock
for the 1997 calendar year. None of such shares of Common Stock is
included in the table above as they have not yet been issued.
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<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 Coast, Inc. ("Gulf Coast"), 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 Bayou Caddy's Jubilee Casino (the "Bayou
Caddy's Jubilee Casino" or the "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 (the "B.C. Note")
that bore interest at the rate of 10% per annum and was convertible into shares
of Gulf Coast. Pursuant to an agreement, also dated May 14, 1993, among B.C.,
the Company, Stanley S. Tollman and Monty D. Hundley, the Gulf Coast shares into
which the B.C. Note was convertible were further convertible into shares of
Common Stock upon the happening of certain events. On November 15, 1995, the
Company, Gulf Coast 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 that entitled B.C. to receive 791,880 shares of Common
Stock. As contemplated by the B.C. Agreement, B.C. subsequently distributed
rights to receive 700,000 shares of 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 of Common Stock 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 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 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 owned by Bryanston, which were held by the Company as treasury stock. In
September 1996, the Company issued the 791,800 shares of Common Stock to B.C.
and the B.C. shareholders, and in October 1996, the shares previously held in
treasury stock were canceled.
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 Common Stock, valued at 17.6(cent)
per share, (ii) entered into certain 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
Bayou Caddy's Jubilee Casino.
Under a service agreement, effective as of September 1, 1993, between
Alpha Hotel and Bryanston (the "Service Agreement"), the Company (through Alpha
Hotel) provided management, financial, administrative and marketing 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 was co-terminus with the
last to expire of individual management agreements between Bryanston and 13
hotels (the "Management Agreements"), stated that the Company would provide
certain management services for hotels managed by Bryanston for certain
unaffiliated owners. Pursuant to the Service Agreement, Bryanston received a fee
of 1% of the aggregate compensation paid to the Company pursuant to the
Management Agreements. The Hotel Division of Bryanston 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 provided
management, financial, administrative and marketing services on behalf of
Bryanston. Pursuant to the Management Agreements, the Company was 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 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 Bryanston Loan had an initial interest rate of 12% per annum, and
payment thereunder was subordinated to payment of the Term Loan, described
below. A portion of principal and accrued interest in the aggregate amount of
35
<PAGE>
$1,012,500 was repaid from the proceeds of the Company's initial public offering
("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 Bayou Caddy's Jubilee Casino, and
thereafter, together with such accrued interest amount ($501,294), interest
accrued at the rate of 9% per annum, payable quarterly in equal installments
over a 10-year period, and was subject to prepayment pro rata with the BP Loan,
described below, from the proceeds of the exercise, if any, of the Company's
outstanding warrants and certain options (the "HFS Options") granted to HFS
Gaming Corp. ("HFS"), provided the Company is current under the Term Loan
(described below). At December 31, 1997, the principal balance (which included
accrued interest through the second anniversary) was $1,398,622 and accrued
interest of $145,312.
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 Bayou Caddy's 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 (described below) and a $4,000,000 bridge
loan from 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 prime 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 convertible 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 included
approximately $349,000 of accrued interest. In October 1995, those 625,222
shares of preferred stock were converted into 1,250,444 shares of Common Stock.
On November 15, 1995, the Company, Gulf Coast 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 that, upon exercise, entitled B.C. to receive
791,880 shares of Common Stock. Bryanston agreed to contribute 716,881 of its
shares of Common Stock to the Company 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.
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. Thus, the Company is obligated under a $20,000,000
non-revolving promissory note ($3,730,000 and $1,746,000 outstanding at December
31, 1997 and 1996, respectively) with Bryanston. The note, which bears interest
at prime rate (8.5% at December 31, 1997 and 8.25% at December 31, 1996) plus
2%, is payable at the lesser of the outstanding principal amount or $2,000,000
per annum through December 31, 1999. Beginning in 1996, interest accrued monthly
and was 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 is 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 from HFS an outstanding loan
to the Company (the "Term Loan"), which was then in default and was then held by
HFS, having an outstanding balance of $7,816,000. In October 1993, the Company
had issued the Term Loan to HFS in the original principal amount of $8,000,000
for a five-year term. 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 Bayou Caddy's
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 to Bryanston 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. In addition, Bryanston
acquired 96,429 shares of Common Stock from an affiliate of HFS. At
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<PAGE>
December 31, 1997 and 1996, the balance due on the Term Loan was $7,800,000,
plus accrued interest of $1,812,000 and $2,006,789, respectively.
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 certain 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 shares of 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 Preferred Stock. The Company was charged a 5%
transaction fee (approximately $958,000), which was also converted into shares
of Preferred Stock. The conversion was effective June 26, 1996, and the total of
approximately $20,123,000 converted into 693,905 shares of Preferred Stock based
on the fair market value of a share of Common Stock on the date of conversion
($3.625).
In addition, on September 30, 1997, the Company issued 83,333 shares of
Preferred Stock in settlement of $2,000,000 due to Bryanston under a
continuation of the Working Capital Loan. Each share of outstanding 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
shares of Common Stock valued at the market price, and (iv) is convertible into
eight shares of Common Stock.
Since June 1996, Bryanston (without any obligation to do so) has
continued to advance funds to the Company under a continuation of the Working
Capital Loan for working capital and similar purposes, including funding for
construction of the Hotel Casino. As noted above, effective as of September 30,
1997, $2,000,000 of such financing was converted into shares of Preferred Stock
issued to Bryanston, and net of such conversion of indebtedness into shares of
Preferred Stock, as of December 31, 1997, a principal balance of approximately
$3.7 million remained owing to Bryanston plus accrued interest of approximately
$500,000.
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 thereunder was 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 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) accrued interest at
the rate of 12% per annum through the second anniversary of the opening of the
Bayou Caddy's 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 is subject to prepayment, pro rata with the Bryanston
Loan, from the proceeds of the exercise, if any, of the Company's outstanding
warrants and the HFS Options.
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 Bayou Caddy's Jubilee
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 IPO. 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 from February 1, 1994
to December 12, 1997 and the sole shareholder 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
IPO. Westfield Financial Corporation is no longer operating as a broker-dealer.
37
<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 certain requirements for continued listing of
the Company's securities on NASDAQ. In order to avoid delisting the Company's
securities from NASDAQ, BP proposed that the Company convert the BP Loan into
shares of 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 Preferred Stock. The Company
was charged a 5% transaction fee (approximately $61,000), which was also
converted into shares of 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 a share of Common Stock on
the date of conversion ($3.625). The terms of the shares of Preferred Stock
issued to BP are identical to those of the shares of Preferred Stock issued to
Bryanston in June 1996 and September 1997.
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.
38
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
(a) The following documents are filed or part of this report:
1. FINANCIAL REPORTS
ALPHA HOSPITALITY CORPORATION
Independent Auditor's Report.............................F-1
Consolidated Balance Sheets..............................F-2
Consolidated Statements of Operations....................F-3
Consolidated Statements of Stockholders' Equity..........F-4
Consolidated Statement of Cash Flows.....................F-5
Notes to Consolidated Financial Statements...............F-7
2. FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation Accounts for the Years Ended
December 31, 1997, 1996 and 1995 .............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 Incorporation
*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.
39
<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
*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
Agreementof the Company in favor of HFS
40
<PAGE>
(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.
****10(ao) Asset Purchase Agreement between Alpha Gulf Coast, Inc. and Alpha
Greenville Hotel, INc. and Greenville Casino Partners, L.P.
*11 Statement Re: Computation of Per Share Earnings
12 List of Subsidiaries
(b) Reports on Form 8-K
There were no 8-Ks filed by the Company during the last quarter of the
period covered by this report.
* 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
*** 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.
**** Incorporated by reference, filed with the Company's Proxy Statement on
Schedule 14A sent to stockholders of the Company on or about February 12,
1998.
41
<PAGE>
List of Subsidiaries:
Name State of Incorporation
Alpha Gulf Coast, Inc. Delaware
Alpha St. Regis, Inc. Delaware
Alpha Missouri, Inc. Delaware
Alpha Monticello, Inc. Delaware
Alpha Rising Sun, Inc. Delaware
Jubilation Lakeshore, Inc. Mississippi
Alpha Greenville Hotel, Inc. Delaware
Alpha Entertainment, Inc. Delaware
42
<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: /s/ Stanley S. Tollman
Stanley S. Tollman
Title: Chairman of the Board and
Chief Executive Officer
Date: March 25, 1998
By: /s/ Robert Steenhuisen
Robert Steenhuisen
Title: Chief Accounting Officer
Date: March 25, 1998
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Signature Title Date
/s/ Stanley S. Tollman Chairman of the Board and March 25,1998
Stanley S. Tollman Chief Executive Officer
/s/ James A. Cutler Director March 25, 1998
James A. Cutler
/s/ Sanford Freedman Vice President, Secretary and Director March 25, 1998
Sanford Freedman
/s/ Brett G. Tollman Vice President and Director March 25, 1998
Brett G. Tollman
/s/ Thomas W. Aro Vice President and Director March 25, 1998
Thomas W. Aro
/s/ Matthew B. Walker Director March 25, 1998
Matthew B. Walker
</TABLE>
<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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
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 Commission'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, is fairly stated, in all material respects, in
relation to the basic consolidated financial statements taken as a whole.
/S/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 2, 1998
F-1
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands, except for per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996
ASSETS
CURRENT ASSETS:
Cash, including restricted cash of $500 and $270 in
1997 and 1996, respectively.................................... $ 2,211 $ 1,350
Accounts receivable, less allowance for doubtful accounts of $635
and $527 in 1997 and 1996, respectively........................ 15 73
Inventories......................................................... 297
Prepaid insurance................................................... 276 615
Other current assets................................................ 264 195
Deferred tax asset.................................................. 6,375
Net assets held for sale............................................ 13,925
Total current assets.............................................. 23,066 2,530
PROPERTY AND EQUIPMENT, net.................................................. 4,935 39,660
DEPOSITS AND OTHER ASSETS.................................................... 1,992 1,764
$ 29,993 $ 43,954
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Long-term debt, current maturities.................................. $ 81 $ 14,528
Notes payable....................................................... 1,418 2,400
Accounts payable and other accrued expenses......................... 5,851 9,911
Accrued payroll and related liabilities............................. 1,570 3,755
Due to affiliate, current maturity.................................. 3,730 1,746
Total current liabilities......................................... 12,650 32,340
LONG-TERM DEBT, less current maturities...................................... 8,007 7,866
DUE TO AFFILIATE, less current maturity...................................... 503 503
AMOUNTS DUE UNDER REDEMPTION AGREEMENT, including
accrued interest of $286............................................ 1,739
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, cumulative, $.01 par value, 1,000 shares authorized 8 7
Common stock, $.01 par value, 25,000 shares authorized.............. 145 135
Common stock payable................................................ 1,391
Capital in excess of par value...................................... 61,259 56,778
Accumulated deficit................................................. (53,970) (55,414)
Total stockholders' equity........................................ 8,833 1,506
$ 29,993 $ 43,954
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and
1995 (In thousands, except for per
share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
REVENUES:
Casino...................................................... $ 31,048 $ 43,252 $ 26,429
Food and beverage, retail and other......................... 585 1,268 1,210
Total revenues............................................ 31,633 44,520 27,639
COSTS AND EXPENSES:
Casino...................................................... 12,029 16,184 13,493
Food and beverage, retail and other......................... 569 1,657 1,877
Selling, general and administrative......................... 18,398 24,973 18,069
Interest.................................................... 3,138 4,421 3,213
Depreciation and amortization............................... 5,094 6,059 4,508
Pre-opening and development costs........................... 554 1,468 1,290
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.................................. 39,782 70,829 46,983
LOSS FROM CONTINUING OPERATIONS BEFORE DEFERRED
INCOME TAX BENEFIT.......................................... (8,149) (26,309) (19,344)
DEFERRED INCOME TAX BENEFIT.......................................... 6,375
LOSS FROM CONTINUING OPERATIONS...................................... (1,774) (26,309) (19,344)
DISCONTINUED OPERATIONS:
Income from operations of discontinued hotel management
segment................................................... 645 1,351
Gain on disposal of hotel management segment................ 2,849
Total income from discontinued operations................. 3,494 1,351
EXTRAORDINARY ITEM, gain on extinguishment of debt................... 4,609
NET INCOME (LOSS).................................................... 2,835 (22,815) (17,993)
DIVIDENDS ON PREFERRED STOCK......................................... 1,391
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 1,444 $ (22,815) $ (17,993)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,124 13,248 10,617
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
From continuing operations.................................. $ (.23) $ (1.98) $ (1.82)
From discontinued operations................................ .26 .13
From extraordinary item.................................... .33
Net income (loss).................................... $ .10 $ (1.72) $ (1.69)
Diluted:
From continuing operations.................................. $ (.23) $ (1.98) $ (1.82)
From discontinued operations................................ .18 .13
From extraordinary item..................................... .22
Net income (loss).................................... $ .01 $ (1.80) $ (1.69)
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and
1995 (In thousands, except for per
share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common
Capital in Stock
Preferred Stock Common Stock Excess of Subscribed/ Accumulated
Shares Amount Shares Amount Par Value Payable Deficit
Balances, January 1, 1995............... 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)
Sale of common stock................. 571 6 994
Common stock issued in settlement
of notes payable and accrued
interest.......................... 200 2 504
Common stock issued in settlement
of certain accounts payable and
accrued expenses.................. 157 2 509
Stock sold under redemption
agreement......................... 324
Adjustment of amount due under
redemption agreement............... 151
Preferred stock issued in settlement
of due to affiliate ............... 83 1 1,999
Preferred stock dividend payable
in common stock ................... 1,391 (1,391)
Net income........................... 2,835
Balances, December 31, 1997............ 821 $ 8 14,406 $ 145 $ 61,259 $ 1,391 $ (53,970)
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except for per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 2,835 $ (22,815) $ (17,993)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 5,094 6,059 4,508
Provision for losses on accounts receivable........... 108 211 255
Deferred tax benefit.................................. (6,375)
Write-off of deferred costs........................... 460
Common stock/options issued in exchange for financial
advisory services................................... 1,690
Gain on disposal of hotel management segment.......... (2,849)
Gain on extinguishment of debt........................ (4,609)
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.......... (50) 370 248
Decrease in inventories............................. 41 239 201
(Increase) decrease in prepaid insurance............ 339 1,187 (231)
(Increase) decrease in other current assets......... (69) 975 (814)
Increase in accounts payable and other accrued
expense........................................... 561 1,505 2,032
Increase (decrease) in accrued payroll and related
liabilities....................................... (1,144) 848 (187)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................................... (3,269) 955 (9,831)
CASH FLOWS FROM INVESTING ACTIVITIES:
Hotel construction in progress.......................... (2,966)
Purchases of property and equipment..................... (107) (1,460) (3,717)
Cash escrowed for hotel construction.................... (1,700)
Cash acquired in connection with business combination... 543
Proceeds from sales of property and equipment........... 70
Proceeds from (payments for) deposits and other assets.. (371) (1,047) 300
NET CASH USED IN INVESTING ACTIVITIES............................ (5,144) (2,437) (2,874)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate................................. 5,970 3,813 21,209
Payments to affiliate................................... (1,986) (282) (3,848)
Payments on construction and equipment notes payable.... (281)
Proceeds from sale of common stock...................... 1,000
Proceeds from notes payable............................. 307 248
Payments on notes payable............................... (507) (1,262) (857)
Proceeds from long-term debt, net of loan costs......... 17,900 43 8,191
Payments on long-term debt.............................. (13,103) (2,103) (10,821)
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 9,274 516 13,841
NET INCREASE (DECREASE) IN CASH.................................. 861 (966) 1,136
CASH, beginning of year.......................................... 1,350 2,316 1,180
CASH, end of year................................................ $ 2,211 $ 1,350 $ 2,316
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except for per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid for interest during the year............ $ 3,186 $ 2,903 $ 1,035
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Preferred stock issued in settlement of obligations..... $ 2,000 $ 21,406
Net increase (decrease) in capital in excess of par value
related to amount due under redemption agreement...... $ 475 $ (1,442)
Common stock issued in settlement of notes payable
and accrued interest.................................. $ 506
Common stock issued in settlement of certain
accounts payable and accrued expenses................. $ 511
Common stock issued in settlement of long-term debt $ 2,453
Note payable incurred in connection with lease settlement
arrangement........................................... $ 1,200
Common stock/options exchanged for financial
advisory services.................................... $ 1,690
Accrued interest capitalized to debt.................... $ 1,765
Acquisition of casino:
Fair value of net assets acquired..................... $ 21,881
Fair value of liabilities assumed..................... 17,381
Equity investment..................................... $ 4,500
</TABLE>
See accompanying notes to consolidated financial statements
F-6
50
<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 in Greenville, Mississippi, which is operated by
the Company's subsidiary Alpha Gulf Coast, Inc. (Alpha Gulf) (see Note 15) and
the construction of an adjacent hotel, which is being handled through the
Company's subsidiary Alpha Greenville Hotel, Inc. (Greenville Hotel) (see Note
15) and (ii) the pursuit of gaming-related and other opportunities 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), Alpha
Entertainment, Inc. (Alpha Entertainment) 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
13), provided management services to hotels owned by third parties.
Additionally, from December 1995 through July 1996, Jubilation Lakeshore,
formerly known as the Cotton Club of Greenville, Inc. (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
Useful
Assets 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.
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 1995 computations.
During the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards 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 similar to fully diluted earnings
per share pursuant to Accounting Principles Board Opinion No. 15. SFAS 128 did
not have a material impact upon 1996 or 1995 earnings (loss) per common share,
as reported.
F-7
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 2. Summary of Significant Accounting Policies (CONTINUED)
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 for
differences between the 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 is not expected to result in taxable income upon
reversal and thus is not 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 $3,547, $3,721 and $3,456 for the
years ended December 31, 1997, 1996 and 1995, respectively, provided
gratuitously to customers. The cost of these items of $2,990, $3,317 and $3,410
for the years ended December 31, 1997, 1996 and 1995, respectively, are included
in casino expenses.
Interest Capitalization. Interest costs incurred during the
construction and development of the dockside casino, the hotel and related
facilities were capitalized as part of the cost of such assets.
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, 1997 and 1996.
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 reviews the
carrying value of its long-lived assets in relation to historical results, as
well as management's best estimate of future trends, events and overall business
climate. If such reviews indicate that the carrying value of such assets may not
be recoverable, the Company would then estimate the future cash flows
(undiscounted and without interest charges). If such future cash flows are
insufficient to recover the carrying amount of the assets, then impairment is
triggered and the carrying value of any impaired assets would then be reduced to
fair value.
Reclassifications. Certain amounts have been reclassified in prior years to
conform to the 1997 presentation.
F-8
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
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 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.
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 was due at December 31, 1996) to a director
of the Company and an affiliate, respectively. Only the Bryanston unassigned
portion of $1,399 is due as of December 31, 1997 (see Note 5).
F-9
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 4. Property and Equipment
At December 31, 1997 and 1996, property and equipment is comprised of
the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996
Land and building........................................... $ 214 $ 214
Boat, barge and improvements................................ 24,337 24,261
Leasehold and improvements.................................. 14,240 14,215
Gaming equipment............................................ 10,307 10,271
Furniture, fixtures and equipment........................... 7,259 7,414
Transportation equipment.................................... 760 760
Construction in progress.................................... 2,966
60,083 57,135
Less accumulated depreciation and amortization 22,444 17,475
37,639 39,660
Less amounts included in net assets held for sale,
including accumulated depreciation
and amortization of $17,331............................... 32,704
$ 4,935 $ 39,660
</TABLE>
Included in equipment at December 31, 1997 and 1996 is $1,225 related
to assets recorded under capital leases. Included in accumulated depreciation
and amortization at December 31, 1997 and 1996 is $624 and $498, respectively,
of amortization related to assets recorded under capital leases.
Due to 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 in 1996 representing Jubilation Lakeshore's leasehold and
improvements of $16,284 and net of related accumulated amortization of $1,777.
F-10
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 5. Notes Payable
At December 31, 1997 and 1996, notes payable are comprised of the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Interest
Rate 1997 1996
Revolving line of credit collateralized by cash
advances (see Note 6)............................................. 25% $ -- $ 497
Notes payable to Bryanston and former CCG stockholders, of which $295
and $394 in 1997 and 1996, respectively, are non-interest
bearing (see Notes 3 and 10)....................................... 10% 1,399 1,885
Other ............................................................ Various 19 18
$ 1,418 $ 2,400
</TABLE>
At December 31, 1997, the Company was in default of its note payable to
Bryanston. The Company received a waiver of the default through January 1, 1999.
F-11
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 6. Long-Term Debt
At December 31, 1997 and 1996, long-term debt is comprised of the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Interest
Rate 1997 1996
Pre-closing financing (see Note 15 ), collateralized by Alpha Gulf 's
property and equipment and certain related assets, net of an 30 day
uncollateralized, zero-coupon promissory note in the stated LIBOR
principal amount of approximately $4,900............................ + 6.15% $ 19,000$ --
Note payable, Bryanston, principal and interest due
monthly through January 1, 1999 ..................................... 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
Equipment notes payable monthly and collateralized by certain
assets .............................................................. 10-14% 9,284
Capitalized lease obligations, payable monthly, expiring in
various years through 2001........................................... 10-14% 288 386
Note payable quarterly and collateralized by assignment of
interest in the mortgage note payable to Bryanston................... 10% 1,200
Other ............................................................ 7-11% 68
27,088 22,394
Less:
Amount included in net assets held for sale (see Note 15) 19,000
Current portion.................................................... 81 14,528
$ 8,007 $ 7,866
</TABLE>
Aggregate future required principal payments of long-term debt,
excluding amount included in net assets held for sale, are as follows:
Years Ending December 31:
1998........................... $ 81
1999........................... 7,887
2000........................... 96
2001........................... 24
$ 8,088
F-12
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
6. Long-Term Debt (CONTINUED):
In conjunction with and in anticipation of the Company's sale of
substantially all of the assets of Alpha Gulf and Greenville Hotel (see Note
15), the Company obtained $17,900 of net proceeds from certain financing
(Pre-Closing Financing) on December 30, 1997, net of closing costs of $1,100 and
loan discounts of $4,900. The loan discounts represent an uncollateralized,
zero-coupon promissory note which the Company executed and delivered to the
pre-closing lender, in the stated principal amount of $4,900, representing
additional unfunded financing. Although no proceeds were received by the Company
in conjunction with such promissory note, under the terms of the sale, the Buyer
is to assume such promissory note. Accordingly, upon consummation of such sale,
which occurred on March 2, 1998, the Company is relieved of all Pre-Closing
Financing obligations.
Included in the use of the Pre-Closing Financing proceeds was the
extinguishment of certain debt of the Company including the mortgage note
payable collateralized by the boat and improvements, all of the equipment notes
payable, a note payable collateralized by assignment of interest in the mortgage
note payable to Bryanston, the revolving line of credit (see Note 5) and certain
accounts payable and accrued expenses. A gain on the extinguishment of such debt
of $4,609 was recognized for the year ended December 31, 1997. Additionally,
pursuant to the terms of the Pre-Closing Financing and sale agreement (see Note
15), loan proceeds were used to establish escrows for contingent litigation and
hotel construction in the amounts of $500 and $1,700, respectively. An
additional $1,500 of the loan proceeds were paid to Bryanston relative to a
non-revolving promissory note (see Note 8).
In August 1995, Bryanston purchased the mortgage of $7,800 on Alpha
Gulf's 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 10). This mortgage note, initially due November 1998,
was extended to January 1, 1999. Additionally, in connection with the terms of
the Pre- Closing Financing, Bryanston was required to release its security claim
on the barge and certain other assets. Accordingly, as of December 31, 1997, the
note is uncollateralized. At December 31, 1997, the Company was in default of
the note for nonpayment and received a waiver of the default through January 1,
1999.
In October 1995, the Company restructured certain equipment notes,
aggregating approximately $9,000, with unrelated parties, whereby the Company
would 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 was bearing interest at 10% per annum, was due
on November 15, 1999, and either was to 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. These obligations were settled and
extinguished with proceeds from the Pre-Closing Financing, as previously
described.
F-13
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 6. 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 reduced the lease
principal amount to $475 and forgave $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.
On December 31, 1996, the Company was relieved of its loan payable to
Bryanston for $2,694 ( which included 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 13).
At December 31, 1996, the Company was in default of (i) its 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 loan 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.
Note 7. Accounts Payable and Other Accrued Expenses
At December 31, 1997 and 1996, accounts payable and other accrued
expenses are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996
Construction................................................................. $ 1,021 $ 1,121
Insurance financing.......................................................... 273 585
Accrued professional fees.................................................... 634 983
Accrued property taxes....................................................... 492 708
Accrued interest............................................................. 2,219 2,196
Other........................................................................ 3,149 4,318
7,788 9,911
Less amount included in net assets held for sale (see Note 15 ) 1,937
$ 5,851 $ 9,911
</TABLE>
Note 8. 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 13).
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, through the issuance of 96 shares of the Company's stock (see Note
10). Expenses incurred under this marketing agreement were $564 for the year
ended December 31, 1995.
F-14
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 8. 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 (8.50% at December 31,
1997) 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 was 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 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 and September 1997, the Company issued 661 and 83
shares, respectively, of its preferred stock in settlement of $19,165 and
$2,000, respectively, of the note. As a result of the June 1996 settlement, 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 included accrued interest of $90) of the
note, in partial consideration for Bryanston's purchase of Alpha Hotel (see Note
13). The outstanding principal balance at December 31, 1997 and 1996 was $3,730
and $1,746, respectively.
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
terminated, the Company paid $500 at closing and $1,200 in the form of a
three-year, ten percent note payable quarterly. The settlement and early
termination of the operating lease resulted in a $541 charge to operations for
the year ended December 31, 1996. Additionally, the Company had an option to buy
out the remaining obligations at reduced principal amounts at accelerated dates,
as specified in the settlement agreement, which option the Company exercised
when it discharged its remaining obligations thereunder with a portion of the
loan proceeds from the Pre-Closing Financing (see Note 6).
The Company was obligated under a tideland lease which provided for a
mooring site for the Company's Lakeshore, Mississippi vessel. Pursuant to a
lease termination and mutual release agreement, the State of Mississippi
terminated the lease for a settlement of $83. Under the terms of the agreement,
the Company has until June 30, 1998 to remove any structures or equipment
remaining on the site. Rent expense in 1996 was $96 under this lease.
The Company is obligated under operating leases relative to real
property and equipment expiring through 2003. Future aggregate minimum annual
rental payments under all of these leases are as follows:
Years Ending December 31:
1998.................................... 373
1999.................................... 345
2000.................................... 348
2001.................................... 362
2002.................................... 375
Thereafter.............................. 354
$ 2,157
F-15
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 8. Commitments, Contingencies and Related Party Transactions (CONTINUED)
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 approvals by the U.S. Department of Interior, the National Indian
Gaming Commission and the State of New York. As of December 31, 1997 and 1996,
the Company has capitalized $1,291 and $734, respectively, 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 its Chairman
and Chief Executive 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.
Pursuant to a consulting agreement with a director of the Company,
during the year ended December 31, 1997 and 1996, the Company incurred $195 and
$176, respectively, in fees of which $34 and $14 is due at December 31, 1997 and
1996, respectively.
In accordance with Mississippi law, the Company's casino license has a
term of two years and is subject to periodic renewal. In October 1997, the
Company received renewal of its license through October 1999 conditioned by the
opening of its Greenville hotel by no later than February 26, 1998. Such
conditions were fulfilled and the Company received its casino license. Pursuant
to the sale of the casino (see Note 15), the license was surrendered to the
Mississippi Gaming Commission and the Company retained its finding of
suitability.
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. On March 21,
1997, the Company and the principal insurance carrier reached a settlement on
the Wolff case whereby each party gave a general and final release discharging
all claims that each may have against the other.
F-16
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 8. Commitments, Contingencies and Related Party Transactions (CONTINUED)
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. 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. The claim against the Company and
its affiliates in this action has been liquidated and dismissed (see Note 6).
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 payment pursuant to a construction
contract. Plaintiff sought actual and compensatory damages of approximately
$1,200. The consolidated financial statements included a provision for the
liability of $928 for this contract at December 31, 1996. This litigation was
settled by the payment of $750 from the proceeds of the Pre-Closing Financing
(see Note 6).
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, results of operations or cash flows of the Company.
Note 9. Amounts Due Under Redemption Agreement
The amounts due under redemption agreement (see Note 6) were 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. All amounts owing under the redemption agreement as of December
31, 1997 have been extinguished, under the settlement with the holder, in
relationship to their debt. (see Notes 6 and 8).
At December 31, 1996, the amount due under the redemption agreement was
$1,739, which included $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).
F-17
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 10. 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 in 1995 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. Additionally, 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).
In 1995, the Company issued 783 shares related to the CCG acquisition
(see Note 3).
In 1996, the Company issued 701 shares, to be held in escrow, related
to certain restructured equipment notes (see Note 6) and 75 shares related to a
convertible promissory note.
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 6 and 8).
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). In September 1997, an additional 83 shares of the Company's
preferred stock was issued in settlement of $2,000 of the unsecured debt with
Bryanston.
The Company's cumulative preferred stock has voting rights of one vote
per preferred share, is convertible to eight shares of common stock for each
share of preferred stock and 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 quarter. In the event the dividend is not paid
at the end of the Company's fiscal year (December 31), the dividend will be
payable in common stock. On December 17, 1997, the Company declared a 1996
dividend of $ 1,391, payable in 777 shares of the Company's common stock. As of
December 31, 1997, dividends in arrears on the cumulative preferred stock
amounted to 1,071 shares.
In December 1996, the Company's Board of Directors approved an increase
to the total number of shares of common stock that the Company shall have the
authority to issue from 17,000 shares to 25,000 shares.
In March 1997, the Company sold 571 shares of its $.01 par value common
stock for $1,000.
In April 1997, the Company issued 200 shares of its $.01 par value
common stock for $506 in settlement of a note payable (See Note 5) and related
accrued interest. Additionally, during 1997, the Company issued 157 shares of
its $.01 par value common stock for $511 in settlement of certain accounts
payable and accrued expenses.
F-18
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 11. 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") and
non-qualified stock options ("NQSO"). 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.
Pursuant to the Plan, in 1993 the Company granted options to purchase an
aggregate of 385 shares of common stock at an exercise price of $3.25.
Additionally, in 1993, the Company granted options to purchase an aggregate of
24 shares of common stock at an exercise price of $11.50. The maximum term of
each option granted under the Plan is ten years, however, options granted to an
employee owning greater than 10% of the Company's common stock will have a
maximum term of five years. As of December 31, 1997, no options under this Plan
were exercised.
In October 1993, the Company entered into an option agreement with an
unrelated party whereby the unrelated 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, 1997, the option was not
exercised.
In 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. As of December 31, 1997, these options were not
exercised.
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 in November 1993 until November
1998. As of December 31, 1997, 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, 1997, the option was not
exercised.
The Company complies with 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 ended December 31, 1997, 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
Loss from continuing operations, as reported........................... $ (3,165) $ (26,309) $ (19,344)
Loss from continuing operations, pro forma............................. (3,490) (26,634) (19,370)
Loss per common share from continuing operations, basic, as
reported........................................................... (.22) (1.98) (1.82)
Loss per common share from continuing operations, basic,
pro forma.......................................................... (.25) (2.01) (1.82)
</TABLE>
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. Loss from
continuing operations, as reported has been adjusted to reflect the deduction of
dividends on preferred stock to arrive at loss from continuing operations
applicable to common shares. Diluted earnings per share amounts are not
presented because they are anti-dilutive.
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 1997, 1996 and 1995: risk-free interest rates of
six percent; no dividend yield and option life of five years. Volatility of
100%, 80% and 80% was assumed for the years ended December 31, 1997, 1996 and
1995, respectively.
F-19
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 12. Income Taxes
The Company and all of its subsidiaries file a consolidated federal
income tax return. At December 31, 1997 and 1996, the Company's deferred income
tax asset is comprised of the tax benefit (cost) associated with the following
items based on the statutory tax rates currently in effect:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Pre-opening costs expensed for financial reporting and
amortized over five years for tax purposes..................... $ 490 $ 984
Net operating loss carryforwards................................. 15,398 14,153
Depreciation..................................................... (362) (805)
Differences between financial and tax bases of assets
and liabilities................................................ 4,597 4,597
Other............................................................ 238 171
Deferred income tax asset........................................ 20,361 19,100
Valuation allowance.............................................. (13,986) (19,100)
$ 6,375 $ --
</TABLE>
The Company's $6,375 deferred tax benefit represents the reversal of
previously established valuation allowances due to the 1998 utilization of the
Company's net operating loss carryforwards to offset the estimated taxable gain
on the sale of assets (see Note 15). The estimated tax gain exceeds the
estimated financial statement gain due to the differences between the financial
statement and tax bases of Alpha Gulf's assets.
As of December 31, 1997 and before utilization of net operating loss
carryforwards in 1998, as described above, the Company has available for federal
income tax purposes, a net operating loss carryforward of approximately $44,000
expiring in the years 2008 through 2012.
Note 13. 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. Such
transaction resulted in a reduction of the Company's debts to Bryanston (see
Notes 6 and 8). Summary operating results of discontinued operations, excluding
the above gain, for the years ended December 31, 1996 and 1995 are as follows:
1996 1995
Net sales.......................................... $ 1,992 $ 2,863
Cost of sales...................................... 1,347 1,512
Income from operations of discontinued hotel
management segment, before intercompany charge... $ 645 $ 1,351
Note 14. Earnings (Loss) Per Common Share
At December 31, 1997, 1996 and 1995, weighted average common shares
outstanding applicable to diluted earnings is computed as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 1996 1995
Weighted average common shares outstanding, basic...... 14,124 13,248 10,617
Shares applicable to convertible preferred stock....... 6,568 5,904
20,692 19,152 10,617
</TABLE>
Unexercised stock options and warrants to purchase 2,270 shares of the
Company's common stock, as of December 31, 1997, 1996 and 1995, were not
included in the computations of diluted earnings (loss) per common share because
the exercise prices were greater than the average market prices of the Company's
common stock during the respective years.
F-20
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 15. Subsequent Events
In February 1998, Greenville Hotel completed construction of its hotel
at a total cost of $3,800, including capitalized interest and indirect labor and
sundry costs.
On March 2, 1998, the Company sold substantially all of the assets of
Alpha Gulf and Greenville Hotel, including the casino barge, boarding barge,
related gaming and other equipment, furniture and improvements and related
permits, licenses, leases and other agreements to Greenville Casino Partners,
L.P. (Buyer), the owner and operator of one of the two other riverboat casinos
operating in Alpha Gulf's Greenville, Mississippi market. In exchange for such
assets, the Company received from the Buyer total consideration of $40,200,
including $11,800 in cash, the assumption by the Buyer of $2,000 of certain
accounts payable, accrued expenses and payroll liabilities, a 25% partnership
interest in the Buyer valued at $8,500 and the assumption by the Buyer of the
Company's obligations to repay the net proceeds from the Pre-Closing Financing
of $17,900 (see Note 6).
Additionally, the Company entered into a supervisory hotel management
agreement with the Buyer for a term of ten (10) years whereby the Company will
receive $100 per annum for management services, payable monthly.
The consolidated balance sheet as of December 31, 1997 includes net
assets held for sale of $13,925, which is comprised of the following assets and
(liabilities):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Alpha Gulf:
Assets:
Property and equipment, net of accumulated
depreciation and amortization of $17,331............................ $ 29,738
Other deferred financing costs........................................ 143
Inventories........................................................... 256
$ 30,137
Liabilities assumed:
Pre-closing financing................................................. (19,000)
Less related costs.................................................... 1,100
(17,900)
Accounts payable and other accrued expenses............................ (959)
Accrued payroll and related liabilities................................ (1,041)
(2,000)
10,237
Greenville Hotel:
Assets:
Cash escrowed for construction......................................... 1,700
Construction in progress............................................... 2,966
4,666
Liabilities assumed:
Accounts payable and accrued expenses.................................. (978)
3,688
$ 13,925
</TABLE>
F-21
<PAGE>
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 15. Subsequent Events (CONTINUED)
The following summarized unaudited pro forma consolidated balance sheet
assumes the sale had occurred on December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pro Forma
Adjustment
Historical Sale (a) Pro Forma
Cash........................................ $ 2,211 $ 11,800 $ 14,011
Other current assets........................ 555 555
Deferred tax asset.......................... 6,375 (6,375) --
Net assets held for sale.................... 13,925 (13,925) --
Total current assets 23,066 (8,500) 14,566
Investment in Buyer......................... 8,500 8,500
Property and equipment...................... 4,935 4,935
Deposits and other assets................... 1,992 1,992
$ 29,993 $ -- 29,993
Long-term debt, current maturities.......... $ 81 $ -- $ 81
Notes payable............................... 1,418 1,418
Accounts payable and other accrued
expenses.................................. 5,851 5,851
Accrued payroll and related liabilities..... 1,570 1,570
Due to affiliate, current maturities........ 3,730 3,730
Total current liabilities 12,650 $ 12,650
Long-term debt, less current maturities..... 8,007 8,007
Due to affiliate, less current maturity..... 503 503
Stockholders equity......................... 8,833 8,833
$ 29,993 $ -- $ 29,993
</TABLE>
Pro Forma Adjustment:
(a) The sale adjustment is comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Assets Deferred
Cash Investment Held for Sale Income Tax
Proceeds from Buyer:
Cash............................. $ 11,800 $ 11,800
Investment in Buyer............. 8,500 $ 8,500
Liabilities assumed:
Pre-closing financing........ 17,900 $ 17,900
Other........................ 2,000 2,000
$ 40,200
Basis of assets sold:
Alpha Gulf...................... $ (30,137) $ (30,137)
Greenville Hotel............... (3,688) (3,688)
$ (33,825)
Income before deferred income tax 6,375
Deferred income tax (6,375) (6,375)
Total $ -- $ 11,800 $ 8,500 $ (13,925) (6,375)
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
would have occurred had the sale occurred on December 31, 1997.
F-22
<PAGE>
SCHEDULE VII
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
VALUATION ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except for per share data)
Additions
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
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
Year Ended December 31, 1997:
Allowance for doubtful accounts $ 527 108 -- -- 635
</TABLE>
(a) Assumed in conjunction with the October 1995 acquisition of the Cotton Club
of Greenville, Inc.
S-1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Alpha Hospitality Corporation and Subsidiaries on Form S-3 (333-43861), on
Form S-3 (333-39887) and on Form S-8 (333-37293), of our report dated March 2,
1998 on our audits of the consolidated financial statements of Alpha Hospitality
Corporation and Subsidiaries as of December 31, 1997 and 1996, and for the years
ended December 31, 1997, 1996 and 1995, which report is included in the Annual
Report on Form 10-K for the year ended December 31, 1997.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 25, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Alpha Hospitality Corporation and Subsidiaries as
contained in the Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 2211
<SECURITIES> 0
<RECEIVABLES> 650
<ALLOWANCES> 635
<INVENTORY> 276
<CURRENT-ASSETS> 23066
<PP&E> 10048
<DEPRECIATION> 5113
<TOTAL-ASSETS> 29993
<CURRENT-LIABILITIES> 12650
<BONDS> 13739
0
8
<COMMON> 145
<OTHER-SE> 8680
<TOTAL-LIABILITY-AND-EQUITY> 29993
<SALES> 0
<TOTAL-REVENUES> 31633
<CGS> 30996
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3138
<INCOME-PRETAX> (8149)
<INCOME-TAX> (6375)
<INCOME-CONTINUING> (1774)
<DISCONTINUED> 0
<EXTRAORDINARY> 4609
<CHANGES> 0
<NET-INCOME> 2835
<EPS-PRIMARY> .20 (.39) (.23) (.10)
<EPS-DILUTED> .09 (.39) (.23) (.10)
<FN>
Tag #30 - Amount includes depreciation and amortization of $5,094,000 and
development costs of $554,000.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-31-1996 JAN-31-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<EXCHANGE-RATE> <blank>
<CASH> <blank>
<SECURITIES> <blank>
<RECEIVABLES> <blank>
<ALLOWANCES> <blank>
<INVENTORY> <blank>
<CURRENT-ASSETS> <blank>
<PP&E> <blank>
<DEPRECIATION> <blank>
<TOTAL-ASSETS> <blank>
<CURRENT-LIABILITIES> <blank>
<BONDS> <blank>
<blank>
<blank>
<COMMON> <blank>
<OTHER-SE> <blank>
<TOTAL-LIABILITY-AND-EQUITY> <blank>
<SALES> <blank>
<TOTAL-REVENUES> <blank>
<CGS> <blank>
<TOTAL-COSTS> <blank>
<OTHER-EXPENSES> <blank>
<LOSS-PROVISION> <blank>
<INTEREST-EXPENSE> <blank>
<INCOME-PRETAX> <blank>
<INCOME-TAX> <blank>
<INCOME-CONTINUING> <blank>
<DISCONTINUED> <blank>
<EXTRAORDINARY> <blank>
<CHANGES> <blank>
<NET-INCOME> <blank>
<EPS-PRIMARY> (1.72) (1.71) (.59) (.22) (1.69)
<EPS-DILUTED> (1.80) (1.79) (.62) (.23) (1.69)
</TABLE>
