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, 1998.
( ) 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)
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, 1998 were
approximately $5,400,000.
The aggregate market value on March 29, 1999 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 $33,500,000.
As of March 29, 1999, 16,788,228 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 36.
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 Lakeshore") was
incorporated in Mississippi on December 8, 1992; Alpha Missouri, Inc.
("Alpha Missouri") was incorporated in Delaware on March 17, 1996; Alpha
Monticello, Inc. ("Alpha Monticello") was incorporated in Delaware on May
30, 1997; 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 Entertainment") was incorporated in
Delaware on March 12, 1997. Alpha Florida Entertainment, Inc.
("Alpha Florida") was incorporated in Florida on May 26, 1998 and Alpha Peach
Tree Corporation ("Alpha Peach Tree") was incorporated in Delaware on March
16, 1999. 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. As a result of such sale,
the Company ceased its hotel and motel management business through this
subsidiary.
Pursuant to an Asset Purchase Agreement dated December 17, 1997, the
Company agreed to sell to Greenville Casino Partner, L.P. (the operator of
another casino barge in Greenville, Mississippi), its 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 (the "Pre-Closing Financing").
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 completed on March 2, 1998. See Item 7,
herein, for a detailed discussion of the sale transaction.
As a result of the Company's sales of its Alpha Hotel and Alpha Gulf
operations, the Company's current operations include the development of
potential new gaming operations in New York, the potential acquisitions of
manufactured housing, restaurant and gaming operations and the acquisition or
development of other business operations.
Casino Operations and Gaming Activities
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 December 1, 1995, the Company, through its subsidiary, Alpha St. Regis,
entered into a memorandum of understanding (the "Memorandum") 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. The Memorandum was assigned to
Alpha Monticello. Mohawk Management L.L.C. ("Mohawk") (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 (the "Management
Contract"), and subject to the obtaining of requisite approvals, it is
anticipated that Mohawk will
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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
approximately 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,
Catskill and the Company have committed to enter into a definitive agreement
on the terms established in the memorandum.
By its terms, the Memorandum between Catskill and Alpha Monticello terminated
on December 31, 1998, since all of the governmental approvals necessary for the
construction and operation of the Monticello Casino were not obtained by
Mohawk. The Management Contract between Mohawk and the Tribe contains no such
provision. Additionally, the Memorandum is silent as to the effect of such
expiration to the continued existence of Mohawk, the Parties respective 50%
ownership therein and the Management Contract. As of the date hereof, all
such approvals have note been obtained. On December 28, 1998, Alpha
Monticello filed for arbitration as prescribed by the Memorandum to resolve
any disputes by the contracting parties. The Company is seeking a
determination from the arbitrator that the termination of the Memorandum merely
means that the funding obligations of Alpha Monticello and Catskill have
expired and that Mohawk remains a viable entity with both Alpha Monticello and
Catskill as 50% owners. On or about February 8, 1999, Catskill submitted its
response to Alpha Monticello's Demand for Arbitration. Thereafter, the Parties'
counsels informed the American Arbitration Association (the "AAA") that the
Parties were engaged in settlement discussions, and the AAA agreed to stay
further proceedings in the arbitration until April 22, 1999.
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.
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 1998, 1997 and 1996, Alpha Monticello, Inc. incurred $279,000 and
$907,000 and $1,975,000 of costs, of which $75,000, $557,000 and $734,000,
respectively, has been capitalized and the remaining $204,000, $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
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.
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 (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.
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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.
In April 1997, Gulf Coast received approval from the Mississippi Gaming
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
believed that this hotel would add a new dimension to the Company's casino
patron experience and would be an added amenity to the Company's player devel
opment program. The total cost of this project including capitalized
interest, indirect labor and sundry costs was approximately $4 million.
Greenville Hotel received interim financing from Bryanston Group, Inc.
("Bryanston"), an affiliate, to fund construction. In February 1998,
the Company completed construction of its Greenville Hotel and 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 Casino Partners, L.P. ("Buyer") (see Business - General).
Missouri. 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 indeterminate 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 incurred development costs of approximately $318,000 and
$239,000 in 1997 and 1996, 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 Gaming 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
believed 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
relocated it to a terminal in Mobile, Alabama. The Company is investigating
other possible uses, including the possible sale thereof ("see Item 7 - Future
Operations-Krawdaddy's").
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
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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 had provided management services to 14
hotels or motels. The Company had 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 the Company's 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 Item 13 - "Certain Relationships and
Related 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.
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.
4
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 was reached through a combination
of billboards, radio, television and newspaper advertising and direct mail.
The Company developed an in-house mailing list of in excess 130,000 casino
customers. These customers were made up of table game players and "Slot Club"
members. Table game customers were identified through the casino's marketing
representatives, and their play was monitored to evaluate whether the customer
warrants complimentary services provided by the casino. The award of
complimentary services was consistent with standard industry practices and was
based upon a customer's duration of play and average amount wagered. The "Slot
Club" was an operation that allows the casino's computerized tracking system
to identify customers, amount of play and other pertinent characteristics. The
"Slot Club" was an ongoing promotion where members were issued cards and
accumulate points based on the amount of their play. Such points were redeemable
for food, beverages and merchandise. Tournaments for blackjack, craps and poker
are held, along with other special events and promotions.
Competition
At the time of the Company's sale of the Bayou Caddy's Jubilee Casino, there
were 19 casinos located on the Mississippi River. In the Greenville market, the
Company's Bayou Caddy's Jubilee Casino competed with the Las Vegas Casino, which
recently has been closed for possible removal to a new Greenville location, and
the Lighthouse Point Casino, which opened in November 1996.
After the opening of the Lighthouse casino, the Bayou Caddy's Jubilee
Casino's fair share of the market, based on the number of player positions in
the market, improved. The Company believed that the Bayou Caddy's Jubilee
Casino was well-positioned to compete successfully with the two other casinos in
the Greenville market, one of which was 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 Bayou Caddy's Jubilee Casino, the Company owns a 25%
equity interest in Greenville Casino Partners, L.P. In October 1998, the Las
Vegas Casino (owned by Greenville Casino Partners, L.P.) was closed with plans
of a possible relocation to another site in Greenville.
Approximately 60 miles south of the Bayou Caddy's Jubilee Casino is
Vicksburg, which 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 nine casinos -- Harrahs, Sams Town,
Fitzgeralds, Sheraton, Hollywood Casino, Gold Strike (Circus Circus), Horseshoe
Casino, Grand Casino and Ballys. Since casinos outside a 50-mile radius of the
Bayou Caddy's Jubilee Casino were not considered by the Company to be within
its primary competitive market, the Company did not deem the casinos in
Vicksburg, Natchez or Tunica County to be among its principal competitors.
Although the Bayou Caddy's Jubilee Casino remained competitive, at least
until its sale in March 1998, 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".)
Seasonal Fluctuations
The results of the casinos' operations were 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
1997 and March 1998 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 were generally not as
successful as those quarters ending in June and September, and losses
resulted from time to time. The seasonal nature of such casino's operations
increased the risk that natural disasters or the loss of the Casino for
any other reason during the May through September period would have had a
materially adverse effect on the Company's financial condition and results of
operations.
5
Government Regulation
The Company's ownership and operation of its gaming properties were subject
to regulation by federal, state and local governmental and regulatory
authorities, including regulation relating to environmental protection. During
the Company's ownership and operation of its gaming properties, the Company was
not the subject of any complaints or other formal or informal proceedings
alleging any violations of government regulation.
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 Gaming Commission and the Mississippi
State Tax Commission (collectively, the "Mississippi Authorities"). This
includes the regulation of the Company in regard to its 25% investment in
Greenville Casino Partners, L.P.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Gaming 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 Gaming Commission. 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 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 Gaming 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 Gaming Commission to operate casinos in Mississippi and receive a
finding of suitablility to have a certain ownership interest in a casino,
as described by the Mississippi Gaming Commission. Gaming licenses and
findings of suitability are issued by the Mississippi Gaming 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 and findings of suitability 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, findings of suitability and
approvals from the Mississippi Gaming 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 Gaming
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
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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 Gaming 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 Gaming Commission. In addition to its
authority to deny an application for a license, the Mississippi Gaming
Commission has jurisdiction to disapprove a change in corporate officers.
The Mississippi Gaming 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
Gaming 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 Gaming Commission and must
pay the costs and fees that the Mississippi Gaming Commission incurs in
conducting the investigation. The Mississippi Gaming 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 Gaming 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 Gaming
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 Gaming 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 Gaming
Commission upon request the identities of the holders of any debt securities.
In addition, the Mississippi Gaming Commission under the Mississippi Act may,
in its discretion,(i) require disclosure of holders of debt securities of
corporations registered with the Mississippi Gaming Commission, (ii)
investigate such holders and (iii) require such holders to be found suitable
to own such debt securities. Although the Mississippi Gaming Commission
generally does not require the individual holders of obligations such as
notes to be investigated and found suitable, the Mississippi Gaming
Commission retains the discretion to do so for any reason, including, but
not limited to, a default or where the holder of the debt instrument
exercises a material influence over the gaming operations of the entity in
question. Any holder of debt securities required to apply for a finding of
suitability must pay all investigative fees and costs of the Mississippi
Gaming Commission in connection with such an investigation.
Required Records
The Company must maintain a current stock ledger in Mississippi that the
Mississippi Gaming 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 Gaming 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 Gaming Commission. The
Mississippi Gaming Commission has the power to impose additional restrictions on
the holders of the Company's securities at any time.
7
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 Gaming 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 Gaming 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 Gaming 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 Gaming 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 Gaming 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 Gaming Commission. The Mississippi Gaming
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 Gaming Commission were to decide that a Gaming
Subsidiary had violated a gaming law or regulation, the Mississippi Gaming
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 Gaming 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 Gaming 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 issues raised by the
Mississippi Gaming Commission regarding the operation of the Jubilation Casino
did not adversely affect the license to operate the Bayou Caddy's Jubilee
Casino since the Bayou Caddy's Jubilee Casino was operating in compliance with
applicable regulations, including regulations relating to issues raised by
the Mississippi Gaming 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 the renewal of its casino license. In
connection with the sale of the Bayou Caddy's Jubilee Casino (see Item 7),
the gaming license was surrendered to the Mississippi Gaming Commission. To
comply with the Mississippi Gaming Commission requirements regarding the
Company's 25% partnership interest in Greenville Casino Partners, L.P., 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.
8
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 have been 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.
New York
The Federal Indian Gaming Law (as it relates to the Company's proposed
operation in New York State) provides 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 potential operations in New York State, the required documentation has
been filed with the National Indian Gaming Commission.
Employees
As of December 31, 1998, the Company employed approximately 9 full-time
employees, including those Company's executive officers not presently
directly compensated (see "Item 11-Executive Compensation Policy").
9
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 October 1, 2004.
Other Properties
Approximate
Location Principle Use Area Owned/Leased Expires
-------------- ------------------ -------- ------------- ----------
Hancock County Sign location, 3 acres Leased 4/30/03
Waveland, MS warehousing and with option
parking to purchase
Washington County Accounting offices 10,000 Leased 11/30/99
Greenville, MS and warehouse square feet with option
to extend
four years
10
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.
The Company, through its wholly-owned subsidiary Alpha Monticello is party
to a General Memorandum of Understanding (the "Memorandum") with Catskill
Development, LLC ("Catskill") (the "Parties") dated December 1, 1995, which,
among other things, provides for the establishment of Mohawk Management, LLC
("Mohawk"), a New York limited liability company for the purpose of entering
into an agreement to manage a proposed casino on land to be owned by the St.
Regis Mohawk Indian Tribe (the "Tribe"). The Memorandum also sets forth the
general terms for the funding and management obligations of Catskill and Alpha
Monticello, respectively, with regard to Mohawk. In January 1996, Mohawk was
formed with each of Catskill and Alpha Monticello owning a 50% membership
interest . On July 31, 1996, Mohawk entered into a Gaming Facility Management
Agreement with the Tribe (the "Management Contract") for the management of a
casino to be built on the current site of Monticello Raceway in Monticello, New
York (the "Monticello Casino"). Among other things, the Management Contract
provides Mohawk with the exclusive right to manage the Monticello Casino for
seven (7) years from its opening and to receive certain management fees for
the provision of such service. In accordance with Federal law, this agreement
is subject to final approval by the National Indian Gaming Commission. By
its terms, the Memorandum between Catskill and Alpha Monticello terminated
on December 31, 1998, since all of the governmental approvals necessary for the
construction and operation of the Monticello Casino were not obtained by
Mohawk. The Management Contract between Mohawk and the Tribe contains no such
provision. Additionally, the Memorandum is silent as to the effect of such
expiration to the continued existence of Mohawk, the Parties respective 50%
ownership therein and the Management Contract. As of the date hereof, all such
approvals have not been obtained, on December 28, 1998, Alpha Monticello
filed for arbitration as prescribed by the Memorandum to resolve any disputes
by the Parties. The Company is seeking a determination from the arbitrator
that the termination of the Memorandum merely means that the funding
obligations of the Parties have expired and that Mohawk remains a viable
entity with both Alpha Monticello and Catskill as 50% owners. On or about
February 8, 1999, Catskill submitted its response to Alpha Monticello's Demand
for Arbitration. Thereafter, the Parties' counsels informed the American
Arbitration Association (the "AAA") that the Parties were engaged in settlement
discussions, and the AAA agreed to stay further proceedings in the arbitration
until April 22, 1999.
The Company is involved in a dispute with the Buyer regarding certain
claims and the assumption of liabilities pursuant to the terms of the Asset
Purchase Agreement dated December 17, 1997. The Company claims the Buyer is
liable for certain liabilities relating to employees' vacation pay, health
insurance benefits and certain accounts payable. The Buyer's claims against
the Company are for the Company's alleged breach of warranties with respect
to the condition of the assets purchased, alleged failure to continue
operating the casino in the normal course of business through the date of
sale and alleged failure to pay certain accounts payable. Management is
pursuing vigorously both recovery of its claims and its contest of the
Buyer's claims. Although a ruling from an arbitrator is not expected for
another three to five months, the Company and its counsel believe that, based on
information presently available, the arbitrator will find the aggregate
claims of the Company exceed the aggregate claims of the Buyer, and that the
arbitrator will enter an award in favor of the Company.
11
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
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", respectively and on the Boston Stock Exchange
under the symbols "ALH" and "ALHW", respectively.
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
1999 Quarters: (through March 24,1999)
First. . . . . . . . . . . . . $2.75 $1.19 $.0625 $.0625
1998 Quarters:
Fourth . . . . . . . . . . . . $1.56 $ .50 $.0625 $.0625
Third. . . . . . . . . . . . . 2.06 .50 .125 .0625
Second . . . . . . . . . . . . 2.50 1.50 .1875 .0625
First. . . . . . . . . . . . . 3.00 1.63 .375 .0625
1997 Quarters:
Fourth . . . . . . . . . . . . $4.25 2.00 .599 .547
Third. . . . . . . . . . . . . 4.00 2.94 .691 .599
Second . . . . . . . . . . . . 4.81 2.37 .692 .616
First. . . . . . . . . . . . . 3.30 1.69 .563 .474
As of March 25, 1999, 1,678,288 shares of Common Stock and 956,000 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 t0
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 loans pursuant to the terms 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 of the Bayou Caddy's Jubilee Casino and the
Greenville Hotel, the Pre-Closing Finanicng was assumed by Greenville Casino
Partners, L.P., effectively relieving the Company from such prohibition.
However, there can be no assurance that the Company will declare or pay any
dividends of the shares of its capital stock or will not obtain financing
under terms that could prohibit the declaration of payment of any dividends on
its capital stock. There can be no assurance that the Company will have any
surplus (as defined in the GCL) or that the Company will achieve any net profits
and 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.
13
The Company's cumulative preferred stock, series B, has voting rights of
eight votes per preferred share, is convertible is 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 shares of Common Stock. On December 17, 1997,
the Company declared a 1996 dividend of $1,391,000 with respect to the
outstanding shares of the series B preferred stock, which was payable in 777
shares of the Company's Common Stock, which were issued in April 1998. On
May 12, 1998, the Company declared a 1997 dividend of $2,861,000 with respect
to the outstanding shares of the series B preferred stock, which was payable
in approximately 1,480,000 shares of Common Stock, which were issued in
January 1999. As of December 31, 1998, dividends in arrears on the outstanding
series B preferred stock amounted to approximately 2,065,000 shares.
On June 30, 1998, the Company issued 135 shares of cumulative preferred
stock, series C, in settlement of $9,729,000 of net obligations. The series C
preferred stock has voting rights of twenty-four votes per preferred share, is
convertible into twenty-four shares of Common Stock and carries a dividend of
$5.65 per share. In addition, the terms of the series C preferred stock
includes a provision granting the Company the right to call such stock based
upon the occurrence of certain capital events which realize a profit in
excess of $5,000,000. In the event the dividend on the series C preferred
stock is not paid by the end of the Company's fiscal year (December 31), the
dividend is payable in common stock. As of December 31, 1998, dividends in
arrears on the outstanding series C preferred stock amounted to approximately
255,000 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
such dividend in cash or in shares of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Years ended December 31, 1998, 1997, 1996, 1995 and 1994
1998 1997 1996 1995 1994
Revenues $ 5,424 $ 31,633 $ 44,520 $ 27,639 $ 43,265
Loss from
continuing operations $(13,399) $ (1,774) $ (26,309) $ (19,344) $(11,026)
Loss per common
share from
continuing
operations,
basic and diluted $ (1.09) $ (.23) $ (1.98) $ (1.82) $ (1.08)
December 31,
1998 1997 1996 1995 1994
Total assets $ 10,196 $ 29,993 $ 43,954 $ 66,774 $ 45,490
Long-term debt $ 2,108 $ 8,088 $ 22,394 $ 29,632 $ 20,100
Redeemable preferred
stock $ -- $ -- $ --- $ --- $ 565
Stockholders' equity $ 5,163 $ 8,833 $ 1,506 $ 1,904 $ 13,143
See Management's Discussion and Analysis of Financial Condition and Results of
Operations and Consolidated Financial Statements.
14
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, through its subsidiary, Gulf Coast, acquired
certain of the assets of B.C. of Mississippi, Inc. ("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 the Company's series B 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 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,
providing for the sale of the Bayou Caddy's Jubilee Casino and Greenville
Hotel (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 note,
15
under the terms of the Sale Agreement, Buyer assumed such promissory note upon
closing of the sale of the casino assets.
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 improvement and related
permits, licenses, leases and other agreements to Buyer. 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
approximately $2 million of certain accounts payable, accrued expenses, payroll
liabilities and a capital lease obligation, a 25% partnership interest in the
Buyer and the assumption of the Company's obligation to repay the net
proceeds from 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, 1998, 1997 and 1996 (dollar
amounts in thousands):
1998(1) 1997 1996
Revenues:
Casino . . . . . . . . . . . . $ 4,923 $ 31,048 $ 36,340
Food and beverage, retail
and other. . . . . . . . . . . 140 570 947
-------- -------- --------
Total revenues . . . . . . . 5,063 31,618 37,287
-------- -------- --------
Operating expenses:
Casino . . . . . . . . . . . . 1,901 12,029 12,619
Food and beverage, retail and
other. . . . . . . . . . . . 91 569 1,282
Selling, general and
administrative . . . . . . . 3,211 16,765 17,125
-------- -------- ---------
Total operating expenses . . 5,203 29,363 31,026
-------- -------- ---------
Income (loss) from operations . . . (140) 2,255 6,261
-------- -------- ---------
Other expenses:
Loss from equity investee. . . 8,500 -- --
Depreciation and
amortization . . . . . . . . 890 5,076 4,874
Interest . . . . . . . . . . . 797 2,009 2,031
-------- --------- --------
Total other expenses . . . . 10,187 7,085 6,905
-------- --------- --------
Loss before intercompany charges,
deferred income taxes and gain
on sale of assets . . . . . . . $(10,327) $ (4,830) $ (644)
========= ========= ========
Years Ended December 31, 1998 and 1997:
The 1998 activity for casino, food and beverage revenues and expenses
represents Alpha Gulf's operation of its Bayou Caddy's Jubilee Casino through
the date of its sale on March 2, 1998. For the years ended December 31, 1997
and 1996, Alpha Gulf operated its Bayou Caddy's Jubilee Casino for that
entire period. Accordingly, the 1998 revenues and operating expenses are
less than 1997 and 1996.
Selling, general and administrative expenses for the year ended December
31, 1998, costs of payroll and related expenses of approximately $1,243,000
marketing and advertising of approximately $930,000 occupancy costs of
approximately $352,000 and other operating expenses of $686,000.
<F1>
Relates only to the period through March 2, 1998, when the Bayou Caddy's
Jubilee Casino was sold.
16
Included in the consideration received in exchange for the sale of the
Bayou Caddy's Jubilee Casino, Alpha Gulf received a 25% partnership interest
in 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 the currently operating gaming devices is 25 table
games and 800 slots, which represents 54.4% of the devices in the Greenville
market. The two hotels offer 56 rooms and 41 rooms and suites, respectively.
Since the adquisition of substantially all of the assets of Alpha Gulf and
Greenville Hotel, Management has been advised that the Buyer has incurred
significant operating losses resulting in a substantial working capital
deficiency and partners' deficiency of approximately $1.4 million through
December 31, 1998. The Buyer decided to temporarily close the Las Vegas in
October 1998 in an effort to decrease expenses and improve the operating
performance of the Bayou Caddy's Jubilee Casino. Nonetheless, Management has
been advised that the Buyer continues to incur operating losses and
anticipates incurring operating losses in 1999. Currently,
Management has been advised that the Buyer plans to reopen the Las
Vegas during 1999 if sufficient capital can be raised to allow
both of its boats to be operated contiguously under on gaming license.
The Buyer believes that the contiguous operation of the two casinos will yield
increased market share and operating cash flows. Additionally, Management has
been advised that the Buyer is pursuing other capital sources and modifying
its debt service requirements in such a manager to provide additional
working capital. However, there can be no assurance that Buyer will be able
to attract the necessary capital, modify its debt service requirements or
otherwise fund the cost of mooring and operating these boats in a contiguous
manner. Futhermore, Buyer's independent public accountants' have issued
their report, dated March 26, 1999, with an explanatory paragraph relating
to the Buyer's ability to continue as a going concern. In light of these
developments and in accordance with its policy on impairment of long-lived
assets, the Company has adjusted the carrying value of its remaining
25% partnership interest in Buyer to zero during the fourth quarter of 1998.
Interest expense for the year ended December 31, 1998, was primarily
attributable to the Pre-Closing Financing, amounts due to Bryanston and a
capital lease. The Pre-Closing Financing and the capital lease were
extinguished in March 1998 with the proceeds from the March 2, 1998 sale of
substantially all of the assets of Alpha Gulf and Greenville Hotel. A
portion of the amounts due to Bryanston were extinguished on June 30, 1998,
pursuant to a restructuring and refinancing of the Company's debts with
Bryanston.
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. Prior to December 31, 1997, the entry of the third casino vessel in
the Greenville market to date had not increased the market volume to absorb
the additional player positions. The market growth during 1997 was 5.2 %
over 1996. Gulf Coast continued 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 were reflective of Gulf
Coast's player development program, which focused on player parties
showcasing the food and entertainment facilities of the Bayou Caddy's Jubilee
Casino. The player parties were by invitation only and were 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 did 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 was due to the decreased
casino activity discussed above. The operating costs associated with these
services were allocated to the casino costs, which in turn reduced the food
and beverage costs.
17
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
with 1996 with a 1% increase of $63,000.
The reduction of $229,000 in occupancy costs in 1997 (compared to 1996)
was the result of management's energy reduction and efficiency measures
implemented in 1997 and reduced insurance costs.
Interest expense primarily related to the first mortgage on the gaming
vessel, equipment financing and various capitalized leases and was 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.
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 were terminated on October 30, 1995. After its relocation to
Lakeshore, the Cotton Club, renamed the Jubilation Casino, reopened for
business on December 21, 1995 and has been closed since July 1996. In August
1998, the Company relocated the casino vessel to Mobile, Alabama, where it is
being moored at a terminal. The Company does not currently have plans to
re-open or operate the Jubilation Casino. See Future Operations for a
discussion of management's proposal involving the Jubilation vessel. The
following table sets forth the statement of operations for the Jubilation
Casino before intercompany charges, for the years ended December 31, 1998,
1997 and 1996 (amounts in thousands):
1998 1997 1996
Revenues:
Casino . . . . . $ -- $ -- $ 6,913
Food and beverage, retail
and other . . . . . . . 64 -- 313
-------- --------- --------
Total revenues . . 64 -- 7,226
Operating expenses:
Casino . . . . . . -- -- 3,564
Food and beverage, retail
and other . . . . . . . -- -- 376
Selling, general and
administrative . . . . . 744 993 7,419
-------- --------- --------
Total operating
expenses . . . . . . 744 993 11,359
-------- --------- --------
(Loss) from operations. . . (680) (993) (4,133)
-------- --------- --------
Other expenses:
Depreciation and
amortization. . . . -- -- 1,166
Interest . . . . . . . 108 870 977
Other non-operating. . -- -- --
Write-off of property
and equipment. . . . 327 -- 14,507
-------- --------- --------
Total other . . . . . . 435 870 16,650
-------- --------- --------
(Loss) before intercompany
charges. . . . . . . $ (1,115) $ (1,863) $(20,783)
========= ========= =========
Years Ended December 31, 1998 and 1997:
The continuing costs incurred during the years ended December 31, 1998
and 1997 for administration, insurance, compensation, settlements with former
employees and vessel mooring and relocation were $744,000 and $993,000,
respectively. Interest expense, primarily related to the debt on the idle
gaming vessel and equipment, amounted to $108,000 and $870,000 for the years
ended December 31, 1998 and 1997. In connection with the Company's annual
review of the carrying value of its long-lived assets and, in accordance with
its policy on impaired long-lived assets, the Company recorded a write-down
of certain of the Jubilation Lakeshore's impaired property and equipment of
$327,000 in 1998.
18
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 had to construct
additional amenities, which would have required a substantial investment of
funds. Since revenues had not improved 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 Lakeshore 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 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 Casino in light of its previously
announced plan to close the Jubilation Casino 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.
Future Operations
General:
Proposals or prospects for new casinos, other gaming activities or
other opportunities may be presented to the Company , or the Company may
otherwise become aware of such opportunities (any such new casino, other
gaming activities or other opportunities being hereinafter sometimes referred
to as "New Opportunities"). The Company will continue to investigate and
evaluate New Opportunities and, subject to available resources, may choose to
pursue and develop one or more New 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 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 Opportunity or that any New Opportunity that the Company
may elect to pursue or develop will actually come to fruition or (even if
brought to fruition) will be profitable.
Except to the extent the Company may pursue any New Opportunity, as a
result of the sale of Bayou Caddy's Jubilee Casino, 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 any New 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.
19
Casino Development:
The Company, through its wholly owned subsidiary, Alpha Monticello, is a
party to a Memorandum with Catskill dated December 1, 1995, which, among
other things, provides for the establishment of Mohawk, a New York limited
liability company, for the purpose of entering into an agreement to manage a
proposed casino on land to be owned by the Tribe. The Memorandum also sets
forth the general terms of the funding and management obligations of Catskill
and Alpha Monticello, respectively with regard to Mohawk. In January 1996,
Mohawk was formed with each of Catskill and Alpha Monticello owning a 50%
membership interest in Mohawk. On July 31, 1996, Mohawk entered into a
Gaming Facility Management agreement with the Tribe (the "Management
Contract") for the management of a casino to be built on the current site of
the Monticello Raceway in Monticello, New York (the "Monticello Casino").
Among other things, the Management Contract provides Mohawk with the exclusive
right to manage the Monticello Casino for seven (7) years from its opening
and to received certain management fees for the provision of such service.
In accordance with Federal Law, this agreement is subject to final approval
by the National Indian Gaming Commission. By its terms, the Memorandum
between Catskill and Alpha Monticello terminated on December 31, 1998,
since all of the governmental approvals necessary for the construction and
operation of the Monticello Casino were not obtained by Mohawk. The Management
Contract between Mohawk and the Tribe contain no such provision. Additionally,
the Memorandum is silent as to the effect of such expiration to the continued
existence of Mohawk, the Parties respective 50% ownership therein and the
Management Contract. As of the date hereof all such approvals have not been
obtained. On December 28, 1998, Alpha Monticello filed for arbitration as
prescribed by the Memorandum to resolve any disputes by the Parties. The
Company is seeking a declaration from the arbitrator that the termination of
the Memorandum merely means that the funding obligations of the Parties have
expired and that Mohawk remains a viable entity with both Alpha Monticello
and Catskill as 50% owners. On or about February 8, 1999, Catskill submitted
its response to Alpha MOnticello's Demand for Arbitration. Thereafter, the
Parties' counsels informed the American Arbitration Associtaion (the "AAA")
that the Parties were engaged in settlement discussions, and the AAA agreed
to stay further proceedigns in the arbitration until April 22, 1999.
For the years ended December 31, 1998, 1997 and 1996, the Company incurred
casino development costs of $204,000, $350,000 and $1,241,000,respectively,
which relates to a general overhead allocation. As of December 31, 1998 and
1997, the Company has capitalized $1,366,000 and $1,291,000, respectively,
towards the design, architecture and other costs of development plans for the
casino.
Manufactured Housing:
In December 1998, the Company, through its wholly-owned subsidiary,
Alpha Peach Tree, entered into letters of intent to acquire all of the issued
and outstanding shares of Sunstate Manufactured Homes of Georgia, Inc.
("Sunstate") dba Peach State Homes and its affiliated company, South Georgia
Frames Unlimited ("South Georgia"), two closely held corporations engaged in
the manufacture and sale of single family homes. On March 29, 1999, the
Company executed the definitive agreements governing the acquisition.
Sunstate and South Georgia currently own and operate three manufacturing
facilities in Adel, Georgia. Additionally, Sunstate has recently developed
four retail centers in which they hold a majority interest. The retail centers
feature the Peach State and Navigator lines currently produced by Sunstate.
The purchase price will be approximately $10,000,000. The final price
will be determined by the ultimate verification of the adjusted cash flow of
the entities for the twelve month period ending September 26, 1998, expected
to be approximately $2,000,000. The purchase price will be paid with a
combination of cash and Alpha stock. Upon closing, the Company will expand
its Board to add two new board members. The selling shareholders of
Sunstate, certain of whom will remain in their current management capacity,
will nominate the additional Board members.
Although, on March 29, 1999, the Company (through its subsidiary Peach
Tree) entered into definitive agreements with respect to the acquisitions of
Sunstate and South Georgia, the consummation of such acquisitions remain subject
to various conditions, including (a) the satisfactory completion of the
Company's due diligence (as approved by the Company's Board of Directors) and
(b) the obtainment of acceptable financing by the Company. Accordingly, there
can be no assurance that such acquisitions will be consummated.
The Company plans to seek other opportunities in the industry, including
additional manufacturing and retail operation and residential parks.
20
Krawdaddy's:
In December 1998, the Company entered into a memorandum of
understanding with Equity Services, Inc. ("EQS") to exchange the Company's
dormant Jubilation casino vessel, berthed in Mobile, Alabama, for the
ownership of "Krawdaddy's", an operating truck stop with a restaurant and
video poker room in Port Allen, Louisiana. The proposed transaction would
involve an exchange of the casino vessel and its equipment for all the assets
of the Krawdaddy's Operation, which includes the real estate, fixtures,
licenses and permits and a 49% interest in the video poker machines.
In connection with the transactions, the Company will either assume
$3,300,000 of existing debt or, if such debt cannot be assumed, will pay
$3,000,000 to EQS to enable EQS to discharge such debt. In addition, the
Company will issue 100,000 shares of common stock to EQS upon the closing.
The closing of this transaction is subject to certain conditions, which include
the Company's completion of due diligence, the execution of definitive
agreements and the final approval of the Company's
Board of Directors.
Hotel Management -- Alpha Hotel
The following table sets forth the statement of income of Alpha Hotel
for the year ended December 31, 1996 (dollar amounts in thousands):
1996
Management fees . . . . . . . . $ 1,992
---------
Operating expenses:
Direct payroll and related
expenses. . . . . . . . . 1,285
Selling, general and
administrative. . . . . . 62
---------
1,347
---------
Income from management fees before
intercompany charges. . . . . . $ 645
=========
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.
Other Operations
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. Supervisory management fees for the year ended December 31, 1998
amounted to $83,000.
21
Liquidity and Capital Resources
For the year ended December 31, 1998, the Company had net cash used in
operating activities of $5,920,000. The uses were the result of net loss of
$13,399,000 less non-cash items of $10,313,000 and a net decrease in working
capital of $2,834,000. The non-cash items were $909,000 of depreciation and
amortization, a $250,000 provision for doubtful note, the Company's losses
of an equity investee of $8,500,000 a gain on sale of assets of $6,048,000,
a write-off of property and equipment of $327,000 and $6,375,000 of deferred
taxes. The decrease in working capital consisted primarily of a net decrease
in accounts receivable, prepaid insurance, inventories and other current
assets of $388,000, a decrease in accounts payable and other accrued expenses of
$2,824,000 and a decrease in payroll and related liabilities of $398,000.
Cash provided by investing activities of $11,765,000 consisted of proceeds
from the sale of assets of $11,388,000 (net of related costs) cash from the
hotel construction escrow of $1,700,000 hotel construction costs of $1,086,000
proceeds from deposits and other assets of $13,000 and amounts advanced under
a promissory note of $250,000.
Cash used in financing activities of $4,219,000 was attributable to
$3,294,000 in net payments under the $20,000,000 non-revolving promissory note
with Bryanston, repayments of the mortgage payable to Bryanston of $892,000 and
payments of $33,000 on other long-term debt.
On June 30, 1998, the Company restructured its obligations to Bryanston
by extinguishing its notes payable of $7,800,000, $1,399,000 and $432,000 plus
accrued interest on the notes aggregating $3,101,000, in exchange for the
issuance of preferred stock and a $3,000,000 mortgage note on the Company's
idle gaming vessel located in Mobile, Alabama.
The closing of both the acquisitions of Peach Tree and Krawdaddy's are
conditional based upon obtaining the financing of all or some of the cash
portions of the purchase prices. There can be no assurances such financing
will be obtained by the Company.
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.
Year 2000 Compliance
The Company does not anticipate making significant expenditures in
connection with Year 2000 and believes the Year 2000 will not have a materially
adverse effect on the Company's operations.
22
ITEM 8. FINANCIAL STATEMENTS
See Index to Financial Statements attached hereto.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
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. . . . . . 67 Chairman of the Board and Chief
Executive Officer
Thomas W. Aro . . . . . . . . 56 Vice President, Secretary and Director
Brett G. Tollman. . . . . . . 37 Vice President and Director
Craig Kendziera . . . . . . . 44 Treasurer
Robert Steenhuisen. . . . . . 41 Chief Accountant and Assistant Secretary
James A. Cutler . . . . . . . 47 Director
Matthew B. Walker . . . . . . 48 Director
Herbert F. Kozlov. . . . . . 46 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 also 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 America 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 Item 13
"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.
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.
Mr. Tollman currently serves as President of Tollman-Hundley Hotel Group. He
also serves as Director and President of Bryanston. Mr. Tollman is the son
of Stanley S. Tollman, the Chairman of the Board and Chief Executive Officer
of the Company. (See Item 13 -"Certain Proceedings Involving Management".)
Craig Kendziera has served as Treasurer of the Company since his
appointment on May 12, 1998. He also serves as Corporate Controller of the
Tollman-Hundley Hotel Group and a Director, Vice President, Secretary and
Corporate Controller of Bryanston.
Robert Steenhuisen has served as Chief Accountant of the Company since
his appointment on May 12, 1998. He also serves as the Chief Accountant for
the Tollman-Hundley Hotel Group and a Director, Vice President, Treasurer and
Chief Accountant of Bryanston.
James A. Cutler served as Treasurer and Chief Financial Officer of
the Company since its formation until his resignation on March 6, 1998.
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, 1996.
He served as Senior Vice President and Treasurer of the Tollman-Hundley Hotel
Group until June 1997. Mr. Cutler has agreed to continue to serve as a
Director of the Company. (See Item 13 - " Certain Proceedings Involving
Management".)
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.
25
Herbert F. Kozlov has served as a Director of the Company since his
appointment upon the resignation of Mr.Sanford Freedman in March of 1998.
Mr. Kozlov is a partner is the law firm of Parker, Duryee Rosoff & Haft where he
has been a partner since 1989. Mr. Kozlov is also a director of HMG Worldwide
Corporation and Worldwide Entertainment & Corp. Parker Duryee Rosoff & Haft
provides legal services to the Company and receives fees for such services from
the Company.
Each Director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until his/her successor is duly
elected by the Stockholders. Vacancies and newly created directorships
resulting from any increase in the number of authorized directors may be
filled by a majority vote of Directors then in office. Officers are
elected by and serve at the pleasure of the Board of Directors. Directors
are reimbursed for expenses incurred in connection with the performance of
their duties.
CERTAIN PROCEEDINGS INVOLVING MANAGEMENT
Messrs. Stanley S. Tollman and Brett G. Tollman 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 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 was
approved by the Bankruptcy Court, which approval was appealed by the lender
to the U.S. District Court. The U.S. District Court affirmed 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 and Brett G. Tollman 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 and Brett G. Tollman 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 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 1998,
Orlando and Resorts agreed to a settlement with its secured lender resulting
in the sale of the hotel properties and dismissal of the proceeding.
26
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, 1998, December 31, 1997 and December 31, 1996 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.
Restricted
Name and Principal Stock Options All Other
Position Year Year Salary(1) Awards /SARS Compensation
Stanley S. Tollman . . . 1998 $250,000 -- 250,000 --
Chairman of the
Board of Directors, 1997 $250,000 -- -- --
Chief Executive
Officer and President 1996 $250,000 -- -- --
Thomas W. Aro . . . . . . 1998 $130,000 -- 145,000 --
Vice President and
Secretary. . . . . 1997 -- -- -- --
1996 -- -- -- --
<F1>
No portions of the cash salaries to which Stanley S. Tollman was entitled
during the periods indicated have been paid; the expense and liability have
been accrued without interest.
Option/SAR Grants in Last Fiscal Year. During the last completed fiscal
year, the Company granted options to certain executive officers to purchase
550,000 shares of the Company's common stock including 250,000 shares to
Stanley S. Tollman and 145,000 shares to Thomas W. Aro.
Compensation of Directors. On May 12, 1998, subject to shareholder
approval, the Board approved annual compensation whereby each of the three
outside directors will receive $6,000 per annum plus the option to purchase
25,000 shares, and an additional 15,000 shares for each committee served
upon, of the Company's common stock at the then current market price.
Accordingly in 1998, and subject to shareholder approval, the Company granted
options to purchase an aggregate amount of 270,000 shares of its common stock
at an exercise price of $1.063, which can be exercised any time up to 2008.
The amount granted represents options to purchase an aggregate amount of
135,000 shares per year for each of the 1998 and 1999 years of service. As
compensation to its employee directors, in December 1998, the Company granted
an aggregate amount of 85,000 options to purchase shares of its common stock.
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, 1999. 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 Employment 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, 1998, accrued consulting fees to Mr.
27
Tollman amounted to $1,276,167.
Consulting Agreement. The Company and Mr. Sanford Freedman, a former
director and officer of the Company, entered into a Consulting Agreement
dated March 1, 1997, whereby the former director agreed to render consulting
services to the Company with respect to development activities relating to the
Company's casino 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 $102,117 and $195,000 of consulting fees
during the year ended December 31, 1998 and 1997, respectively.
BOARD COMPENSATION REPORT
Executive Compensation Policy
Cash Compensation. Certain of the Company's executive officers 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
those executive officers not presently directly compensated and the overall
employee compensation plan. 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 those
Company's executive officers not presently directly compensated without
seeking reimbursement therefore 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. In
December 1998, the Company granted to Mr. Tollman options to purchase 250,000
shares of the Company's common stock.
Corporate Performance Graph. The following graph shows a comparison of
cumulative total stockholders' returns from December 31, 1993 through
December 31, 1998 for the Company, the Russell 2000 Index ("Russell") and the
Dow Jones Entertainment and Leisure -- Casino Index ("DJ Casino").
The graph assumes the investment of $100 in shares of Common Stock or
Index on December 31, 1993 and that all dividends were reinvested. No
dividends have been declared or paid on the Common Stock.
NASDAQ ceased listing the Company's warrants in December 1998, since there
ceased being at least two market makers for such securities. The warrants
continue to trade in the over-the-counter market in the "pink sheets".
28
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, 1998,
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. S. Tollman, Cutler 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 be issued pursuant to the exercise of options
granted under the 1993 Stock Option Plan; (ii) permit the grant of a stock
option under the 1993 Stock Option Plan with an exercise price less than 100%
of the fair market value of the shares at the time such option is granted;
(iii) change the eligibility requirements for participation in the 1993 Stock
Option Plan; (iv) extend the term of any option or the period during which
any option may be granted under the 1993 Stock Option Plan; or (v) decrease
an option exercise price (although an option may be canceled and new option
granted at a lower exercise price).
Shares Subject to the Plan
The 1993 Stock Option Plan provides that options may be granted with
respect to a total of 900,000 shares of Common Stock, subject to adjustment
upon certain changes in capitalization without receipt of consideration by the
Company. In addition, if the Company is involved in a merger, consolidation,
dissolution or liquidation, the options granted under the 1993 Stock Option
Plan will be adjusted or, under certain conditions, will terminate, subject
to the right of each option holder to exercise this option or a comparable
option substituted at the discretion of the Company prior to such event. If
any option expires or terminates for any reason, without having been
exercised in full, the unpurchased shares subject to such option will be
available again for the purposes of the 1993 Stock Option Plan. All of the
794,000 shares of Common Stock underlying options granted pursuant to the
1993 Stock Option Plan have been registered in this Registration
29
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 under such plan.
Option Price
The exercise price of each option will be determined by the Stock Option
Committee or the Board of Directors, but may not be less than 100% of the
fair market value of the shares of Common Stock covered by the option on the
date the option is granted. If an incentive stock option is to be granted to
an employee who owns over 10% of the total combined voting power of all
classes of the Company's stock, then the exercise price may not be less than
110% of the fair market value of the Common Stock covered by the option on
the date the option is granted.
Terms of Options
The Stock Option Committee, or the Board of Directors until such
committee is constituted, shall, in its discretion, fix the term of each
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 385,000 total options granted, including 305,000 to executive
officers in the fiscal year ended December 31, 1998. A total of 794,000
options to purchase shares of Common Stock have been granted to employees to
date, and are currently outstanding.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OWNERSHIP OF SECURITIES
As of March 29, 1999, there were issued and outstanding 16,788,228 shares
of Common Stock, 821,496 shares of Preferred Stock, Series B, and 135,162
shares of Preferred Stock, Series C.
Each share of Common Stock, Series B Preferred Stock and Series C
Preferred Stock entitles the holder thereof to, respectively, one, eight and
twenty-four votes.
The following table sets forth certain information as of March 29, 1999,
with respect to each beneficial owner of five (5%) percent or more of the
outstanding shares of Common Stock or any series or class of Preferred Stock,
each officer and director of the Company and all officers and directors as a
group. Unless otherwise indicated, the address of each such person or entity
is c/o Alpha Hospitality Corporation, 12 East 49th Street, New York, New York
10017.
Title of Class Name and Address No. of Percent Percent
Shares(1) of Class of Vote(2)
Common Stock Stanley Tollman (3) (4) 250,000 .90 0.0
$.01 par value Beatrice Tollman(4)(9) 1,815,890 6.50 6.8
Thomas W. Aro(6) 245,000 .90 .2
Brett G. Tollman(7) 1,759,875 6.30 5.9
James A. Cutler(8) 86,320 .30 .2
Matthew B. Walker(5) 404,237 1.40 1.5
Herbert F. Kozlov(11) 0 0.00 0.0
Craig Kendziera(12) 20,300 .07 0.0
Robert Steenhuisen(13) 20,000 .07 0.0
Bryanston Group(9) 12,223,855 43.60 9.1
1886 Route 52
Hopewell Junction, N.Y.
All Officers and Directors
as a group (8 persons)
(3, 5-8, 11-13) 2,785,732 9.94 7.8
Preferred Stock,
Series B Bryanston Group, Inc. 777,238 94.60 23.3
$29.00 liquidation BP Group, Ltd.(10) 44,258 5.4 1.3
value 5111 Islesworth Country
Club Dr.
Windemere, Fl 34786
Preferred Stock,
Series C Bryanston Group, Inc. 135,162 100.0 12.2
$72.00 liquidation
value
<F1>
(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 holder 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.
<F2>
(2) Represents the vote, as a percentage of the total votes that may be cast
by the hodlers of all outstanding shares.
<F3>
(3) Includes 250,000 shares of common stock issuable upon the exercise of
options granted to Stanley S. Tollman, the Chairman of the Board, Chief
Executive Officer and President of the Company.
31
<F4>
(4) Stanley S. Tollman is the spouse of Beatrice Tollman. Stanley S. Tollman
disclaims beneficial ownership of the shares beneficially owned by Beatrice
Tollman.
<F5>
(5) Does not includes 80,000 shares, subject to shareholder approval, of
Common Stock issuable upon the exercise of options granted to Mr. Walker.
<F6>
(6) Includes 205,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Aro, all of which options are currently exercisable.
<F7>
(7) Includes 200,000 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.
<F8>
(8) Does not include 110,000 shares, subject to shareholder approval, of
Common Stock issuable upon the exercise of options granted to Mr. Cutler.
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.
<F9>
(9) Includes (i) 6,217,904 shares of Common Stock issuable upon conversion
of 777,238 shares of Preferred Stock, series B, owned by Bryanston Group,
Inc. ("Bryanston"); (ii) 3,243,888 shares of Common Stock issuable upon
conversion of 135,162 shares of Preferred Stock, series C, owned by
Bryanston; and (iii) 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 May 17, 1998, the Company
declared a dividend of approximately 1,400,000 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 1997. Such shares
were issued on January 5, 1999, and are included in the preceding table. As
of January 30, 1999, the Company became obligated to issue to Bryanston
approximately 1,950,000 and 115,000 additional shares of Common Stock in lieu
of the cash dividend payable with respect to Bryanston's shares of Preferred
Stock, Series B and C, respectively, for the 1998 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.
<F10>
(10) On May 17, 1998, the Company declared a dividend of approximately
86,000 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
1997. Such shares were issued on January 5, 1998, and are included in the
preceding table. As of January 30, 1999, the Company became obligated to
issue to BP approximately 115,000 additional shares of Common Stock in lieu of
the cash dividend payable with respect to BP's shares of Preferred Stock, Series
B for the 1998 calendar year. None of such shares of Common Stock is included in
the table above as they have not yet been issued. Patricia Cohen is the sole
stockholder of BP. This table does not include 100,352 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 354,064 shares of Common
Stock issuable upon conversion of 44,258 shares of Preferred Stock, series B,
owned by BP Group, LTD ("BP"). All of such shares of Preferred Stock are
currently convertible into shares of Common Stock.
<F11>
(11) Does not includes 80,000 shares, subject to shareholder approval, of
Common Shares issuable upon the exercise of options granted to Mr. Kozlov.
<F12>
(12) Includes 20,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Kendziera, all of which are currently exercisable.
<F13>
(13) Includes 20,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Steenhuisen, all of which are currently exercisable.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
cents 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 was 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
$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 was current under the Term Loan (described below). At
December 31, 1998, 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
33
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.
Pursuant to the Company's restructuring of its obligations on June 30, 1998,
all amounts due under this note were extinguished.
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 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. Pursuant to the Company's restructuring of its obligations on
June 30, 1998, all amounts due under this note wer extinguished.
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,
Series B, 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,
Series B. The Company was charged a 5% transaction fee (approximately $958,000),
which was also converted into shares of Preferred Stock, Series B. 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).
As of December 31, 1996, the Company sold 100% of the stock of Alpha Hotel
to Bryanston for consideration of $3,000,000.
In addition, on September 30, 1997, the Company issued 83,333 shares of
Preferred Stock, Series B, 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 eight votes, (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. On December 17, 1997, the Company
declared a 1996 dividend payable to Bryanston in approximately 730,000 shares
of the Company's common stock, which were issued in April 1998. On May 12,
1998, the Company declared a 1997 dividend payable to Bryanston in
approximately 1,400,000 shares of the Company's stock, which were issued on
January 5, 1999.
On June 30, 1998, the Company restructured its obligations to Bryanston
by extinguishing its notes payable of
34
$7,800,000, $1,399,000 and $432,000 plus accrued interest on the notes
aggregating $3,098,000, in exchange for the issuance of Preferred Stock,
series C, and a $3,000,000 mortgage note on the Company's idle gaming vessel
located in Mobile, Alabama. The Preferred Stock, Series C, has voting rights
of twenty-four votes per preferred share, is convertible to twenty-four
shares of Common Stock and carries a dividend of $5.65 per share. In
addition, the terms of the preferred shares include a provision allowing the
Company the option of calling the preferred shares based upon occurrence of
certain capital events which realize a profit in excess of $5,000,000.
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. Patricia 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 cents 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.
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, Series B, 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, Series B. The Company was charged a 5% transaction
fee (approximately $61,000), which was also converted into shares of Preferred
Stock, Series B. The conversion was effective June 26, 1996, and the total of
approximately $1,283,000 was converted into 44,258 shares of Preferred Stock,
Series B, 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,
Series B,issued to BP are identical to those of the shares of Preferred Stock,
Series B,issued to Bryanston in June 1996 and September 1997.
On December 17, 1997, the Company declared a 1996 dividend payable to BP
in approximately 47,000 shares, which were issued in April 1998. On May 12,
1998, the Company declared a 1997 dividend payable to BP in approximately
86,000 shares of the Company's common stock, which were issued on January 5,
1999.
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.
35
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 Auditors' 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 II Valuation and Qualifying Accounts for the Years Ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . .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
4(c) Certificate of Designation
*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.
*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
36
*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 Agreement of the Company in favor of HFS
(x) HFS Option Agreement: HFS Option Certificate
(xi) Bryanston Subordination Agreement
(xii) BP Subordination Agreement
(xiii) Bryanston Subordinated Promissory Note dated as of August
5, 1993 (Bryanston Loan)
*10(ae) Deleted
*10(af) Form of Underwriters' Warrant
***10(ag) Amended Cure Lease
***10(ah) Peoples Bank Loan Agreement
***10(ai) Non-Revolving Promissory Note with Bryanston Group, Inc.
***10(aj) $20,000,000 Non-Revolving Promissory Note dated January 5, 1996
***10(ak) Stock Purchase Agreement dated October 20, 1996
***10(al) Stock Acquisition Agreement dated January 25, 1996
***10(am) Form 8-K dated October 31, 1996
37
***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.
10(ap) Merger Agreement with South Georgia Frames, Inc.
10(aq) Merger Agreement with Sunstate Manufatured Homes of Georgia, Inc.
d/b/a Peach State Homes
*11 Statement Re: Computation of Per Share Earnings
21 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.
38
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
Alpha Florida Entertainment, Inc. Florida
Alpha Peach Tree Corporation Delaware
39
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 30, 1999
By: /s/Robert Steenhuisen
Robert Steenhuisen
Title: Chief Accounting Officer
Date: March 30, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Stanley S. Tollman Chairman of the Board and March 30, 1999
Stanley S. Tollman Chief Executive Officer
/s/ Thomas W. Aro Vice President, Secretary March 30, 1999
Thomas W. Aro and Director
/s/ Brett G. Tollman Vice President and Director March 30, 1999
Brett G. Tollman
/s/ James A. Cutler Director March 30, 1999
James A. Cutler
/s/ Matthew B. Walker Director March 30, 1999
Matthew B. Walker
/s/ Herbert F. Kozlov Director March 30, 1999
Herbert F. Kozlov
40
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ALPHA HOSPITALITY CORPORATION
New York, New York
We have audited the accompanying consolidated balance sheets of Alpha
Hospitality Corporation and Subsidiaries as of December 31, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, 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
February 17, 1999, except for
Note 3 as to which the date
is March 26, 1999
F-1
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except for per share data)
1998 1997
ASSETS
CURRENT ASSETS:
Cash, including restricted cash of
$1,619 and $500 in 1998 and 1997,
respectively. . . . . . . . . . . . . . . $ 3,837 $ 2,211
Accounts receivable, less allowance for
doubtful accounts of $635 in 1998
and 1997. . . . . . . . . . . . . . . . . 15
Note receivable, less allowance of
$250 in 1998 . . . . . . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . . . . 276
Other current assets. . . . . . . . . . . . . 179 264
Deferred tax asset. . . . . . . . . . . . . . 6,375
Net assets held for sale. . . . . . . . . . . 13,925
---------- ---------
Total current assets. . . . . . . . . . . . 4,016 23,066
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . 4,630 4,935
DEPOSITS AND OTHER ASSETS. . . . . . . . . . . . . 1,550 1,992
---------- ---------
$ 10,196 $ 29,993
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Long-term debt, current maturity. . . . . . . $ 1,000 $ 81
Notes payable . . . . . . . . . . . . . . . . 1,418
Accounts payable and accrued expenses . . . . 871 5,851
Accrued payroll and related liabilities . . . 1,774 1,570
Due to affiliate, current maturity. . . . . . 3,730
------- ----------
Total current liabilities . . . . . . . . . 3,645 12,650
------- ----------
LONG-TERM DEBT, less current maturity. . . . . . . 1,108 8,007
------- ----------
OTHER LIABILITIES. . . . . . . . . . . . . . . . . 280
------- ----------
DUE TO AFFILIATE, less current maturity. . . . . . 503
------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 25,000 shares
authorized 15,183 and 14,406 issued and
outstanding in 1998 and 1997,
respectively . . . . . . . . . . . . . . . 152 145
Preferred stock, 1,000 shares authorized:
Series B, $.01 par value, 821 issued . . . 8 8
Series C, $.01 par value, 135 issued . . . 1
Common stock payable. . . . . . . . . . . . . 2,861 1,391
Capital in excess of par value. . . . . . . . 72,371 61,259
Accumulated deficit . . . . . . . . . . . . . (70,230) (53,970)
---------- ----------
Total stockholders' equity. . . . . . . . . 5,163 8,833
---------- ----------
$ 10,196 $ 29,993
========== ==========
See accompanying notes to consolidated financial statements
F-2
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except for per share data)
1998 1997 1996
REVENUES:
Casino. . . . . . . . . . . . . . . . . . $ 4,923 $ 31,048 $ 43,252
Food and beverage, retail and other . . . 501 585 1,268
-------- -------- --------
Total revenues. . . . . . . . . . . . . 5,424 31,633 44,520
-------- -------- --------
COSTS AND EXPENSES:
Casino. . . . . . . . . . . . . . . . . . 1,901 12,029 16,184
Food and beverage, retail and other . . . 91 569 1,657
Selling, general and administrative . . . 5,097 18,398 24,973
Interest. . . . . . . . . . . . . . . . . 1,062 3,138 4,421
Depreciation and amortization . . . . . . 909 5,094 6,059
Pre-opening and development costs . . . . 359 554 1,468
Provision for loss on note receivable . . 250
Debt conversion fee . . . . . . . . . . . 1,019
Write-down of property and equipment. . . 327 14,507
Settlement and termination of lease
agreement . . . . . . . . 541
-------- --------- -------
Total costs and expenses. . . . . . . . 9,996 39,782 70,829
-------- --------- -------
OTHER INCOME (LOSS):
Loss from equity investee . . . . . . . . (8,500)
Gain on sale of assets. . . . . . . . . . 6,048
-------- --------- --------
Total other loss, net. . . . . . . . . (2,452)
-------- --------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE DEFERRED
INCOME (TAX) BENEFIT. . . . . . . . . . . (7,024) (8,149) (26,309)
DEFERRED INCOME (TAX) BENEFIT. . . . . . . . . (6,375) 6,375
-------- --------- --------
LOSS FROM CONTINUING OPERATIONS. . . . . . . . (13,399) (1,774) (26,309)
-------- --------- --------
DISCONTINUED OPERATIONS:
Income from operations of discontinued
hotel management operation . . . . . . 645
Gain on disposal of hotel management
operation. . . . . . . . . . . . . . . 2,849
-------- --------- --------
Total income from discontinued
operations . . . . . . . . . . . . . 3,494
-------- --------- --------
EXTRAORDINARY ITEM, gain on extinguishment
of debt . . . . . . . . . . . . . . 4,609
-------- --------- --------
NET INCOME (LOSS). . . . . . . . . . . . . . (13,399) 2,835 (22,815)
DIVIDENDS ON PREFERRED STOCK . . . . . . . . 2,861 1,391
-------- --------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES. . . . . . . . . . . . . . . $(16,260) $ 1,444 $(22,815)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,966 14,124 13,248
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
From continuing operations. . . . . . . $ (1.09) $ (.23) $ (1.98)
From discontinued operations. . . . . . .26
From extraordinary item . . . . . . . . .33
--------- --------- ---------
Net income (loss). . . . . . . . . $ (1.09) $ .10 $ (1.72)
Diluted: ========= ========= =========
From continuing operations. . . . . . . $ (1.09) $ (.23) $ (1.98)
From discontinued operations. .18
From extraordinary item . . . . . . . . .22
--------- --------- ---------
Net income (loss). . . . . . . . . $ (1.09) $ (.01) $ (1.80)
========= ========= =========
See accompanying notes to consolidated financial statements
F-3
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except for per share data)
Common
Series C Series B Capital in Stock
Preferred Stock Preferred Stock Common Stock Excess of Subscribed/ Accumulated
Shares Amount Shares Amount Shares Amount Par Value Payable Deficit
Balances, January 1,
1996. . . . . . $ $ 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 0 (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)
Preferred stock
issued in
settlement of
due to
affiliate . . . 135 1 9,728
Common stock
issued in
settlement
of preferred
stock dividend
payable . . . 777 7 1,384 (1,391)
Preferred stock
dividend
payable in
common stock. . 2,861 (2,861)
Net loss. . . . . (13,399)
------ ------ ------ ------ -------- ------- ------- --------- ---------
Balances, December
31, 1998 . . . 135 $ 1 821 $ 8 15,183 $ 152 $72,371 $ 2,861 $(70,230)
====== ====== ====== ====== ======== ======= ======== ======== ==========
See accompanying notes to consolidated financial statements
F-4
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except for per share data)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . $ (13,399) $ 2,835 $ (22,815)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . 909 5,094 6,059
Provision for losses on accounts
and note receivable. . . . . . . 250 108 211
Deferred tax (benefit). . . . . . . . 6,375 (6,375)
Loss from equity investee . . . . . . 8,500
Gain on sale of assets. . . . . . . . (6,048)
Gain on disposal of hotel management
segment. . . . . . . . . . . . . (2,849)
Gain on extinguishment of debt. . . . (4,609)
Debt conversion fee . . . . . . . . . 1,019
Write-off of property and equipment . 327 14,507
Other . . . . . . . . . (301)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable. . . . . . . . . . . 15 (50) 370
Decrease in inventories. . . . . 12 41 239
Decrease in prepaid insurance . . 276 339 1,187
(Increase) decrease in other
current assets . . . . . . . . . 85 (69) 975
Increase (decrease) in accounts
payable and accrued expenses. . . (2,824) 561 1,505
Increase (decrease) in accrued
payroll and related liabilities . (398) (1,144) 848
-------- --------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES . . . . . . . . . (5,920) (3,269) 955
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Hotel construction costs. . . . . . . . (1,086) (2,966)
Purchases of property and equipment . . (107) (1,460)
Payment on note receivable. . . . . . . (250) (1,700)
Proceeds from hotel construction
escrow . . . . . . . . . . . . . . . 1,700
Proceeds from sale of assets,
net of related costs. . . . . . . . . 11,388 70
Proceeds from (payments for) deposits
and other assets. . . . . . . . 13 (371) (1,047)
-------- ---------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES. . . . . . . 11,765 (5,144) (2,437)
-------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliate . . . . . . . . 5,970 3,813
Payments to affiliate . . . . . . . . . (3,294) (1,986) (282)
Proceeds from sale of common stock. . . 1,000
Proceeds from notes payable . . . . . . 307
Payments on notes payable . . . . . . . (507) (1,262)
Proceeds from long-term debt, net of
loan costs . . . . . . . . . . . . . 17,900 43
Payments on long-term debt. . . . . . . (925) (13,103) (2,103)
-------- ---------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES. . . . . . . . . . . . . . . . (4,219) 9,274 516
-------- ---------- --------
NET INCREASE (DECREASE) IN CASH. . . . . . . 1,626 861 (966)
-------- ---------- --------
CASH, beginning of year. . . . . . . . . . . 2,211 1,350 2,316
-------- ---------- --------
CASH, end of year. . . . . . . . . . . . . . $ 3,837 $ 2,211 $ 1,350
======== ========== ========
See accompanying notes to consolidated financial statements
F-5
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except for per share data)
1998 1997 1996
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid for interest
during the year. . . . . . . . . . $ 425 $ 3,186 $ 2,903
======== ========= ========
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Restructuring and conversion of
Bryanston obligations:
Issuance of preferred stock. . $ 9,729
=========
Mortgage on Jubilation gaming
vessel . . . . . . . . . . . $ 3,000
=========
Extinguishment of debt including
accrued interest of $3,098. . . $ 12,729
=========
Non-cash consideration received in
exchange for sale of assets:
Investment in Buyer. . . . . . . . $ 8,500
=========
Assumption by Buyer of net
proceeds of pre-financing. . . . $ 17,900
=========
Assumption by Buyer of certain
accounts payable, accrued
expenses, payroll liabilities
and capital lease obligation . . $ 2,000
=========
Common stock issued in settlement
of preferred stock dividends. . $ 1,391
=========
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
=========
See accompanying notes to consolidated financial statements
F-6
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, was engaged in the ownership and operation of a gaming
vessel in Greenville, Mississippi, which was operated by the Company's wholly
- -owned subsidiary, Alpha Gulf Coast, Inc. ("Alpha Gulf"), and the
construction of an adjacent hotel which was handled through the Company's
wholly-owned subsidiary, Alpha Greenville Hotel, Inc. ("Greenville Hotel").
On March 2, 1998, the Company sold substantially all of these assets to
Greenville Casino Partners, L.P. ("Buyer") (see Note 3). Included in the
consideration, the Company received a 25% partnership interest in the Buyer,
whose assets include an additional casino and hotel located in Greenville,
Mississippi.
The Company is in pursuit of additional gaming-related and other
opportunities through its other wholly-owned subsidiaries: Alpha St. Regis,
Inc.("Alpha St. Regis"), 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"), Alpha Florida Entertainment, Inc.
("Alpha Florida") and Alpha Peach Tree Corporation ("Alpha Peach Tree").
Additionally, from December 1995 through July 1996, Jubilation Lakeshore,
formerly known as the Cotton Club of Greenville, Inc., 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.
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
Investment. The Company's 25% partnership interest in Buyer is being
accounted for under the equity method of accounting. Accordingly, the
investment is recorded at cost and adjusted by the Company's proportionate share
of the Buyer's undistributed earnings or losses (see Note 3).
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.
F-7
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)
The Company complies with Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings Per Share", which requires dual presentation of
basic and diluted earnings per share. 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 year. 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.
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, 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 $496, $3,547 and $3,721 for the years
ended December 31, 1998, 1997 and 1996, respectively, provided gratuitously
to customers. The cost of these items of $418, $2,990 and $3,317 for the years
ended December 31, 1998, 1997 and 1996, respectively, is 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, 1998 and 1997.
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 prior year amounts have been reclassified to
conform to the 1998 presentation.
F-8
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 3. Sale of Assets
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 the Buyer for approximately $40,200.
Specifically, the Company received cash of $11,800 and a 25% partnership
interest in the Buyer. Additionally, the Buyer assumed approximately $2,000 of
certain accounts payable, accrued expenses, payroll liabilities and a capital
lease obligation and the Company's obligations to repay the net proceeds from
certain financing (Pre-Closing Financing) of $17,900 (see Note 6). The
Company recognized a gain on the sale of $6,048.
Approximately $895 of the sale proceeds were escrowed for potential repairs
to the barge and surrounding property arising from storm damage, which occurred
prior to the sale. As of December 31, 1998, there is a balance of $363
remaining in the escrow account. A $200 reserve for the estimate of potential
repairs in excess of insurance proceeds was recorded during the year ended
December 31, 1998, as a reduction to the gain on the sale.
Since the acquisition of substantially all of the assets of Alpha Gulf and
Greenville Hotel, Management has been advised that the Buyer has
incurred significant operating losses resulting in a substantial working
capital deficiency and a partners' deficiency of approximately $1.4 million
through December 31, 1998. Furthermore, Buyer's independent public
accountants' have issued their report dated March 26, 1999, with an
explanatory paragraph relating to the Buyer's ability to continue as a going
concern. In light of these developments and in accordance with its policy
on impairment of long-lived assets, the Company has adjusted the carrying value
of its remaining 25% partnership interest in the Buyer to zero during the fourth
quarter of 1998.
Summarized financial information of Buyer as of or for the year ended
December 31, 1998 are as follows:
Total assets $59,892
Total liabilities $61,260
Net revenues $42,269
Net loss $14,232
Note 4. Property and Equipment
At December 31, 1998 and 1997, property and equipment is comprised of the
following:
1998 1997
Land and building. . . . . . . . . . . . $ -- $ 214
Boat, barge and improvements. . . . . 4,940 24,337
Leasehold and improvements . . . . . . . 82 14,240
Gaming equipment . . . . . . . . . . . . 3,023 10,307
Furniture, fixtures and equipment. . . . 1,834 7,259
Transportation equipment . . . . . . . . 760
Construction in progress . . . . . . . . 2,966
---------- ---------
9,879 60,083
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 5,249 22,444
---------- ---------
4,630 37,639
Less amounts included in net assets held
for sale, including accumulated
depreciation and amortization of
$17,331. . . . . . . . . . . . . . . . 32,704
---------- ---------
$ 4,630 $ 4,935
F-9
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (Continued)
(in thousands, except for per share data)
Note 4. Property and Equipment (CONTINUED)
In February 1998, Greenville Hotel completed construction of its hotel at a
total cost of $4,050, including capitalized interest, indirect labor and
sundry costs.
Included in equipment at December 31, 1997 is $1,225 related to assets
recorded under capital leases. Included in accumulated depreciation and
amortization at December 31, 1997 is $624 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
$327 and $14,507 in 1998 and 1996, respectively, representing a write-down of
certain of Jubilation Lakeshore's impaired property and equipment to its fair
market value in 1998 and the write-off of Jubilation Lakeshore's leasehold and
improvements of $16,284, and net of related accumulated amortization of $1,777,
in 1996.
Note 5. Notes Payable
At December 31, 1997, notes payable are comprised of the following:
Interest
Rate
Notes payable to Bryanston Group, Inc.
("Bryanston), an affiliate of which
$295 were non-interest bearing
(see Notes 6 and 9). . . . . . . . . . 10% $ 1,399
Other. . . . . . . . . . . . . . . . . . Various 19
--------
$ 1,418
========
F-10
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, 1998 and 1997, long-term debt is comprised of the
following:
Interest
Rate 1998 1997
Mortgage note payable to Bryanston,
collateralized by the Company's
idle gaming vessel, interest
payable monthly and principal
payments not to exceed $1,000
per annum, with any unpaid
balance due at maturity in
April 2005 . . . . . . 8% $ 2,108
Pre-Closing Financing, assumed
by Buyer in the Company's sale
of substantially all of the
assets of Alpha Gulf and Greenville LIBOR
Hotel. . . . . . . . . + 6.15% $ 19,000
Note payable, Bryanston,
extinguished in 1998 . . . . . . 10% 7,800
Capitalized lease obligations,
extinguished in 1998 . . . . . 10-14% 288
-------- --------
2,108 27,088
Less:
Amount included in net assets
held for sale . . . . . . . . . 19,000
Current portion . . . . . . . . . 1,000 81
-------- --------
$ 1,108 $ 8,007
======== ========
Aggregate future required principal payments of long-term debt are as
follows:
Years Ending December 31:
1999. . . . . . . . . . . . . . . . . . . . . $ 1,000
2000. . . . . . . . . . . . . . . . . . . . . 1,000
2001. . . . . . . . . . . . . . . . . . . . . 108
---------
$ 2,108
In conjunction with the Company's sale of substantially all of the assets
of Alpha Gulf and Greenville Hotel (see Note 3), 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 represented 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 assumed such promissory
note. Accordingly, upon consummation of such sale on March 2, 1998, the Company
was relieved of all Pre-Closing Financing obligations.
On June 30, 1998, the Company restructured its obligations to Bryanston by
extinguishing its notes payable of $7,800, $1,399 (see Note 5) and $432 (see
Note 8), plus accrued interest on the notes aggregating $3,098, in exchange for
the issuance of 135 shares of preferred stock, series C (see Note 9) and a
$3,000 mortgage note on the Company's idle gaming vessel.
F-11
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 7. Accounts Payable and Accrued Expenses
At December 31, 1998 and 1997, accounts payable and accrued expenses are
comprised of the following:
1998 1997
Construction. . . . . . . . . . . . . . . . . .$ -- $ 1,021
Insurance . . . . . . . . . . . . . . . . . . . 227 273
Accrued professional fees . . . . . . . . . . . 250 634
Accrued property taxes. . . . . . . . . . . . . 492
Accrued interest. . . . . . . . . . . . . . . . 4 2,219
Other . . . . . . . . . . . . . . . . . . . . . 390 3,149
-------- --------
871 7,788
Less amount included in net assets held for
sale 1,937
-------- --------
$ 871 $ 5,851
======== ========
Accounts payable of $280 has been reclassified to other long-term
liabilities as of December 31, 1998, as they are not expected to be paid
during 1999.
Note 8. Commitments, Contingencies and Related Party Transactions
In September 1993, the Company's former hotel management subsidiary, Alpha
Hotel Management Company, Inc. ("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 12).
The Company was obligated under a $20,000 non-revolving promissory note
with Bryanston. The note bore interest at the prime rate plus 2% and was 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 1996 interest accrued on the note ($503) was payable on the note's
maturity date, December 2000. Additionally, commencing May 1, 1996 and for each
of the three years thereafter, the Company was 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
12).Pursuant to the Company's restructuring of its obligations to Bryanston (see
Note 6), the June 30, 1998 principal balance of $432 and accrued interest of
$507 were extinguished.
In March 1997, the Company reached settlement terms in a dispute over
alleged past due and future accelerated rentals and other costs under an
operating lease relative to real property located in Lakeshore, Mississippi.
The settlement and early termination of the operating lease resulted in a $541
charge to operations for the year ended December 31, 1996.
F-12
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 was obligated under a tidelands lease which provided for a
mooring site for the Company's idle gaming vessel in Lakeshore, Mississippi.
Pursuant to a lease termination and mutual release agreement, the State of
Mississippi terminated the lease for a settlement of approximately $91.
In August 1998, under the terms of the agreement, the Company removed all
structures and equipment remaining on this site. Subsequently, the Company
relocated the vessel to a terminal in Mobile Alabama, where it's obligated
under a month to month 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:
1999. . . . . . . . . . . . . . . . . . . . . $ 353
2000. . . . . . . . . . . . . . . . . . . . . 348
2001. . . . . . . . . . . . . . . . . . . . . 362
2002. . . . . . . . . . . . . . . . . . . . . 375
2003. . . . . . . . . . . . . . . . . . . . . 353
Thereafter. . . . . . . . . . . . . . . . . . 257
--------
$ 2,048
The Company, through its wholly-owned subsidiary Alpha Monticello, is
party to a General Memorandum of Understanding (the "Memorandum") with Catskill
Development, LLC ("Catskill") (the "Parties") dated December 1, 1995, which,
among other things, provides for the establishment of Mohawk Management, LLC
("Mohawk"), a New York limited liability company, for the purpose of entering
into an agreement to manage a proposed casino on land to be owned by the St.
Regis Mohawk Indian Tribe (the "Tribe"). The Memorandum also sets forth the
general terms for the funding and management obligations of Catskill (25%
owned by Bryanston) and Alpha Monticello, respectively, with regard to Mohawk.
In January 1996, Mohawk was formed with each of Catskill and Alpha Monticello
owning a 50% membership. On July 31, 1996, Mohawk entered into a Gaming
Facility Management Agreement with the Tribe (the "Management Contract") for
the management of a casino to be built on the current site of Monticello
Raceway in Monticello, New York (the "Monticello Casino"). Among other things,
the Management Contract provides Mohawk with the exclusive right to manage the
Monticello Casino for seven (7) years from its opening and to receive certain
management fees. In accordance with Federal law, this agreement is subject to
final approval by the National Indian Gaming Commission. By its terms, the
Memorandum between Catskill and Alpha Monticello terminated December 31, 1998,
since all of the governmental approvals necessary for the construction
and operation of the Monticello Casino were not obtained by Mohawk. The
Management Contract between Mohawk and the Tribe contains no such provision.
Additionally, the Memorandum is silent as to the effect of such expiration to
the continued existence of Mohawk, the Parties' respective 50% ownership therein
and the Management Contract. As of the date hereof, all such approvals have
not been obtained. On December 28, 1998, Alpha Monticello filed for
arbitration, as prescribed by the Memorandum, to resolve any disputes by the
Parties. The Company is seeking a determination from the arbitrator that the
termination of the Memorandum merely means that the funding obligations of
the Parties have expired and that Mohawk remains a viable entity with both
Alpha Monticello and Catskill as 50% owners. On or about February 8, 1999,
Catskill submitted its response to Alpha Monticello's Demand for Arbitration.
Thereafter, the Parties' counsels informed the American Arbitration Association
(the "AAA") that the Parties were engaged in settlement discussion, and the
AAA agreed to stay further proceedings in the arbitration until April 22, 1999.
Included in deposits and other assets as of December 31, 1998 and 1997, the
Company capitalized $1,366 and $1,291, respectively, towards the design,
architecture and other costs of the development plans for the casino.
F-13
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 an employment contract with its Chairman and
Chief Executive Officer. Under this agreement, the Company accrues 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 their 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.
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)
Included in restricted cash at December 31, 1998 is $1,256 pledged as
collateral on behalf of the Chairman and Chief Executive Officer of the
Company. Although not currently anticipated, any drawing upon such cash will be
recorded as a reduction in the balance of deferred compensation payable to the
Chairman and Chief Executive Officer. As of December 31, 1998, deferred
compensation payable to the Chairman and Chief Executive Officer, included in
accrued payroll and related liabilities, is approximately $1,279.
Directors of the Company performed consulting services during the years
ended December 31, 1998, 1997 and 1996 amounting to $58, $195 and $176,
respectively.
To comply with State requirements regarding the Company's 25% partnership
interest in Greenville Casino Partners, L.P., the Company has received a
finding of suitability from the Mississippi Gaming Commission. The Company's
finding of suitability has a term of two years and is subject to renewal in
October 1999.
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,
the plaintiffs alleged that on January 16, 1996, 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.
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.
On March 2, 1998, the Company entered into a supervisory hotel management
agreement with the Buyer (see Note 3) for a term of ten years, whereby the
Company will receive $100 per annum for management services, payable monthly.
Supervisory management fees earned for the period March 2, 1998 through December
31, 1998 amount to $83.
On May 12, 1998, subject to shareholder approval, the Company approved
annual compensation to each of the three outside directors of $6 per annum
plus the option to purchase 25 shares, along with 15 shares for each committee
served upon, of the Company's common stock at the current market price (see
Note 10). Compensation expense to the three outside directors for the year
ended December 31, 1998, amounted to $12.
On September 15, 1998, $250 was advanced to Southern Classic, Inc.
("Southern") pursuant to a 9 1/4% promissory note maturing January 30, 1999.
Southern defaulted on its payment in January 1999 and filed for bankruptcy in
February 1999. Accordingly, a $250 reserve has been recorded as of December 31,
1998. A member of the Board of Directors of the Company formerly served as
Southern's Chief Financial Officer.
A director of the Company is a partner in a law firm which provides legal
services to the Company. Fees to such firm in the year ended December 31, 1998,
has been recorded at approximately $200, related to general corporated matters.
F-14
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (Continued)
(in thousands, except for per share data)
Note 8. Commitments, Contingencies and Related Party Transactions (CONTINUED)
The Company is involved in a dispute with the Buyer regarding certain
claims and the assumption of liabilities pursuant to the terms of the Asset
Purchase Agreement dated December 17, 1997. The Company claims the Buyer is
liable for certain liabilities relating to employees' vacation pay, health
insurance benefits and certain accounts payable. The Buyer's claims against
the Company are for the Company's alleged breach of warranties with respect
to the condition of the assets purchased, alleged failure to continue
operating the casino in the normal course of business through the date of sale
and alleged failure to pay certain accounts payable. Management is pursuing
vigorously both recovery of its claims and its contest of the Buyer's claims.
Although a ruling from an arbitrator is not expected for another three to five
months, the Company and its counsel believe that, based on information
presently available, the arbitrator will find the aggregate claims of the
Company exceed the aggregate claims of the Buyer, and that the arbitrator
will enter an award in favor of the Company.
Note 9. Stockholders' Equity
In 1996, the Company issued 701 shares of its common stock related to
certain restructured equipment notes and 75 shares of its common stock
related to a convertible promissory note. Additionally, in consideration for
1995 services provided to the Company, the Company issued 348 shares of its
common stock, with a fair value of $1,600, to Bryanston in 1996.
In June 1996, the Company issued 661 and 42 shares of its preferred stock,
series B, 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, series B, was issued in settlement of $2,000 of
the unsecured debt with Bryanston.
In March 1997, the Company sold 571 shares of its common stock for $1,000.
In April 1997, the Company issued 200 shares of its common stock for $506
in settlement of a note payable and related accrued interest. Additionally,
during 1997, the Company issued 157 shares of its common stock for $511 in
settlement of certain accounts payable and accrued expenses.
The Company's cumulative preferred stock, series B, 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,
which was issued in April 1998. On May 12, 1998, the Company declared a 1997
dividend of $2,861, payable in approximately 1,480 shares of common stock,
which were issued in January 1999. As of December 31, 1998, dividends in
arrears on the cumulative preferred stock, series B, amounted to approximately
2,065 shares.
On June 30, 1998, the Company issued 135 shares of cumulative preferred
stock, series C, in settlement of certain obligations to Bryanston (see Note
6). The preferred stock, series C, has voting rights of twenty-four votes per
preferred share, is convertible to twenty-four shares of common stock and
carries a dividend of $5.65 per share. In addition, the terms of the
preferred shares include a provision allowing the Company the option of calling
the preferred shares based upon the occurrence of certain capital events which
realize a profit in excess of $5,000. In the event the dividend is not paid by
the end of the Company's fiscal year, the dividend will be payable in common
stock. As of December 31, 1998, dividends in arrears on the cumulative
preferred stock, series C, amounted to approximately 255 shares.
F-15
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 10. Stock Options and Warrants
1993 Stock Option Plan
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 per
share. Additionally, in 1993, the Company granted options to purchase an
aggregate of 24 shares of common stock at an exercise price of $11.50. In
1998, the Company granted additional options to purchase 385 shares of common
stock at a price of $1.063 per share. 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, 1998, no options under this Plan were
exercised.
In December 1998, the Company determined that the purposes of the Plan were
not being adequately achieved with respect to those employees and consultants
holding options that were exercisable at prices above current market value and
that it was in the best interests of the Company and its shareholders that the
Company retain and motivate such employees and consultants. Therefore, in
order to provide such optionees the opportunity to exchange their above market
value options for options exercisable at the current market value, the Company
repriced the outstanding options under the Plan to $1.063, the closing NASDAQ
bid price on December 12, 1998.
Other Stock Options
In October 1993, the Company entered into an option agreement with an
unrelated party whereby the unrelated party received an option, which expired
on October 31, 1998, to purchase 600 shares of the Company's common stock at an
exercise price of $14 per share.
In 1994, the Company granted to a former 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, 1998, these options were not
exercised.
In December 1995, the Company granted to Bryanston an option to acquire 348
shares of the 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, 1998, the option was not exercised.
Pursuant to the compensation of its three outside directors (see note 8)
and subject to shareholder approval, in 1998, the Company granted options to
purchase an aggregate of 270 shares of its common stock at an exercise price of
$1.063, which can be exercised any time up to 2008. The amount granted
represents options to purchase an aggregate amount of 135 shares per year, for
services rendered and to be rendered for 1998 and 1999, respectively. As of
December 31, 1998, none of these options were exercised.
In December 1998, the Company granted the Company's Chairman of the Board,
options to purchase 250 shares of common stock at an exercise price of $1.063,
which can be exercised at any time. As of December 31, 1998, none of these
options were exercised.
Warrants
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. In
September 1998, the expiration date was extended to December 31, 2001 and the
exercise price was amended to $4.00 through December 31, 2000 and to $6.00
through December 31, 2001. As of December 31, 1998, no warrants were exercised.
F-16
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 10. Stock Options and Warrants (continued)
Pro forma Information
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 Plans. Had compensation cost for the Company's
Plans been determined based on the fair value at the grant date of awards in the
years ended December 31, 1998, 1997 and 1996 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:
1998 1997 1996
Loss from
continuing operations,
as reported. . . . . . . $ (16,260) $ (3,165) $ (26,309)
Loss from continuing
operations, pro forma. . . (17,473) (3,490) (26,634)
Loss per common share from
continuing operations,
basic, as reported. . . . . (1.09) (.23) (1.98)
Loss per common share from
continuing operations, basic,
pro forma . . . . . . . . . (1.17) (.25) (2.01)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1996, 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 1998; risk-free interest rate of five
percent; no dividend yield; option life of ten years and volatility of 100%.
Note 11. Income Taxes
The Company and all of its subsidiaries file a consolidated federal income
tax return. At December 31, 1998 and 1997, 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:
1998 1997
Pre-opening costs expensed for
financial reporting and
amortized over five years for
tax purposes. . . . . . . . $ -- $ 560
Net operating loss
carryforwards. . . . . . . . 18,386 17,599
Depreciation. . . . . . . . . (414)
Differences between financial
and tax bases of assets
and liabilities . . . . . . . 7,686 5,252
Other . . . . . . . . . . . . . 396 271
--------- ---------
Deferred income tax asset,
gross. . . . . . . . . . . . 26,468 23,268
Valuation allowance . . . . . . (26,468) (16,893)
--------- ---------
Deferred income tax asset, net. $ -- $ 6,375
========= =========
The Company's $6,375 deferred tax benefit in 1997 represents the reversal
of previously established valuation allowances due to the anticipated 1998
utilization of the Company's net operating loss carryforwards to offset the
taxable gain on the sale of assets (see Note 3). The tax gain exceeded the
financial statement gain due to the differences between the financial
statement and tax bases of Alpha Gulf's assets. During 1998, upon termination
of its obligation under a lease in Lakeshore, Mississippi (see Note 8), the
Company exercised a tax write-off of leasehold and improvements, written-off
for book purposes in 1996 (see Note 4). The tax write-off and 1998 losses
exceeded the tax gain generated by the sale of assets. Consequently, the
Company did not utilize any of its net operating loss carryforwards during 1998.
These event skewed deferred taxes (benefit) in relationship to loss from
continuing operations before deferred taxes (benefit) in the years ended
December 31, 1998 and 1997.
F-17
ALPHA HOSPTIALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
Note 11. Income Taxes (CONTINUED)
As of December 31, 1998, the Company has available for federal income tax
purposes, a net operating loss carryforward of approximately $45,966 expiring
in the years 2008 through 2018.
Note 12. 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
Note 8). Summary operating results of discontinued operations, excluding the
above gain, for the year ended December 31, 1996 is as follows:
Net sales . . . . . . . . . . . . . . . . . . . . $ 1,992
Cost of sales . . . . . . . . . . . . . . . . . . 1,347
---------
Income from operations of discontinued hotel
management operation before intercompany
charge . . . . . . . . . . . . . . . . . . . . . $ 645
=========
Note 13. Earnings (Loss) Per Common Share
At December 31, 1998, 1997 and 1996, weighted average common shares
outstanding applicable to diluted earnings per share is computed as follows:
1998 1997 1996
Weighted average common shares outstanding, basic. . . 14,966 14,124 13,248
Shares applicable to convertible preferred stock . . . 6,568 5,904
------ ------ ------
14,966 20,692 19,152
====== ====== ======
Unexercised stock options and warrants to purchase 2,575 shares of the
Company's common stock and preferred stock, series B and C, convertible into
9,808 shares of the Company's common stock, as of December 31, 1998, were not
included in the computations of diluted earnings (loss) per common share because
they are anti-dilutive.
Unexercised stock options and warrants to purchase 2,270 shares of the
Company's common stock, as of December 31, 1997 and 1996, 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-18
SCHEDULE II
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except for per share data)
Additions
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, 1996: $ 354 211 -- 38 527
Allowance for doubtful
accounts
Year Ended December 31, 1997: $ 527 108 -- -- 635
Allowance for doubtful
accounts
Year Ended December 31, 1998:
Allowance for doubtful
accounts $ 635 -- -- -- 635
Year Ended December 31, 1998:
Allowance for doubtful note $ 0 250 -- -- 250
S-1