-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZ7UICv00MUXQBu4UtYY9ddbJJD8/LuCySb/vDq1rSazhk9qxrSIXIwOcFaEtS8n rpi65rTufa/AJaL8KUjn5A== 0000906780-99-000002.txt : 19990402 0000906780-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000906780-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA HOSPITALITY CORP CENTRAL INDEX KEY: 0000906780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 133714474 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12522 FILM NUMBER: 99582400 BUSINESS ADDRESS: STREET 1: 12 EAST 49TH STREET STREET 2: 24TH FL CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127503500 MAIL ADDRESS: STREET 1: 12 EAST 49TH ST STREET 2: 24TH FL CITY: NEW YORK STATE: NY ZIP: 10017 10-K 1 ANNUAL REPORT ON FORM 10K 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 1 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. 2 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 3 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 6 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. 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 -- -- -- --
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
(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. (2) Represents the vote, as a percentage of the total votes that may be cast by the hodlers of all outstanding shares. (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 (4) Stanley S. Tollman is the spouse of Beatrice Tollman. Stanley S. Tollman disclaims beneficial ownership of the shares beneficially owned by Beatrice Tollman. (5) Does not includes 80,000 shares, subject to shareholder approval, of Common Stock issuable upon the exercise of options granted to Mr. Walker. (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. (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. (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. (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. (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. (11) Does not includes 80,000 shares, subject to shareholder approval, of Common Shares issuable upon the exercise of options granted to Mr. Kozlov. (12) Includes 20,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Kendziera, all of which are currently exercisable. (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 EX-27 2
5 Alpha Hospitality Corporation Form 10K for the year ended December 31, 1998. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-01-1998 3,837 0 885 885 0 4,016 9,879 5,249 10,196 3,645 2,108 0 9 152 5,002 10,196 0 5,424 7,089 0 1,595 250 1,062 (7,024) (6,375) (13,399) 0 0 0 (13,399) (1.09) (1.09) Amount includes depreciation and amortization of $909, development costs of $359 and write-down of property and equipment of $327.
EX-4 3 Exhibit 4(c) CERTIFICATE OF DESIGNATION SETTING FORTH THE PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES B PREFERRED STOCK AND SERIES C PREFERRED STOCK OF ALPHA HOSPITALITY CORPORATION ALPHA HOSPITALITY CORPORATION, a Delaware Corporation (the "Corporation"), certifies that, pursuant to the authority contained in Article FOURTH of its Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors has adopted the following resolutions creating a series of its preferred stock to be designated "Series C Preferred Stock", and clarifying the preferences, rights and limitations of the Corporation's existing Series B Preferred Stock originally established by a resolution of the Board of Directors as contained in a Certificate of Designations, Preferences and Rights of Preferred Stock filed with the Secretary of State on July 31, 1996 and to correct the number of shares so designated ("Series B Preferred Stock"). WHEREAS, the Corporation desires to create a new series of its Preferred Stock to be designated as "Series C Preferred Stock" which is contemplated to be issued for new consideration to the holder of all of the outstanding shares of the Corporation's existing Series B Preferred Stock (the "Holder"); and WHEREAS, the Corporation and the Holder deem it appropriate to amend and restate the preferences and rights of the Series B Preferred Stock so as to conform the provisions relating thereto to the provisions of the newly created Series C Preferred Stock and so as to correct an error in the Certificate of Designations, Preferences and Rights of Preferred Stock filed with the Secretary of State on July 31, 1996 so as to state the correct number of Series B shares designated by the Board of Directors and to provide that each share of Series B Preferred Stock shall have voting rights equal to the voting rights of the shares of common stock into which such Series B Preferred Stock is convertible; NOW THEREFORE, it is hereby RESOLVED, that the amount, the voting powers, preferences and relative, participating, optional and other special rights of the shares of Series B Preferred Stock, and the qualifications, limitations and restrictions thereof, shall be amended and restated in their entirety, effective upon the filing with the Secretary of State of this Certificate of Designation, as set forth in Section A below; and it is further RESOLVED, that a new series of the class of authorized preferred stock of the Corporation be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof shall be as set forth in Section B below: A. Amendment and Restatement of Preferences, Rights and Limitations of Series B Preferred Stock Section 1. Designation and Amount; Par Value. The shares of such series shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting such series shall be 821,496. The par value of each share of the series shall be $.01. Section 2. Dividends on Series B Preferred Stock 2.1 General Dividend Obligations. The Corporation shall pay to the holders of the Series B Preferred Stock out of the assets of the Corporation, at any time available for the payment of dividends under the provisions of the General Corporation Law of the State of Delaware, preferential dividends at the times and in the amounts provided for in this Section 2. 2.2 Accrual of Dividends. Dividends on each share of Series B Preferred Stock shall be cumulative from the date of issuance of such share of Series B Preferred Stock, whether or not at the time such dividend shall accrue or become due or at any other time there shall be profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall accrue on each share of Series B Preferred Stock (at the rate and in the manner prescribed by this Section 2.2 and Section 2.3 hereof) from and including the date of issuance of such share to and including the date on which such share shall be converted into shares of Common Stock, as set forth in Section 4 hereof. For purposes of this Section 2.2, the date on which the Corporation shall initially issue any share of Series B Preferred Stock shall be deemed to be the "date of issuance" of such share regardless of how many times transfer of such share shall be made on stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such share (whether by reason of transfers of such share or for any other reason). 2.3 Payment of Dividends. Dividends shall accrue on each share of Series B Preferred Stock (computed on a daily basis on the basis of a 360 day year) at the rate of 10% per annum of the Liquidation Value (as defined in Section 5.1 hereof). Dividends shall be payable on Series B Preferred Stock quarterly on the first day of each January, April, July and October, and each such day is herein called a "Dividend Payment Date". On each Dividend Payment Date all dividends which shall have accrued on each share of Series B Preferred Stock then outstanding during the quarter year ending upon the day immediately preceding such Dividend Payment Date shall be deemed to become "due" for all purposes of this Section regardless of whether the Corporation shall be able or legally permitted to pay such dividend on such Dividend Payment Date. If any dividend on any share shall for any reason not be paid at the time such dividend shall become due, such dividend in arrears shall be paid as soon as payments of same shall be permissible under the provisions of the General Corporation Law of the State of Delaware. 2.4 Payment of Dividend in Shares of Common Stock. Notwithstanding the provisions of Section 2.3 hereof, any dividend payment which is not made by the Corporation on or before January 30 of the following calendar year shall be payable in the form of shares of Common Stock, in such number of shares as shall be determined by dividing (A) the product of (x) the amount of the unpaid dividend multiplied by (y) 1.3, by (B) the Fair Market Value of the Common Stock. Fair Market Value shall mean, with respect to the Common Stock, the daily closing prices for the Common Stock of the Corporation for the twenty (20) consecutive trading days preceding the applicable January 30 date, with the closing price for each day being the closing price reported on the principal securities exchange upon which the Common Stock of the Corporation is traded or, if it is not so traded, then the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System or if not quoted thereon, in the interdealer market on the "Pink Sheets" of the National Quotation Bureau (excluding the highest and lowest bids on each day that there are four (4) or more market makers). 2.5 Distribution of Partial Dividend Payments. If at any time the Corporation shall pay less than the total amount of dividends due on outstanding Series B Preferred Stock, at the time of such payment, such payment shall be distributed among the holders of Series B Preferred Stock so that an equal amount shall be paid with respect to each outstanding share of Series B Preferred Stock. Section 3. Intentionally Omitted Section 4. Conversion 4.1 Right to Convert. (a) At any time from and after the date hereof, the shares of Series B Preferred Stock, at the option of the respective holders thereof, may at any time, and from time to time, be converted into fully paid and nonassessable shares of Common Stock of the Corporation at the "Conversion Rate" provided for in subsection 4.1(g) below. (b) So long as any shares of Series B Preferred Stock shall be outstanding, the Corporation will not make any share distribution on its shares of Common Stock unless the Corporation, by proper legal action, shall have authorized and reserved an amount of shares equal to the amount thereof which would have been declared upon the shares of Common Stock into which such shares of Series B Preferred Stock might have been converted, and the Corporation shall, out of such additional shares so authorized and reserved on account of such share distribution, upon the conversion of any shares of Series B Preferred Stock, deliver with any shares of Common Stock into which shares of Series B Preferred Stock are converted, but without additional consideration therefor, such number of shares of Common Stock as would have been deliverable to the holders of the Common Stock into which such shares of Series B Preferred Stock had been so converted had such shares of Common Stock been outstanding at the time of such share distribution. For the purpose of this Section 4.1, a share distribution shall be a dividend payable only in shares of Common Stock of the Corporation of the same class as the present authorized shares of Common Stock. This shall not limit the right of the Corporation, however, to declare and pay any dividends whether in cash, shares, or otherwise, except as specifically otherwise provided herein. (c) In case of any combination or change of the shares of Series B Preferred Stock or of the shares of Common Stock into a different number of shares of the same or any other class or classes, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Conversion Rate shall be appropriately adjusted so that the rights of the holders of shares of Series B Preferred Stock will not be diluted as a result of such combination, change, consolidation, merger, sale or conveyance. Adjustments in the rate of conversion shall be calculated to the nearest one-tenth of a share. (d) So long as any shares of Series B Preferred Stock are outstanding, the Corporation shall reserve and keep available out of its duly authorized but unissued shares for the purpose of effecting the conversion of the shares of Series B Preferred Stock such number of its duly authorized shares of Common Stock and other securities as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock. (e) Any dividends accrued on any shares of Series B Preferred Stock from the preceding Dividend Payment Date to the date of conversion shall be payable to the holder of record of such shares immediately prior to its conversion. In the event that any dividends on the outstanding shares of Common Stock shall have been declared prior to, and shall be payable subsequent to, the conversion of such shares of Series B Preferred Stock, such dividends shall not be payable on any shares of Common Stock into which such shares of Series B Preferred Stock shall have been converted. (f) In the event that the Corporation shall at any time or from time to time offer to the holders of the shares of Common Stock any rights to subscribe for shares or any other securities of the Corporation, each holder of record of the shares of Series B Preferred Stock at the time at which the record is taken of the holders of shares of Common Stock entitled to receive such rights shall be entitled to subscribe for and purchase, at the same price at which such shares or other securities are offered to the holders of the shares of Common Stock and on the same terms, the number of such shares or the amount of such other securities for which such holder would have been entitled to subscribe if he had been the holder of record at that time of the number of shares of Common Stock into which his shares of Series B Preferred Stock were convertible (pursuant to the provisions hereof) at such record time. (g) The initial "Conversion Rate", subject to adjustment as provided above, shall be 8 shares of Common Stock for each share of Series B Preferred Stock. 4.2 Surrender of Certificates. Any holder of shares of Series B Preferred Stock desiring to exercise the right of conversion herein provided shall surrender to the Corporation at one of its share transfer agencies, or in the event that at that time there is no such agency, then at the principal office of the Corporation, the certificate or certificates representing the shares of Series B Preferred Stock so to be converted, duly endorsed in blank for transfer or accompanied by properly executed instruments for the transfer thereof, together with a written request for the conversion thereof. The Corporation shall execute and deliver, at the Corporation's expense, a new certificate or certificates representing the shares of Common Stock into which the shares of Series B Preferred Stock have been converted and, if applicable, a new certificate or certificates representing the balance of the shares of Series B Preferred Stock formerly represented by the surrendered certificate or certificates which, at the holder's request, shall not have been converted into shares of Common Stock. Section 5. Liquidation 5.1 Rights of Holders of Series B Preferred Stock. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation, the holders of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash equal to the sum of $29 per share (the "Liquidation Value"), plus all unpaid dividends accrued thereon to the date of final distribution. No distribution shall be made on any Junior Securities (as defined in Section 6.1) by reason of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation unless each holder of any share of Series B Preferred Stock shall have received all amounts to which such holder shall be entitled under this Section 5.1. 5.2 Allocation of Liquidation Payments Among Holders of Series B Preferred Stock. If upon any dissolution, liquidation (whether complete or partial), or winding up of the Corporation, the assets of the Corporation available for distribution to holders of Series B Preferred Stock (hereinafter in this Section 5.2 called the "Total Amount Available") shall be insufficient to pay the holders of outstanding Series B Preferred Stock the full amounts to which they shall be entitled under Section 5.1, each holder of Series B Preferred Stock shall be entitled to receive an amount equal to the product derived by multiplying the Total Amount Available by a fraction, the numerator of which shall be the number of shares of Series B Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Series B Preferred Stock then outstanding. Section 6. Additional Provisions Governing Series B Preferred Stock 6.1 Seniority Over Junior Securities. No dividend shall be paid on any Junior Securities, no distribution of cash or property of any kind (other than Junior Securities) shall be made for any reason (Including but not limited to any voluntary or involuntary dissolution, winding up, or complete or partial liquidation of the Corporation) by the Corporation or any subsidiary with respect to any Junior Securities, and no redemption or other acquisition of any Junior Securities shall be made directly or indirectly by the Corporation if, when the payment of any such dividends, distribution, redemption or acquisition is to be made: (a) any dividend which shall have become due on any share of Series B Preferred Stock shall remain unpaid (except unpaid dividends added to the Liquidation Value of Series B Preferred Stock pursuant to Section 3.4), or (b) any other payment or distribution on or with respect to any shares of Series B Preferred Stock under the terms hereof which shall have been due from the Corporation at such time shall not have been made in full. The term "Junior Securities" shall mean any equity security of any kind which the Corporation shall at any time issue or be authorized to issue other than Series B Preferred Stock. 6.2 Voting Rights. The holders of Series B Preferred Stock shall be entitled to notice of all stockholders' meetings in accordance with the By-laws of the Corporation and to vote on all matters submitted to the vote of the holders of Common Stock; provided, that each share of Series B Preferred Stock shall represent such number of votes as shall equal the number of shares of Common Stock into which such share is convertible at such time in accordance with the provisions of Section 4, hereof. 6.3 Method of Payments. Any payment at any time due with respect to any share of Series B Preferred Stock (including but not limited to any payment of any dividend due on such share, the payment of the Redemption Price for such share, and any payment due on such share under Section 5) shall be made by means of a check to the order of the record holder shown on the Corporation's records, mailed by first class mail. 6.4 Amendment and Waiver. No change affecting any interests of the holders of shares of Series B Preferred Stock, including without limitation the amendment of any rights or preferences of the Series B Preferred Stock or the establishment of any class of stock ranking as to distribution of assets prior to the Series B Preferred Stock, shall be binding or effective unless such change shall have been approved in writing by the holders of at least 51% of the shares of Series B Preferred Stock outstanding at the time such change shall be made. 6.5 Registration of Transfer of Series B Preferred Stock. The Corporation will keep at one of its share transfer agencies, or in the event that at that time there is no such agency, then in its principal office, a register for the registration of the Series B Preferred Stock. Upon the surrender of any certificate representing shares of Series B Preferred Stock at such agency or the Corporation's principal office, the Corporation will, at the request of the registered holder of such certificate, execute and delier, at the Corporation's expense, a new certificate or certificates in exchange representing the number of shares of Series B Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall be substantially identical in form to the surrendered certificate, and the shares of Series B Preferred Stock represented by such new certificate shall earn cumulative dividends from the date to which dividends shall have been paid on the shares represented by the surrendered certificate or certificates. 6.6 Replacement. Upon receipt by the Corporation of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Series B Preferred Stock (an affidavit of the registered holder without bond being satisfactory for this purpose) the Corporation, at its expense, will execute and deliver in lieu of such certificate, a new certificate of like kind, representing the number of shares of Series B Preferred Stock which shall have been represented by such lost, stolen, destroyed or mutilated certificate, dated and earning cumulative dividends from the date to which dividends shall have been paid on such lost, stolen, destroyed or mutilated certificate. B. Establishment of Series C Preferred Stock Section 1. Designation and Amount; Par Value. The shares of such series shall be designated as "Series C Preferred Stock" (the "Series C Preferred Stock") and the number of shares constituting such series shall be 137,889. The par value of each share of the series shall be $.01. Section 2. Dividends on Series C Preferred Stock 2.1 General Dividend Obligations. The Corporation shall pay to the holders of the Series C Preferred Stock out of the assets of the Corporation, at any time available for the payment of dividends under the provisions of the General Corporation Law of the State of Delaware, preferential dividends at the times and in the amounts provided for in this Section 2. 2.2 Accrual of Dividends. Dividends on each share of Series C Preferred Stock shall be cumulative from the date of issuance of such share of Series C Preferred Stock, whether or not at the time such dividend shall accrue or become due or at any other time there shall be profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall accrue on each share of Series C Preferred Stock (at the rate and in the manner prescribed by this Section 2.2 and Sections 2.3 and 3.4 hereof) from and including the date of issuance of such share to and including the date on which either (a) payment equal to the Redemption Price of such share (as defined in Section 3.4 hereof) shall have been paid in the manner prescribed in Section 6.3 hereof or (b) such share shall be converted into shares of Common Stock, as set forth in Section 4 hereof. For purposes of this Section 2.2, the date on which the Corporation shall initially issue any share of Series C Preferred Stock shall be deemed to be the "date of issuance" of such share regardless of how many times transfer of such share shall be made on stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such share (whether by reason of transfers of such share or for any other reason). 2.3 Payment of Dividends. Dividends shall accrue on each share of Series C Preferred Stock (computed on a daily basis on the basis of a 360 day year) at the rate of 8% per annum of the Liquidation Value (as defined in Section 5.1 hereof). Dividends shall be payable on Series C Preferred Stock quarterly on the first day of each January, April, July and October, and each such day is herein called a "Dividend Payment Date". On each Dividend Payment Date all dividends which shall have accrued on each share of Series C Preferred Stock then outstanding during the quarter year ending upon the day immediately preceding such Dividend Payment Date shall be deemed to become "due" for all purposes of this Section regardless of whether the Corporation shall be able or legally permitted to pay such dividend on such Dividend Payment Date. If any dividend on any share shall for any reason not be paid at the time such dividend shall become due, such dividend in arrears shall be paid as soon as payments of same shall be permissible under the provisions of the General Corporation Law of the State of Delaware. Until such dividend in arrears is paid, dividends shall continue to accrue on shares of Series C Preferred Stock but the percentage rate expressed herein shall be applied to the Liquidation Value thereof plus all dividends in arrears thereon (including dividends computed pursuant to this sentence). 2.4 Distribution of Partial Dividend Payments. If at any time the Corporation shall pay less than the total amount of dividends due on outstanding Series C Preferred Stock, at the time of such payment, such payment shall be distributed among the holders of Series C Preferred Stock so that an equal amount shall be paid with respect to each outstanding share of Series C Preferred Stock. Section 3. Optional Redemption 3.1 Time of Election. The Corporation may, within 120 days of the occurrence of a "Capital Event", as defined below, elect, by written notice (the "Redemption Notice") to the holders of the Series C Preferred Stock, to redeem all or a portion of the outstanding shares of Series C Preferred Stock. A "Capital Event" shall be defined as a sale of assets of the Corporation which results in the excess of cash proceeds received by the Corporation in consideration for such assets exceeds the Corporations basis in such assets by at lease $5,000,000. The Redemption Notice shall set forth the number of shares of Series C Preferred Stock to be redeemed, the date upon which such redemption will be effected, and the procedure for payment of the Redemption Price and the surrender of Certificates representing the redeemed Series C Preferred Stock. 3.2 Redeemed Series C Preferred Stock to be Cancelled. The Corporation shall cancel each share of Series C Preferred Stock which it shall redeem or for any other reason acquire, and no shares of Series C Preferred Stock which shall be redeemed or otherwise acquired by the Corporation shall thereafter be reissued, sold or transferred by the Corporation to any person. The number of shares of Series C Preferred Stock which the Corporation shall be authorized to issue shall be deemed to be reduced by the number of shares of Series C Preferred Stock which the Corporation shall redeem or otherwise acquire. 3.3 Determination of Number of Each Holder's Shares to be Redeemed. If the Corporation does not redeem all of the outstanding shares of Series C Preferred Stock on the Redemption Date, the number of shares of Series C Preferred Stock to be redeemed from each holder thereof shall be determined by multiplying the total number of shares of Series C Preferred Stock to be redeemed by a fraction, the numerator of which shall be the total number of shares of Series C Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Series C Preferred Stock outstanding, except that in situations to which Section 3.4(b) hereof applies, the Corporation shall not, as set forth in such Section, repurchase the last share of Series C Preferred Stock held by any holder. 3.4 Redemption Price. (a) For each share of Series C Preferred Stock which shall be redeemed by the Corporation pursuant to this Section 3, the Corporation shall be obligated to pay to the holder of such share an amount (herein called the "Redemption Price") for such share equal to $72 per share. The Corporation shall be obligated to pay on any Redemption Date both the Redemption Price for each share and all dividends which shall have accrued (computed on a daily basis) on each share to and including the Redemption Date and which shall not previously have been paid. Such payments which the Corporation shall be obligated to make on any Redemption Date shall be deemed to become "due" for all purposes of this Section 3 regardless of whether paid on such Redemption Date. (b) If for any reason the Corporation is prohibited from paying accrued unpaid dividends on shares of Series C Preferred Stock being redeemed from any holder, then such accrued unpaid dividends shall be added in equal amounts per share to the Liquidation Value of the shares of Series C Preferred Stock remaining outstanding in the hands of such holder; provided, that in no event shall the Corporation redeem the last share of Series C Preferred Stock (the "Last Share") held by any holder until the Corporation shall have paid to such holder all accrued unpaid dividends on all Series C Preferred Stock held by such holder at any time. The shares of Series C Preferred Stock remaining outstanding after any redemption (including the Last Share), and including the accrued unpaid dividends thereon, shall continue to earn cumulative dividends at the rate and in the manner prescribed in Section 2.3 hereof. (c) Each holder of Series C Preferred Stock shall be entitled to receive on or at any time after any Redemption Date the full Redemption Price, plus accrued unpaid dividends, for each share of Series C Preferred Stock held by such holder which the Corporation shall be obligated to redeem on the Redemption Date upon surrender by such holder to the Corporation of the certificate representing such share of Series C Preferred Stock duly endorsed in blank or accompanied by an appropriate form of assignment duly endorsed in blank. The holder shall surrender such certificate at one of its share transfer agencies, or in the event that at that time there is no such agency, then at the Corporation's principal office. After the payment by the Corporation in the manner required by Section 6.3 hereof of the full Redemption Price for any Series C Preferred Stock, plus accrued unpaid dividends except as otherwise provided in Section 3.4(b) hereof, all rights of the holder of such stock shall (whether or not the certificate representing such share of Series C Preferred Stock shall have been surrendered for cancellation) cease and terminate with respect to such share of Series C Preferred Stock. Section 4. Conversion 4.1 Right to Convert. (a) At any time from and after the filing by the Corporation of a Certificate of Amendment to its Certificate of Incorporation which increases the number of authorized shares of Common Stock of the Corporation by at least 5,000,000 shares (the "Certificate of Amendment"), the shares of Series C Preferred Stock, at the option of the respective holders thereof, may at any time, and from time to time, be converted into fully paid and nonassessable shares of Common Stock of the Corporation at the "Conversion Rate" provided for in subsection 4.1(g) below. The Corporation shall, within 365 days after the date hereof, submit to the stockholders of the Corporation a proposal to increase the number of authorized shares of Common Stock by at least 5,000,000 shares. (b) So long as any shares of Series C Preferred Stock shall be outstanding, the Corporation will not make any share distribution on its shares of Common Stock unless the Corporation, by proper legal action, shall have authorized and reserved an amount of shares equal to the amount thereof which would have been declared upon the shares of Common Stock into which such shares of Series C Preferred Stock might have been converted, and the Corporation shall, out of such additional shares so authorized and reserved on account of such share distribution, upon the conversion of any shares of Series C Preferred Stock, deliver with any shares of Common Stock into which shares of Series C Preferred Stock are converted, but without additional consideration therefor, such number of shares of Common Stock as would have been deliverable to the holders of the Common Stock into which such shares of Series C Preferred Stock had been so converted had such shares of Common Stock been outstanding at the time of such share distribution. For the purpose of this Section 4.1, a share distribution shall be a dividend payable only in shares of Common Stock of the Corporation of the same class as the present authorized shares of Common Stock. This shall not limit the right of the Corporation, however, to declare and pay any dividends whether in cash, shares, or otherwise, except as specifically otherwise provided herein. (c) In case of any combination or change of the shares of Series C Preferred Stock or of the shares of Common Stock into a different number of shares of the same or any other class or classes, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the Conversion Rate shall be appropriately adjusted so that the rights of the holders of shares of Series C Preferred Stock will not be diluted as a result of such combination, change, consolidation, merger, sale or conveyance. Adjustments in the rate of conversion shall be calculated to the nearest one-tenth of a share. (d) From and after the filing of a Certificate of Amendment and so long as any shares of Series C Preferred Stock are outstanding, the Corporation shall reserve and keep available out of its duly authorized but unissued shares for the purpose of effecting the conversion of the shares of Series C Preferred Stock such number of its duly authorized shares of Common Stock and other securities as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series C Preferred Stock. (e) Any dividends accrued on any shares of Series C Preferred Stock from the preceding Dividend Payment Date to the date of conversion shall be payable to the holder of record of such shares immediately prior to its conversion. In the event that any dividends on the outstanding shares of Common Stock shall have been declared prior to, and shall be payable subsequent to, the conversion of such shares of Series C Preferred Stock, such dividends shall not be payable on any shares of Common Stock into which such shares of Series C Preferred Stock shall have been converted. (f) In the event that the Corporation shall at any time or from time to time offer to the holders of the shares of Common Stock any rights to subscribe for shares or any other securities of the Corporation, each holder of record of the shares of Series C Preferred Stock at the time at which the record is taken of the holders of shares of Common Stock entitled to receive such rights shall be entitled to subscribe for and purchase, at the same price at which such shares or other securities are offered to the holders of the shares of Common Stock and on the same terms, the number of such shares or the amount of such other securities for which such holder would have been entitled to subscribe if he had been the holder of record at that time of the number of shares of Common Stock into which his shares of Series C Preferred Stock were convertible (pursuant to the provisions hereof) at such record time. (g) The initial "Conversion Rate", subject to adjustment as provided above, shall be 24 shares of Common Stock for each share of Series C Preferred Stock. 4.2 Surrender of Certificates. Any holder of shares of Series C Preferred Stock desiring to exercise the right of conversion herein provided shall surrender to the Corporation at one of its share transfer agencies, or in the event that at that time there is no such agency, then at the principal office of the Corporation, the certificate or certificates representing the shares of Series C Preferred Stock so to be converted, duly endorsed in blank for transfer or accompanied by properly executed instruments for the transfer thereof, together with a written request for the conversion thereof. The Corporation shall execute and deliver, at the Corporation's expense, a new certificate or certificates representing the shares of Common Stock into which the shares of Series C Preferred Stock have been converted and, if applicable, a new certificate or certificates representing the balance of the shares of Series C Preferred Stock formerly represented by the surrendered certificate or certificates which, at the holder's request, shall not have been converted into shares of Common Stock. Section 5. Liquidation 5.1 Rights of Holders of Series C Preferred Stock. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation, the holders of Series C Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash equal to the sum of $72 per share plus any amounts payable pursuant to Section 3.4(b) (the "Liquidation Value"), plus all unpaid dividends accrued thereon to the date of final distribution. No distribution shall be made on any Junior Securities (as defined in Section 6.1) by reason of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation unless each holder of any share of Series C Preferred Stock shall have received all amounts to which such holder shall be entitled under this Section 5.1. 5.2 Allocation of Liquidation Payments Among Holders of Series C Preferred Stock. If upon any dissolution, liquidation (whether complete or partial), or winding up of the Corporation, the assets of the Corporation available for distribution to holders of Series C Preferred Stock (hereinafter in this Section 5.2 called the "Total Amount Available") shall be insufficient to pay the holders of outstanding Series C Preferred Stock the full amounts to which they shall be entitled under Section 5.1, each holder of Series C Preferred Stock shall be entitled to receive an amount equal to the product derived by multiplying the Total Amount Available by a fraction, the numerator of which shall be the number of shares of Series C Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Series C Preferred Stock then outstanding. Section 6. Additional Provisions Governing Series C Preferred Stock 6.1 Seniority Over Junior Securities. No dividend shall be paid on any Junior Securities, no distribution of cash or property of any kind (other than Junior Securities) shall be made for any reason (Including but not limited to any voluntary or involuntary dissolution, winding up, or complete or partial liquidation of the Corporation) by the Corporation or any subsidiary with respect to any Junior Securities, and no redemption or other acquisition of any Junior Securities shall be made directly or indirectly by the Corporation if, when the payment of any such dividends, distribution, redemption or acquisition is to be made: (a) any dividend which shall have become due on any share of Series C Preferred Stock shall remain unpaid (except unpaid dividends added to the Liquidation Value of Series C Preferred Stock pursuant to Section 3.4), or (b) any other payment or distribution on or with respect to any shares of Series C Preferred Stock under the terms hereof which shall have been due from the Corporation at such time shall not have been made in full. The term "Junior Securities" shall mean any equity security of any kind which the Corporation shall at any time issue or be authorized to issue other than Series C Preferred Stock and Series B Preferred Stock that the Corporation heretofore authorized. 6.2 Voting Rights. The holders of Series C Preferred Stock shall be entitled to notice of all stockholders' meetings in accordance with the By-laws of the Corporation and to vote on all matters submitted to the vote of the holders of Common Stock; provided, that each share of Series C Preferred Stock shall represent such number of votes as shall equal the number of shares of Common Stock into which such share is convertible at such time in accordance with the provisions of Section 4, hereof. 6.3 Method of Payments. Any payment at any time due with respect to any share of Series C Preferred Stock (including but not limited to any payment of any dividend due on such share, the payment of the Redemption Price for such share, and any payment due on such share under Section 5) shall be made by means of a check to the order of the record holder shown on the Corporation's records, mailed by first class mail. 6.4 Amendment and Waiver. No change affecting any interests of the holders of shares of Series C Preferred Stock, including without limitation the amendment of any rights or preferences of the Series C Preferred Stock or the establishment of any class of stock ranking as to distribution of assets prior to the Series C Preferred Stock, shall be binding or effective unless such change shall have been approved in writing by the holders of at least 51% of the shares of Series C Preferred Stock outstanding at the time such change shall be made. 6.5 Registration of Transfer of Series C Preferred Stock. The Corporation will keep at one of its share transfer agencies, or in the event that at that time there is no such agency, then in its principal office, a register for the registration of the Series C Preferred Stock. Upon the surrender of any certificate representing shares of Series C Preferred Stock at such agency or the Corporation's principal office, the Corporation will, at the request of the registered holder of such certificate, execute and deliver, at the Corporation's expense, a new certificate or certificates in exchange representing the number of shares of Series C Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall be substantially identical in form to the surrendered certificate, and the shares of Series C Preferred Stock represented by such new certificate shall earn cumulative dividends from the date to which dividends shall have been paid on the shares represented by the surrendered certificate or certificates. 6.6 Replacement. Upon receipt by the Corporation of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Series C Preferred Stock (an affidavit of the registered holder without bond being satisfactory for this purpose) the Corporation, at its expense, will execute and deliver in lieu of such certificate, a new certificate of like kind, representing the number of shares of Series C Preferred Stock which shall have been represented by such lost, stolen, destroyed or mutilated certificate, dated and earning cumulative dividends from the date to which dividends shall have been paid on such lost, stolen, destroyed or mutilated certificate. IN WITNESS WHEREOF, ALPHA HOSPITALITY CORPORATION has caused this Certificate of Designation to be executed by its President and attested to by its Secretary this 29th day of May, 1998. ALPHA HOSPITALITY CORPORATION /s/ Stanley S. Tollman Stanley S. Tollman, Chairman and President ATTEST: /s/ Herbert F. Kozlov Herbert F. Kozlov, Secretary EX-10 4 MERGER AGREEMENT AND PLAN OF REORGANIZATION This MERGER AGREEMENT and PLAN OF REORGANIZATION (the "Agreement") dated as of March 26, 1999 is by and among ALPHA PEACH TREE CORPORATION ("APT"), a Delaware corporation whose principal office is located at 12 East 49th Street, New York, New York 10017; ALPHA HOSPITALITY CORPORATION ("AHC"), the parent of APT, which is a Delaware corporation whose principal office is located at 12 East 49th Street, New York, New York 10017; Forrest Caldwell ("Caldwell"), William H. Shaw ("Shaw"),Roger D. Watson ("Watson") and John Scarboro ("Scarboro" and, collectively with Caldwell, Shaw and Watson, the "SGF Shareholders") and SOUTH GEORGIA FRAMES UNLIMITED, INC.,a Georgia corporation whose principal address is 501 S. Elm Street, Adel, Georgia 31620 ("SGF") R E C I T A L S: A. APT is a wholly-owned subsidiary of AHC and is authorized to issue 200 shares of Common Stock, no par value (the "APT Shares") of which 200 shares are issued and outstanding. B. SGF is in the business of manufacturing and selling single family mobile homes ("SGF's Business"). C. The respective Boards of Directors of SGF and APT deem it desirable and in the best interests of their respective corporations, and of their respective stockholders, that SGF merge with and into APT in accordance with the Delaware General Corporation Law ("DGCL") and the Georgia Business Corporation Code ("GBCC"), as a result of which APT, the surviving corporation, and the holders of the outstanding capital stock of SGF will receive the consideration hereinafter set forth. D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). E. AHC and Sunstate Manufactured Homes of Georgia, Inc. d/b/a Peachstate Homes, an affiliate of SGF, have agreed to merge (the "Sunstate Merger") into APT as set forth in a separate Merger Agreement and Plan of Reorganization (the "Sunstate Merger Agreement"). The simultaneous consummation of the mergers of SGF and Sunstate, respectively, into APT is a condition to the consummation of both the SGF Merger and the Sunstate Merger. NOW, THEREFORE, in consideration of the terms, conditions, agreements and covenants contained herein, and in reliance upon the representations and warranties contained in this Agreement, the parties hereto agree as follows: 1. MERGER OF SGF WITH AND INTO APT 1.1 The Merger; Survival of APT. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 1.2 below), SGF shall be merged with and into APT in accordance with the provisions of Section 252 of the DGCL and Section 14-2-1107 of the GBCC and with the effect provided in Sections 259 and 261 of the DGCL and 14-2-1106 of the GBCC, and the separate existence of SGF shall thereupon cease. APT shall be the surviving corporation in the Merger (hereinafter sometimes referred to as "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time of the Merger, (a) Surviving Corporation shall possess all assets and property of every description, and every interest therein, wherever located, and the rights, privileges, immunities, powers, franchises and authority, of a public as well as of a private nature, of SGF, (b) all obligations belonging to or due SGF shall be vested in, and become the obligations of, Surviving Corporation without further act or deed, (c) title to any real estate or any interest therein vested in SGF shall not revert or in any way be impaired by reason of the Merger,(d) all rights of creditors and all liens upon any property of SGF shall be preserved unimpaired, and (e) Surviving Corporation shall be liable for all of the obligations of SGF and any claim existing, or action or proceeding pending, by or against SGF may be prosecuted to judgment with right of appeal, as if the Merger had not taken place. 1.2 Effective Time of the Merger. The Merger shall become effective at such time (the"Effective Time") as a Certificate of Merger, in the form set forth as Exhibit 1.2 hereto, is filed with the Secretaries of State of the State of Delaware and the State of Georgia (the "Merger Filings") or such later date and time as may be specified in the Certificate of Merger, such filing shall be made simultaneously with or as soon as practicable after the closing of the transactions contemplated by this Agreement (the "Effective Date"). 1.3 Consideration for the Merger. 1.3.1 Merger Value. As used herein, "Merger Value" shall be $1,248,145. The SGF Shareholders hereby represent and warrant that such value represents five times the twelve month cash flow of Sunstate and SGF for the period ended December 31, 1998, as set forth in the December 31, 1998 unaudited statement of cash flow, as calculated in accordance with Schedule 1.3.1 hereof, that the data on Schedule 1.3.1 is true and accurate in all material aspects, and that Schedule 1.3.1 hereof is a true, complete and correct calculation, accurate in all material respects, of the Merger Value. 1.3.2 Merger Consideration. As used herein the "Merger Consideration" shall consist of: (i) Cash equal to $624,073, representing 50% of the Merger Value ("Cash Consideration"); plus (ii) A number of shares of AHC common stock having a market value equal to 25% of the Merger Value (the "Alpha Merger Stock"). The aggregate value, and number of shares, of the Alpha Merger Stock shall be based on a per share valuation equal to the fourteen (14) day average of the closing price of AHC Common Stock as reported on the Nasdaq Small Cap Market, for the fourteen (14) successive trading day period terminating two (2) days prior to the Closing Date (the "Alpha Merger Stock Valuation"); plus (iii) A number of shares of AHC Series D Preferred Stock having an aggregate liquidation value of 25% of the Merger Value (the "Preferred Stock"). 1.4 Conversion of the SGF Stock; Registration of AHC Merger Stock. The manner and basis of converting the shares of SGF Stock (as defined below) into shares of AHC Common Stock shall be as follows: 1.4.1 Conversion Ratio. (i) SGF has issued and outstanding 9,000 shares of Common Stock (the "SGF Shares"). Each share of SGF Stock shall, by virtue of the Merger and without any action on the part of the holder thereof, or any other action whatsoever, be converted into .0111% of the Merger Consideration. (ii) Each issued share of APT common stock shall remain unchanged. 1.4.2 No Fractional Shares. No rights to receive fractional shares of or interests in fractional Alpha Merger Stock shall arise under this Agreement, and no certificates or scrip representing fractional Alpha Merger Stock shall be issued hereunder. Upon surrender of a certificate or certificates previously evidencing SGF Stock, any fractional share interest or interests in Alpha Merger Stock that the holder of such certificate or certificates would otherwise be entitled to receive shall be paid by AHC to such holder by check in an amount based upon the Alpha Merger Stock Valuation m ultiplied by the fractional number of shares to which such holder would be entitled. 1.4.3 Unregistered Stock. Certificates evidencing the Alpha Merger Stock shall bear an appropriate legend to the effect that they have not been registered with the Securities and Exchange Commission or any other state securities authority. 1.4.4 Registration Rights. The SGF Shareholders shall collectively have certain "piggy back" rights with regard to the Alpha Merger Stock and also shall have the right to make one request that AHC register all or a portion of the Alpha Merger Stock with the Securities and Exchange Commission ("SEC") pursuant to the requirements of the Securities Act of 1933, as amended, and all Rules and Regulations promulgated thereunder (the "Act"), during the twelve (12) month period following the Closing Date, subject to the terms and conditions of that certain Registration Rights Agreement of even date herewith between AHC and the SGF Shareholders, a copy of which is appended hereto as Exhibit 1.4.4. 1.4.5 Valuation Protection. For a period of eighteen months after the effective date of the registration of the Alpha Merger Stock, if any SGF Shareholder sells any of his Alpha Merger Stock in an open market brokered transaction for less than 80% of the Alpha Merger Stock Valuation, APT shall pay such SGF Shareholder the negative difference, if any, between (x) the sales price on such Stock sale, (making no deduction or adjustment for fees or commissions paid in connection with such sale) (the "Gross Sales Price"), minus (y) 80% of the Alpha Merger Stock Valuation. The result of the application of the foregoing formula is referred to as the "Shortfall". APT shall have the option to pay any Shortfall by (i) making a cash payment in the amount of the Shortfall; or (ii) causing AHC to issue additional unregistered shares of AHC Common Stock having a value equal to the Shortfall; or (iii) a combination of (i) or (ii). For purposes of valuing Alpha Common Stock used to pay all or a portion of a Shortfall, Alpha Common Stock shall be deemed to have a value equal to the average closing bid price for AHC common stock as reported by the Nasdaq Small Cap Market, or any other such national exchange, public market or over-the-counter market on which the AHC Common Stock is then trading (the "Primary Exchange"), for each of the ten (10) trading days preceding the SGF Shareholder's sale triggering this obligation, and the ten (10) days succeeding such sale. If, however, at any time during the eighteen month period following the effective date of the registration of the Alpha Merger Stock, AHC's Common Stock's average closing price, as reported by the Primary Exchange, for fourteen (14) consecutive days is at least 120% of the Alpha Merger Stock Valuation, the provisions of this Section 1.4.5 will expire and terminate. 1.4.6 Preferred Stock Designations. The rights and designations of the Preferred Stock shall be as set forth in the Series D Preferred Stock Certificate of Designation in the form attached hereto as Exhibit 1.4.6. Such rights and designations shall include, without limitation, the following provisions: (i) Each share of Series D Preferred Stock to be entitled to an annual dividend of an amount equal to nine percent (9%) of the liquidation value of such share, which shall be payable, at AHC's election, in either cash or shares of AHC Common Stock. For purposes of valuing Alpha Common Stock used to pay all or a portion of a dividend, Alpha Common Stock shall be deemed to have a value equal to the average closing bid price as reported by the Primary Exchange for AHC common stock for each of the ten (10) days preceding such event of liquidation and for each of the ten (10) days succeeding such event. The aggregate liquidation value of the Preferred Stock shall be equal to twenty- five percent (25%) of the Merger Value. (ii) Each share of Series D Preferred Stock shall be convertible into shares of AHC Common Stock at a per-share price for such common stock equal to two times the Alpha Merger Stock Valuation. AHC shall have the right, at any time during the five year period immediately succeeding the Closing Date to redeem the Preferred Stock for a payment in cash equal to the liquidation value of the Preferred Stock, plus any accrued and unpaid dividends, upon fourteen (14) days' notice to the SGF Shareholders. The SGF Shareholders shall have the option to accept the cash redemption or to exercise their conversion option during such fourteen (14) day period. On the fifth anniversary of the Closing Date the Preferred Stock shall automatically convert into AHC Common Stock at a price equal to two times the Alpha Merger Stock Valuation. 1.5 Exchange at Closing. (a) At the Closing, AHC and APT shall deliver to the SGF Shareholders: (i) certificates for the AHC Merger Stock and the Preferred Stock; (ii) bank checks or wire transfers for the Cash Consideration. (b) The SGF Shareholders shall deliver certificates to AHC and APT evidencing the SGF Shares. (c) In the event the Merger cannot be consummated on the Closing Date, the deliveries made pursuant to (a) and (b) above shall be placed in escrow with Parker Duryee Rosoff & Haft, attorney for AHC, who, pursuant to a written escrow agreement in form attached hereto as Exhibit 1.5, shall be instructed to release the foregoing from escrow promptly upon notification of the effectiveness of the Merger on the Effective Date. All documents executed in connection herewith in anticipation of Closing, if any, shall likewise be held pursuant to such Escrow Account. 1.6 Effect of Merger. As of the Effective Date, all of the following shall occur: (a) The separate existence and corporate organization of SGF (except insofar as it may be continued by statute) shall cease and APT, as the corporation surviving the Merger, shall possess the rights, privileges, powers and franchises, and be subject to all the restrictions, disabilities and duties of, SGF in the manner specified in the corporate laws of the States of Georgia and Delaware. (b) The Certificate of Incorporation of APT, as in effect on the Effective Date, shall continue in effect without change or amendment. (c) The By-laws of APT, as in effect on the Effective Date, shall continue in effect without change or amendment. (d) Upon the Effective Date, the Board of Directors of APT shall continue. 1.7 Disclosure Schedules. Simultaneously with the execution of this Agreement, (a) SGF and the SGF Shareholders shall deliver a schedule relating to SGF and the SGF Shareholders (the "SGF Disclosure Schedule"), and (b) AHC shall deliver a schedule relating to AHC and APT (the "Alpha Disclosure Schedule" and, collectively, with the SGF Disclosure Schedule, the "Disclosure Schedules") setting forth the matters required to be set forth in the Disclosure Schedules as described elsewhere in this Agreement. The Disclosure Schedules shall be deemed to be part of this Agreement. 2. CONDUCT OF BUSINESS PENDING CLOSING; STOCKHOLDER APPROVAL SGF (which for purposes of this Article 2 shall include the SGF Shareholders) and AHC (which for purposes of this Article 2 shall include APT) covenant that between the date hereof and the Closing Date (as hereinafter defined): 2.1 General. Each of the parties agrees to use his, her or its best efforts to take, or cause to be taken, all action to do, or cause to be done all things necessary, proper or advisable to consummate and make effective the Sunstate Merger and the SGF Merger. 2.2 Notices and Consents. 2.2.1 SGF shall give any notices to third parties, and use its best efforts to obtain any third party consents that AHC may request in connection with the matters pertaining to SGF and its Business, whether disclosed or required to be disclosed in the Disclosure Schedule. Each of SGF and AHC shall take any additional action that may be necessary, proper or advisable in connection with any other notices to, filings with, and authorizations, consents and approvals of, governments, governmental agencies and third parties, that such party is required to give, make or obtain. 2.2.2 Schedule 2.2 lists all of the obligations of SGF for which any of the SGF Shareholders have given personal guaranties or are otherwise personally obligated and the amounts of such obligations. The SGF Shareholder shall be removed from such personal obligations prior to the Closing. 2.3 Access by AHC. SGF shall afford to AHC and to AHC's counsel, accountants and other representatives full access, during normal business hours, throughout the period prior to the Closing Date, (a) to all of the books, contracts and records of SGF and shall furnish AHC during such period with all information concerning SGF that AHC may reasonably request and (b) to the properties of SGF in order to conduct inspections at AHC's expense to determine that SGF is operating in material compliance with all applicable federal, state and local and foreign statutes, rules and regulations, and that SGF's assets are substantially in the condition and of the capacities represented and warranted in this Agreement. Any such investigation or inspection by AHC shall not be deemed a waiver of, or otherwise limit, the representations, warranties and covenants contained herein. 2.4 Conduct of Business. During the period from the date hereof to the Closing Date, the business of SGF shall be operated by SGF in the usual and ordinary course of such business and in material compliance with the terms of this Agreement. Without limiting the generality of the foregoing: 2.4.1 SGF shall use its reasonable efforts to (i) keep available the services of the present employees and agents of SGF; (ii) complete or maintain all existing arrangements including but not limited to filings, licensing, affiliate arrangements, transferrals, leases and other arrangements referred to in Section 3.6.1 in full force and effect in accordance with their existing terms; (iii) maintain the integrity of all confidential information of SGF; (iv) maintain in full force and effect the existing insurance policies (or policies providing substantially the same coverage, copies of which shall be made available to AHC) insuring the business and properties of SGF; (v) comply in all material respects with all applicable laws; and (vi) preserve the goodwill of, and SGF's business and contractual relationship with, suppliers, customers and others having business relations with SGF; and 2.4.2 SGF shall not (i) sell or transfer any of its assets or property; (ii) shall not make any distribution, whether by dividend or otherwise, to any of its stockholders or employees except for compensation to employees and payments to associated companies for goods and services, in the usual and ordinary course of business; (iii) not declare any dividend or other distribution; (iv) redeem or otherwise acquire any shares of its capital stock or other securities; (v) issue or grant rights to acquire shares of its capital stock or other securities; or (vi) agree to do any of the foregoing. 2.5 Exclusivity to AHC. SGF and its officers, directors, representatives and agents, from the date hereof until the Closing (unless this Agreement shall be earlier terminated as hereinafter provided), shall not (i) solicit, initiate, or encourage the submission of any proposal or offer from any person (including any of them) relating to (A) liquidation, dissolution or recapitalization; (B) merger or consolidation; (C) acquisition or purchase of securities or assets; or (D) similar transactions, or (ii) hold discussions with any person other than AHC, negotiate or entertain any inquiries, proposals or offers to purchase the business of SGF or the shares of capital stock of SGF, or, except in connection with the normal operation of SGF's business, disclose any confidential information concerning SGF to any person other than AHC and AHC's representatives or agents. SGF shall notify AHC immediately if any person makes any proposal, offer, inquiry or contact with respect to the foregoing. 2.6 Sunstate Merger. AHC and Sunstate shall in good faith use their best efforts to consummate the Sunstate Merger in accordance with the terms of the Sunstate Merger Agreement so that the Sunstate Merger may close on the Closing Date simultaneously with the SGF Merger. 2.7 Negotiation of Financing. The Board of Directors of AHC shall use its reasonable efforts to locate a source of, and to negotiate appropriate financing for the Merger in amounts, and on terms and conditions, acceptable to the directors of AHC in the exercise of their sole discretion. 2.8 Agreement to Vote for the Merger. 2.8.1 The Board of Directors of SGF has determined that the Merger is advisable and in the best interests of the stockholders of SGF and, subject to its fiduciary obligations as advised in writing by counsel, shall recommend that SGF's stockholders vote to approve and adopt this Agreement and the Merger. The SGF Shareholders hereby irrevocably agree to the Merger and hereby covenant to provide SGF with such approval and adoption either (i) at a meeting of the SGF Shareholders or (ii) pursuant to the written consent of the SGF Shareholders in lieu of a meeting as soon as practicable after the date of this Agreement. 2.8.2 Subject to the completion to its satisfaction of all due diligence, and the securing of appropriate financing on terms it deems acceptable, if in the determination of AHC's Board of Directors (based on advice from AHC's counsel) it shall be necessary to obtain shareholder approval of the Merger for the AHC shareholders, AHC shall use its reasonable efforts to promptly prepare a Proxy Statement and file such document with the Securities and Exchange Commission. Upon approval of such Proxy, AHC will use its reasonable efforts to solicit and obtain shareholder approval for the Merger. 3. REPRESENTATIONS AND WARRANTIES OF THE SGF SHAREHOLDERS AND SGF As used in this Agreement, the following terms shall have the meanings indicated below: The term "Basis" as used in this Agreement means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that forms the basis for any specified consequence. The term "Knowledge" as used in this Agreement with respect to a party's awareness of the presence or absence of a fact, event or condition shall mean (a) actual knowledge plus, if different, (b) the knowledge that would be obtained if such party conducted itself faithfully and exercised a sound discretion in the management of his own affairs. The term "Liability" as used herein shall mean any liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due). Except as set forth in the SGF Disclosure Schedule in each instance, each of the SGF Shareholders, jointly and severally, and SGF, hereby represents and warrants to AHC and APT as follows, with the knowledge and understanding that AHC and APT are relying upon such representations and warranties: 3.1 Organization and Standing. 3.1.1 SGF is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia which has all requisite corporate power to own its assets and to carry on its business as it is now being conducted. 3.1.2 SGF is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions set forth in Section 3.1.2 of the SGF Disclosure Schedule and, to the knowledge of the SGF Shareholders, in each jurisdiction where such qualification is necessary under applicable law except where the failure to qualify (individually or in the aggregate) will not have any material adverse effect on the respective business or prospects of SGF. 3.1.3 The copies of the Certificate of Incorporation, By-laws and minute books of SGF, as they may be amended to date, as has been delivered to AHC, are true and complete copies of these documents as now in effect. The minute books of each corporation are accurate in all material respects. 3.2 Capitalization. 3.2.1 The authorized capital stock of SGF, the number of shares of capital stock which are issued and outstanding, the par value thereof and the record and beneficial holders thereof are as set forth in Section 3.2 of the SGF Disclosure Schedule. The SGF Shareholders own all of the issued and outstanding shares of common stock of SGF free and clear of all liens and encumbrances of any kind. All of the shares of capital stock that are issued and outstanding of SGF are duly authorized, validly issued and outstanding, fully paid and nonassessable, and were not issued in violation of the preemptive rights of any person. Other than as set forth in Section 3.2 of the SGF Disclosure Schedule, there are no subscriptions, options, warrants, rights or calls or other commitments or agreements to which SGF is a party or by which such entity is bound, calling for any issuance, transfer, sale or other disposition of any class of securities of SGF. There are no outstanding rights, contracts, or securities convertible or exchangeable, actually or contingently, into common stock or any other securities of SGF. 3.2.2 None of the issued and outstanding shares of common stock of SGF is subject to any buy-sell agreements, shareholder agreements, pledge obligations or any other restrictive covenants other than as set forth in Section 3.2.2 of the SGF Disclosure Schedule. Any such restrictions in effect as of the date hereof shall be canceled and be of no further force and effect as of the Closing Date. 3.2.3 SGF is not a party to any management agreement or an agreement which in effect places a restriction upon the management of SGF. 3.3 Subsidiaries. SGF does not own or have an interest in any other corporation, partnership, joint venture or other entity. 3.4 Authority. 3.4.1 SGF's Board of Directors has determined that the Merger is fair to, and in the best interests of, SGF's stockholders and has approved and adopted this Agreement and the Merger and has adopted a resolution recommending approval and adoption of this Agreement and the Merger by SGF's stockholders. The SGF Shareholders, being the holders of all of the issued and outstanding shares of SGF's common stock, irrevocably consent to the merger and shall deliver evidence of such approval and resolution adoption at Closing. Assuming the delivery of SGF Shareholder consent, this Agreement constitutes, and all other agreements contemplated hereby will constitute, when executed and delivered by SGF and the SGF Shareholders in accordance herewith, the valid and binding obligations of SGF and the SGF Shareholders, enforceable in accordance with their respective terms. 3.4.2 The execution and delivery of this Agreement by SGF and the SGF Shareholders does not, and the consummation by SGF and the SGF Shareholders of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or in an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of SGF under any of the terms, conditions or provisions of (i) the Certificate of Incorporation or By-laws of SGF, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to SGF or any of its properties or assets, or (iii) except as set forth in Section 3.4.2 of the SGF Disclosure Schedule, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which SGF is now a party or by which SGF or any of its or their properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii), such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of SGF. 3.5 Assets. SGF has good and marketable title to or licenses to all of the assets and properties which each purports to own as reflected on the most recent balance sheet comprising a portion the SGF Financial Statements (as defined below), or thereafter acquired. SGF has a valid leasehold interest in all material properties of which it is the lessee and each such lease is valid, binding and enforceable against SGF, as applicable, and, to the knowledge of the SGF Shareholders, the other parties thereto in accordance with its terms. SGF is not, nor, to the knowledge of the SGF Shareholders, is any other party in default in the performance of any material provision thereunder. No material portion of the assets of SGF is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to their knowledge, has any such condemnation, expropriation or taking been proposed. None of the material assets of SGF is subject to any restriction which would prevent continuation of the use currently made thereof or materially adversely affect the value thereof. 3.6 Contracts, Etc. 3.6.1 Section 3.6.1 of the SGF Disclosure Schedule consists of a true and complete list of all contracts, agreements, purchase orders, commitments and other instruments (whether oral or written) to which SGF is a party that (i) involve a receipt or an expenditure by SGF or require the performance of services or delivery of goods to, by, through, on behalf of or for the benefit of SGF, which in each case, relates to a contract, agreement, commitment or instrument that either (A) requires payments or receipts in excess of $10,000 per year or (B) is not terminable by SGF on notice of thirty (30) days or less without penalty or SGF being liable for damages, or (ii) involve an obligation for the performance of services or delivery of goods by SGF that cannot, or in reasonable probability will not, be performed within thirty (30) days from the dates as of which these representations are made. 3.6.2 All of the contracts and other instruments described on Schedule 3.6.1 are valid and binding upon SGF and, to the knowledge of the SGF Shareholders, the other parties thereto, and are in full force and effect and enforceable in accordance with their terms, even after giving effect to the Merger, and SGF has not, nor do any of the SGF Shareholders know of any other party to any such contract, agreement, commitment or other instrument, who has breached any provision of, and, to the knowledge of the SGF Shareholders, no event has occurred which, with the lapse of time or action by a third party, could result in a default under the terms thereof which, alone or in the aggregate, would provide the Basis for a claim against SGF in excess of $50,000, and, there are no existing facts or circumstances which would prevent SGF's contracts and agreements, respectively, from maturing in due course into fully collectible accounts receivable. Except for terms specifically described in Section 3.6.1 of SGF's Disclosure Schedule, neither SGF nor any SGF Shareholder has received any payment from any contracting party in connection with, or as an inducement for, entering into any contract, agreement, commitment or instrument except for payment for actual services rendered or to be rendered by SGF consistent with amounts historically charged for such service. 3.7 Litigation. Except as described on Section 3.7 of the SGF Disclosure Schedule, there is no claim, suit, action, proceeding, or investigation (a "Litigation") pending or, to the knowledge of the SGF Shareholders, threatened against or affecting SGF before or by any court, arbitrator or governmental agency or authority which, alone or in the aggregate, could or will have a material adverse effect on the operations or prospects of SGF. There is no current or past policy, action, failure to act, or other omission which could form the Basis for any such Litigation. There is no strike or unresolved labor dispute relating to SGF's employees which, in the judgment of the SGF Shareholders, could have a material adverse effect on the business or prospects of SGF. There are no decrees, injunctions or orders of any court, governmental department, agency or arbitration outstanding against SGF. 3.8 Taxes. Except as described on Section 3.8 of the SGF Disclosure Schedule: 3.8.1 SGF has (i) duly and timely filed with the appropriate governmental authorities all Tax returns (as defined in subsection 3 below) required to be filed by it, and they each have not filed for an extension to file any Tax Returns and such Tax Returns are true, correct and complete in all material respects, and (ii) duly paid in full or made adequate provision for the payment of all Taxes (as defined in subsection (b) below) shown to be due on such Tax Returns, except for the payment of state and local sales taxes which, alone or in the aggregate, would not have a material adverse effect on the business, operations, properties, assets, condition (financial or other), result of operations or prospects of such company. The Tax Returns referred to in clause (i) hereinabove either have been examined by the United States Internal Revenue Service (the "IRS") or the appropriate governmental authority, or the period of assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired. All deficiencies asserted or assessments made as a result of such examinations have been paid in full and no issues that have been raised by the relevant governmental authority in connection with the examination of any of the Tax Returns referred to in clause (i) hereinabove are currently pending. No claim has been made by any authority in a jurisdiction where SGF does not file a Tax Return that such activity is or may be subject to Tax in such jurisdiction. No waiver of statutes of limitation have been given by or requested with respect to any Taxes of SGF. SGF has not agreed to any extension of time with respect to any Tax deficiency. The Liabilities and reserves for Taxes reflected in SGF's Consolidated Balance Sheet as of December 31, 1998 will be adequate to cover all Taxes for all periods ending on or prior to such respective dates, and there are no liens for Taxes upon any property or asset of the respective company's, except for liens for Taxes not yet due. There are no unresolved issues of law or fact arising out of a notice of deficiency, proposed deficiency or assessment from the IRS or any other governmental taxing authority with respect to Taxes of SGF which, if decided adversely, singly or in the aggregate, would have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of SGF. SGF is not a party to any agreement providing for the allocation or sharing of Taxes with any entity. SGF has not, with regard to any assets or property held, acquired or to be acquired by it, filed a consent to the application of Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). SGF has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. No Tax is required to be withheld pursuant to Section 1445 of the Code as a result of the transfer contemplated by this Agreement. As a result of the Merger, SGF will not be obligated to make a payment to an individual that would be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. 3.8.2 For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, property, sales, withholdings, social security, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed or with respect to any such taxes, charges, fees, levies or other assessments. 3.8.3 For purposes of this Agreement, the term "Tax Return" shall mean any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. 3.9 Employee Benefit Plans; ERISA. 3.9.1 At the date hereof, except as set forth in Section 3.9.1 of SGF's Disclosure Schedule, SGF maintains or contributes to no employee benefit plans, programs, arrangements and practices (such plans, programs, arrangements and practices of an entity being referred to as "Company Plans"), including employee benefit plans within the meaning set forth in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated thereunder, as in effect from time to time ("ERISA"), or any written employment contracts providing for an annual base salary in excess of $100,000 and having a term in excess of one year, which contracts are not immediately terminable without penalty or further ability, or other similar arrangements for the provision of benefits (excluding any "Multiemployer Plan" within the meaning of Section 3(37) of ERISA or a "Multiple Employer Plan" within the meaning of Section 413(c) of the Code, and all regulations promulgated thereunder, as in effect from time to time). Section 3.9.1 of SGF's Disclosure Schedule lists all Multiemployer Plans and Multiple Employer Plans which SGF maintains or to which it makes contributions. SGF has no obligation to create any additional such plan or to amend any such plan so as to increase benefits thereunder, except as required under the terms of the Company Plans, under existing collective bargaining agreements or to comply with applicable law. 3.9.2 Except as set forth in Section 3.9.2 of the SGF Disclosure Schedule, (i) there have been no prohibited transactions within the meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with respect to any Company Plans that could result in penalties, taxes or liabilities which, singly or in the aggregate, could have a material adverse effect on the business, operations, properties, assets, condition (financial or other) results of operations or prospects of SGF, (ii) except for premiums due, there is no outstanding liability in excess of $50,000, whether measured alone or in the aggregate, under Title IV of ERISA with respect to any of the Company Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan administrator has instituted proceedings to terminate any of the Company Plans subject to Title IV of ERISA other than in a "standard termination" described in Section 4041(b) of ERISA, (iv) none of the Company Plans have incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the Company Plans ended prior to the date of this Agreement, (v) each of the Company Plans has been operated and administered in all material respects in accordance with applicable laws during the period of time covered by the applicable statute of limitations, (vi) each of the Company Plans which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified and such determination has not been modified, revoked or limited by failure to satisfy any condition thereof or by a subsequent amendment thereto or a failure to amend, except that it may be necessary to make additional amendments retroactively to maintain the "qualified" status of such Company Plan, and the period for making any such necessary retroactive amendments has not expired, (vii) with respect to Multiemployer Plans, SGF has not made or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203, 4204 and 4205 of ERISA and, to the best knowledge of the SGF Shareholders, no event has occurred or is expected to occur which presents a material risk of a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (viii) there are no pending or, to the best knowledge of the SGF Shareholders, threatened or anticipated claims involving any of the Company Plans other than claims for benefits in the ordinary course, and (ix) SGF has no current liability in excess of $50,000, whether measured alone or in the aggregate, for plan termination or withdrawal (complete or partial) under Title IV of ERISA based on any plan to which any entity that would be deemed one employer with SGF under Section 4001 of ERISA or Section 414 of the Code contributed during the period of time covered by the applicable statute of limitations (the "Company Controlled Group Plans"), and SGF does not reasonably anticipate that any such liability will be asserted against the Company, none of the Company Controlled Group Plans has an "accumulated funding deficiency" (as defined in Section 302 of ERISA and 412 of the Code), and no Company Controlled Group Plan has an outstanding funding waiver which could result in the imposition of liens, excise taxes or liability at SGF in excess of $50,000 whether measured alone or in the aggregate. 3.10 Compliance with Laws and Regulations. 3.10.1 SGF has complied and is presently complying, in all material respects, with all laws, rules, regulations, orders and requirements (federal, state and local and foreign) applicable to it in all jurisdictions where the business of each such entity is conducted or to which each such entity is subject, including, without limitation, all applicable federal and state laws regulating the production, sale and delivery of mobile homes and other products manufactured and marketed by SGF, civil rights and equal opportunity employment laws and regulations, HUD regulations and all federal, antitrust, antimonopolies and fair trade practice laws ("Laws") and the SGF Shareholders know of no pending or anticipated changes to such Laws that could cause SGF's current business practices to fall out of compliance with such Laws. The SGF Shareholders do not know of any assertion by any party that SGF is in violation in any material respect of any such laws, rules, regulations, orders, restrictions or requirements with respect to its operations and no notice in that regard has been received by SGF. SGF has complied and currently complies with all applicable laws (including rules and regulations thereunder) relating to employment of labor, employee civil rights and equal employment opportunities. 3.10.2 SGF, has not: (i) violated in any respect or received a notice or charge asserting any violation of the Sherman Act, the Clayton Act, the Robinson-Patman Act or the Federal Trade Commission Act, each as amended; (ii) made or agreed to make any contribution payment or gift of funds or property to any governmental official, employee or agent where either the contribution, payment or gift or the purpose thereof was illegal under the laws of any federal, state or local jurisdiction; or (iii) established or maintained any unrecorded fund or asset account for any purpose. 3.11 Certain Agreements. 3.11.1 Except as described on Section 3.11.1 of the SGF Disclosure Schedule, as of the date hereof, SGF is not a party to any oral or written (i) consulting or similar agreement with any present or former director, officer or employee or any entity controlled by any such person not terminable on thirty days' or less notice involving the payment of not more than $25,000 per annum; (ii) agreement with any director, executive officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving any such company of the nature contemplated by this Agreement; (iii) agreement with respect to any director, executive officer or other key employee providing any term of employment or compensation guarantee extending for a period longer than one year and for the payment in excess of $100,000 per annum; or (iv) agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement, except as set forth in Section 3.11.1 of the Disclosure Schedule. 3.11.2 Except as set forth in Section 3.11.2 of the SGF Disclosure Schedule, SGF is not indebted for money borrowed, either directly or indirectly, from any of its officers, directors, or any Affiliate (as defined below), in any amount whatsoever, nor are any of its officers, directors, or Affiliates indebted for money borrowed from such entity; nor are there any transactions of a continuing nature between such entity and any of its officers, directors, or Affiliates (other than by or through the regular employment thereof) not subject to cancellation which will continue beyond the Closing Date, including, without limitation, use of SGF's, GHC's or SGHC's, respectively, assets for personal benefit with or without adequate compensation. For purposes of this Agreement, the term "Affiliate" shall mean any person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. As used in the foregoing definition, the term (i) "control" shall mean the power through the ownership of voting securities, contract or otherwise to direct the affairs of another person and (ii) "person" shall mean an individual, firm, trust, association, corporation, partnership, government (whether federal, state, local or other subdivision, or any agency or bureau of any of them) or other entity. 3.12 Environment, Health and Safety. Prior to the Closing Date, SGF, and, to the knowledge of the SGF Shareholders, SGF's predecessors and Affiliates, has complied with all applicable laws (including rules and regulations thereunder) of federal, state, and local governments (and all agencies thereof) concerning the environment, public health and safety and employee health and safety, and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice has been filed or commenced against any of them alleging any failure to comply with, or Liabilities, arising under any such law or regulation. Without limiting the foregoing: 3.12.1 SGF and the SGF Shareholders have not either jointly or severally received any notification of potential responsibility (and there is no Basis related to the past or present operations, facilities or properties of SGF and, to the knowledge of the SGF Shareholders, the predecessors of such entities, for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against SGF giving rise to any Liability) under, the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Resource Conservation and Recovery Act of 1976; the Federal Water Pollution Control Act of 1972; the Clean Air Act of 1970; the Safe Drinking Water Act of 1974; the Toxic Substances Control Act of 1976; the Refuse Act of 1988; the Emergency Planning and Community Right-to-Know Act of 1986; the Georgia Hazardous Site Reuse and Redevelopment Act; the Georgia Comprehensive Solid Waste and Management Act; the Georgia Hazardous Waste Management Act; the Georgia Hazardous Site Response Act; the Southeast Interstate Low-level Radioactive Waste Management Compact; the Georgia Underground Storage Tank Act; the Georgia Sewage Holding Tank Act and the Georgia Environmental Policy Act (each as amended), without limitation, or any other law (or rule or regulation thereunder) of any federal, state or local government (or agency thereof) concerning the release or threatened release of hazardous substances, public health and safety or pollution or protection of the environment; 3.12.2 SGF has no Liability (and, to the knowledge of the SGF Shareholders, no predecessors of SGF has handled or disposed of any substance, arranged for the disposal of any substance or owned or operated any property or facility in any manner that could form the Basis of any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against SGF giving rise to any Liability) for damage to any site, location or body of water (surface or subsurface) or for illness or personal injury; 3.12.3 SGF has obtained and been in compliance with all of the terms and conditions of all permits, licenses and other authorizations which are required under, and have complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables which are contained in all federal, state, local, and foreign laws (including rules, regulations, codes, plans, judgments, orders, decrees stipulations, injunctions and charges thereunder) relating to public health and safety, worker health and safety and pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes into ambient air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes; 3.12.4 All properties and equipment used in SGF's Business have been free of asbestos, PCB's, dioxins, dibenzofurans and Extremely Hazardous Substances (as such term is defined in the Emergency Planning and Community Right to Know Act of 1986, as amended); 3.12.5 All product labeling has been in conformity with applicable laws (including regulations thereunder); and 3.12.6 No pollutant, contaminant or chemical, industrial, hazardous or toxic material or waste ever has been buried, stored, spilled, leaked, discharged, emitted or released on any real property that SGF has ever owned, leases or has leased. Notwithstanding anything contained herein or in the SGF Disclosure Schedule to the contrary, the disclosure in the SGF Disclosure Schedule pursuant to, or relating in any way to, this Section 3.13 shall not detract from or diminish in any manner or to any extent any Liability of SGF and the SGF Shareholders, jointly and severally pursuant to Section 8.2 hereof. 3.13 Insurance. 3.13.1 Section 3.13 of the SGF Disclosure Schedule sets forth the name of each insurer, the name and telephone number of each insurance broker, the name of each policyholder, policy number, period of coverage, scope and amount, and a description of any retroactive premium adjustments or other loss-sharing arrangements for each insurance policy to which SGF has been a party, a named insured or otherwise the beneficiary of coverage at any time within the past five years. 3.13.2 With respect to each such insurance policy, except as otherwise specifically identified in Section 3.13 of the SGF Disclosure Schedule: (A) the policy is legal, valid, binding and enforceable and in full force and effect; (B) the policy will continue to be legal, valid, binding and enforceable and in full force and effect on identical terms following the Closing Date; (C) SGF has not, and to the SGF Shareholders' knowledge, no other party to the policy is in breach or default (including with respect to payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default or permit termination, modification or acceleration, under the policy; and (D) SGF has not nor, to the knowledge of the SGF Shareholders, has any other party to the policy repudiated any provision thereof. SGF is now covered, and has been covered during the past five years (dating back from the date of this Agreement), by insurance in scope and amount customary and reasonable for the business in which it has engaged during the aforementioned period and in which it currently engages. During the past five years SGF has not maintained any self-insurance arrangements. 3.14 Title and Use of Real and Other Property. 3.14.1 SGF has, and immediately prior to the Closing will have good, valid and marketable title in fee simple to all real property and structures ("Real Property") and all personal property reflected on SGF's Balance Sheet as owned by SGF and all Real Property and personal property acquired by SGF since December 31, 1998, in each case free and clear of liens except (i) as set forth in Section 3.14.1 of the SGF Disclosure S Schedule, (ii) for sales and other dispositions of inventory in the ordinary course of business since December 31, 1998 which, in the aggregate, have not been materially different from prior periods. 3.14.2 Section 3.14.2 contains a true and complete list and legal description of each parcel of Real Property owned by SGF and a general description of each structure thereon. The SGF Shareholders have heretofore furnished to AHC true and complete copies of all deeds, other instruments of title and policies of title insurance indicating and describing SGF's ownership of such Real Property, as well as copies of any survey or environmental reports relating to such Real Property. 3.14.3 Section 3.14.3 of the SGF Disclosure Schedule contains a list of all tangible personal property having in the aggregate a cost or fair market value in excess of $174,562, owned by SGF. 3.14.4 Section 3.14.4 of the SGF Disclosure Schedule contains a list of all Real Property leases, licenses and personal property leases under which SGF is the lessee or licensee, together with (i) the location and nature of each of the leased or licensed properties (including a legal description of all leased Real Property); (ii) the termination date of each such lease or license; (iii) the name of the lessor or licensor; and (iv) all rental and other payments made or required to be made. All leases and license, pursuant to which SGF leases or licenses from others real or personal property are valid, subsisting and in full force and effect in accordance with their respective terms, and there is not under any Real Property lease, personal property lease or license, any existing default or event of default (or event that, with notice or passage of time, or both, would constitute a default). True and complete copies of all real property leases, licenses and personal property leases listed in Section 3.14.4 have been delivered to AHC heretofore, as well as any copies of title reports, surveys or environmental reports or audits relating to any leased Real Property. Except as set forth in Section 3.14.4, no such lease or license will require the consent of the lessor or licensor to or as a result of the consummation of the transactions contemplated by this Agreement. 3.14.5 All personal property owned by SGF and all personal property held by such entities pursuant to leases is in good operating condition and repair, subject only to ordinary wear and tear, has been operated, serviced and maintained properly within the recommendation and requirements of the manufacturer thereof (if any) and is suitable and appropriate for the use thereof made and proposed to be made by SGF in their respective businesses and operations. The Real Property and personal property scheduled pursuant to this Section 3.14 comprise all of the Real Property and personal property used in, or necessary for the conduct of SGF's Business. 3.14.6 Except as set forth in Section 3.14.6 of the SGF Disclosure Schedule: (i) SGF is not in violation of, or default under any statute, law, ordinance, rule, regulation, permit, order, writ, judgment, injunction, decree or award ("Legal Requirement") pertaining to any of the Real Property. No notice of violation of any Legal Requirement, or of any covenant, condition, restriction or easement affecting any Real Property or with respect to the use or occupancy thereof, has been given to any SGF Shareholder or SGF; (ii) All structures on the Real Property are (A) in good operating condition and repair, (B) are adequate and suitable for the purpose for which they are currently and proposed to be used, and (C) are supplied with utilities and other services necessary for the operation of such structures and the business conducted by SGF therein, including gas, water, electricity, telephone, sanitary sewer and storm sewer, all of which services are maintained in accordance with all Legal Requirements and are provided via permanent, irrevocable, appurtenant easements in favor of SGF; (iii) No condemnation proceeding is pending or, to the knowledge of the SGF Shareholders, threatened which would impair the occupancy, use or value of any Real Property; (iv) No structure, nor the operations of SGF therein or thereon (A) is located outside of the boundary lines of the described parcel of land on which it is located, (B) is in violation of applicable setback requirements, zoning laws, or ordinances, (C) is subject to "permitted non-conforming use" or "permitted non-conforming structure" classification, or (D) encroaches any property owned by or easement granted in favor of a third party; (v) There are no (i) leases, subleases, licences, concessions or other agreements, written or oral, granting to any person the right to acquire, use, or occupy any portion of any, Real Property, (ii) outstanding options or rights of first refusal to purchase all or any portion of the Real Property, and (iii) persons other than SGF in possession of any Real Property; and (vi) Each parcel of Real Property owned by SGF (A) is fully and adequately described in the legal description therefor contained in the deed thereof, (B) abuts a paved public right-of-way, (C) does not serve any adjoining property for any purpose inconsistent with the use of the land, and (D) is not located within any flood plain or subject to any similar type restriction for which any permits or licenses necessary to the use thereof have not been obtained. 3.15 Condition of Assets. The equipment, real property, fixtures and other personal property of SGF are in good operating condition and repair (ordinary wear and tear excepted) for the conduct of their respective businesses as presently being conducted. Title to all such assets was acquired through arms-length transactions. All assets necessary for the conduct of SGF's Business are owned by SGF. 3.16 Inventories. The inventories of raw materials and other consumable items reflected in the Financial Statements do not include any items in any material amount that are below standard quality or are damaged, obsolete, slow- moving or of a quantity or quality not usable or suitable in the ordinary course of business. The Financial Statements reflect adequate reserves in accordance with GAAP, consistently applied, with respect to inventories and raw materials. The entire inventory was acquired in the ordinary course of business, on an arms - -length basis. 3.17 Employees. Except as set forth in Section 3.17 of the SGF Disclosure Schedule, none of the employees of SGF is represented by any labor union or collective bargaining unit and SGF nor the SGF Shareholders are not aware of any organizational efforts taking place with respect to such r epresentation. 3.18 Financial Statements. The SGF Disclosure Schedule contains unaudited balance sheets of SGF as at December 31, 1998 and related unaudited statements of operations, cash flows and stockholders' equity of SGF for the periods ended at such dates (collectively the "Financial Statements"). The Financial Statements present fairly, in all material respects, the financial position on the dates thereof and results of operations of SGF for the periods indicated, prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"). The Financial Statements are capable of being audited in accordance with Regulation S-X, promulgated by the Securities and Exchange Commission. There are no assets of SGF, the value of which is materially overstated in said balance sheets. 3.19 Undisclosed Liabilities. SGF has no Liability (and there is no Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against SGF giving raise to a Liability) except for (i) Liabilities set forth on the face of SGF's latest Balance Sheet (as opposed to the footnotes); (ii) Liabilities which have arisen after the date of the last balance sheet in the ordinary course of business; and (iii) Liabilities set forth as such in the SGF Disclosure Schedule. 3.20 Absence of Certain Changes or Events. Except as set forth in the SGF Disclosure Schedule, since December 31, 1998 (the "Balance Sheet Date"), there has not been: 3.20.1 any material adverse change in the financial condition, properties, assets, liabilities or business of SGF; 3.20.2 any material damage, destruction or loss of any material properties of SGF, whether or not covered by insurance; 3.20.3 any material adverse change in the manner in which the business of SGF has been conducted; 3.20.4 any material adverse change in the treatment and protection of trade secrets or other confidential information of SGF; and 3.20.5 any occurrence not included in sub-paragraphs 1 through 4 of this Section 3.20 which has resulted, or which the SGF Shareholders have reason to believe, might be expected to result in a material adverse change in the business or prospects of SGF. 3.21 Government Licenses, Permits, Etc. SGF has all material governmental licenses, permits, authorizations and approvals necessary for the conduct of its business as currently conducted ("Licenses and Permits"). Section 3.21 of the SGF Disclosure Schedule includes a list of all Licenses and Permits. All Licenses and Permits are in full force and effect, and no proceedings for the suspension or cancellation of any thereof is pending or, to their knowledge, threatened. The SGF Shareholders know of no action, omission or policy which could form a reasonable Basis for the loss of any such licensure. 3.22 Business Locations. SGF does not own or lease any real or personal property in any state or country except as set forth on the SGF Disclosure Schedule. Such entities have no executive offices or places of business except as otherwise set forth on the SGF Disclosure Schedule. 3.23 Intellectual Property. Section 3.23 of the SGF Disclosure Schedule sets forth a complete and correct list and summary description of all trademarks, trade names, service marks, service names, brand names, copyrights and patents, registrations thereof and applications therefore, applicable to or used in the business of SGF, GHC and SGHC, together with a complete list of all licenses granted by or to such entities with respect to any of the above. Except as otherwise set forth in Section 3.23, all such trademarks, trade names, service marks, service names, brand names, copyrights and patents are owned by SGF free and clear of all liens, claims, security interests and encumbrances of any nature whatsoever. SGF is currently not in receipt of any notice of any violation or infringements of, and such entities are not knowingly violating or infringing, the rights of others in any trademark, trade name, service mark, copyright, patent, trade secret, know-how or other intangible asset. 3.24 Continuity of Existing Arrangements. Except as set forth in Section 3.24 of the SGF Disclosure Schedule, the SGF Shareholders have no knowledge of, or the Basis for a belief that, either as a result of the transactions contemplated hereby or for any other reason (exclusive of expiration of a contract upon the passage of time), (i) any material distributor or supplier of SGF intends to discontinue, materially alter, or substantially diminish its relationship with such entity, or with APT, after the Closing Date or (ii) any key employee of SGF intends to terminate such employment. 3.25 Governmental Approvals. Except as set forth in Section 1.2 as to the Merger Filing, no authorization, license, permit, franchise, approval, order or consent of, and no registration, declaration or filing by SGF with, any governmental authority, domestic or foreign, federal, state or local, is required in connection with SGF's execution, delivery and performance of this Agreement. 3.26 Accounts Receivable. Except as set forth in Section 3.26 of the SGF Disclosure Schedule, all of the accounts receivable of SGF included in the Financial Statements or otherwise reflect actual transactions, have arisen in the ordinary course of business, will not, to the knowledge of the SGF Shareholders, be subject to offset or deduction and, except as noted, will be collectible at the aggregate recorded amounts thereof net of any reserves established in a manner consistent with past practices of all as reflected in the financial statements. 3.27 Liabilities. SGF has no material Liabilities, whether or not of a kind required by generally accepted accounting principles to be set forth on a financial statement, other than (i) Liabilities fully and adequately reflected or reserved against on the Balance Sheets, (ii) Liabilities incurred since the Balance Sheet Date in the ordinary course of the business of SGF or (iii) Liabilities otherwise disclosed in this Agreement, including the Exhibits hereto and Disclosure Schedule. 3.28 OSHA. Except as otherwise provided in Section 3.28 of the SGF Disclosure Schedule, during the three (3) years immediately prior to the date of this Agreement, SGF has not been cited for any violations of the Occupational Safety and Health Act of 1970, as amended, nor to the knowledge of the SGF Shareholders, are there any citations pending as a result of inspections of the Company or for non-compliance with such Act. Except as otherwise indicated in Section 3.28 of the SGF Disclosure Schedule, each of the conditions which resulted in the issuance of a citation have been abated or otherwise corrected to the satisfaction of the Occupational Safety and Health Administration as of the Closing Date. 3.29 Product Warranties. Each product manufactured, sold, leased or delivered by SGF has been in substantial conformity with all applicable HUD specifications, contractual commitments and all express and implied warranties, and, except for normal returns or allowances in the ordinary course of business, not in excess of warranty reserves. SGF has no Liability (and there is no Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against it giving rise to any Liability) for replacement or repair thereof or for other damages in connection therewith. No product manufactured by SGF is subject to any guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of sale or lease as set forth in purchase orders delivered pursuant to Section 3.6.1. 3.30 Immigration Matters. Except as set forth in Section 3.30 of the SGF Disclosure Schedule, SGF has properly completed and maintained Forms I-9 on all persons who became employed by such entity for the past three (3) years, and each alien employee of such entity is employed pursuant to a valid temporary work authorization. Section 3.30 of the Disclosure Schedule lists the names of all alien employees who are required to have temporary work authorizations, the date of their employment and their job titles and responsibilities, and copies of each Form I-9 for each such person. 3.31 Investment Representations. The SGF Shareholders acknowledge that the Alpha Merger Stock is not registered under the Act, or any state securities laws and are being offered and issued in reliance upon federal and state exemptions for transactions not involving any public offering. The SGF Shareholders are each acquiring the Alpha Merger Stock solely for their own respective accounts for investment purposes and not with a view to the sale or other disposition thereof within the meaning of the Act, except as may be permitted by such Act and the rules and regulations promulgated under the Act. Each SGF Shareholder has experience investing in unregistered securities and is fully cognizant of the risks inherent in the ownership thereof and each is capable of withstanding substantial losses as a result of such ownership. 3.32 Reserves Adequate. Section 3.33 of the SGF Disclosure Schedule sets forth a list of all the reserves established by SGF for all Liabilities, and the amounts for each such reserve. All the reserves which have been established are adequate to cover 100% of the costs, expenses, losses and Liabilities that will be incurred in connection with all such matters. There will be no material change in the amounts of such reserves prior to the Closing Date. 3.33 No Omissions or Untrue Statements. No representation or warranty made by SGF, GHC, SGHC or the Stockholders to AHC and APT anywhere in this Agreement, the SGF Disclosure Schedule or in any certificate of a SGF officer required to be delivered to AHC pursuant to the terms of this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading as of the date hereof and as of the Closing Date. 4. REPRESENTATIONS AND WARRANTIES OF AHC AND APT Except as set forth in the Alpha Disclosure Schedule in each instance, and AHC's Annual Report on Form 10-K for the year ended December 31, 1998, including the Exhibits thereto (the "10-K") filed with the SEC, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), AHC and APT, jointly and severally, represent and warrant to, and agree with, the SGF Shareholders and SGF as follows, as of the date hereof and as of the Closing Date: 4.1 Organization and Standing of AHC and APT. AHC and APT are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware, and have the corporate power to carry on their business as now conducted and to own their assets and are duly qualified to transact business as foreign corporations in each state where such qualification is necessary except where the failure to qualify (individually or in the aggregate) will not have a material adverse effect on the business or prospects of AHC or APT on a combined basis. The copies of the Certificate of Incorporation and By-laws of AHC and APT, as amended to date, and delivered to SGF, are true and complete copies of those documents as now in effect. 4.2 Authority. The approval of the Merger by the respective Boards of Directors of AHC and APT, once given, shall be binding on AHC and APT, subject to the approval of their respective stockholders as mandated by the DGCL and, with regard to AHC, the Securities Exchange Act of 1934, as amended, and all Rules and Regulations promulgated thereunder, and all applicable NASDAQ listing agreements and requirements. This Agreement will constitute, and all other agreements contemplated hereby will constitute, when executed and delivered by AHC and APT, the valid and binding obligations of each corporation, enforceable in accordance with their respective terms. 4.3 No Conflict. The making and performance of this Agreement will not (i) conflict with the Certificate of Incorporation or the By-laws of AHC or APT, (ii) violate any laws, ordinances, rules, or regulations, or any order, writ, injunction or decree to which AHC or APT is a party or by which AHC or APT or any of its material assets, business, or operations may be bound or affected or (iii) result in any breach or termination of, or constitute a default under, or constitute an event which, with notice or lapse of time, or both, would become a default under, or result in the creation of any encumbrance upon any material asset of AHC or APT under, or create any rights of termination, cancellation, or acceleration in any person under, any material agreement, arrangement, or commitment, or violate any provisions of any laws, ordinances, rules or regulations or any order, writ, injunction, or decree to which AHC or APT is a party or by which AHC or APT, or any of their material assets may be bound. 4.4 Capitalization. The Authorized capital stock of AHC consists of 25,000,000 shares of Common Stock, par value $.01 and 1,000,000 shares of Preferred Stock, par value $.01. As of January 12, 1998, 16,788,228 shares of Common Stock, 821,496 shares of Series B Preferred Stock and 135,162 shares of Series C Preferred Stock were issued and outstanding. Such outstanding shares of Common Stock are duly authorized, validly issued, fully paid, and non- assessable. The AHC Merger Stock and the Series D Preferred Stock to be issued pursuant to this Agreement, when issued in accordance with the terms of this Agreement, will be duly authorized, validly issued, fully paid and non- assessable. As of December 31, 1998 there were outstanding options, warrants or rights of conversion or other rights, agreements, arrangements or commitments relating to the capital stock of AHC or obligating AHC to issue or sell an aggregate of 1,796,500 shares of Common Stock as set forth in the Disclosure Schedule. 4.5 AHC Financial Statements. The financial statements of AHC (collectively the "AHC Financial Statements") included in AHC's SEC Reports (as hereinafter defined) present fairly, in all material respects, the financial position of AHC as of the respective dates and the results of its operations and other information for the periods covered in accordance with GAAP and in accordance with Regulation S-X of the SEC (subject, in the case of unaudited interim period financial statements, to normal and recurring year-end adjustments which, individually or collectively, are not material). 5. STOCKHOLDER APPROVALS; CLOSING DELIVERIES 5.1 Stockholder Approvals. Subject to the satisfactory completion of all undertakings contemplated by this Agreement including, without limitation all due diligence reviews and investigations undertaken by AHC which are deemed to be necessary by AHC's Board of Directors. and the other provisions of this Agreement, the parties shall hold a closing (the "Closing") on the next business day (or such later date as the parties hereto may agree) following the business day on which the last of the conditions set forth in Articles 6 and 7 hereof is fulfilled or waived (such later date, the "Closing Date"), at 10:00 A.M. at the offices of Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York, New York 10017, or at such other time or place as the parties may agree upon. 5.2 Closing Deliveries to APT and AHC. At the Closing, in addition to documents referred elsewhere, SGF and the SGF Shareholders shall deliver, or cause to be delivered, to AHC: 5.2.1 a certificate, dated as of the Closing Date, executed by the Secretary of SGF and each of the SGF Shareholders, to the effect that representations and warranties contained in this Agreement are true and correct in all material respects at and as of the Closing Date and that SGF and the SGF Shareholders have complied with or performed in all material respects all terms, covenants and conditions to be complied with or performed by them on or prior to the Closing Date; 5.2.2 an opinion of SGF's counsel, substantially in the form of Exhibit 5.2.2 attached; 5.2.3 certificates representing SGF Stock owned by all of the SGF Shareholders; and 5.2.4 such other documents as AHC or its counsel may reasonably require to evidence compliance with Article 7 hereof. 5.3 Closing Deliveries to SGF. At the Closing, in addition to documents referred to elsewhere, AHC shall deliver to SGF: 5.3.1 a cashier's check or evidence of compliance with the wiring instructions of SGF with regard to the cash component of the Merger Consideration; 5.3.2 certificates representing the AHC Merger Stock and the Series D Preferred Stock issued to the SGF Shareholders in accordance with the instructions delivered to AHC by the SGF Shareholders; 5.3.3 a certificate of AHC, dated as of the Closing Date, executed by the President or an Executive Vice President of AHC to the effect that the representations and warranties of AHC and APT contained in this Agreement are true and correct in all material respects and that AHC and APT have each complied with or performed in all material respects all terms, covenants, and conditions to be complied with or performed by AHC and APT on or prior to the Closing Date; 5.3.4 an opinion of AHC's counsel, Parker Duryee Rosoff & Haft, substantially in the form of Exhibit 5.3.4 attached; and 5.3.5 such other documents as SGF or it's counsel may reasonably require to evidence compliance with Article 6 hereof. 6. CONDITIONS TO OBLIGATIONS OF THE SGF SHAREHOLDERS AND SGF The obligation of the SGF Shareholders and SGF to consummate the Closing is subject to the following conditions, any of which may be waived by it in their sole discretion: 6.1 Compliance by AHC and APT. AHC and APT shall have performed and complied in all material respects with all agreements and conditions required by this Agreement including without limitation the obligations set forth in Section 2.2 to be performed or complied with by AHC or APT prior to or on the Closing Date; 6.2 Accuracy of AHC's and APT's Representations. AHC's and APT's representations and warranties contained in this Agreement (including the AHC Disclosure Schedule) or any schedule, certificate, or other instrument delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects at and as of the Closing Date (except for such changes permitted by this Agreement) and shall be deemed to be made again as of the Closing Date. 6.3 Documents. All documents and instruments required hereunder to be delivered by AHC to SGF at the Closing shall be delivered in form and substance reasonably satisfactory to SGF and its counsel, including, without limitation, resolutions of the Board of Directors of AHC to increase the number of directors on AHC's Board of Directors by two persons and appointing Roger D. Watson and William H. Shaw to serve on the Board of Directors until their successors are duly elected, and evidence of the filing of the Certificate of Designation for the Series D Preferred Stock. 6.4 Agreements. AHC shall have entered into the following binding agreements with: 6.4.1 Employment Agreement between APT and Shaw in the form of Exhibit 6.4.1 hereto; 6.4.2 Employment Agreement between APT and Watson in the form of Exhibit 6.4.2 hereto; and 6.4.3 Registration Rights Agreement in the form of Exhibit 1.4.4 hereto. 6.5 Litigation. No action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent the consummation of any of the transactions contemplated by this Agreement; (ii) would cause any of the transaction contemplated by this Agreement to be rescinded following consummation; or (iii) materially affect adversely APT's right to operate or control the business of SGF. 6.6 Sunstate Merger. The Sunstate Merger is closed subject only to the filing of such documents with the Secretaries of State of the States of Delaware and Georgia as are required by the respective corporate laws of such jurisdictions. 7. CONDITIONS TO AHC'S AND APT'S OBLIGATIONS AHC's and APT's obligation to consummate the Closing is subject to the following conditions, any of which may be waived by AHC or APT it in their sole discretion: 7.1 Compliance by SGF. SGF and the SGF Shareholders shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date. 7.2 Accuracy of Representations of SGF. The representations and warranties of SGF and the SGF Shareholders contained in this Agreement (including the exhibits hereto and the SGF Disclosure Schedule) or any schedule, certificate, or other instrument delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects at and as of the Closing Date (except for changes permitted by this Agreement) and shall be deemed to be made again as of the Closing Date. 7.3 Third Party Consents. SGF and the SGF Shareholders shall have procured and delivered all third party consents deemed necessary by APT and AHC. 7.4 Material Adverse Change. AHC shall be satisfied that nothing which in its reasonable discretion constitutes a material adverse change shall have occurred subsequent to September 26, 1998 in the financial position, results of operations, assets, liabilities, or prospects of SGF. 7.5 Litigation. No action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent the consummation of any of the transactions contemplated by this Agreement, (ii) would cause any of the transaction contemplated by this Agreement to be rescinded following consummation, or (iii) materially affect adversely APT's right to operate or control the business of SGF. 7.6 Collateral Agreements. 7.6.1 The Agreements referred to in paragraph 6.4 hereof shall be executed; and 7.6.2 Caldwell, Knight, and Scarboro shall have entered into a Non - -Competition Agreement in the form of Exhibit 7.6 hereof with APT and AHC. 7.7 Documents. All documents, instruments and actions required hereunder to be performed or delivered by SGF and/or the SGF Shareholders or each of them to AHC at the Closing shall be delivered in form and substance reasonably satisfactory to AHC and its counsel. 7.8 Sunstate Merger. The Sunstate Merger is closed subject only to the filing of such documents with the Secretaries of State of the States of Delaware and Georgia as are required by the respective corporate laws of such jurisdictions. 7.9 Acceptable Financing. AHC shall have secured appropriate financing on terms and conditions acceptable to AHC's Board of Directors enabling it to undertake the Merger. 7.10 Due Diligence. The completion, to AHC's satisfaction of all due diligence review with respect to the business, assets, financial condition, prospects and otherwise of SGF deemed necessary by AHC's Board of Directors, including without limitation, all tests, studies analyses, legal and regulatory audits or reviews that AHC's Board of Directors deems appropriate 7.11 Shareholder Approval. Approval of the Merger by the Shareholders of AHC as determined by the vote of such shareholders at an annual meeting duly held and organized in accordance with the terms of the Exchange Act and the DGCL shall have been obtained by the Board of Directors of AHC. 8. REMEDIES FOR BREACHES OF THIS AGREEMENT 8.1 Survival. All representations, warranties, covenants and agreements contained in this Agreement, and any financial statements, deeds, certificates (including closing certificates), instruments, schedules or other documents delivered pursuant hereto or otherwise in connection herewith will survive the execution and delivery of this Agreement, regardless of any investigation made by APT, AHC, or on behalf of either, for a period of five years from the Closing Date, except for (i) those representations and warranties contained in Section 3.8 which shall survive until the expiration of all applicable statutes of limitation with respect thereto and (ii) those representations and warranties contained in Sections 3.1, 3.2, 3.4 and 3.12 which shall continue in full force and effect forever. 8.2 Indemnification. The SGF Shareholders jointly and severally agree to indemnify AHC and APT or their respective officers, directors, SGF Shareholders, employees, agents or affiliates (each an "Alpha Indemnitee") and each of them, from and against all losses, liabilities, obligations, costs, expenses, damages, judgments of any kind or nature whatsoever (including reasonable attorneys', accountants' and experts' fees, disbursements of counsel, and other costs and expenses) incurred by any of them ("Losses"), from, arising out of, relating to, in the nature of or caused by any breach of any representation or warranty contained in Section 3 hereof and of the Sunstate Merger Agreement or in any certificate delivered by SGF, the SGF Shareholders, or the Shareholders of Sunstate, or any of them, in connection herewith or any breach or failure to perform or comply with any obligation, agreement or covenant made in this Agreement and the Sunstate Merger Agreement or in connection herewith or therewith. 8.3 Third Party Claims. 8.3.1 If any party entitled to be indemnified pursuant to this Article 8 receives notice of the assertion by any third party of a claim or the commencement by such third person of any action (an "Indemnifiable Claim") with respect to which another party hereto (an "Indemnifying Party") is or may be obligated to provide indemnification, the Indemnified Party shall promptly notify the Indemnifying Party in writing (the "Claim Notice") of the Indemnifiable Claim; provided that the failure to provide such notice shall not relieve or otherwise affect the obligation of the Indemnifying Party to provide indemnification hereunder, except to the extent that any damages directly resulted from, or were caused by, such failure. 8.3.2 The Indemnifying Party shall have thirty days after receipt of the Claim Notice to undertake, conduct and control, through counsel of its own choosing, and at its expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith; provided, that (i) the Indemnifying Party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party (subject to the consent of the Indemnifying Party, which consent shall not be unreasonably withheld), provided that the fees and expenses of such counsel shall not be borne by the Indemnifying Party, and (ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the Indemnified Party's consent. So long as the Indemnifying Party is vigorously contesting any such Indemnifiable Claim in good faith, the Indemnified Party shall not pay or settle such claim without the Indemnifying Party's consent, which consent shall not be unreasonably withheld. 8.3.3 If the Indemnifying Party does not notify the Indemnified Party within thirty days after receipt of the Claim Notice that it elects to undertake the defense of the Indemnifiable Claim described therein, the Indemnified Party shall have the right to contest, settle or compromise the Indemnifiable Claim in the exercise of its reasonable discretion; provided that the Indemnified Party shall notify the Indemnifying Party of any compromise or settlement of such Indemnifiable Claim. 8.4 Indemnification Non-Exclusive. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory, equitable or common-law remedy any party may have for breach of representation, warranty, covenant or agreement. 8.5 Pending Indemnity Claims. The proceeds from the sale of any Alpha Merger Stock by a SGF Shareholder, in accordance with the terms of Article 1 hereof and the Registration Rights Agreement, during a period in which an Indemnifiable Claim is outstanding or pending shall be placed into an escrow account acceptable to AHC pending the resolution of such Indemnifiable Claim. 9. TERMINATION 9.1 Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing as follows: 9.1.1 by mutual consent of the parties; 9.1.2 by either SGF or AHC following the insolvency or bankruptcy of a party hereto, or if any one or more of the conditions to Closing set forth in Article 6 or Article 7 shall become incapable of fulfillment and such condition or breach shall not have been waived by the party for whose benefit the condition was established; 9.1.3 by AHC or APT if either determines the representations and warranties made by the SGF Shareholders in this Agreement were not true and correct at and as of the date of this Agreement; and 9.1.4 by AHC or APT if the results, determination, indications or findings of any of the due diligence review undertaken by them prior to Closing, regarding the business, assets, financial condition, prospects and otherwise, of SGF (including, without limitation all tests, analyses, legal and regulatory audits and reviews, including Phase I environmental analyses of the Real Property) is, in the opinion of AHC's Board of Directors, unacceptable. 9.1.5 by AHC or APT if AHC fails to obtain adequate financing for the Merger on terms and conditions acceptable to the Board of Directors of AHC. 9.2 Effect of Termination. If any party terminates this Agreement pursuant to Section 9.1 above, all obligations of the parties hereunder shall terminate without any liability to the other party (except for any liability of the party then in breach); provided, however, that the confidentiality provisions contained herein shall survive termination. 10. ADDITIONAL COVENANTS 10.1 Mutual Cooperation. The parties hereto will cooperate with each other, and will use all reasonable efforts to cause the fulfillment of the conditions to the parties' obligations hereunder and to obtain as promptly as possible all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement. 10.2 Changes in Representations and Warranties of a Party. Between the date of this Agreement and the Closing Date, no party shall directly or indirectly, enter into any transaction, take any action, or by inaction permit an event to occur, which would result in any of the representations and warranties of any party herein contained not being true and correct at and as of (a) the time immediately following the occurrence of such transaction or event or (b) the Closing Date. A party shall promptly give written notice to the other parties upon becoming aware of (A) any fact which, if known on the date hereof, would have been required to be set forth or disclosed pursuant to this Agreement and (B) any impending or threatened breach in any material respect of any of the representations and warranties contained in this Agreement and with respect to the latter shall use all reasonable efforts to remedy same. 11. BROKERS 11.1 Brokers. AHC and APT represent to SGF and the SGF Shareholders, and SGF and the SGF Shareholders represent to AHC and APT, that, other than as set forth on Schedule 11.1, hereto, there is no other broker or finder entitled to a fee or other compensation for bringing the parties together to effect the Merger, and that the payment of such fees or other compensation as described on Schedule 11.1 is true and accurate in all respects and such amounts are to be paid in the manner, and by the parties, set forth thereon. 12. MISCELLANEOUS 12.1 Expenses. Except as otherwise provided herein, each of the SGF Shareholders and AHC shall pay their own expenses incident to the negotiation, preparation, and carrying out of this Agreement, including all fees and expenses of its counsel and accountants for all activities of such counsel and accountants undertaken pursuant to this Agreement, irrespective of whether or not the transactions contemplated hereby are consummated. It is agreed that expenses associated with this transaction attributable to SGF shall not exceed $25,000. 12.2 Survival of Representations, Warranties and Covenants. All statements contained in this Agreement or in any certificate delivered by or on behalf of SGF, the SGF Shareholders, AHC or APT pursuant hereto, or in connection with the transactions contemplated hereby shall be deemed representations, warranties and covenants by the SGF Shareholders, AHC or APT, as the case may be, hereunder. All representations, warranties, and covenants made by the SGF Shareholders, SGF, AHC or APT in this Agreement, or pursuant hereto, shall survive the Closing in accordance with the terms of Section 8.1 hereof. 12.3 Publicity. The parties hereto shall not issue any press release or make any other public statement, in each case, relating to, connection with or arising out of this Agreement or the transactions contemplated hereby, without obtaining the prior approval of the other, which shall not be unreasonably withheld or delayed, except that prior approval shall not be required if, in the reasonable judgment of AHC, prior approval by SGF or the SGF Shareholders would prevent the timely dissemination of such release or statement in violation of applicable Federal securities laws, rules or regulations or policies of the Nasdaq Small Cap Market. 12.4 Nondisclosure. The SGF Shareholders will not at any time after the date of this Agreement, without AHC's consent, divulge, furnish to or make accessible to anyone any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulae, plans, material, devices or ideas or know-how, whether patentable or not,with respect to any confidential or secret aspects of APT (including, without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers) ("Confidential Information"). AHC will not at any time after the date of this Agreement use, divulge, furnish to or make accessible to anyone any Confidential Information (other than to its representatives as part of its due diligence or corporate investigation). Any information, which (i) at or prior to the time of disclosure by either SGF or AHC was generally available to the public through no breach of this covenant, (ii) was available to the public on a nonconfidential basis prior to its disclosure by either SGF, the SGF Shareholders or AHC or (iii) was made available to the public from a third party provided that such third party did not obtain or disseminate such information in breach of any legal obligation of SGF or AHC, shall not be deemed Confidential Information for purposes hereof, and the undertakings in this covenant with respect to Confidential Information shall not apply thereto. If this Agreement is terminated pursuant to the provisions of Article 8 or any other express right of termination set forth in this Agreement, AHC shall return to SGF all copies of all Confidential Information previously furnished to it by SGF. 12.5 Succession and Assignments; Third Party Beneficiaries. This Agreement may not be assigned (either voluntarily or involuntarily) by any party hereto without the express written consent of the other party. Any attempted assignment in violation of this Section shall be void and ineffective for all purposes. In the event of an assignment permitted by this Section, this Agreement shall be binding upon the heirs, successors and assigns of the parties hereto. There shall be no third party beneficiaries of this Agreement. 12.6 Notices. All notices, requests, demands, or other communications with respect to this Agreement shall be in writing and shall be (i) sent by facsimile transmission, (ii) sent by the United States Postal Service, registered or certified mail, return receipt requested, or (iii) personally delivered by a nationally recognized express overnight courier service, charges prepaid, to the following addresses (or such other addresses as the parties may specify from time to time in accordance with this Section). 12.6.1 To AHC and APT: Alpha Hospitality Corporation 12 East 49th Street New York, New York 10017 Attn: Thomas W. Aro Fax No.: (212) 750-5171 With a copy to: Parker Duryee Rosoff & Haft 529 Fifth Avenue New York, New York 10017 Attn: Herbert F. Kozlov, Esq. Fax No.: (212) 972-9488 12.7 To SGF and the SGF Shareholders: South Georgia Frames Unlimited, Inc. 501 S. Elm Street Adel, Georgia 31620 Fax No: Forrest Caldwell 504 East 10th Street Adel, Georgia 31620 William H. Shaw 2808 Bud McKey Valdosta, Georgia 31602 Roger D. Watson 4603 Ridgeview Circle Valdosta, Georgia 31602 John Scarboro 605 Newton Drive Adel, Georgia 31620 With a copy to: C. George Newbern Coleman, Talley, Newbern, Kurrie, Prescott & Holland P.O. Box 5437 Valdosta, Georgia 31603-5437 Any such notice shall, when sent in accordance with the preceding sentence, be deemed to have been given and received on the earliest of (i) the day delivered to such address or sent by facsimile transmission, (ii) the fifth business day following the date deposited with the United States Postal Service, or (iii) 24 hours after shipment by such courier service. 12.8 Construction; Selection of Forum. (a) This Agreement shall be construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. (b) The parties hereby agree that the state and federal courts located in the State of New York, County of New York shall be the exclusive forum for the resolution of any disputes arising hereunder. The parties irrevocably consent to the jurisdiction and venue of such federal and state courts for such purposes and hereby waive any defenses as to improper venue, forum non conveniens and improper jurisdiction in connection herewith. 12.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same Agreement. 12.10 No Implied Waiver; Remedies. No failure or delay on the part of the parties hereto to exercise any right, power, or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. All rights, powers, and privileges granted herein shall be in addition to other rights and remedies to which the parties may be entitled at law or in equity. 12.11 Entire Agreement. This Agreement, including the Exhibits and Disclosure Schedules attached hereto, sets forth the entire understandings of the parties with respect to the subject matter hereof, and it incorporates and merges any and all previous communications, understandings, oral or written as to the subject matter hereof, and cannot be amended or changed except in writing, signed by the parties. 12.12 Headings. The headings of the Sections of this Agreement, where employed, are for the convenience of reference only and do not form a part hereof and in no way modify, interpret or construe the meanings of the parties. 12.13 Severability. To the extent that any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted hereof and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. ATTEST: SOUTH GEORGIA FRAMES UNLIMITED, INC. By: Name: Name: Title: Title: ATTEST: ALPHA HOSPITALITY CORP. By: Name: Name: Title: Title: ATTEST: ALPHA PEACH TREE CORPORATION By: Name: Name: Title: Title: Forrest Caldwell William H. Shaw Samuel B. Knight Roger D. Watson John Scarboro EX-10 5 Exhibit 10(aq) MERGER AGREEMENT AND PLAN OF REORGANIZATION This MERGER AGREEMENT and PLAN OF REORGANIZATION (the "Agreement") dated as of March 26, 1999 is by and among ALPHA PEACH TREE CORPORATION ("APT"), a Delaware corporation whose principal office is located at 12 East 49th Street, New York, New York 10017; ALPHA HOSPITALITY CORPORATION ("AHC"), the parent of APT, which is a Delaware corporation whose principal office is located at 12 East 49th Street, New York, New York 10017; Carroll E. Sentz ("Sentz"), Samuel B. Knight ("Knight"). William H. Shaw ("Shaw"), Roger D. Watson ("Watson") and John Scarboro ("Scarboro" and,collectively with Sentz, Knight, Shaw and Watson, the "Sunstate Shareholders") and SUNSTATE MANUFACTURED HOMES OF GEORGIA, INC. d/b/a PEACH STATE HOMES, a Georgia corporation whose principal address is P.O. Box 615, Adel, Georgia 31620 ("Sunstate"). R E C I T A L S: A. APT is a wholly-owned subsidiary of AHC and is authorized to issue 200 shares of Common Stock, no par value (the "APT Shares") of which 200 shares are issued and outstanding. B. Sunstate is in the business of manufacturing and selling single family mobile homes ("Sunstate's Business"), directly and through its two majority- owned subsidiaries, Georgia Housing Connection, Inc. ("GHC") and South Georgia Housing Connection, Inc. ("SGHC", and with GHC, collectively, "Sunstate's Subsidiaries"). C. The respective Boards of Directors of Sunstate and APT deem it desirable and in the best interests of their respective corporations, and of their respective stockholders, that Sunstate merge with and into APT in accordance with the Delaware General Corporation Law ("DGCL") and the Georgia Business Corporation Code ("GBCC"), as a result of which APT, the surviving corporation, and the holders of the outstanding capital stock of Sunstate will receive the consideration hereinafter set forth. D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). E. AHC and South Georgia Frames, Inc. ("SGF"), an affiliate of Sunstate, have agreed to merge (the "SGF Merger") into APT as set forth in a separate Merger Agreement and Plan of Reorganization (the "SGF Merger Agreement"). The simultaneous consummation of the mergers of Sunstate and SGF, respectively, into APT is a condition to the consummation of both the SGF Merger and the Sunstate Merger. NOW, THEREFORE, in consideration of the terms, conditions, agreements and covenants contained herein, and in reliance upon the representations and warranties contained in this Agreement, the parties hereto agree as follows: 1. MERGER OF SUNSTATE WITH AND INTO APT 1.1 The Merger; Survival of APT. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 1.2 below), Sunstate shall be merged with and into APT in accordance with the provisions of Section 252 of the DGCL and Section 14-2-1107 of the GBCC and with the effect provided in Sections 259 and 261 of the DGCL and 14-2-1106 of the GBCC, and the separate existence of Sunstate shall thereupon cease. APT shall be the surviving corporation in the Merger (hereinafter sometimes referred to as "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time of the Merger, (a) Surviving Corporation shall possess all assets and property of every description, and every interest therein, wherever located, and the rights, privileges, immunities, powers, franchises and authority, of a public as well as of a private nature, of Sunstate, (b) all obligations belonging to or due Sunstate shall be vested in, and become the obligations of, Surviving Corporation without further act or deed, (c) title to any real estate or any interest therein vested in Sunstate shall not revert or in any way be impaired by reason of the Merger, (d) all rights of creditors and all liens upon any property of Sunstate shall be preserved unimpaired, and (e) Surviving Corporation shall be liable for all of the obligations of Sunstate and any claim existing, or action or proceeding pending, by or against Sunstate may be prosecuted to judgment with right of appeal, as if the Merger had not taken place. 1.2 Effective Time of the Merger. The Merger shall become effective at such time (the "Effective Time") as a Certificate of Merger, in the form set forth as Exhibit 1.2 hereto, is filed with the Secretaries of State of the State of Delaware and the State of Georgia (the "Merger Filings") or such later date and time as may be specified in the Certificate of Merger, such filing shall be made simultaneously with or as soon as practicable after the closing of the transactions contemplated by this Agreement (the "Effective Date"). 1.3 Consideration for the Merger. 1.3.1 Merger Value. As used herein, "Merger Value" shall be $8,560,625. The Sunstate Shareholders hereby represent and warrant that such value represents five times the twelve month cash flow set forth in the September 26, 1998 audited consolidated cash flow adjusted for fraudulent overpayments resulting from the actions of a former employee and for executive compensation, as calculated in accordance with Schedule 1.3.1 hereof, that the data on Schedule 1.3.1 is true and accurate in all material aspects, and that Schedule 1.3.1 hereof is a true, complete and correct calculation, accurate in all material respects of the Merger Value 1.3.2 Merger Consideration. As used herein the "Merger Consideration" shall consist of: (i) Cash equal to $4,280,312, representing 50% of the Merger Value ("Cash Consideration"); plus (ii) A number of shares of AHC common stock having a market value equal to 25% of the Merger Value (the "Alpha Merger Stock"). The aggregate value, and number of shares, of the Alpha Merger Stock shall be based on a per share valuation equal to the fourteen (14) day average of the closing price of AHC Common Stock as reported on the Nasdaq Small Cap Market, for the fourteen (14) successive trading day period terminating two (2) days prior to the Closing Date (the "Alpha Merger Stock Valuation"); plus (iii) A number of shares of AHC Series D Preferred Stock having an aggregate liquidation value of 25% of the Merger Value (the "Preferred S tock"). 1.4 Conversion of the Sunstate Stock; Registration of AHC Merger Stock. The manner and basis of converting the shares of Sunstate Stock (as defined below) into shares of AHC Common Stock shall be as follows: 1.4.1 Conversion Ratio. (i) Sunstate has issued and outstanding 400,000 shares of common stock (the "Sunstate Stock"). Each share of Sunstate Stock shall, by virtue of the Merger and without any action on the part of the holder thereof, or any other action whatsoever, be converted into .00025% of the Merger Consideration. (ii) Each issued share of APT common stock shall remain unchanged. 1.4.2 No Fractional Shares. No rights to receive fractional shares of or interests in fractional Alpha Merger Stock shall arise under this Agreement, and no certificates or scrip representing fractional Alpha Merger Stock shall be issued hereunder. Upon surrender of a certificate or certificates previously evidencing Sunstate Stock, any fractional share interest or interests in Alpha Merger Stock that the holder of such certificate or certificates would otherwise be entitled to receive shall be paid by AHC to such holder by check in an amount based upon the Alpha Merger Stock Valuation multiplied by the fractional number of shares to which such holder would be entitled. 1.4.3 Unregistered Stock. Certificates evidencing the Alpha Merger Stock shall bear an appropriate legend to the effect that they have not been registered with the Securities and Exchange Commission or any other state securities authority. 1.4.4 Registration Rights. The Sunstate Shareholders shall collectively have certain "piggy back" rights with regard to the Alpha Merger Stock and also shall have the right to make one request that AHC register all or a portion of the Alpha Merger Stock with the Securities and Exchange Commission ("SEC") pursuant to the requirements of the Securities Act of 1933, as amended, and all Rules and Regulations promulgated thereunder (the "Act"), during the twelve (12) month period following the Closing Date, subject to the terms and conditions of that certain Registration Rights Agreement of even date herewith between AHC and the Sunstate Shareholders, a copy of which is appended hereto as Exhibit 1.4.4. 1.4.5 Valuation Protection. For a period of eighteen months after the effective date of the registration of the Alpha Merger Stock, if any Sunstate Shareholder sells any of his or her Alpha Merger Stock in an open market brokered transaction for less than 80% of the Alpha Merger Stock Valuation, APT shall pay such Sunstate Shareholder the negative difference, if any, between (x) the sales price on such Stock sale, (making no deduction or adjustment for fees or commissions paid in connection with such sale) (the "Gross Sales Price"), minus (y) 80% of the Alpha Merger Stock Valuation. The result of the application of the foregoing formula is referred to as the "Shortfall". APT shall have the option to pay any Shortfall by (i) making a cash payment in the amount of the Shortfall; or (ii) causing AHC to issue additional unregistered shares of AHC Common Stock having a value equal to the Shortfall; or (iii) a combination of (i) and (ii). For purposes of valuing Alpha Common Stock used to pay all or a portion of a Shortfall, Alpha Common Stock shall be deemed to have a value equal to the average closing bid price for AHC common stock as reported by the Nasdaq Small Cap Market, or any other such national exchange, public market or over-the-counter market on which the AHC Common Stock is then trading (the "Primary Exchange"), for each of the ten (10) trading days preceding the Sunstate Shareholder's sale triggering this obligation, and the ten (10) days succeeding such sale. If, however, at any time during the eighteen month period following the effective date of the registration of the Alpha Merger Stock, AHC's Common Stock's average closing price, as reported by the Primary Exchange, for fourteen (14) consecutive days is at least 120% of the Alpha Merger Stock Valuation, the provisions of this Section 1.4.5 will expire and terminate. 1.4.6 Preferred Stock Designations. The rights and designations of the Preferred Stock shall be as set forth in the Series D Preferred Stock Certificate of Designation in the form attached hereto as Exhibit 1.4.6. Such rights and designations shall include, without limitation, the following provisions: (i) Each share of Series D Preferred Stock to be entitled to an annual dividend of an amount equal to nine percent (9%) of the liquidation value of such share, which shall be payable, at AHC's election, in either cash or shares of AHC Common Stock. For purposes of valuing Alpha Common Stock used to pay all or a portion of a dividend, Alpha Common Stock shall be deemed to have a value equal to the average closing bid price as reported by the Primary Exchange for AHC common stock for each of the ten (10) days preceding such event of liquidation and for each of the ten (10) days succeeding such event. The aggregate liquidation value of the Preferred Stock shall be equal to twenty-five percent (25%) of the Merger Value. (ii) Each share of Series D Preferred Stock shall be convertible into shares of AHC Common Stock at a per-share price for such common stock equal to two times the Alpha Merger Stock Valuation. AHC shall have the right, at any time during the five year period immediately succeeding the Closing Date to redeem the Preferred Stock for a payment in cash equal to the liquidation value of the Preferred Stock, plus any accrued and unpaid dividends, upon fourteen (14) days' notice to the Sunstate Shareholders. The Sunstate Shareholders shall have the option to accept the cash redemption or to exercise their conversion option during such fourteen (14) day period. On the fifth anniversary of the Closing Date the Preferred Stock shall automatically convert into AHC Common Stock at a price equal to two times the Alpha Merger Stock Valuation. 1.5 Exchange at Closing. (a) At the Closing, AHC and APT shall deliver to the Sunstate Shareholders: (i) certificates for the AHC Merger Stock and the Preferred Stock; (ii) bank checks or wire transfers for the Cash Consideration. (b) The Sunstate Shareholders shall deliver to AHC and APT certificates evidencing the Sunstate Shares. (c) In the event the Merger cannot be consummated on the Closing Date, the deliveries made pursuant to (a) and (b) above shall be placed in escrow with Parker Duryee Rosoff & Haft, attorney for AHC, who, pursuant to a written escrow agreement, in form attached hereto as Exhibit 1.5, shall be instructed to release the foregoing from escrow promptly upon notification of the effectiveness of the Merger on the Effective Date. All documents executed in connection herewith in anticipation of Closing, if any, shall likewise be held pursuant to such Escrow Agreement. 1.6 Effect of Merger. As of the Effective Date, all of the following shall occur: (a) The separate existence and corporate organization of Sunstate (except insofar as it may be continued by statute) shall cease and APT, as the corporation surviving the Merger, shall possess the rights, privileges, powers and franchises, and be subject to all the restrictions, disabilities and duties of, Sunstate in the manner specified in the corporate laws of the States of Georgia and Delaware. (b) The Certificate of Incorporation of APT, as in effect on the Effective Date, shall continue in effect without change or amendment. (c) The By-laws of APT, as in effect on the Effective Date, shall continue in effect without change or amendment. (d) Upon the Effective Date, the Board of Directors of APT shall continue. 1.7 Disclosure Schedules. Simultaneously with the execution of this Agreement, (a) Sunstate and the Sunstate Shareholders shall deliver a schedule relating to Sunstate (including Sunstate's Subsidiaries) and the Sunstate Shareholders (the "Sunstate Disclosure Schedule"), and (b) AHC shall deliver a schedule relating to AHC and APT (the "Alpha Disclosure Schedule" and, collectively, with the Sunstate Disclosure Schedule, the "Disclosure Schedules") setting forth the matters required to be set forth in the Disclosure Schedules as described elsewhere in this Agreement. The Disclosure Schedules shall be deemed to be part of this Agreement. 2. CONDUCT OF BUSINESS PENDING CLOSING; STOCKHOLDER APPROVAL Sunstate (which for purposes of this Article 2 shall include Sunstate's Subsidiaries and the Sunstate Shareholders) and AHC (which for purposes of this Article II shall include APT) covenant that between the date hereof and the Closing Date (as hereinafter defined): 2.1 General. Each of the parties agrees to use his, her or its best efforts to take, or cause to be taken, all action to do, or cause to be done all things necessary, proper or advisable to consummate and make effective the Merger and the SGF Merger. 2.2 Notices and Consents. 2.2.1 Sunstate shall give any notices to third parties, and use its best efforts to obtain any third party consents that AHC may request in connection with the matters pertaining to Sunstate and its Business, whether disclosed or required to be disclosed in the Disclosure Schedule. Each of Sunstate and AHC shall take any additional action that may be necessary, proper or advisable in connection with any other notices to, filings with, and authorizations, consents and approvals of, governments, governmental agencies and third parties, that such party is required to give, make or obtain. 2.2.2 Schedule 2.2 lists all of the obligations of Sunstate for which any of the Sunstate Shareholders have given personal guaranties or are otherwise personally obligated and the amounts of such obligations. The Sunstate Shareholders shall be removed from such personal obligations and guaranties, prior to the Closing. 2.3 Access by AHC. Sunstate shall afford to AHC and to AHC's counsel, accountants and other representatives full access, during normal business hours, throughout the period prior to the Closing Date, (a) to all of the books, contracts and records of Sunstate and shall furnish AHC during such period with all information concerning Sunstate that AHC may reasonably request and (b) to the properties of Sunstate in order to conduct inspections at AHC's expense to determine that Sunstate is operating in material compliance with all applicable federal, state and local and foreign statutes, rules and regulations, and that Sunstate's assets are substantially in the condition and of the capacities represented and warranted in this Agreement. Any such investigation or inspection by AHC shall not be deemed a waiver of, or otherwise limit, the representations, warranties and covenants contained herein. 2.4 Conduct of Business. During the period from the date hereof to the Closing Date, the business of Sunstate shall be operated by Sunstate in the usual and ordinary course of such business and in material compliance with the terms of this Agreement. Without limiting the generality of the foregoing: 2.4.1 Sunstate shall use its reasonable efforts to (i) keep available the services of the present employees and agents of Sunstate; (ii) complete or maintain all existing arrangements including but not limited to filings, licensing, affiliate arrangements, transferrals, leases and other arrangements referred to in Section 3.6.1 in full force and effect in accordance with their existing terms; (iii) maintain the integrity of all confidential information of Sunstate; (iv) maintain in full force and effect the existing insurance policies (or policies providing substantially the same coverage, copies of which shall be made available to AHC) insuring the business and properties of Sunstate; (v) comply in all material respects with all applicable laws; and (vi) preserve the goodwill of, and Sunstate's business and contractual relationship with, suppliers, customers and others having business relations with Sunstate; and 2.4.2 Sunstate shall not (i) sell or transfer any of its assets or property; (ii) shall not make any distribution, whether by dividend or otherwise, to any of its stockholders or employees except for compensation to employees and payments to associated companies for goods and services, in the usual and ordinary course of business; (iii) not declare any dividend or other distribution; (iv) redeem or otherwise acquire any shares of its capital stock or other securities; (v) issue or grant rights to acquire shares of its capital stock or other securities; or (vi) agree to do any of the foregoing. 2.5 Exclusivity to AHC. Sunstate and its officers, directors, representatives and agents, from the date hereof until the Closing (unless this Agreement shall be earlier terminated as hereinafter provided), shall not (i) solicit, initiate, or encourage the submission of any proposal or offer from any person (including any of them) relating to (A) liquidation, dissolution or recapitalization; (B) merger or consolidation; (C) acquisition or purchase of securities or assets; or (D) similar transactions, or (ii) hold discussions with any person other than AHC, negotiate or entertain any inquiries, proposals or offers to purchase the business of Sunstate or the shares of capital stock of Sunstate, or, except in connection with the normal operation of Sunstate's business, disclose any confidential information concerning Sunstate to any person other than AHC and AHC's representatives or agents. Sunstate shall notify AHC immediately if any person makes any proposal, offer, inquiry or contact with respect to the foregoing. 2.6 SGF Merger. AHC and SGF shall in good faith use their best efforts to consummate the SGF Merger in accordance with the terms of the SGF Merger Agreement so that the SGF Merger may close on the Closing Date simultaneously with the Sunstate Merger. 2.7 Negotiation of Financing. The Board of Directors of AHC shall use its reasonable efforts to locate a source of, and to negotiate appropriate financing for, the Merger in amounts, and on terms and conditions, acceptable to the directors of AHC in the exercise of their sole discretion. 2.8 Agreement to Vote for the Merger. 2.8.1 The Board of Directors of Sunstate has determined that the Merger is advisable and in the best interests of the stockholders of Sunstate and, subject to its fiduciary obligations as advised in writing by counsel, shall recommend that Sunstate's stockholders vote to approve and adopt this Agreement and the Merger. The Sunstate Shareholders hereby irrevocably agree to the Merger and hereby covenant to provide Sunstate with such approval and adoption either (i) at a meeting of the Sunstate Shareholders or (ii) pursuant to the written consent of the Sunstate Shareholders in lieu of a meeting as soon as practicable after the date of this Agreement. 2.8.2 Subject to the completion to its satisfaction of all due diligence, and the securing of appropriate financing on terms it deems acceptable, if in the determination of AHC's Board of Directors (based on advice from AHC's counsel) it shall be necessary to obtain shareholder approval of the Merger from the AHC shareholders, AHC shall use its reasonable efforts to promptly prepare a Proxy Statement and file such document with the Securities and Exchange Commission. Upon the approval of such Proxy, AHC will use its reasonable efforts to solicit and obtain shareholder approval for the Merger. 3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS AND SUNSTATE As used in this Agreement, the following terms shall have the meanings indicated below: The term "Basis" as used in this Agreement means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that forms the basis for any specified consequence. The term "Knowledge" as used in this Agreement with respect to a party's awareness of the presence or absence of a fact, event or condition shall mean (a) actual knowledge plus, if different, (b) the knowledge that would be obtained if such party conducted itself faithfully and exercised a sound discretion in the management of his own affairs. The term "Liability" as used herein shall mean any liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due). Except as set forth in the Sunstate Disclosure Schedule in each instance, each of the Sunstate Shareholders, jointly and severally, and Sunstate, hereby represents and warrants to AHC and APT as follows, with the knowledge and understanding that AHC and APT are relying upon such representations and warranties: 3.1 Organization and Standing. 3.1.1 Sunstate and each of Sunstate's Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia. Each such corporation has all requisite corporate power to own its assets and to carry on its business as it is now being conducted. 3.1.2 Sunstate and each of Sunstate's Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions set forth in Section 3.1.2 of the Sunstate Disclosure Schedule and, to the knowledge of the Sunstate Shareholders, in each jurisdiction where such qualification is necessary under applicable law except where the failure to qualify (individually or in the aggregate) will not have any material adverse effect on the respective business or prospects of Sunstate or Sunstate's Subsidiaries. 3.1.3 The copies of the Certificate of Incorporation, By-laws and minute books of Sunstate and each of Sunstate's Subsidiaries, as they may be amended to date, as has been delivered to AHC, are true and complete copies of these documents as now in effect. The minute books of each corporation are accurate in all material respects. 3.2 Capitalization. 3.2.1 The authorized capital stock of Sunstate and each of Sunstate's Subsidiaries, the number of shares of capital stock which are issued and outstanding for each such corporation, the par value thereof and the record and beneficial holders thereof are as set forth in Section 3.2.1 of the Sunstate Disclosure Schedule. The Sunstate Shareholders own all of the issued and outstanding shares of common stock of Sunstate free and clear of all liens and encumbrances of any kind. Sunstate owns the number of shares and percentage amounts of the issued and outstanding common stock of each of its Subsidiaries as set forth in Section 3.2.1 of the Sunstate Disclosure Schedule, free and clear of all liens and encumbrances of any kind. All of the shares of capital stock that are issued and outstanding of Sunstate and each of its Subsidiaries are duly authorized, validly issued and outstanding, fully paid and nonassessable, and were not issued in violation of the preemptive rights of any person. Other than as set forth in Section 3.2.1 of the Sunstate Disclosure Schedule, there are no subscriptions, options, warrants, rights or calls or other commitments or agreements to which Sunstate or either of Sunstate's Subsidiaries is a party or by which such entity is bound, calling for any issuance, transfer, sale or other disposition of any class of securities of any of Sunstate, GHC or SGHC. There are no outstanding rights, contracts or securities convertible or exchangeable, actually or contingently, into common stock or any other securities of Sunstate or any of Sunstate's Subsidiaries. 3.2.2 None of the issued and outstanding shares of common stock of Sunstate or the Sunstate Subsidiaries is subject to any buy-sell agreements, shareholder agreements, pledge obligations or any other restrictive covenants other than as set forth in Section 3.2.2 of the Sunstate Disclosure Schedule. Any such restrictions in effect as of the date hereof shall be cancelled and be of no further force and effect as of the Closing Date. 3.2.3 Neither Sunstate nor any Sunstate Subsidiary is a party to any management agreement or an agreement which in effect places a restriction upon the management of such an entity. 3.3 Subsidiaries. Except as set forth in Section 3.3 of the Sunstate Disclosure Schedule, GHC and SGHC are the only subsidiaries of Sunstate and Sunstate does not own or have an interest in any other corporation, partnership, joint venture or other entity. None of Sunstate's Subsidiaries owns any interest in any other corporation, partnership, joint venture or entity. 3.4 Authority. 3.4.1 Sunstate's Board of Directors has determined that the Merger is fair to, and in the best interests of, Sunstate's stockholders and has approved and adopted this Agreement and the Merger and has adopted a resolution recommending approval and adoption of this Agreement and the Merger by Sunstate's stockholders. The Sunstate Shareholders, being the holders of all of the issued and outstanding shares of Sunstate's common stock, irrevocably consent to the merger and shall deliver evidence of such approval and resolution adoption at Closing. Assuming the delivery of Sunstate Shareholder consent, this Agreement constitutes, and all other agreements contemplated hereby will constitute, when executed and delivered by Sunstate and the Sunstate Shareholders in accordance herewith, the valid and binding obligations of Sunstate and the Sunstate Shareholders, enforceable in accordance with their respective terms. 3.4.2 The execution and delivery of this Agreement by Sunstate and the Sunstate Shareholders does not, and the consummation by Sunstate and the Sunstate Shareholders of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or in an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Sunstate or either of Sunstate's Subsidiaries under any of the terms, conditions or provisions of (i) the Certificate of Incorporation or By-laws of Sunstate, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Sunstate or any of its properties or assets, or (iii) except as set forth in Section 3.4.2 of the Sunstate Disclosure Schedule, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Sunstate or either of Sunstate's Subsidiaries is now a party or by which Sunstate or any of Sunstate's Subsidiaries or any of its or their properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii), such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of Sunstate. 3.5 Assets. Sunstate and each of Sunstate's Subsidiaries have good and marketable title to or licenses to all of the assets and properties which each purports to own as reflected on the most recent balance sheet comprising a portion the Sunstate Financial Statements (as defined below), or thereafter acquired. Sunstate and each of Sunstate's Subsidiaries has a valid leasehold interest in all material properties of which it is the lessee and each such lease is valid, binding and enforceable against Sunstate and each of Sunstate's Subsidiaries, as applicable, and, to the knowledge of the Sunstate Shareholders, the other parties thereto in accordance with its terms. Sunstate and each of Sunstate's Subsidiaries is not, nor, to the knowledge of the Sunstate Shareholders, is any other party, in default in the performance of any material provision thereunder. No material portion of the assets of Sunstate, or either of Sunstate's Subsidiaries, is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to their knowledge, has any such condemnation, expropriation or taking been proposed. None of the material assets of Sunstate, or either of Sunstate's Subsidiaries, is subject to any restriction which would prevent continuation of the use currently made thereof or materially adversely affect the value thereof. 3.6 Contracts, Etc. 3.6.1 Section 3.6.1 of the Sunstate Disclosure Schedule consists of a true and complete list of all contracts, agreements, purchase orders, commitments and other instruments (whether oral or written) to which Sunstate or a Sunstate Subsidiary is a party that (i) involve a receipt or an expenditure by Sunstate or require the performance of services or delivery of goods to, by, through, on behalf of or for the benefit of Sunstate, which in each case, relates to a contract, agreement, commitment or instrument that either (A) requires payments or receipts in excess of $10,000 per year or (B) is not terminable by Sunstate on notice of thirty (30) days or less without penalty or Sunstate being liable for damages, or (ii) involve an obligation for the performance of services or delivery of goods by Sunstate that cannot, or in reasonable probability will not, be performed within thirty (30) days from the dates as of which these representations are made. 3.6.2 All of the contracts and other instruments described on Schedule 3.6.1 are valid and binding upon Sunstate, or any of its Subsidiaries, as applicable, and, to the knowledge of the Sunstate Shareholders, the other parties thereto, and are in full force and effect and enforceable in accordance with their terms, even after giving effect to the Merger, and neither Sunstate, Sunstate's Subsidiaries, nor to the knowledge of the Sunstate Shareholders, any other party to any such contract, agreement, commitment or other instrument has breached any provision of, and, to the knowledge of the Sunstate Shareholders, no event has occurred which, with the lapse of time or action by a third party, could result in a default under the terms thereof which, alone or in the aggregate, would provide the Basis for a claim against Sunstate, or its Subsidiaries in excess of $50,000, and, there are no existing facts or circumstances which would prevent Sunstate's, or its Subsidiaries' contracts and agreements, respectively, from maturing in due course into fully collectible accounts receivable. Except for terms specifically described in Section 3.6.1 of Sunstate's Disclosure Schedule, neither Sunstate, any of Sunstate's Subsidiaries nor any Sunstate Shareholder has received any payment from any contracting party in connection with, or as an inducement for, entering into any contract, agreement, commitment or instrument except for payment for actual services rendered or to be rendered by Sunstate, GHC or SGHC consistent with amounts historically charged for such service. 3.7 Litigation. Except as described on Section 3.7 of the Sunstate Disclosure Schedule, there is no claim, suit, action, proceeding, or investigation (a "Litigation") pending or, to the knowledge of the Sunstate Shareholders, threatened against or affecting Sunstate or any of Sunstate's Subsidiaries before or by any court, arbitrator or governmental agency or authority which, alone or in the aggregate, could or will have a material adverse effect on the operations or prospects of Sunstate or any of Sunstate's Subsidiaries. There is no current or past policy, action, failure to act, or other omission which could form the Basis for any such Litigation. There is no strike or unresolved labor dispute relating to Sunstate's or any of Sunstate's Subsidiaries' employees which, in the judgment of the Sunstate Shareholders, could have a material adverse effect on the business or prospects of Sunstate or any of Sunstate's Subsidiaries. There are no decrees, injunctions or orders of any court, governmental department, agency or arbitration outstanding against Sunstate or any of Sunstate's Subsidiaries. 3.8 Taxes. Except as described on Section 3.8 of the Sunstate Disclosure Schedule: 3.8.1 Sunstate, and each of Sunstate's Subsidiaries, respectively, has (i) duly and timely filed with the appropriate governmental authorities all Tax returns (as defined in subsection 3 below) required to be filed by it, and they each have not filed for an extension to file any Tax Returns and such Tax Returns are true, correct and complete in all material respects, and (ii) duly paid in full or made adequate provision for the payment of all Taxes (as defined in subsection (b) below) shown to be due on such Tax Returns, except for the payment of state and local sales taxes which, alone or in the aggregate, would not have a material adverse effect on the business, operations, properties, assets, condition (financial or other), result of operations or prospects of such company. The Tax Returns referred to in clause (i) hereinabove either have been examined by the United States Internal Revenue Service (the "IRS") or the appropriate governmental authority, or the period of assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired. All deficiencies asserted or assessments made as a result of such examinations have been paid in full and no issues that have been raised by the relevant governmental authority in connection with the examination of any of the Tax Returns referred to in clause (i) hereinabove are currently pending. No claim has been made by any authority in a jurisdiction where Sunstate or, as applicable, either of Sunstate's Subsidiaries, does not file a Tax Return that such activity is or may be subject to Tax in such jurisdiction. No waiver of statutes of limitation have been given by or requested with respect to any Taxes of Sunstate, or, as applicable, either of Sunstate's Subsidiaries. Sunstate or, as applicable, either of Sunstate's Subsidiaries has not agreed to any extension of time with respect to any Tax deficiency. The Liabilities and reserves for Taxes reflected in Sunstate's Consolidated Balance Sheet as of September 26, 1998 will be adequate to cover all Taxes for all periods ending on or prior to such respective dates, and there are no liens for Taxes upon any property or asset of the respective company's, except for liens for Taxes not yet due. There are no unresolved issues of law or fact arising out of a notice of deficiency, proposed deficiency or assessment from the IRS or any other governmental taxing authority with respect to Taxes of Sunstate or, as applicable, either of Sunstate's Subsidiaries which, if decided adversely, singly or in the aggregate, would have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of Sunstate, or, as applicable, either of Sunstate's Subsidiaries. Neither Sunstate nor any of Sunstate's Subsidiaries, is a party to any agreement providing for the allocation or sharing of Taxes with any entity. Sunstate and each of Sunstate's Subsidiaries has not, with regard to any assets or property held, acquired or to be acquired by it, filed a consent to the application of Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). Sunstate and each of Sunstate's Subsidiaries have, as applicable respectively withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. No Tax is required to be withheld pursuant to Section 1445 of the Code as a result of the transfer contemplated by this Agreement. As a result of the Merger, Sunstate will not be obligated to make a payment to an individual that would be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. 3.8.2 For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, property, sales, withholdings, social security, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed or with respect to any such taxes, charges, fees, levies or other assessments. 3.8.3 For purposes of this Agreement, the term "Tax Return" shall mean any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. 3.9 Employee Benefit Plans; ERISA. 3.9.1 At the date hereof, except as set forth in Section 3.9.1 of Sunstate's Disclosure Schedule, neither Sunstate nor either of Sunstate's Subsidiaries maintains or contributes to any employee benefit plans, programs, arrangements and practices (such plans, programs, arrangements and practices of an entity being referred to as "Company Plans"), including employee benefit plans within the meaning set forth in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated thereunder, as in effect from time to time ("ERISA"), or any written employment contracts providing for an annual base salary in excess of $100,000 and having a term in excess of one year, which contracts are not immediately terminable without penalty or further ability, or other similar arrangements for the provision of benefits (excluding any "Multiemployer Plan" within the meaning of Section 3(37) of ERISA or a "Multiple Employer Plan" within the meaning of Section 413(c) of the Code, and all regulations promulgated thereunder, as in effect from time to time). Section 3.9.1 of Sunstate's Disclosure Schedule lists all Multiemployer Plans and Multiple Employer Plans which Sunstate maintains or to which it makes contributions. Neither Sunstate nor either of Sunstate's Subsidiaries has any obligation to create any additional such plan or to amend any such plan so as to increase benefits thereunder, except as required under the terms of the Company Plans, under existing collective bargaining agreements or to comply with applicable law. 3.9.2 Except as set forth in Section 3.9.2 of the Sunstate Disclosure Schedule, (i) there have been no prohibited transactions within the meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with respect to any Company Plans that could result in penalties, taxes or liabilities which, singly or in the aggregate, could have a material adverse effect on the business, operations, properties, assets, condition (financial or other) results of operations or prospects of Sunstate or either of Sunstate's Subsidiaries, (ii) except for premiums due, there is no outstanding liability in excess of $50,000, whether measured alone or in the aggregate, under Title IV of ERISA with respect to any of the Company Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan administrator has instituted proceedings to terminate any of the Company Plans subject to Title IV of ERISA other than in a "standard termination" described in Section 4041(b) of ERISA, (iv) none of the Company Plans have incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the Company Plans ended prior to the date of this Agreement, (v) each of the Company Plans has been operated and administered in all material respects in accordance with applicable laws during the period of time covered by the applicable statute of limitations, (vi) each of the Company Plans which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified and such determination has not been modified, revoked or limited by failure to satisfy any condition thereof or by a subsequent amendment thereto or a failure to amend, except that it may be necessary to make additional amendments retroactively to maintain the "qualified" status of such Company Plan, and the period for making any such necessary retroactive amendments has not expired, (vii) with respect to Multiemployer Plans, neither Sunstate nor either of Sunstate's Subsidiaries has made or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203, 4204 and 4205 of ERISA and, to the best knowledge of the Sunstate Shareholders, no event has occurred or is expected to occur which presents a material risk of a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (viii) there are no pending or, to the best knowledge of the Sunstate Shareholders, threatened or anticipated claims involving any of the Company Plans other than claims for benefits in the ordinary course, and (ix) Sunstate has no current liability in excess of $50,000, whether measured alone or in the aggregate, for plan termination or withdrawal (complete or partial) under Title IV of ERISA based on any plan to which any entity that would be deemed one employer with Sunstate nor either of Sunstate's Subsidiaries under Section 4001 of ERISA or Section 414 of the Code contributed during the period of time covered by the applicable statute of limitations (the "Company Controlled Group Plans"), and Sunstate does not reasonably anticipate that any such liability will be asserted against the Company, none of the Company Controlled Group Plans has an "accumulated funding deficiency" (as defined in Section 302 of ERISA and 412 of the Code), and no Company Controlled Group Plan has an outstanding funding waiver which could result in the imposition of liens, excise taxes or liability at Sunstate in excess of $50,000 whether measured alone or in the aggregate. 3.10 Compliance with Laws and Regulations. 3.10.1 Sunstate and each of Sunstate's Subsidiaries has complied and is presently complying, in all material respects, with all laws, rules, regulations, orders and requirements (federal, state and local and foreign) applicable to it in all jurisdictions where the business of each such entity is conducted or to which each such entity is subject, including, without limitation, all applicable federal and state laws regulating the production, sale and delivery of mobile homes and other products manufactured and marketed by Sunstate, civil rights and equal opportunity employment laws and regulations, HUD regulations and all federal, antitrust, antimonopolies and fair trade practice laws ("Laws") and the Sunstate Shareholders know of no pending or anticipated changes to such Laws that could cause Sunstate's current business practices to fall out of compliance with such Laws. The Sunstate Shareholders do not know of any assertion by any party that Sunstate or any of Sunstate's Subsidiaries is in violation in any material respect of any such laws, rules, regulations, orders, restrictions or requirements with respect to its operations and no notice in that regard has been received by Sunstate or any of Sunstate's Subsidiaries. Sunstate and the Sunstate Subsidiaries have complied and currently comply with all applicable laws (including rules and regulations thereunder) relating to employment of labor, employee civil rights and equal employment opportunities. 3.10.2 Sunstate and each of Sunstate's Subsidiaries, has not: (i) violated in any respect or received a notice or charge asserting any violation of the Sherman Act, the Clayton Act, the Robinson-Patman Act or the Federal Trade Commission Act, each as amended; (ii) made or agreed to make any contribution payment or gift of funds or property to any governmental official, employee or agent where either the contribution, payment or gift or the purpose thereof was illegal under the laws of any federal, state or local jurisdiction; or (iii) established or maintained any unrecorded fund or asset account for any purpose. 3.11 Certain Agreements. 3.11.1 Except as described on Section 3.11.1 of the Sunstate Disclosure Schedule, As of the date hereof, neither Sunstate nor either of Sunstate's Subsidiaries is a party to any oral or written (i) consulting or similar agreement with any present or former director, officer or employee or any entity controlled by any such person not terminable on thirty days' or less notice involving the payment of not more than $25,000 per annum; (ii) agreement with any director, executive officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving any such company of the nature contemplated by this Agreement; (iii) agreement with respect to any director, executive officer or other key employee providing any term of employment or compensation guarantee extending for a period longer than one year and for the payment in excess of $100,000 per annum; or (iv) agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement, except as set forth in Section 3.11.1 of the Disclosure Schedule. 3.11.2 Except as set forth in Section 3.11.2 of the Sunstate Disclosure Schedule, neither Sunstate nor either of Sunstate's Subsidiaries is indebted for money borrowed, either directly or indirectly, from any of its officers, directors, or any Affiliate (as defined below), in any amount whatsoever, nor are any of its officers, directors, or Affiliates indebted for money borrowed from such entity; nor are there any transactions of a continuing nature between such entity and any of its officers, directors, or Affiliates (other than by or through the regular employment thereof) not subject to cancellation which will continue beyond the Closing Date, including, without limitation, use of Sunstate's, GHC's or SGHC's, respectively, assets for personal benefit with or without adequate compensation. For purposes of this Agreement, the term "Affiliate" shall mean any person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. As used in the foregoing definition, the term (i) "control" shall mean the power through the ownership of voting securities, contract or otherwise to direct the affairs of another person and (ii) "person" shall mean an individual, firm, trust, association, corporation, partnership, government (whether federal, state, local or other subdivision, or any agency or bureau of any of them) or other entity. 3.12 Environment, Health and Safety. Prior to the Closing Date, each of Sunstate, Sunstate's Subsidiaries and, to the knowledge of the Sunstate Shareholders, Sunstate's predecessors and Affiliates, has complied with all applicable laws (including rules and regulations thereunder) of federal, state, and local governments (and all agencies thereof) concerning the environment, public health and safety and employee health and safety, and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice has been filed or commenced against any of them alleging any failure to comply with, or Liabilities, arising under any such law or regulation. Without limiting the foregoing: 3.12.1 Sunstate, Sunstate's Subsidiaries and the Sunstate Shareholders have not either jointly or severally received any notification of potential responsibility (and there is no Basis related to the past or present operations, facilities or properties of Sunstate or Sunstate's Subsidiaries and, to the knowledge of the Sunstate Shareholders, the predecessors of such entities, for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against Sunstate or Sunstate's Subsidiaries giving rise to any Liability) under, the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Resource Conservation and Recovery Act of 1976; the Federal Water Pollution Control Act of 1972; the Clean Air Act of 1970; the Safe Drinking Water Act of 1974; the Toxic Substances Control Act of 1976; the Refuse Act of 1988; the Emergency Planning and Community Right-to-Know Act of 1986; the Georgia Hazardous Site Reuse and Redevelopment Act; the Georgia Comprehensive Solid Waste and Management Act; the Georgia Hazardous Waste Management Act; the Georgia Hazardous Site Response Act; the Southeast Interstate Low-level Radioactive Waste Management Compact; the Georgia Underground Storage Tank Act; the Georgia Sewage Holding Tank Act and the Georgia Environmental Policy Act (each as amended), without limitation, or any other law (or rule or regulation thereunder) of any federal, state or local government (or agency thereof) concerning the release or threatened release of hazardous substances, public health and safety or pollution or protection of the environment; 3.12.2 Sunstate and Sunstate's Subsidiaries have no Liability (and, to the knowledge of the Sunstate Shareholders, no predecessors of such entities has handled or disposed of any substance, arranged for the disposal of any substance or owned or operated any property or facility in any manner that could form the Basis of any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against Sunstate or either of Sunstate's Subsidiaries giving rise to any Liability) for damage to any site, location or body of water (surface or subsurface) or for illness or personal injury; 3.12.3 Sunstate and Sunstate's Subsidiaries have each obtained and been in compliance with all of the terms and conditions of all permits, licenses and other authorizations which are required under, and have complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables which are contained in all federal, state, local, and foreign laws (including rules, regulations, codes, plans, judgments, orders, decrees stipulations, injunctions and charges thereunder) relating to public health and safety, worker health and safety and pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes into ambient air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes; 3.12.4 All properties and equipment used in Sunstate's Business and the business of Sunstate's Subsidiaries have been free of asbestos, PCB's, dioxins, dibenzofurans and Extremely Hazardous Substances (as such term is defined in the Emergency Planning and Community Right to Know Act of 1986, as amended); 3.12.5 All product labeling has been in conformity with applicable laws (including regulations thereunder); and 3.12.6 No pollutant, contaminant or chemical, industrial, hazardous or toxic material or waste ever has been buried, stored, spilled, leaked, discharged, emitted or released on any real property that Sunstate or Sunstate's Subsidiaries has ever owned, leases or has leased. Notwithstanding anything contained herein or in the Sunstate Disclosure Schedule to the contrary, the disclosure in the Sunstate Disclosure Schedule pursuant to, or relating in any way to, this Section 3.12 shall not detract from or diminish in any manner or to any extent any Liability of Sunstate and the Sunstate Shareholders, jointly and severally pursuant to Section 8.2 hereof. 3.13 Insurance. 3.13.1 Section 3.13 of the Sunstate Disclosure Schedule sets forth the name of each insurer, the name and telephone number of each insurance broker, the name of each policyholder, policy number, period of coverage, scope and amount, and a description of any retroactive premium adjustments or other loss-sharing arrangements for each insurance policy to which Sunstate and/or each Sunstate Subsidiary has been a party, a named insured or otherwise the beneficiary of coverage at any time within the past five years. 3.13.2 With respect to each such insurance policy, except as otherwise specifically identified in Section 3.13 of the Sunstate Disclosure Schedule: (A) the policy is legal, valid, binding and enforceable and in full force and effect; (B) the policy will continue to be legal, valid, binding and enforceable and in full force and effect on identical terms following the Closing Date; (C) neither Sunstate nor any of its Subsidiaries nor, to the Sunstate Shareholders' knowledge, any other party to the policy is in breach or default (including with respect to payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default or permit termination, modification or acceleration, under the policy; and (D) neither Sunstate nor its Subsidiaries nor, to the knowledge of the Sunstate Shareholders, any other party to the policy has repudiated any provision thereof. Sunstate and its Subsidiaries are now covered, and have been covered during the past five years (dating back from the date of this Agreement), by insurance in scope and amount customary and reasonable for the business in which it has engaged during the aforementioned period and in which it currently engages. During the past five years neither Sunstate nor any of its Subsidiaries has maintained any self-insurance arrangements. 3.14 Title and Use of Real and Other Property. 3.14.1 Sunstate and all of its Subsidiaries has, and immediately prior to the Closing will have good, valid and marketable title in fee simple to all real property and structures ("Real Property") and all personal property reflected on Sunstate's Balance Sheet as owned by Sunstate and all Real Property and personal property acquired by Sunstate or a Sunstate Subsidiary since September 26, 1998, in each case free and clear of liens except (i) as set forth in Section 3.14.1 of the Sunstate Disclosure Schedule, or (ii) for sales and other dispositions of inventory in the ordinary course of business since September 26, 1998 which, in the aggregate, have not been materially different from prior periods. 3.14.2 Section 3.14.2 contains a true and complete list and legal description of each parcel of Real Property owned by Sunstate and its Subsidiaries ("Owned Real Property") and a general description of each structure thereon. The Sunstate Shareholders have heretofore furnished to AHC true and complete copies of all deeds, other instruments of title and policies of title insurance indicating and describing Sunstate's or its Subsidiaries' ownership of such Owned Real Property, as well as copies of any survey or environmental reports relating to such Owned Real Property. 3.14.3 Section 3.14.3 of the Sunstate Disclosure Schedule contains a list of all tangible personal property having, in the aggregate, a cost or fair market value in excess of $3,404,440, owned by Sunstate and its Subsidiaries. 3.14.4 Section 3.14.4 of the Sunstate Disclosure Schedule contains a list of all Real Property leases, licenses and personal property leases under which Sunstate or its Subsidiaries is the lessee or licensee ("Leased Property"), together with (i) the location and nature of each of the Leased Properties (including a legal description of all leased Real Property); (ii) the termination date of each such lease or license; (iii) the name of the lessor or licensor; and (iv) all rental and other payments made or required to be made. All leases and licenses, pursuant to which Sunstate or its Subsidiaries leases or licenses Leased Property from others are valid, subsisting and in full force and effect in accordance with their respective terms, and there is not under any Leased Property lease or license, any existing default or event of default (or event that, with notice or passage of time, or both, would constitute a default). True and complete copies of all Leased Property and licenses listed in Section 3.14.4 have been delivered to AHC heretofore, as well as any copies of title reports, surveys or environmental reports or audits relating to any Leased Property. Except as set forth in Section 3.14.4, no such lease or license will require the consent of the lessor or licensor to or as a result of the consummation of the transactions contemplated by this Agreement. 3.14.5 All personal property owned by Sunstate and Sunstate's Subsidiaries and all personal property held by such entities pursuant to leases is in good operating condition and repair, subject only to ordinary wear and tear, has been operated, serviced and maintained properly within the recommendation and requirements of the manufacturer thereof (if any) and is suitable and appropriate for the use thereof made and proposed to be made by Sunstate and its Subsidiaries in their respective businesses and operations. The Real Property and personal property scheduled pursuant to this Section 3.14 comprise all of the Real Property and personal property used in, or necessary for the conduct of Sunstate's Business and the businesses of its Subsidiaries. 3.14.6 Except as set forth in Section 3.14.6 of the Sunstate Disclosure Schedule: (i) Sunstate and its Subsidiaries are not in violation of, or default under any statute, law, ordinance, rule, regulation, permit, order, writ, judgment, injunction, decree or award ("Legal Requirement") pertaining to any of the Real Property. No notice of violation of any Legal Requirement, or of any covenant, condition, restriction or easement affecting any Real Property or with respect to the use or occupancy thereof, has been given to any Sunstate Shareholder, Sunstate or any of its Subsidiaries; (ii) All structures on the Real Property are (A) in good operating condition and repair,(B) are adequate and suitable for the purpose for which they are currently and proposed to be used, and (C) are supplied with utilities and other services necessary for the operation of such structures and the business conducted by Sunstate or its Subsidiaries therein, including gas, water, electricity, telephone, sanitary sewer and storm sewer, all of which services are maintained in accordance with all Legal Requirements and are provided via permanent, irrevocable, appurtenant easements in favor of Sunstate or its Subsidiaries, as appropriate; (iii) No condemnation proceeding is pending or, to the knowledge of the Sunstate Shareholders, threatened which would impair the occupancy, use or value of any Real Property; (iv) No structure, nor the operations of Sunstate or its Subsidiaries therein or thereon (A) is located outside of the boundary lines of the described parcel of land on which it is located, (B) is in violation of applicable setback requirements, zoning laws, or ordinances, (C) is subject to "permitted non-conforming use" or "permitted non-conforming structure" classification, or (D) encroaches any property owned by or easement granted in favor of a third party; (v) There are no (i) leases, subleases, licences, concessions or other agreements, written or oral, granting to any person the right to acquire, use, or occupy any portion of any, Real Property, (ii) outstanding options or rights of first refusal to purchase all or any portion of the Real Property, and (iii) persons other than Sunstate or its Subsidiaries in possession of any Real Property; and (vi) Each parcel of Owned Real Property and, as applicable Leased Real Property (A) is fully and adequately described in the legal description therefor contained in the deed or other applicable instrument of conveyance thereof, (B) abuts a paved public right-of-way, (C) does not serve any adjoining property for any purpose inconsistent with the use of the land, and (D)is not located within any flood plain or subject to any similar type restriction for which any permits or licenses necessary to the use thereof have not been obtained. 3.15 Condition of Assets. The equipment, real property, fixtures and other personal property of Sunstate and each of Sunstate's Subsidiaries are in good operating condition and repair (ordinary wear and tear excepted) for the conduct of their respective businesses as presently being conducted. Title to all such assets was acquired through arms-length transactions. All assets necessary for the conduct of Sunstate's and its Subsidiaries' businesses are owned by Sunstate or its Subsidiaries, as appropriate. 3.16 Inventories. The inventories of raw materials and other consumable items reflected in the Financial Statements do not include any items in any material amount that are below standard quality or are damaged, obsolete, slow- moving or of a quantity or quality not usable or suitable in the ordinary course of business. The Financial Statements reflect adequate reserves in accordance with GAAP, consistently applied, with respect to inventories and raw materials. The entire inventory was acquired in the ordinary course of business, on an arms-length basis. 3.17 Employees. Except as set forth in Section 3.17 of the Sunstate Disclosure Schedule, none of the employees of Sunstate is represented by any labor union or collective bargaining unit and Sunstate nor the Sunstate Shareholders are not aware of any organizational efforts taking place with respect to such representation. 3.18 Financial Statements. The Sunstate Disclosure Schedule contains audited Consolidated Balance Sheets of Sunstate and Sunstate's Subsidiaries as at September 26, 1998 and September 27, 1997 and related unaudited consolidated statements of operations, cash flows and stockholders' equity of Sunstate and Sunstate's Subsidiaries for the periods ended at such dates (collectively the "Financial Statements"). The Financial Statements present fairly, in all material respects, the financial position on the dates thereof and results of operations of Sunstate and Sunstate's Subsidiaries for the periods indicated, prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"). The Financial Statements are capable of being audited in accordance with Regulation S-X, promulgated by the Securities and Exchange Commission. There are no assets of Sunstate or Sunstate's Subsidiaries, the value of which is materially overstated in said balance sheets. 3.19 Undisclosed Liabilities. Sunstate has no Liability (and there is no Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against Sunstate giving raise to a Liability) except for (i) Liabilities set forth on the face of Sunstate's latest Balance Sheet (as opposed to the footnotes); (ii) Liabilities which have arisen after the date of the last balance sheet in the ordinary course of business; and (iii) Liabilities set forth as such in the Sunstate Disclosure Schedule. 3.20 Absence of Certain Changes or Events. Except as set forth in the Sunstate Disclosure Schedule, since September 26, 1998 (the "Balance Sheet Date"), there has not been: 3.20.1 any material adverse change in the financial condition, properties, assets, liabilities or business of Sunstate or Sunstate's Subsidiaries; 3.20.2 any material damage, destruction or loss of any material properties of Sunstate or Sunstate's Subsidiaries, whether or not covered by insurance; 3.20.3 any material adverse change in the manner in which the business of Sunstate or Sunstate's Subsidiaries has been conducted; 3.20.4 any material adverse change in the treatment and protection of trade secrets or other confidential information of Sunstate or Sunstate's Subsidiaries; and 3.20.5 any occurrence not included in sub-paragraphs 1 through 4 of this Section 3.20 which has resulted, or which the Sunstate Shareholders have reason to believe, might be expected to result in a material adverse change in the business or prospects of Sunstate or Sunstate's Subsidiaries. 3.21 Government Licenses, Permits, Etc. Sunstate, and as applicable, each of Sunstate's Subsidiaries has all material governmental licenses, permits, authorizations and approvals necessary for the conduct of its business as currently conducted ("Licenses and Permits"). Section 3.21 of the Sunstate Disclosure Schedule includes a list of all Licenses and Permits. All Licenses and Permits are in full force and effect, and no proceedings for the suspension or cancellation of any thereof is pending or, to their knowledge, threatened. The Sunstate Shareholders know of no action, omission or policy which could form a reasonable Basis for the loss of any such licensure. 3.22 Business Locations. Neither Sunstate nor Sunstate's Subsidiaries owns or leases any real or personal property in any state or country except as set forth on the Sunstate Disclosure Schedule. Such entities have no executive offices or places of business except as otherwise set forth on the Sunstate Disclosure Schedule. 3.23 Intellectual Property. Section 3.23 of the Sunstate Disclosure Schedule sets forth a complete and correct list and summary description of all trademarks, trade names, service marks, service names, brand names, copyrights and patents, registrations thereof and applications therefore, applicable to or used in the business of Sunstate, GHC and SGHC, together with a complete list of all licenses granted by or to such entities with respect to any of the above. Except as otherwise set forth in Section 3.23, all such trademarks, trade names, service marks, service names, brand names, copyrights and patents are owned by Sunstate and/or Sunstate's Subsidiaries as applicable, free and clear of all liens, claims, security interests and encumbrances of any nature whatsoever. Neither Sunstate nor Sunstate's Subsidiaries is currently in receipt of any notice of any violation or infringements of, and such entities are not knowingly violating or infringing, the rights of others in any trademark, trade name, service mark, copyright, patent, trade secret, know-how or other intangible asset. 3.24 Continuity of Existing Arrangements. Except as set forth in Section 3.24 of the Sunstate Disclosure Schedule, the Sunstate Shareholders have no knowledge of, or the Basis for a belief that, either as a result of the transactions contemplated hereby or for any other reason (exclusive of expiration of a contract upon the passage of time), (i) any material distributor or supplier of Sunstate or its Subsidiaries intends to discontinue, materially alter, or substantially diminish its relationship with such entity, or with APT, after the Closing Date or (ii) any key employee of Sunstate or its Subsidiaries intends to terminate such employment. 3.25 Governmental Approvals. Except as set forth in Section 1.2 as to the Merger Filing, no authorization, license, permit, franchise, approval, order or consent of, and no registration, declaration or filing by Sunstate or Sunstate's Subsidiaries with, any governmental authority, domestic or foreign, federal, state or local, is required in connection with Sunstate's execution, delivery and performance of this Agreement. 3.26 Accounts Receivable. Except as set forth in Section 3.26 of the Sunstate Disclosure Schedule, all of the accounts receivable of Sunstate or Sunstate's Subsidiaries included in the Financial Statements or otherwise reflect actual transactions, have arisen in the ordinary course of business, will not, to the knowledge of the Sunstate Shareholders, be subject to offset or deduction and, except as noted, will be collectible at the aggregate recorded amounts thereof net of any reserves established in a manner consistent with past practices of all as reflected in the financial statements. 3.27 Liabilities. Neither Sunstate nor any of the Sunstate Subsidiaries have any material Liabilities, whether or not of a kind required by generally accepted accounting principles to be set forth on a financial statement, other than (i) Liabilities fully and adequately reflected or reserved against on the Balance Sheets, (ii) Liabilities incurred since the Balance Sheet Date in the ordinary course of the business of Sunstate or Sunstate's Subsidiaries, or (iii) Liabilities otherwise disclosed in this Agreement, including the Exhibits hereto and Disclosure Schedule. 3.28 OSHA. Except as otherwise provided in Section 3.28 of the Sunstate Disclosure Schedule, during the three (3) years immediately prior to the date of this Agreement, neither Sunstate nor either of the Sunstate Subsidiaries have been cited for any violations of the Occupational Safety and Health Act of 1970, as amended, nor to the knowledge of the Sunstate Shareholders, are there any citations pending as a result of inspections of the Company or for non - -compliance with such Act. Except as otherwise indicated in Section 3.28 of the Sunstate Disclosure Schedule, each of the conditions which resulted in the issuance of a citation have been abated or otherwise corrected to the satisfaction of the Occupational Safety and Health Administration as of the Closing Date. 3.29 Product Warranties. Each product manufactured, sold, leased or delivered by Sunstate or Sunstate's Subsidiaries has been in substantial conformity with all applicable HUD specifications, contractual commitments and all express and implied warranties, and, except for normal returns or allowances in the ordinary course of business, not in excess of warranty reserves. Neither Sunstate nor its Subsidiaries has any Liability (and there is no Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against it giving rise to any Liability) for replacement or repair thereof or for other damages in connection therewith. No product manufactured by Sunstate or Sunstate's Subsidiaries is subject to any guaranty, warranty or other indemnity beyond the applicable standard terms and conditions of sale or lease as set forth in purchase orders delivered pursuant to Section 3.6.1. 3.30 Immigration Matters. Except as set forth in Section 3.30 of the Sunstate Disclosure Schedule, Sunstate and each of Sunstate's Subsidiaries has properly completed and maintained Forms I-9 on all persons who became employed by such entity for the past three (3) years, and each alien employee of such entity is employed pursuant to a valid temporary work authorization. Section 3.30 of the Disclosure Schedule lists the names of all alien employees who are required to have temporary work authorizations, the date of their employment and their job titles and responsibilities, and copies of each Form I-9 for each such person. 3.31 Investment Representations. The Sunstate Shareholders acknowledge that the Alpha Merger Stock is not registered under the Act, or any state securities laws and are being offered and issued in reliance upon federal and state exemptions for transactions not involving any public offering. The Sunstate Shareholders are each acquiring the Alpha Merger Stock solely for their own respective accounts for investment purposes and not with a view to the sale or other disposition thereof within the meaning of the Act, except as may be permitted by such Act and the rules and regulations promulgated under the Act. Each Sunstate Shareholder has experience investing in unregistered securities and is fully cognizant of the risks inherent in the ownership thereof and each is capable of withstanding substantial losses as a result of such ownership. 3.32 Reserves Adequate. Section 3.32 of the Sunstate Disclosure Schedule sets forth a list of all the reserves established by Sunstate and its Subsidiaries for all Liabilities, and the amounts for each such reserve. All the reserves which have been established are adequate to cover 100% of the costs, expenses, losses and Liabilities that will be incurred in connection with all such matters. There will be no material change in the amounts of such reserves prior to the Closing Date. 3.33 No Omissions or Untrue Statements. No representation or warranty made by Sunstate, GHC, SGHC or the Stockholders to AHC and APT anywhere in this Agreement, the Sunstate Disclosure Schedule or in any certificate of a Sunstate officer required to be delivered to AHC pursuant to the terms of this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading as of the date hereof and as of the Closing Date. 4. REPRESENTATIONS AND WARRANTIES OF AHC AND APT Except as set forth in the Alpha Disclosure Schedule in each instance, and AHC's Annual Report on Form 10-K for the year ended December 31, 1998, including the Exhibits thereto (the "10-K") filed with the SEC, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), AHC and APT, jointly and severally, represent and warrant to, and agree with, the Sunstate Shareholders and Sunstate as follows, as of the date hereof and as of the Closing Date: 4.1 Organization and Standing of AHC and APT. AHC and APT are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware, and have the corporate power to carry on their business as now conducted and to own their assets and are duly qualified to transact business as foreign corporations in each state where such qualification is necessary except where the failure to qualify (individually or in the aggregate) will not have a material adverse effect on the business or prospects of AHC or APT on a combined basis. The copies of the Certificate of Incorporation and By-laws of AHC and APT, as amended to date, and delivered to Sunstate, are true and complete copies of those documents as now in effect. 4.2 Authority. The approval of the Merger by the respective Boards of Directors of AHC and APT, once given, shall be binding on AHC and APT, subject to the approval of their respective stockholders as mandated by the DGCL and, with regard to AHC, the Securities Exchange Act of 1934, as amended, and all Rules and Regulations promulgated thereunder and all applicable NASDAQ listing agreements and requirements. This Agreement will constitute, and all other agreements contemplated hereby will constitute, when executed and delivered by AHC and APT, the valid and binding obligations of each corporation, enforceable in accordance with their respective terms. 4.3 No Conflict. The making and performance of this Agreement will not (i) conflict with the Certificate of Incorporation or the By-laws of AHC or APT, (ii) violate any laws, ordinances, rules, or regulations, or any order, writ, injunction or decree to which AHC or APT is a party or by which AHC or APT or any of its material assets, business, or operations may be bound or affected or (iii) result in any breach or termination of, or constitute a default under, or constitutean event which, with notice or lapse of time, or both, would become a default under, or result in the creation of any encumbrance upon any material asset of AHC or APT under, or create any rights of termination, cancellation, or acceleration in any person under, any material agreement, arrangement, or commitment, or violate any provisions of any laws, ordinances, rules or regulations or any order, writ, injunction, or decree to which AHC or APT is a party or by which AHC or APT, or any of their material assets may be bound. 4.4 Capitalization. The Authorized capital stock of AHC consists of 25,000,000 shares of Common Stock, par value $.01 and 1,000,000 shares of Preferred Stock, par value $.01. As of January 12, 1998, 16,788,228 shares of Common Stock, 821,496 shares of Series B Preferred Stock and 135,162 shares of Series C Preferred Stock were issued and outstanding. Such outstanding shares of Common Stock are duly authorized, validly issued, fully paid, and non-assessable. The AHC Merger Stock and the Series D Preferred Stock to be issued pursuant to this Agreement, when issued in accordance with the terms of this Agreement, will be duly authorized, validly issued, fully paid and non-assessable. As of December 31, 1998 there were outstanding options, warrants or rights of conversion or other rights, agreements, arrangements or commitments relating to the capital stock of AHC or obligating AHC to issue or sell an aggregate of 1,796,500 shares of Common Stock as set forth in the Disclosure Schedule. 4.5 AHC Financial Statements. The financial statements of AHC (collectively the "AHC Financial Statements") included in AHC's SEC Reports (as hereinafter defined) present fairly, in all material respects, the financial position of AHC as of the respective dates and the results of its operations and other information for the periods covered in accordance with GAAP and in accordance with Regulation S-X of the SEC (subject, in the case of unaudited interim period financial statements, to normal and recurring year-end adjustments which, individually or collectively, are not material). 5. STOCKHOLDER APPROVALS; CLOSING DELIVERIES 5.1 Stockholder Approvals. Subject to the satisfactory completion of all undertakings contemplated by this Agreement including all due diligence reviews and investigations by AHC which are deemed to be necessary by the Board of Directors of AHC, and the other provisions of this Agreement, the parties shall hold a closing (the "Closing") on the next business day (or such later date as the parties hereto may agree) following the business day on which the last of the conditions set forth in Articles 6 and 7 hereof is fulfilled or waived (such later date, the "Closing Date"), at 10:00 A.M. at the offices of Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York, New York 10017, or at such other time or place as the parties may agree upon. 5.2 Closing Deliveries to APT and AHC. At the Closing, in addition to documents referred elsewhere, Sunstate and the Sunstate Shareholders shall deliver, or cause to be delivered, to AHC: 5.2.1 a certificate, dated as of the Closing Date, executed by the Secretary of Sunstate and each of the Sunstate Shareholders, to the effect that representations and warranties contained in this Agreement are true and correct in all material respects at and as of the Closing Date and that Sunstate and the Sunstate Shareholders have complied with or performed in all material respects all terms, covenants and conditions to be complied with or performed by them on or prior to the Closing Date; 5.2.2 an opinion of Sunstate's counsel, substantially in the form of Exhibit 5.2.2 attached; 5.2.3 certificates representing Sunstate Stock owned by all of the Sunstate Shareholders; and 5.2.4 such other documents as AHC or its counsel may reasonably require to evidence compliance with Article 7 hereof. 5.3 Closing Deliveries to Sunstate. At the Closing, in addition to documents referred to elsewhere, AHC shall deliver to Sunstate: 5.3.1 a cashier's check or evidence of compliance with the wiring instructions of Sunstate with regard to the cash component of the Merger Consideration; 5.3.2 certificates representing the AHC Merger Stock and the Series D Preferred Stock issued to the Sunstate Shareholders in accordance with the instructions delivered to AHC by the Sunstate Shareholders; 5.3.3 a certificate of AHC, dated as of the Closing Date, executed by the President or an Executive Vice President of AHC to the effect that the representations and warranties of AHC and APT contained in this Agreement are true and correct in all material respects and that AHC and APT have each complied with or performed in all material respects all terms, covenants, and conditions to be complied with or performed by AHC and APT on or prior to the Closing Date; 5.3.4 an opinion of AHC's counsel, Parker Duryee Rosoff & Haft, substantially in the form of Exhibit 5.3.4 attached; and 5.3.5 such other documents as Sunstate or it's counsel may reasonably require to evidence compliance with Article 6 hereof. 6. CONDITIONS TO OBLIGATIONS OF THE SUNSTATE SHAREHOLDERS AND SUNSTATE The obligation of the Sunstate Shareholders and Sunstate to consummate the Closing is subject to the following conditions, any of which may be waived by it in their sole discretion: 6.1 Compliance by AHC and APT. AHC and APT shall have performed and complied in all material respects with all agreements and conditions required by this Agreement including without limitation the obligations set forth in Section 2.2 to be performed or complied with by AHC or APT prior to or on the Closing Date; 6.2 Accuracy of AHC's and APT's Representations. AHC's and APT's representations and warranties contained in this Agreement (including the AHC Disclosure Schedule) or any schedule, certificate, or other instrument delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects at and as of the Closing Date (except for such changes permitted by this Agreement) and shall be deemed to be made again as of the Closing Date. 6.3 Documents. All documents and instruments required hereunder to be delivered by AHC to Sunstate at the Closing shall be delivered in form and substance reasonably satisfactory to Sunstate and its counsel, including, without limitation, resolutions of the Board of Directors of AHC to increase the number of directors on AHC's Board of Directors by two persons and appointing Roger D. Watson and William H. Shaw to serve on the Board of Directors until their successors are duly elected, and evidence of the filing of the Certificate of Designation for the Series D Preferred Stock. 6.4 Agreements. AHC shall have entered into the following binding agreements with: 6.4.1 Employment Agreement between APT and Shaw in the form of Exhibit 6.4.1 hereto; 6.4.2 Employment Agreement between APT and Watson in the form of Exhibit 6.4.2 hereto; and 6.4.3 Registration Rights Agreement in the form of Exhibit 1.4.4 hereto. 6.5 Litigation. No action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent the consummation of any of the transactions contemplated by this Agreement; (ii) would cause any of the transaction contemplated by this Agreement to be rescinded following consummation; or (iii) materially affect adversely APT's right to operate or control the business of Sunstate or Sunstate's Subsidiaries. 6.6 SGF Merger. The SGF Merger is closed subject only to the filing of such documents with the Secretaries of State of the States of Delaware and Georgia as are required by the respective corporate laws of such jurisdictions. 7. CONDITIONS TO AHC'S AND APT'S OBLIGATIONS AHC's and APT's obligation to consummate the Closing is subject to the following conditions, any of which may be waived by AHC or APT in their sole discretion: 7.1 Compliance by Sunstate. Sunstate and the Sunstate Shareholders shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date. 7.2 Accuracy of Representations of Sunstate. The representations and warranties of Sunstate and the Sunstate Shareholders contained in this Agreement (including the exhibits hereto and the Sunstate Disclosure Schedule) or any schedule, certificate, or other instrument delivered pursuant to the provisions hereof or in connection with the transactions contemplated hereby shall be true and correct in all material respects at and as of the Closing Date (except for changes permitted by this Agreement) and shall be deemed to be made again as of the Closing Date. 7.3 Third Party Consents. Sunstate and the Sunstate Shareholders shall have procured and delivered all third party consents deemed necessary by APT and AHC. 7.4 Material Adverse Change. AHC shall be satisfied that nothing, which in the exercise of its discretion constitutes a material adverse change, shall have occurred subsequent to September 26, 1998 in the financial position, results of operations, assets, liabilities, or prospects of Sunstate and/or the Sunstate Subsidiaries. 7.5 Litigation. No action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment, order, decree, stipulation, injunction or charge would (i) prevent the consummation of any of the transactions contemplated by this Agreement, (ii) would cause any of the transaction contemplated by this Agreement to be rescinded following consummation, or (iii) materially affect adversely APT's right to operate or control the business of Sunstate or Sunstate's Subsidiaries. 7.6 Collateral Agreements. 7.6.1 The Agreements referred to in paragraph 6.4 hereof shall be executed; and 7.6.2 Sentz, Knight, and Scarboro shall have entered into a Non-Competition Agreement in the form of Exhibit 7.6 hereof with APT and AHC. 7.7 Documents. All documents, instruments and actions required hereunder to be performed or delivered by Sunstate and/or the Sunstate Shareholders or each of them to AHC at the Closing shall be delivered in form and substance reasonably satisfactory to AHC and its counsel. 7.8 SGF Merger. The SGF Merger is closed subject only to the filing of such documents with the Secretaries of State of the States of Delaware and Georgia as are required by the respective corporate laws of such jurisdictions. 7.9 Acceptable Financing. AHC shall have secured appropriate financing on terms and conditions acceptable to AHC's Board of Directors. 7.10 Due Diligence. The completion, to AHC's satisfaction of all due diligence review with respect to the business, assets, financial condition, prospects and otherwise of Sunstate and its Subsidaries that is deemed necessary by AHC's Board of Directors, including without limitation, all tests, studies analyses, legal and regulatory audits or reviews. 7.11 Shareholder Approval. Approval of the Merger by the Shareholders of AHC as determined by the vote of such shareholders at an annual meeting duly held and organized in accordance with the terms of the Exchange Act and the DGCL shall have been obtained by the Board of Directors of AHC. 8. REMEDIES FOR BREACHES OF THIS AGREEMENT 8.1 Survival. All representations, warranties, covenants and agreements contained in this Agreement, and any financial statements, deeds, certificates (including closing certificates), instruments, schedules or other documents delivered pursuant hereto or otherwise in connection herewith will survive the execution and delivery of this Agreement, regardless of any investigation made by APT, AHC, or on behalf of either, for a period of five years from the Closing Date, except for (i) those representations and warranties contained in Section 3.8 which shall survive until the expiration of all applicable statutes of limitation with respect thereto and (ii) those representations and warranties contained in Sections 3.1, 3.2, 3.4 and 3.12 which shall continue in full force and effect forever. 8.2 Indemnification. The Sunstate Shareholders jointly and severally agree to indemnify AHC and APT or their respective officers, directors, Sunstate Shareholders, employees, agents or affiliates (each an "Alpha Indemnitee") and each of them, from and against all losses, liabilities, obligations, costs, expenses, damages, judgments of any kind or nature whatsoever (including reasonable attorneys', accountants' and experts' fees, disbursements of counsel, and other costs and expenses) incurred by any of them ("Losses"), from, arising out of, relating to, in the nature of or caused by any breach of any representation or warranty contained in Section 3 hereof and of the SGF Merger Agreement or in any certificate delivered by Sunstate, the Sunstate Shareholders, or the Shareholders of SGF or any of them in connection herewith or any breach or failure to perform or comply with any obligation, agreement or covenant made in this Agreement and the SGF Merger Agreement or in connection herewith or therewith. 8.3 Third Party Claims. 8.3.1 If any party entitled to be indemnified pursuant to this Article 8 receives notice of the assertion by any third party of a claim or the commencement by such third person of any action (an "Indemnifiable Claim") with respect to which another party hereto (an "Indemnifying Party") is or may be obligated to provide indemnification, the Indemnified Party shall promptly notify the Indemnifying Party in writing (the "Claim Notice") of the Indemnifiable Claim; provided that the failure to provide such notice shall not relieve or otherwise affect the obligation of the Indemnifying Party to provide indemnification hereunder, except to the extent that any damages directly resulted from, or were caused by, such failure. 8.3.2 The Indemnifying Party shall have thirty days after receipt of the Claim Notice to undertake, conduct and control, through counsel of its own choosing, and at its expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith; provided, that (i) the Indemnifying Party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party (subject to the consent of the Indemnifying Party, which consent shall not be unreasonably withheld), provided that the fees and expenses of such counsel shall not be borne by the Indemnifying Party, and (ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the Indemnified Party's consent. So long as the Indemnifying Party is vigorously contesting any such Indemnifiable Claim in good faith, the Indemnified Party shall not pay or settle such claim without the Indemnifying Party's consent, which consent shall not be unreasonably withheld. 8.3.3 If the Indemnifying Party does not notify the Indemnified Party within thirty days after receipt of the Claim Notice that it elects to undertake the defense of the Indemnifiable Claim described therein, the Indemnified Party shall have the right to contest, settle or compromise the Indemnifiable Claim in the exercise of its reasonable discretion; provided that the Indemnified Party shall notify the Indemnifying Party of any compromise or settlement of such Indemnifiable Claim. 8.4 Indemnification Non-Exclusive. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory, equitable or common-law remedy any party may have for breach of representation, warranty, covenant or agreement. 8.5 Pending Indemnity Claims. The proceeds from the sale of any Alpha Merger Stock by a Sunstate Shareholder, in accordance with the terms of Article 1 hereof and the Registration Rights Agreement, during a period in which an Indemnifiable Claim is outstanding or pending shall be placed into an escrow account acceptable to AHC pending the resolution of such Indemnifiable Claim. 9. TERMINATION 9.1 Termination of Agreement. This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing as follows: 9.1.1 by mutual consent of the parties; 9.1.2 by either Sunstate or AHC following the insolvency or bankruptcy of a party hereto, or if any one or more of the conditions to Closing set forth in Article 6 or Article 7 shall become incapable of fulfillment and such condition or breach shall not have been waived by the party for whose benefit the condition was established; and 9.1.3 by AHC or APT if either determines the representations and warranties made by the Sunstate Shareholders in this Agreement were not true and correct at and as of the date of this Agreement. 9.1.4 by AHC or APT if the results, determinations, indications or findings of any of the due diligence review undertaken by them prior to Closing, regarding the business, assets, financial condition, prospects and otherwise of Sunstate and its Subsidiaries (including, without limitation, all tests, analyses, legal and regulatory audits and reviews, including Phase I environmental analyses of the Real Property) is, in the opinion of AHC's Board of Directors, unacceptable. 9.1.5 by AHC or APT if AHC fails to obtain adequate financing for the Merger on terms and conditions acceptable to the Board of Directors of AHC. 9.2 Effect of Termination. If any party terminates this Agreement pursuant to Section 9.1 above, all obligations of the parties hereunder shall terminate without any liability to the other party (except for any liability of the party then in breach); provided, however, that the confidentiality provisions contained herein shall survive termination. 10. ADDITIONAL COVENANTS 10.1 Mutual Cooperation. The parties hereto will cooperate with each other, and will use all reasonable efforts to cause the fulfillment of the conditions to the parties' obligations hereunder and to obtain as promptly as possible all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement. 10.2 Changes in Representations and Warranties of a Party. Between the date of this Agreement and the Closing Date, no party shall directly or indirectly, enter into any transaction, take any action, or by inaction permit an event to occur, which would result in any of the representations and warranties of any party herein contained not being true and correct at and as of (a) the time immediately following the occurrence of such transaction or event or (b) the Closing Date. A party shall promptly give written notice to the other parties upon becoming aware of (A) any fact which, if known on the date hereof, would have been required to be set forth or disclosed pursuant to this Agreement and (B) any impending or threatened breach in any material respect of any of the representations and warranties contained in this Agreement and with respect to the latter shall use all reasonable efforts to remedy same. 11. BROKERS 11.1 Brokers. AHC and APT represent to Sunstate and the Sunstate Shareholders, and Sunstate and the Sunstate Shareholders represent to AHC and APT, that, other than as set forth on Schedule 11.1, hereto, there is no other broker or finder entitled to a fee or other compensation for bringing the parties together to effect the Merger, and that the payment of such fees or other compensation as described on Schedule 11.1 is true and accurate in all respects and such amounts are to be paid in the manner, and by the parties, set forth thereon. 12. MISCELLANEOUS 12.1 Expenses. Except as otherwise provided herein, each of the Sunstate Shareholders and AHC shall pay their own expenses incident to the negotiation, preparation, and carrying out of this Agreement, including all fees and expenses of its counsel and accountants for all activities of such counsel and accountants undertaken pursuant to this Agreement, irrespective of whether or not the transactions contemplated hereby are consummated. It is agreed that expenses associated with this transaction attributable to Sunstate shall not exceed $50,000. 12.2 Survival of Representations, Warranties and Covenants. All statements contained in this Agreement or in any certificate delivered by or on behalf of Sunstate, Sunstate's Subsidiaries, the Sunstate Shareholders, AHC or APT pursuant hereto, or in connection with the transactions contemplated hereby shall be deemed representations, warranties and covenants by the Sunstate Shareholders, AHC or APT, as the case may be, hereunder. All representations, warranties, and covenants made by the Sunstate Shareholders, Sunstate, AHC or APT in this Agreement, or pursuant hereto, shall survive the Closing in accordance with the terms of Section 8.1 hereof. 12.3 Publicity. The parties hereto shall not issue any press release or make any other public statement, in each case, relating to, connection with or arising out of this Agreement or the transactions contemplated hereby, without obtaining the prior approval of the other, which shall not be unreasonably withheld or delayed, except that prior approval shall not be required if, in the reasonable judgment of AHC, prior approval by Sunstate or the Sunstate Shareholders would prevent the timely dissemination of such release or statement in violation of applicable Federal securities laws, rules or regulations or policies of the Nasdaq Small Cap Market. 12.4 Nondisclosure. The Sunstate Shareholders will not at any time after the date of this Agreement, without AHC's consent, divulge, furnish to or make accessible to anyone any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulae, plans, material, devices or ideas or know-how, whether patentable or not, with respect to any confidential or secret aspects of APT (including, without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers) ("Confidential Information"). AHC will not at any time after the date of this Agreement use, divulge, furnish to or make accessible to anyone any Confidential Information (other than to its representatives as part of its due diligence or corporate investigation). Any information, which (i) at or prior to the time of disclosure by either Sunstate or AHC was generally available to the public through no breach of this covenant, (ii) was available to the public on a nonconfidential basis prior to its disclosure by either Sunstate, the Sunstate Shareholders or AHC or (iii) was made available to the public from a third party provided that such third party did not obtain or disseminate such information in breach of any legal obligation of Sunstate or AHC, shall not be deemed Confidential Information for purposes hereof, and the undertakings in this covenant with respect to Confidential Information shall not apply thereto. If this Agreement is terminated pursuant to the provisions of Article 8 or any other express right of termination set forth in this Agreement, AHC shall return to Sunstate all copies of all Confidential Information previously furnished to it by Sunstate. 12.5 Succession and Assignments; Third Party Beneficiaries. This Agreement may not be assigned (either voluntarily or involuntarily) by any party hereto without the express written consent of the other party. Any attempted assignment in violation of this Section shall be void and ineffective for all purposes. In the event of an assignment permitted by this Section, this Agreement shall be binding upon the heirs, successors and assigns of the parties hereto. There shall be no third party beneficiaries of this Agreement. 12.6 Notices. All notices, requests, demands, or other communications with respect to this Agreement shall be in writing and shall be (i) sent by facsimile transmission, (ii) sent by the United States Postal Service, registered or certified mail, return receipt requested, or (iii) personally delivered by a nationally recognized express overnight courier service, charges prepaid, to the following addresses (or such other addresses as the parties may specify from time to time in accordance with this Section). 12.6.1 To AHC and APT: Alpha Hospitality Corporation 12 East 49th Street New York, New York 10017 Attn: Thomas W. Aro Fax No.: (212) 750-5171 With a copy to: Parker Duryee Rosoff & Haft 529 Fifth Avenue New York, New York 10017 Attn: Herbert F. Kozlov, Esq. Fax No.: (212) 972-9488 12.7 To Sunstate and the Sunstate Shareholders: Sunstate Manufactured Homes of Georgia d/b/a Peach State Homes P.O. Box 615 Adel, Georgia 31620 Fax No: Carroll E. Sentz 32 E. Arch Dr. Lake Worth, Florida 33467 Samuel B. Knight 3975 N. Oak St. Exit, Apt. 613 Valdosta, Georgia 31603 William H. Shaw 2808 Bud McKey Valdosta, Georgia 31602 Roger D. Watson 4603 Ridgeview Circle Valdosta, Georgia 31602 John Scarboro 605 Newton Drive Adel, Georgia 31620 With a copy to: C. George Newbern Coleman, Talley, Newbern, Kurrie, Prescott & Holland P.O. Box 5437 Valdosta, Georgia 31603-5437 Any such notice shall, when sent in accordance with the preceding sentence, be deemed to have been given and received on the earliest of (i) the day delivered to such address or sent by facsimile transmission, (ii) the fifth business day following the date deposited with the United States Postal Service, or (iii) 24 hours after shipment by such courier service. 12.8 Construction; Selection of Forum. (a) This Agreement shall be construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. (b) The parties hereby agree that the state and federal courts located in the State of New York, County of New York shall be the exclusive forum for the resolution of any disputes arising hereunder. The parties irrevocably consent to the jurisdiction and venue of such federal and state courts for such purposes and hereby waive any defenses as to improper venue, forum non conveniens and improper jurisdiction in connection herewith. 12.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same Agreement. 12.10 No Implied Waiver; Remedies. No failure or delay on the part of the parties hereto to exercise any right, power, or privilege hereunder or under any instrument executed pursuant hereto shall operate as a waiver nor shall any single or partial exercise of any right, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. All rights, powers, and privileges granted herein shall be in addition to other rights and remedies to which the parties may be entitled at law or in equity. 12.11 Entire Agreement. This Agreement, including the Exhibits and Disclosure Schedules attached hereto, sets forth the entire understandings of the parties with respect to the subject matter hereof, and it incorporates and merges any and all previous communications, understandings, oral or written as to the subject matter hereof, and cannot be amended or changed except in writing, signed by the parties. 12.12 Headings. The headings of the Sections of this Agreement, where employed, are for the convenience of reference only and do not form a part hereof and in no way modify, interpret or construe the meanings of the parties. 12.13 Severability. To the extent that any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted hereof and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. ATTEST: SUNSTATE MANUFACTURED HOMES OF GEORGIA, INC. d/b/a Peachstate Manufactured Homes of Georgia By: Name: Name: Title: Title: ATTEST: ALPHA HOSPITALITY CORP. By: Name: Name: Title: Title: ATTEST: ALPHA PEACH TREE CORPORATION By: Name: Name: Title: Title: Carroll E. Sentz William H. Shaw Samuel B. Knight Roger D. Watson John Scarboro -----END PRIVACY-ENHANCED MESSAGE-----