10-K 1 0001.txt 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, 2000. ( ) 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 registrant as specified 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, 2000 were $872,000. The aggregate market value on March 23, 2001 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 $14,000,000. As of March 23, 2001, 20,748,312 shares of Common Stock, $.01 par value, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None Transitional Small Business Disclosure Format: Yes No X The Exhibit Index is located on Page 35. ITEM 1. BUSINESS General Alpha Hospitality Corporation (the "Company") was incorporated in Delaware on March 19, 1993, and its subsidiaries Alpha Gulf Coast, Inc. ("Alpha Gulf") 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. ("AMI") 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, 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, Alpha Peach Tree Corporation ("Alpha Peach Tree") was incorporated in Delaware on March 16, 1999, Casino Ventures, L.L.C. ("Casino Ventures") was formed as a limited liability company in Mississippi on June 6, 1999, Alpha Florida Entertainment, L.L.C. ("Alpha Florida LLC") was formed as a limited liability company in Florida on October 19, 2000 and Alpha Casino Management Inc. ("ACM") was incorporated in Delaware on June 26, 2000. As used herein, the term "Company" includes Alpha Hospitality Corporation and such of its subsidiaries as the context requires. 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. In November 2000, the Company launched its gaming day cruise vessel operations out of Miami-Dade County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. The Company is pursuing additional gaming related and other opportunities. 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 and (ii) the pursuit of gaming related and other opportunities through the Company's other subsidiaries. Effective March 2, 1998, the Company sold to Greenville Casino Partners, L.P. (the operator of another casino barge in Greenville, Mississippi), its Bayou Caddy's Jubilee Casino ("Jubilee") and related assets, which then constituted substantially all the Company's operating assets, in consideration for (i) approximately $11,800,000 in cash, (ii) a 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. See Item 7, herein, for a more detailed discussion of the sale transaction. Casino Operations and Gaming Activities 2000 Operations Florida. On May 7, 1999, Alpha Florida was notified by Miami-Dade County (the "County") that it had received the final approval on a lease to dock and operate a day cruise vessel out of the County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. The exclusive lease is for five years. The County may renew this exclusive agreement for two periods of five years each. For this exclusivity the Company has agreed to pay the County a minimum guaranteed monthly base rent, a per-passenger fee and a percentage of retail merchandise sold in the facility. The lease commenced on November 26, 2000, the date of the vessel's inaugural cruise. On June 15, 2000, the Company entered into a Charter Agreement that required that $1,250,000, including the application of a previously issued $400,000 promissory note, be paid towards the completion of construction of the vessel and monthly payments over a three-year period commencing upon completion. The monthly payments are $41,000 during the first year and $46,667 during years two and three, with an additional surcharge for each month of the three-year period amounting to one dollar per each passenger during each previous month. At the completion of the three-year period, the Company has the option to purchase the vessel at a cost of $4,500,000, towards which all previous construction payments would be applied. In November 2000, the interior design and construction was completed on the vessel, the Ella Star Casino ("Ella Star"), with the inaugural cruise taking place on November 26, 2000. The Ella Star has an inherent competitive advantage as it has the fastest route to the three mile limit, putting its passengers in gaming action in just 20 minutes. The vessel's first two decks provide for 7,000 square feet of Las Vegas style gaming with 165 slot machines and 20 table games. The third deck features the Star Cafe with seating for 150 people. Included in property and equipment at December 31, 2000 are $2,345,000 (including $1,250,000 paid pursuant to the Charter Agreement) of payments related to the construction of the vessel and related improvements. On September 7, 2000, the Company entered into a three-year agreement for the rental of certain furniture and equipment to be used in the gaming day cruise vessel. Rental payments, which commenced in November 2000 and December 2000, are approximately $36,000 per month. In October 2000, Alpha Florida merged into Alpha Florida LLC. Also, in October 2000, the Company received $900,000 from an unrelated third party and an additional $71,000 of pre-opening expenses paid directly by that third party, in exchange for a 25% interest in Alpha Florida LLC, while retaining the remaining 75% interest. In addition, the Company will receive a monthly management fee amounting to 5% of gross revenue. Development Activities New York. The Company, through its wholly-owned subsidiary, AMI is party to a General Memorandum of Understanding (the "Memorandum") with Catskill Development, LLC ("CDL" and, collectively with AMI, the "Parties") dated December 1, 1995, which among other things, provided for the establishment of Mohawk Management, LLC ("MML"), 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 "Mohawk Tribe"). The Memorandum also sets forth the general terms for the funding and management obligations of CDL (25% owned by Bryanston Group, Inc. ("Bryanston")) and AMI with regard to MML. In January 1996, MML was formed with each of CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML entered into a Gaming Facility Management Agreement with the Mohawk 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 provided MML with the exclusive right to manage the Monticello Casino for seven (7) years from its opening and to receive certain fees for the provision of management and related services. By its terms, the Memorandum between CDL and AMI 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 MML. The Management Contract between MML and the Mohawk Tribe contains no such provision. Additionally, the Memorandum was silent as to the effect of such termination on the continued existence of MML on the Parties' respective 50% membership interests therein or on the Management Contract. On December 28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to resolve certain disputes between the Parties. In July 2000, the Parties completed a final settlement agreement whereby Alpha's wholly-owned subsidiary will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing for the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitles Alpha's subsidiary to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe, while the settlement agreement covers all prospective federally recognized Native American Nations. Accordingly, Alpha Casino Management Inc. ("ACM") and Monticello Casino Management, L.L.C. ("MCM") were formed to facilitate such potential non-Mohawk Tribe arrangements. As part of and in conjunction with such settlement, AMI acquired 5 percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $456,000 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 200 acres of land. Bryanston has agreed to defer payment of this liability until the earlier of the liquidation of the asset or January 2002. The $456,000 is included in other assets and liabilities on the consolidated balance sheet as of December 31, 2000. AMI was also granted the right to receive 25% of all net development fees earned by CDL in the development of these holdings. Additionally, Bryanston has agreed to transfer its 25% ownership in the Raceway's parimutuel operations to AMI. Under the previous agreement, AMI did not participate in any of these sources of revenue nor the previously discussed development fee arrangement. For the year ended December 31, 2000, the Company's share of the Raceway's parimutuel operations amounted to $72,000. Included in deposits and other assets as of December 31, 2000 and December 31, 1999, the Company capitalized $2,047,00 and $1,366,000, respectively towards the design, architecture and other costs of the development plans for the proposed Monticello Casino. On April 6, 2000, in a letter to New York Governor George Pataki, the U.S. Department of the Interior and its Bureau of Indian Affairs (the "Department") forwarded its initial Two-Part Determination, which included the Department's findings that: 1) the Monticello Casino was in the best interests of the Mohawk Tribe; and 2) that there was local support for the project. The Department has requested the Governor's concurrence in their findings. Such concurrence is an integral step in establishing the trust lands on which the proposed casino would be developed. On April 19, 2000, MML received a letter from the National Indian Gaming Commission asking for additional information as it was completing its review of the underlying management and development agreements. As explained below, on June 5, 2000, MML notified the Department of the purported abandonment of the project by the Mohawk Tribe. On April 22, 2000, the Company was made aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment ("PPE"), which agreement (with two irrelevant exceptions) would purportedly give PPE the exclusive rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. The validity of the aforementioned purported agreement is not clear at this time. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs proposed casino in Monticello. Subject to the obtaining of requisite approvals and satisfactory resolution of the previously mentioned lawsuit, it is anticipated that MML or MCM will undertake the development and management of the proposed casino in Monticello, New York, and AMI will be responsible for the day-to-day operations of that casino. It is intended that that casino will be owned by the respective Native American Nation and will be located on land to be placed in trust for the benefit of that Native American Nation. CDL purchased the 225 acre Monticello Raceway in June 1996. The Company has been advised by CDL that CDL plans to continue its racing program at the Monticello Raceway 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 2000, 1999 and 1998, respectively, AMI incurred $962,000, $209,000 and $279,000, respectively, of costs, of which $681,000, $0, and $75,000, respectively, has been capitalized, and the remaining $281,000 $209,000 and $204,000, respectively, of which has been expensed as casino development costs, which are substantially comprised of a corporate overhead allocation. In March 1998, CDL completed the State Environmental Quality Review Act process with the Village of Monticello's Planning Board as lead agency. Mississippi. On July 8, 1999, the Company, through its subsidiary, Jubilation Lakeshore, contributed its inactive gaming vessel, Bayou Caddy's Jubilation Casino ("Jubilation") to Casino Ventures in exchange for $150,000 in cash, a promissory note of $1,350,000 plus a membership interest in Casino Ventures. Upon repayment of the promissory note and other funding to the venture, the Company's membership interest in Casino Ventures will decrease from its current percentage of 93% to 15%. Matthew Walker ("Mr. Walker"), a director of the Company, is a member in Casino Ventures and serves as its General Manager (see Item 13 - "Certain Relationships and Related Transactions"). The Jubilation vessel has been relocated to Mhoon Landing in Tunica, Mississippi ("Tunica"), where it is anticipated it will be refurbished and operated as a gaming vessel. To fund such costs in 2000, Casino Ventures was loaned $804,000 from Mr. Walker, $172,000 from the Company and $29,000 from the holder of a $650,000 mortgage on the inactive gaming vessel. An additional $350,000 was received by Casino Ventures in 2000 for future equity contingent upon final approval of the casino by the Mississippi Gaming Commission. During 2000 and 1999, the Company capitalized $1,859,000 and $364,000, respectively, of costs related to the relocation and refurbishing of the vessel and improvements to its redeployment site in Tunica. An additional $268,000 and $100,000 of start-up costs were incurred in 2000 and 1999, respectively. The Company expects Casino Ventures to commence operations in Tunica in late 2001. The Company is not required to make any further capital contributions to Casino Ventures. On January 18, 2001, Casino Ventures received site approval for the casino in Mhoon Landing from the Mississippi Gaming Commission. If the project is completed as approved, the casino will be supported by enhanced existing land-based infrastucture, including restaurant and lodging facilities, as well as the requisite back of house service areas. Discontinued Activities The Bayou Caddy's Jubilee Casino. The Jubilee, originally located in Lakeshore, Mississippi, was owned and operated by the Company's wholly-owned subsidiary Alpha Gulf. 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 relocated the Jubilee to Greenville, Mississippi. The Jubilee reopened in Greenville on November 17, 1995. The movement of the Jubilee to Greenville increased the capacity at Greenville and brought an upscale facility to the Greenville market. Management believed that the relocation of the Jubilee to Greenville was an appropriate action designed to increase the return on the Company's gaming assets in Mississippi. In April 1997, Alpha Gulf received approval from the Mississippi Gaming Commission to make the infrastructure investment required to build and operate a hotel on property adjacent to the Jubilee 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 development 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 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 Jubilee, the Greenville Hotel and other related assets to Greenville Casino Partners, L.P. ("GCP") (see "Business General"). The Jubilation Casino. In August 1998, the Company relocated its idle Jubilation vessel to a terminal in Mobile, Alabama. In July 1999, the Company contributed the vessel to Casino Ventures (see "Casino Operations and Gaming Activities - Development Activities - Mississippi"). Marketing Florida. With the concentration of people in the immediate area of the Ella Star, the Company's sales, marketing and promotional activities target a market area of up to a 15 mile radius of the Ella Star's location. The target market is reached through a combination of billboard, bus, cable and print advertising,direct mail and group sales efforts. The Company is developing an in-house mailing list, which currently is in excess of 100,000 potential casino customers. A portion of this list is comprised of Ella Star's "All Star Players' Club" members. The All-Star Players' Club is an ongoing promotion encouraging customers to sign up for a players' card, which will let the players accumulate points based on table or slot play. Players are issued different cards depending on level of play. Points may be redeemed for cash. Complementaries for this group of players may also include free admissions and meals. Other special events, giveaways and entertainment are offered to Ella Star's customers as part of the ongoing promotions at the casino. Mississippi. The Company concentrated its sales, marketing and promotional activities for the Jubilee in its principal target market within a 50-mile radius of the Jubilee's location. 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 of 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 warranted 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 allowed 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 accumulated points based on the amount of their play. Such points were redeemable for food, beverages and merchandise. Tournaments for blackjack, craps and poker were held, along with other special events and promotions. Competition Florida. There are three day cruise vessels currently in the Ella Star's target market area - Sun Cruz Casino, Star Dancer Casino and Casino Princesa. At this point, though the competition between the day cruise vessels is vigorous, the Company feels no threat to its immediate market from any of these competitors. Mississippi. At the time of the Company's sale of the Jubilee, there were 19 casinos located on the Mississippi River. In the Greenville market, the Company's Jubilee competed with the Las Vegas Casino, which in October 1998 was 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 Point Casino, the Jubilee's share of the market, based on the number of player positions in the market, improved. The Company believed that the Jubilee was well-positioned to compete successfully with the two other casinos in the Greenville market, one of which (the Las Vegas Casino) was owned and operated by GCP, the purchaser of Jubilee. As a result of the sale of the Jubilee, the Company owns a 25% equity interest in GCP. Approximately 60 miles south of Greenville is Vicksburg, which has four casinos: the Isle of Capri, Harrah's Vicksburg, Ameristar and Rainbow Casino. Approximately 110 miles south of Greenville is Natchez with the Lady Luck Natchez Casino. Approximately 60 miles north of Greenville is Coahoma County with the Lady Luck Coahoma Casino. Tunica County is approximately 150 miles north of Greenville and has nine casinos -- Harrah's, Sam's Town, Fitzgerald's, Sheraton, Hollywood Casino, Gold Strike (Circus Circus), Horseshoe Casino, Grand Casino and Bally's. Since casinos outside a 50-mile radius of Greenville 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. Government Regulation The Company's ownership and operation of its gaming properties are and have been subject to regulation by federal, state and local governmental and regulatory authorities, including regulation relating to environmental protection. The Company has not been the subject of any complaints or other formal or informal proceedings alleging any violations of government regulation. Seasonal Fluctuations Florida. It is expected that the results of the Ella Star's results will reflect seasonal fluctuations. More particularly, the results of the Ella Star will be impacted by weather. The winter weather that the Ella Star has experienced in South Florida thus far has been the worst for the region in approximately 25 years. The nature of such weather increases the risk of loss of casino revenue and would have had a materially adverse effect on the Company's financial condition and results of operations. Mississippi. The results of the casinos' operations were seasonal, with the greatest activity occurring during the fair weather months of May through September. Consequently, the Company's operating results during the calendar quarters 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. 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. Florida. At this writing, there are no state regulations for the day cruise industry in the State of Florida. However, as stated below, the Company holds a Finding of Suitability from the Mississippi Gaming Commission and is subject to its requirements on foreign gaming. The Company is subject to regulation by federal and, per its contractual agreement, Miami-Dade County authorities. Mississippi. The ownership and operation of casino facilities in Mississippi were and 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 GCP. Gaming licenses and findings of suitability are not transferable, are initially issued for a two-year period and are subject to periodic renewal. Such renewal was obtained in November 1999 for a two year period. 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. 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. Mississippi law 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 Mississippi law, 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 "Mississippi 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 Mississippi law, the Company and its Mississippi Gaming Subsidiaries cannot own or operate gaming facilities in Mississippi. Each Mississippi Gaming Subsidiary must obtain gaming licenses from the Mississippi Gaming Commission to operate casinos in Mississippi and receive a finding of suitability 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. Licensing of Officers, Directors and Employees Officers, directors and certain key employees of the Company and Alpha Gulf (as the owner of the 25% interest in GCP) and Casino Ventures (in connection with its proposed operation of the Jubilation) 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 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 and 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 Company's 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 Company's common stock, as reported in filings under the Securities Exchange Act of 1934, as amended, must apply for a finding of suitability by the Mississippi Gaming Commission and must pay the costs and fees that such 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 Mississippi 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 Mississippi law 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 such 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. Mississippi law requires that the certificates representing securities of a publicly traded corporation (as defined under Mississippi law) bear a legend to the general effect that such securities are subject to Mississippi law 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. Approval of Corporate Matters and Foreign Gaming Operations Substantially all loans, leases, sales of securities and similar financing transactions by a Mississippi 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. Foreign gaming approval was received by the Company for the Ella Star operation. Sanctions If the Mississippi Gaming Commission were to decide that a Mississippi Gaming Subsidiary had violated a gaming law or regulation, the Mississippi Gaming Commission could limit, condition, suspend or revoke the license of such Subsidiary. In addition, the Mississippi Gaming Subsidiary, the Company and the persons involved could be subject to substantial fines for each separate violation. On the basis of any 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 Mississippi Gaming Subsidiary's gaming operations. To comply with the Mississippi Gaming Commission's requirements regarding the Company's 25% partnership interest in GCP, the Company retained its finding of suitability in November 1999 for a two-year period. The Company anticipates renewal of this finding of suitability in November 2001. 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 Mississippi 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 Mohawk Tribe relating to the proposed Monticello Casino, 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. Florida Currently, the casino day cruise industry operating for the State of Florida is unregulated as its activities are beyond Florida's three-mile limit of jurisdiction. Employees As of December 31, 2000, the Company employed 118 full-time employees, including the Company's Chairman and Chief Executive Officer and those executives not presently compensated directly by the Company (see "Item 11 - Executive Compensation Policy"). 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 Principal Use Area Owned/Leased Expires 990 NW 166th St Business office 2,148 sq ft Leased 7/31/2001 Miami, FL Miami-Dade County Dock and operation see 1) below Leased 11/26/05 Miami Beach, FL of gaming day Option for cruise vessel two 5 yr terms Miami-Dade County Charter agreement Leased/ 11/26/03 Miami Beach, FL vessel Option to Buy Hancock County Warehousing 3 acres Leased 4/30/03 Waveland, MS and with option parking to purchase Washington County Accounting offices 10,000 Leased Month to Greenville, MS and warehouse square feet Month 1) Lease requires sufficient dockage space to provide a berth for the vessel and space large enough to allow room for the permanent office and ticketing center. 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. On March 1, 2000, mediation took place between the Company's insurance company and plaintiffs Amos, Batiste and Ducre with settlements being reached in all three cases for an aggregate amount of $110,000, of which $85,000 is covered by the Company's insurance. The remaining $25,000, representing the cost to the Company, is included in accounts payable and accrued expenses as of December 31, 2000. Although the Company's insurance company has initiated settlement discussions with plaintiffs Johnston and Rainey, neither case has been settled nor can there be any assurance that settlements can be reached. 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 remaining risk referred to in this paragraph is adequately covered by insurance. In 1998, the Company became engaged in an arbitration proceeding in connection with its development and management agreements with respect to the proposed casino in Monticello, New York (see "Item 1 - Business- Casino Operations and Gaming Activities - Development Activities"). In July 2000, a final settlement of the issue was agreed upon whereby the Company will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing for the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitles the Company to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe while the settlement agreement covers all prospective federally recognized Native American Nations. As part of and in conjunction with such settlement, the Company acquired 5 percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $456,000 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 200 acres of land. Bryanston has agreed to defer payment of this liability until the earlier of the liquidation of the asset or January 2002. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs proposed casino in Monticello. The Company was involved in a dispute with GCP regarding an agreement dated December 17, 1997, pursuant to which the Company sold the Jubilee and related hotel property to GCP. The Company claimed GCP was liable for certain liabilities and certain accounts payable. GCP counterclaimed that the Company breached some of its warranties, failed to continue operating the casino in the normal course of business through the date of sale and also failed to pay certain accounts payable. An arbitration hearing was held in March 1999, at which time each side presented its final arguments. In September 2000, an arbitrator awarded the Company a net amount of $136,000 in satisfaction of all claims and counterclaims in the dispute. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None ITEM 5. MARKET INFORMATION Market Prices The Company's Common Stock is traded on the Automated Quotation System of the National Association of Securities Dealers, Inc. ("NASDAQ") under the symbols "ALHY", on the Boston Stock Exchange under the symbols "ALH". The Company's its Redeemable Common Stock Purchase Warrants (the "Warrants") are traded on the Boston stock Exchange under the symbol "ALHW" and on the OTC BB under the symbol "ALHYW". 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 2000 Quarters: Fourth . . . . . . 3.125 .875 .75 .13 Third. . . . . . . 3.50 1.00 .6875 .30 Second . . . . . . .7.50 1.375 4.9375 .50 First. . . . . . . 9.75 3.375 5.4375 1.00 1999 Quarters: Fourth . . . . . . $6.69 $2.50 $3.38 $1.25 Third. . . . . . . 4.44 3.00 2.38 .88 Second . . . . . . 5.00 1.50 .375 .0625 First. . . . . . . 2.81 1.19 .0625 .0625
As of March 23, 2001, 20,748,312 shares of Common Stock and 960,695 shares of Preferred Stock were issued and outstanding. The outstanding shares of Common Stock were held of record by approximately 800 persons, including ownership by nominees who may hold for multiple beneficial owners. Dividends The Company has not, since its inception, declared or paid any dividends on its shares of Common Stock. Under Section 170(a) of the General Corporation Law of Delaware (the "GCL"), the Corporation is, and has been, proscribed from declaring or paying any dividends upon any shares of its capital stock except to the extent of (1) its surplus (as defined under the GCL) or (2) in the case of no such surplus, its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. As the Company has no surplus (as defined under the GCL) or net profits, the Company is foreclosed from declaring or paying any dividends even if it were otherwise inclined to do so. 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, nor can there any assurance that even if the Company were to have such a surplus or achieve net profits, the Company would 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. 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 in connection with the sale of the assets of Alpha Gulf and Greenville Hotel were used to discharge loans pursuant to the terms of 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 such pre-closing financing that effectively reinstated such prohibition. Upon consummation of the sale of the Jubilee and the Greenville Hotel, such pre-closing financing 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 in 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. The Company's Series B Preferred Stock has voting rights of eight votes 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 shares of Common Stock instead of cash. On December 17, 1997, the Company declared a dividend of $1,391,000 with respect to the outstanding shares of the Series B Preferred Stock for 1996, which was paid by the issuance of 777,000 shares of the Company's Common Stock in April 1998. On May 12, 1998, the Company declared a dividend of $2,861,000 with respect to the outstanding shares of the Series B Preferred Stock for 1997, which was paid by the issuance of approximately 1,605,000 shares of Common Stock in January 1999. On May 12, 2000, the Company declared dividends on the Series B Preferred Stock for the 1999 and 1998 fiscal years amounting to 450,479 and 1,942,607, respectively, shares of the Company's common stock. These shares were issued in July 2000. As of December 31, 2000, dividends in arrears on the outstanding Series B Preferred Stock amounted to approximately 3,167,000 shares for 2000. On June 30, 1998, the Company issued 135,000 shares of Series C Preferred Stock 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. As of December 31, 2000, dividends accruing on the outstanding Series C Preferred Stock amounted to approximately $382,000, $763,000 and $763,000 for 1998, 1999 and 2000, respectively. On February 8, 2000, the Company issued 4,000 shares of its 7% convertible Series D Preferred Stock (the "Series D Preferred Stock") for an aggregate price of $3,900,000, net of approximately $100,000 of closing costs. The Series D Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price of the lesser of $6 per share or a price based upon the prevailing market price of the Company's Common Stock at the time of conversion, and accrues dividends at a rate of 7% per annum. In the event the Series D Preferred Stock is not converted into shares of the Company's Common Stock by February 8, 2005, there will be a mandatory redemption at that time, payable in shares of the Company's Common Stock at the same aforementioned conversion price. The dividends are payable in arrears on the earlier of the date of conversion of a share of Series D Preferred Stock or the date of redemption. At the Company's option, the dividends are payable in the form of cash or shares of the Company's Common Stock. The maximum aggregate total of shares of the Company's Common Stock issuable relative to the conversions and payments of dividends on the Series D Preferred Stock is 3,300,000 shares. In the event such limitation prevents the conversion of any Series D Preferred Stock, the dividend rate will increase to 15% per annum to be payable in cash in arrears, semi- annually on June 30 and December 31. The Series D Preferred Stock contains no voting rights prior to its conversion to Common Stock. During 2000, 1,900 shares of the Series D Preferred Stock were converted into approximately 1,387,000 shares of the Company's Common Stock. 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, 2000, 1999, 1998, 1997 and 1996
2000 1999 1998 1997 1996 Revenues $ 872 $ 185 $ 5,424 $ 31,633 $ 44,520 Loss from continuing operations $ (647) $(5,763) $(13,399) $ (1,774) $(26,309) Loss per common share from continuing operations, basic and diluted $ (.35) $ (.34) $ (1.09) $ (.23) $ (1.98) December 31, 2000 1999 1998 1997 1996 Total assets $ 13,533 $ 8,128 $ 10,196 $ 29,993 $ 43,954 Long-term debt $ 2,473 $ 1,407 $ 2,108 $ 8,088 $ 22,394 Stockholders' equity $ 3,576 $ 2,761 $ 5,163 $ 8,833 $ 1,506
See Management's Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY Casino Operations And Gaming Activities Florida: On May 7, 1999, Alpha Florida was notified by County that it had received the final approval on a lease to dock and operate a day cruise vessel out of the County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. The exclusive lease is for five years. The County may renew this exclusive agreement for two periods of five years each. For this exclusivity, the Company has agreed to pay the County a minimum guaranteed monthly base rent, a per-passenger fee and a percentage of retail merchandise sold in the facility. The lease commenced on November 26, 2000, the date of the vessel's inaugural cruise. On June 15, 2000, the Company entered into a Charter Agreement that required that $1,250,000, including the application of a previously issued $400,000 promissory note, be paid towards the completion of construction of the vessel and monthly payments over a three-year period commencing upon the completion. The monthly payments are $41,000 during the first year and $46,667 during years two and three, with an additional surcharge for each month of the three year period amounting to one dollar per each passenger during each previous month. At the completion of the three-year period, the Company has the option to purchase the vessel at a cost of $4,500,000 towards which all previous construction payments would be applied. In November 2000, the interior design and construction was completed on the vessel, the Ella Star, with the inaugural cruise taking place on November 26, 2000 The Ella Star has an inherent competitive advantage as it has the fastest route to the three-mile limit, putting its passengers in gaming action in just 20 minutes. The vessel's first two decks provide for 7,000 square feet of Las Vegas style gaming with 165 slot machines and 20 table games. The third deck features the Star Cafe with seating for 150 people. Included in property and equipment at December 31, 2000 is $2,345,000 (including $1,250,000 paid pursuant to the Charter Agreement) of payments related to the construction of the vessel and related improvements). On September 7, 2000, the Company entered into a three-year agreement for the rental of certain furniture and equipment to used relative to the gaming day cruise vessel. Rental payments, which commenced in November 2000 and December 2000, are approximately $36,000 per month. In October 2000, Alpha Florida merged into Alpha Florida LLC. Also, in October 2000, the Company received $900,000 from an unrelated third party and an additional $71,000 of pre-opening expenses paid directly by that third party, in exchange for a 25% interest in Alpha Florida LLC, while retaining the remaining 75% interest. In addition, the Company will receive a monthly management fee amounting to 5% of gross revenues. Results of Operation: The following table sets forth the statements of operations for Alpha Florida's Ella Star before intercompany charges, minority interest and pre- opening expenses for the year ended December 31, 2000 (dollar amounts in thousands):
2000 Revenues: Casino . . . . . . . . . . . . . . . . $ 324 Food and beverage, retail and other. . 25 Total revenues . . . . . . . . . . . 349 Operating expenses: Casino . . . . . . . . . . . . . . . . 215 Food and beverage, retail and other. . 26 Selling, general and administrative. . 796 Total operating expenses . . . . . . 1,037 Other expenses: Depreciation and amortization . . . . . 70 Total other expenses . . . .. . . . . 70 Loss before intercompany charges, minority interest and pre-opening expenses $ (758)
The Ella Star, operating from November 26, 2000, had its revenues negatively impacted by the unusually poor winter weather conditions in South Florida. Because of the severe weather the Ella Star was forced to cancel several cruises and the attendance of those that did cruise was negatively impacted because of inclement conditions. To ameliorate the negative impact of poor weather in the future, the Company pulled the vessel out of the water for several days in January 2001 and installed bilge keel stabilizers at a cost of $81,000. The retrofitting of the stabilizers has greatly improved the comfort of the passengers during rough weather. Casino expenses, representing 66% of casino revenues, included $96,000 of payroll and related expenses, $78,000 of expenses related to food and beverage provided gratuitously to customers and other expenses of $41,000. Selling, general and administrative expenses include $219,000 of payroll and related expenses, $176,000 of advertising and marketing expenses, $175,000 of dock, vessel, equipment and office rental expenses, $98,000 of insurance, utilities, fuel and other maintenance costs and the remaining $128,000 for professional fees, office expenses and other miscellaneous general and administrative expenses. Mississippi: On May 14, 1993, the Company, through its subsidiary, Alpha Gulf, 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 Jubilee and B.C.'s interest in certain related license applications, approvals and permits. The Jubilee 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) at its original location in Greenville, Mississippi. Immediately following such acquisition, the Company relocated the Jubilee to Greenville and the Jubilation Casino to Lakeshore. Management believed that these relocations were appropriate in order to increase the return on the Company's gaming assets, since management believed that the Jubilee would better serve the larger Greenville market and that the Jubilation Casino would adequately serve the smaller Lakeshore market. The Jubilee reopened in Greenville on November 17, 1995, and the Jubilation Casino reopened in Lakeshore on December 21, 1995. In August 1996, the Jubilation Casino was closed due to its inability to overcome operating deficits. In or about September 1997, GCP 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 GCP's proposed lender). Therefore, the Company and GCP proceeded to negotiate terms with the lender to lend funds to both GCP and the Company on or before December 31, 1997 in contemplation of the sale taking place thereafter. On December 30, 1997, Alpha Gulf 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 Alpha Gulf and Greenville Hotel borrowed $17.9 million ($23.9 million less loan costs and loan discounts of approximately $6 million), and concurrently therewith Alpha Gulf 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 Jubilee and Greenville Hotel (the "Sale Agreement"); (a) GCP 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 Alpha Gulf at such closing. Additionally, in conjunction with and as part of the Pre-Closing Financing, Alpha Gulf 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 Alpha Gulf or Greenville Hotel in conjunction with such promissory note, under the terms of the Sale Agreement GCP 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 improvements and related permits, licenses, leases and other agreements to GCP. In exchange for such assets, the Company received from GCP 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 GCP and the assumption of the Company's obligation to repay the net proceeds from the Pre-Closing Financing of $17.9 million. During 2000, Alpha Gulf sold certain gaming equipment, the majority of which was transferred to it in 1999 from the idle Jubilation Casino, for approximately $35,000 and incurred a loss on the sale of approximately $341,000. Results of Operations -- Alpha Gulf: The following table sets forth the statements of operations for Alpha Gulf's Jubilee before intercompany charges and deferred income tax for the years ended December 31, 2000, 1999 and 1998 (dollar amounts in thousands):
2000 1999 1998(1) Revenues: Casino . . . . . . . . . . . . $ $ -- $ 4,923 Food and beverage, retail and other. . . . . . . . . . . 145 15 140 Total revenues . . . . . . . 145 15 5,063 Operating expenses: Casino . . . . . . . . . . . . -- 1,901 Food and beverage, retail and other. . . . . . . . . . . . -- 91 Selling, general and administrative . . . . . . . 89 237 3,211 Total operating expenses . . 89 237 5,203 Income (loss) from operations . . . 56 (222) (140) Other expenses: Loss from equity investee. .. -- -- 8,500 Depreciation and amortization . . . . . . . . 9 17 890 Interest . . . . . . . . . . . 797 Total other expenses . . . . 9 17 10,187 Gain (loss) before intercompany charges, deferred income taxes and gain (loss) on sale of assets . . . . . . . $ 47 $ (239) $(10,327)
1 Relates only to the period through March 2, 1998, when the Jubilee was sold. Years Ended December 31, 2000, 1999 and 1998: Selling, general and administrative expenses for the year ended December 31, 1998, included costs of payroll and related expenses of approximately $1,243,000, marketing and advertising expenses of approximately $930,000, occupancy costs of approximately $352,000 and other operating expenses of $686,000. The continuing general and administrative costs for the years ended December 31, 2000 and 1999 consisted of payroll and related expenses of approximately $48,000 and $100,000, respectively, occupancy costs of approximately $35,000 and $34,000, respectively, and other expenses of $6,000 and $103,000, respectively, which included a corporate overhead allocation of approximately $58,000 in 1999. Included in other revenue in 2000 is $136,000 awarded the Company in satisfaction of all claims and counterclaims related to a dispute with GCP (See "Item 3-Legal Proceedings"). Included in the consideration received in exchange for the sale of the Jubilee, Alpha Gulf received a 25% partnership interest in GCP, whose primary assets included the idle Las Vegas Casino, the Jubilee, the Key West Inn and the Greenville Inn and Suites. The complement of the Jubilee's currently operating gaming devices is 25 table games and 800 slots, which represents approximately 54% of the devices in the Greenville market. The two hotels offer 56 rooms and 41 rooms and suites, respectively. Since the acquisition of substantially all of the assets of Alpha Gulf and Greenville Hotel, management has been advised that GCP has incurred significant operating losses in 2000 and 1999 resulting in a substantial working capital deficiency and partners' deficiency. GCP decided to close the Las Vegas Casino in October 1998 in an effort to decrease expenses and improve the operating performance of the Jubilee. Nonetheless, management has been advised that GCP continued to incur operating losses and anticipated incurring operating losses in 2000. Additionally, management has been advised that GCP is pursuing other capital sources and attempting to modify its debt service requirements in a manner designed to provide additional working capital. However, there can be no assurance that GCP will be able to attract the necessary capital, modify its debt service requirements or otherwise fund the cost of operating the Jubilee. In light of these developments and in accordance with its policy on impairment of long-lived assets, the Company adjusted the carrying value of its remaining 25% partnership interest in GCP to zero in 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 was extinguished on June 30, 1998, pursuant to a restructuring and refinancing of the Company's debts with Bryanston. 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, but closed in August 1996. In August 1998, the Company relocated the casino vessel to Mobile, Alabama, where it was moored at a terminal. On July 8, 1999, the Company contributed the idle gaming vessel to Casino Ventures in exchange for $150,000 cash, a promissory note of $1,350,000 plus a membership interest in Casino Ventures. Upon repayment of the promissory note and other funding to the venture, the Company's membership interest in Casino Ventures decreases from its current percentage of 93% to 15%. The consolidated financial statements of the Company will include the amounts of Casino Ventures until such time as the Company's membership interest decreases to less than 50%. See "Future Operations" for a discussion of Casino Ventures' operating plan for the vessel. Years Ended December 31, 2000 (exclusive of Casino Ventures - see "Future Operations"), 1999 and 1998: The continuing costs incurred during the year ended December 31, 2000 amounted to $33,000 of warehousing costs. Continuing costs incurred during the years ended December 31, 1999 and 1998 for administration, insurance, compensation, settlements with former employees and vessel mooring and relocation were $185,000 and $744,000, respectively. Interest expense of $113,000, $146,000 and $108,000 for the years ended December 31, 2000, 1999 and 1998, respectively, primarily related to debt to Bryanston. Such debt was originally related to the idle gaming vessel and equipment until its contribution to Casino Ventures in July 1999. 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, in 1998 the Company recorded a write-down in the amount of $327,000 with respect to certain of the Jubilation Lakeshore's impaired property and equipment. 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 the Jubilee, the Company has been since March 1998 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 or other operations, 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. Casino Development: The Company, through its wholly-owned subsidiary, AMI, is party to a General Memorandum of Understanding (the "Memorandum") with Catskill Development, LLC ("CDL" and, collectively with AMI, the "Parties") dated December 1, 1995, which among other things, provided for the establishment of Mohawk Management, LLC ("MML"), 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 "Mohawk Tribe"). The Memorandum also sets forth the general terms for the funding and management obligations of CDL (25% owned by Bryanston Group, Inc. ("Bryanston")) and AMI with regard to MML. In January 1996, MML was formed with each of CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML entered into a Gaming Facility Management Agreement with the Mohawk 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 provided MML with the exclusive right to manage the Monticello Casino for seven (7) years from its opening and to receive certain fees for the provision of management and related services. By its terms, the Memorandum between CDL and AMI 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 MML. The Management Contract between MML and the Mohawk Tribe contains no such provision. Additionally, the Memorandum was silent as to the effect of such termination on the continued existence of MML on the Parties' respective 50% interests membership therein or on the Management Contract. On December 28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to resolve certain disputes between the Parties. In July 2000, the Parties completed a final settlement agreement whereby the Company's wholly- owned subsidiary will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing for the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitles Alpha's subsidiary to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe while the settlement agreement covers all prospective federally recognized Native American Nations. Accordingly, Alpha Casino Management Inc. ("ACM") and Monticello Casino Management, L.L.C. ("MCM") were formed to facilitate such potential non-Mohawk Tribe arrangements. As part of and in conjunction with such settlement, AMI acquired 5 percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $456,000 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 200 acres of land. Bryanston has agreed to defer payment of this liability until the earlier of the liquidation of the asset or January 2002. The $456,000 is included in other assets and liabilities on the consolidated balance sheet as of December 31, 2000. Additionally, Bryanston has agreed to transfer its 25% ownership in the Raceway's parimutuel operations to AMI. Under the previous agreement, AMI did not participate in any of these sources of revenue. For the year ended December 31, 2000, the Company's share of the Raceway's parimutuel operations amounted to $72,000. Included in deposits and other assets as of December 31, 2000 and December 31, 1999, the Company capitalized $2,047,00 and $1,366,000, respectively towards the design, architecture and other costs of the development plans for the proposed Monticello Casino. On April 6, 2000, in a letter to New York Governor George Pataki, the U.S. Department of the Interior and its Bureau of Indian Affairs (the "Department") forwarded its initial Two-Part Determination, which included the Department's findings that: 1) the Monticello Casino was in the best interests of the Mohawk Tribe; and 2) that there was local support for the project. The Department has requested the Governor's concurrence in their findings. Such concurrence is an integral step in establishing the trust lands on which the proposed casino would be developed. On April 19, 2000, MML received a letter from the National Indian Gaming Commission asking for additional information as it was completing its review of the underlying management and development agreements. As explained below, on June 5, 2000, MML notified the Department of the purported abandonment of the project by the Mohawk Tribe. On April 22, 2000 the Company was made aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment ("PPE"), which agreement (with two irrelevant exceptions) would purportedly give PPE the exclusive rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. The validity of the aforementioned purported agreement is not clear at this time. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs proposed casino in Monticello. Subject to the obtaining of requisite approvals and the satisfactory resolution of the previously mentioned lawsuit, it is anticipated that MML will undertake the development and management of the proposed casino in Monticello, New York, and AMI will be responsible for the day-to-day operations of that casino. It is intended that that casino will be owned by the Mohawk Tribe and will be located on land to be placed in trust for the benefit of the Mohawk Tribe. CDL purchased the 225 acre Monticello Raceway in June 1996. The Company has been advised by CDL that CDL plans to continue its racing program at the Monticello Raceway 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 2000, 1999 and 1998, AMI incurred $962,000, $209,000 and $279,000, respectively, of costs, of which $681,000, $0 and $75,000, respectively, has been capitalized, and the remaining $281,000 $209,000 and $204,000, respectively, has been expensed as casino development costs, which are substantially comprised of a corporate overhead allocation. In March 1998, CDL completed the State Environmental Quality Review Act process with the Village of Monticello's Planning Board as lead agency. 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, Inc. ("South Georgia"), two closely held corporations engaged in the manufacture and sale of single family homes. On March 26, 1999, the Company executed definitive agreements governing the acquisition, which remained subject to certain conditions, including satisfactory completion of the Company's due diligence review. Upon completion of its due diligence (as approved by the Company's Board of Directors) relative to this transaction, the Company decided not to consummate this proposed acquisition. Development costs for the year ended December 31, 2000 incurred by the Company with respect to the proposed transaction amounted to $341,000, which included a general corporate overhead allocation of $132,000. Casino Ventures: On July 8, 1999, the Company, through its subsidiary, Jubilation Lakeshore, contributed its inactive gaming vessel, Bayou Caddy's Jubilation Casino ("Jubilation") to Casino Ventures in exchange for $150,000 in cash, a promissory note of $1,350,000 plus a membership interest in Casino Ventures. Upon repayment of the promissory note and other funding to the venture, the Company's membership interest in Casino Ventures will decrease from its current percentage of 93% to 15%. Matthew Walker ("Mr. Walker"), a director of the Company, is a member in Casino Ventures and serves as its General Manager (see Item 13 - "Certain Relationships and Related Transactions"). The Jubilation vessel has been relocated to Mhoon Landing in Tunica, Mississippi ("Tunica"), where it is anticipated it will be refurbished and operated as a gaming vessel. To fund such costs in 2000, Casino Ventures was loaned $804,000 from Mr. Walker, $172,000 from the Company and $29,000 from the holder of a $650,000 mortgage on the inactive gaming vessel. An additional $350,000 was received by Casino Ventures in 2000 for the future equity contingent upon final approval of the casino by the Mississippi Gaming Commission. During 2000 and 1999, the Company capitalized $1,859,000 and $364,000, respectively, of costs related to the relocation and refurbishing of the vessel and improvements to its redeployment site in Tunica. An additional $268,000 and $100,000 of start-up costs were incurred in 2000 and 1999, respectively. The Company expects Casino Ventures to commence operations in Tunica in late 2001. The Company is not required to make any further capital contributions to Casino Ventures. On January 18, 2001, Casino Ventures received site approval for the casino in Mhoon Landing from the Mississippi Gaming Commission. If the project is completed as approved, the casino will be supported by enhanced existing land-based infrastructure, including restaurant and lodging facilities, as well as the requisite back of house service areas. Casino Ventures' interest expense for the year ended December 31, 2000 and 1999, not eliminated in consolidation, amounted to $78,000 and $22,000. This was substantially attributable to a $650,000 mortgage note payable secured by the vessel and the $804,000 loan from Mr. Walker. Louisiana Truckstop/Video Poker: In December 1998, the Company entered into a memorandum of understanding with Equity Service, Inc. ("Equity") to exchange the Company's then-dormant Jubilation vessel plus cash for the ownership of an operating truckstop and video poker room in Port Allen, Louisiana. The proposed transaction as originally contemplated in the memorandum of understanding will not proceed. Liquidity and Capital Resources For the year ended December 31, 2000, the Company had net cash used in operating activities of $3,699,000. The uses were the result of a net loss of $412,000 plus depreciation and amortization of $113,000, noncash compensation of $3,251,000, minority interest of $235,000, interest amortized on loan discount $29,000, other compensation adjustment of $250,000, loss on sale of assets of $341,000 and a net increase in working capital of $534,000. The increase in working capital consisted primarily of a net increase in other current assets of $574,000, a decrease in accounts payable and other accrued expenses of $86,000 and an increase in payroll and related liabilities of $126,000. Cash used in investing activities of $3,858,000 consisted of $3,087,000 of payments for property and equipment and a $771,000 increase in deposits and other assets. Cash provided by financing activities of $7,356,000 was attributable to $3,867,000 of net proceeds form the sale of preferred stock, $1,321,000 of capital contributed by holders of minority interest and $2,168,000 of net proceeds from long-term debt and the exercise of options to purchase the Company's common stock. The Company has incurred an accumulated deficit and current net losses of approximately $82,599,000 and $412,000, respectively, used approximately $2,589,000 in operations during 2000 and has a working capital surplus (excluding Casino Ventures which is not expected to be paid by the Company during the next twelve months) of approximately $452,000 at December 31, 2000. While the Company's 2000 efforts were geared primarily at capital raising and pre-opening activities relating to the November 2000 launching of the Ella Star, the Company anticipates positive cash flows from the Ella Star during 2001. Further, the Company anticipates the 2001 repayment of the $1,350,000 promissory note and all other advances to Casino Ventures and an approximate $250,000 cash infusion from the minority member of Alpha Florida LLC. Long-term liquidity is dependent on the Company's ability to attain profitable operations. Although the Company is subject to continuing litigation, the ultimate outcome of which cannot presently be determined, management believes any additional liabilities that may result from pending litigation in excess of insurance coverage will not be in an amount that will materially increase the liabilities of the Company as presented in the attached consolidated financial statements. Year 2000 Compliance The Company did not experience any Year 2000 computer problems that had a materially adverse effect on the Company's operations. ITEM 8. FINANCIAL STATEMENTS See Index to Financial Statements attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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. . . . . . 70 Chairman of the Board and Chief Executive Officer Thomas W. Aro . . . . . . . . 58 Vice President, Secretary and Director Brett G. Tollman. . . . . . . 39 Vice President and Director Craig Kendziera . . . . . . . 46 Treasurer Robert Steenhuisen. . . . . . 43 Chief Accountant and Assistant Secretary James A. Cutler . . . . . . . 49 Director Matthew B. Walker . . . . . . 50 Director Herbert F. Kozlov. . . . . . 48 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, a hotel management company, and of Trafalgar Tours International, a tour operator. The business addresses of Bryanston and Trafalgar Tours International are, respectively, 1886 Route 52, Hopewell Junction, New York and 5 Reid Street, Hamilton, Bermuda. Thomas W. Aro has served as a Director of the Company since February 1, 1994, and as Vice President of the Company since its formation. Mr. Aro also serves as Chief Operating Officer of the Company's subsidiary Alpha Gulf. He has served as Executive Vice President of the Tollman-Hundley Hotel Group since 1982 and served 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 selected 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. Craig Kendziera has served as Treasurer of the Company since his appointment on May 12, 1998. He also have served as the Corporate Controller of the Tollman-Hundley Hotel Group since June 1992 and a Director, Vice President, Treasurer and Corporate Controller of Bryanston since March 6, 1998. Robert Steenhuisen has served as Chief Accountant of the Company since his appointment on May 12, 1998. He also has served as the Chief Accountant for the Tollman-Hundley Hotel Group since May 1992 and a Director, Vice President, Assistant Secretary and Chief Accountant of Bryanston since March 2, 1998. James A. Cutler served as Treasurer and Chief Financial Officer of the Company from 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. He now serves as President and Chief Executive Officer of Truckee Resorts, Inc., a company engaged in the community development business. 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. 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 Magnum Sports & Entertainment, Inc. (previously named Worldwide Entertainment & Sports Corporation). 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. 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, 2000, 1999 and 1998, paid to the Company's Chief Executive Officer and one executive officer (collectively the "Named Executive Officers") whose total compensation exceeded $100,000 per annum. No other executive officers' compensation exceeded $100,000 during the above fiscal years.
Restricted Name and Principal Stock Options All Other Position Year Salary(1) Awards /SARS Compensation Stanley S. Tollman . . . 2000 -- Chairman of the 1999 $250,000 -- 250,000 (2) -- Board of Directors, 1998 $250,000 250,000 -- Chief Executive Officer and President Thomas W. Aro . . . . . 2000 $206,500 Vice President and 1999 $160,000 -- 205,000 -- Secretary 1998 $160,000 155,000 --
1 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. Mr. Tollman has agreed to waive his right to receive any salary for the year 2000. 2 Does not include any valuable for the right granted to Mr. Tollman to convert up to $2,000,000 of deferred compensation into shares of Common Stock at $2.00 per share. Option/SAR Grants in Last Fiscal Year. None The following table sets forth certain information with respect to the exercise of stock options during fiscal 2000 by the named executive officers and the number and value of unexercised options held by each of those named executive officers as of December 31, 2000:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Options at Fiscal Shares Year End Fiscal Year End(1) Acquired Value On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable Stanley S. Tollman . . . -- -- 500,000(2) -- $ 0 -- Thomas W. Aro . . . . . . -- -- 420,000 -- $ 0 --
(1) None of the existing options were in-the-money at December 31, 2000. (2) Does not include the right granted to Mr. Tollman to convert up to $2,000,000 of deferred compensation into shares of Common Stock at $2.00 per share. In November 2000 and 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 in 2000 and 1998, respectively, the Company cancelled all options that were outstanding under the 1998 and 1993 stock option plans at that time and reissued the options at an exercise price of $1.063, the closing NASDAQ bid prices on November 30, 2000 and December 12, 1998. The following table sets forth certain information with respect to all such cancellations and reissuances with respect to options held by any executive officer from March 19, 1993 (date of inception) through December 31, 2000:
Length of Number of Market Original Securities Price of Exercise Option Term Underlying stock at Price at Remaining Cancellation/ Options time of time of New at Date of Reissuance Cancelled/ Cancelling/ Cancelling/ Exercise Cancelling/ Date Reissued Reissuing Reissuing Price Reissuing Thomas W. Aro 12/12/98 60,000 $1.063 $3.25 $1.063 4.5 years 12/12/98 100,000 $1.063 $2.00 $1.063 9.5 years 10/12/00 75,000 $1.375 $2.00 $1.375 7.5 years 10/12/00 130,000 $1.375 $4.25 $1.375 9.0 years Brett G. Tollman 12/12/98 60,000 $1.063 $3.25 $1.063 4.5 years 12/12/98 100,000 $1.063 $2.00 $1.063 9.5 years 10/12/00 75,000 $1.375 $2.00 $1.375 7.5 years 10/12/00 115,000 $1.375 $4.25 $1.375 9.0 years Craig Kendziera 12/12/98 12,000 $1.063 $3.25 $1.063 4.5 years 12/12/98 8,000 $1.063 $2.00 $1.063 9.5 years 10/12/00 50,000 $1.375 $2.00 $1.375 7.5 years 10/12/00 15,000 $1.375 $4.25 $1.375 9.0 years Robert Steenhuisen 12/12/98 8,000 $1.063 $3.25 $1.063 4.5 years 12/12/98 12,000 $1.063 $2.00 $1.063 9.5 years 10/12/00 50,000 $1.375 $2.00 $1.375 7.5 years 10/12/00 15,000 $1.375 $4.25 $1.375 9.0 years
Compensation of Directors. On May 12, 1998, with shareholder approval granted in September 1999, the Board approved an annual compensation arrangement whereby each of the three outside directors will receive $6,000 per annum plus options to purchase up to 25,000 shares, and an additional 15,000 shares for each committee served upon, of the Company's Common Stock at an exercise price equal to the current market price at the date the option is granted. Accordingly, in 1999 and 1998 the Company granted to its outside directors options to purchase an aggregate amount of up to 150,000 and 285,000 shares, respectively, of its Common Stock at an exercise price of $4.25 and $1.063, respectively, per share, which can be exercised any time up to 2009 and 2008, respectively. The amount granted in 1999 is for services to be rendered in the year 2000. The amount granted in 1998 represents options to purchase aggregate amounts of up to 135,000 and 150,000 shares for the 1998 and 1999 years of service, respectively. As compensation to its employee directors, in December 1999 and 1998, the Company granted options to purchase an aggregate amount of up to 95,000 shares of its Common Stock for each of the 2000, 1999 and 1998 years. Employment Agreements. The Company and 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 that Agreement. Thereafter, such Agreement is automatically renewable for successive twelve (12) month periods unless either party advises the other on at least 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, 2001. 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. Mr. Tollman has agreed to waive his right to receive the $250,000 salary for the year 2000. As of December 31, 2000, accrued salary payable to Mr. Tollman amounted to $1,529,167. On May 27, 1999, the Company, subject to approval by the Company's shareholders (which approval was obtained in September 1999), agreed to afford Mr. Tollman the right to convert up to $2,000,000 of deferred compensation payable into up to 1,000,000 shares of the Company's common stock at a stock price of $2.00 per share, the closing price on that day. Mr. Tollman's right to convert deferred compensation into the Company's Common Stock shall only be exercisable if he continues to defer his salary and he remains employed through and including April 2002, provided, however, that if his employment by the Company is terminated prior to such date on account of his death or other disability, he or his estate shall have the right for the period of 90 days after such termination to exercise such conversion right. During the year ended December 31, 2000, the Company has recorded a noncash compensation charge of $3,251,000 reflecting an increase in the market price of the Company's Common Stock since the date of the agreement. The $3,251,000 charge was reversed in 2000 to reflect the decrease in the market price of the Company's common stock during the year. BOARD COMPENSATION REPORT Executive Compensation Policy General. Decisions concerning executive officers' salaries for 2000 were made by the full Board of Directors. Decisions concerning the grant of stock options to executive officers were made by the Stock Option Committee. The Company otherwise has no formal compensation policies applicable to executive officers. The Board of Directors' recommendations in each case were based on the subjective evaluation of each officer's contribution to the Company and the level of compensation necessary to adequately motivate and reward the officer. The composition and amount of each item of executive compensation for 2000 did not bear a specific relationship to any particular measure of performance. Cash Compensation. Certain of the Company's executive officers are not compensated directly 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. Bryanston has, without seeking reimbursement therefor from the Company, provided salaries and benefits to those of the Company's executive officers not presently compensated directly by 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. Mr. Tollman has agreed to waive his rights to receive the $250,000 salary for the year 2000. 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. In setting compensation for Mr. Tollman, the Company also considered its financial position and reviewed compensation levels of chief executive officers at comparable companies within the Company's industry. In both December 1999 and 1998, the Company granted to Mr. Tollman options to purchase 250,000 shares of the Company's Common Stock. Stanley S. Tollman Thomas W. Aro James A. Cutler Herbert F. Kozlov Brett G. Tollman Matthew B. Walker Corporate Performance Graph. The following graph shows a comparison of cumulative total stockholders' returns from December 31, 1993 through December 31, 2000 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, securities represented by the Russell Index or DJ Casino 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" and on the Boston Stock Exchange. 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. Based upon the Company's review of Forms 3, 4 and 5 and amendments thereto, if any, furnished to the Company under Rule 16a-3(e) during and with respect to the Company's most recent fiscal year and any written representations provided to the effect that no Form 5 is required, no person that, at any time during the Company's last fiscal year, was an officer, director or beneficial owner of more the 10 percent of the Company's Common Stock reported on any of the foregoing forms failed to file, on a timely basis, any reports required by Section 16(a) of the Exchange Act. 1998 and 1993 Stock Option Plan The purpose of the Company's Stock Option Plans ("1998 Stock Option Plan", "1993 Stock Option Plan" or "Stock Option Plans" as applicable) are 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 Stock Option Plans 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 Stock Option Plans is qualified in its entirety by reference to the Stock Option Plans. Administration of the Plan The Stock Option Plans are administered by a Stock Option Committee (currently consisting of Messrs. S. Tollman, Cutler, Kozlov 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 Stock Option Plans, 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 Stock Option Plans, (ii) permit the grant of a stock option under the Stock Option Plans 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 Stock Option Plans, (iv) extend the term of any option or the period during which any option may be granted under the Stock Option Plans 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 1998 Stock Option Plan and 1993 Stock Option Plan provide that options may be granted with respect to a total of up to 4,000,000 and 900,000 shares of Common Stock, respectively, 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 Stock Option Plans will be adjusted or, under certain conditions, will terminate, subject to the right of each option holder to exercise his/her options or comparable options 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 Stock Option Plans. All of the shares of Common Stock underlying options that can be granted pursuant to the Stock Option Plans have been registered. Participation Any employee is eligible to receive incentive stock options or non- qualified stock options granted under the Stock Option Plans. 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 a share of Common Stock 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 a share of Common Stock on the date the option is granted. Terms of Options The Stock Option Committee shall, in its discretion, fix the term of each options, provided that the maximum term of each option shall be ten 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 Stock Option Plans provide 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 or her. 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 may impose such other conditions on exercise as it deems appropriate. Option Grants Under the Stock Option Plans, net of certain simultaneous cancellations to existing employees, there were 1,389,000 and 1,065,000 total options granted, including 775,000 and 565,000 to executive officers, during the fiscal years ended December 31, 1999 and 1998. As of December 31, 2000, 1,905,000 and 623,000 options to purchase shares of Common Stock granted under the 1998 Stock Option Plan and 1993 Stock Option Plan, respectively, were outstanding, which amounts reflect the cancellation of certain options following the termination of employment of the holders thereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OWNERSHIP OF SECURITIES As of March 23, 2001, there were issued and outstanding 20,748,312 shares of Common Stock, 821,496 shares of Series B Preferred Stock, 135,162 shares of Series C Preferred Stock and 2,100 shares of Series D Preferred Stock. 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 Series D Preferred Stock has no voting rights prior to its conversion into Common Stock. The following table sets forth certain information as of March 23, 2001, with respect to each beneficial owner of five percent (5%) or more of the outstanding shares of Common Stock or of 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 Shares(1) of Class(2) Common Stock Stanley Tollman(3)(4) 500,000 2.35 $.01 par value Beatrice Tollman(4)(9) 1,815,890 8.05 Thomas W. Aro (6) 430,000 2.03 Brett G. Tollman (7) 1,949,875 8.59 James A. Cutler (8) 255,000 1.21 Matthew B. Walker (5) 412,905 1.95 Herbert F. Kozlov (11) 200,000 0.95 Craig Kendziera (12) 85,300 0.41 Robert Steenhuisen (13) 85,000 0.41 Bryanston Group, Inc. (9) 13,869,258 40.07 1886 Route 52 Hopewell Junction, N.Y. Societe Generale (14) 1,912,922 8.4 1221 Ave of the Americas New York, N.Y. All Officers and Directors as a group (8 persons) (3, 5-8, 11-13) 3,918,080 20.97 Preferred Stock, Series B Bryanston Group, Inc. 777,238 94.60 $29.00 liquidation BP Group, Ltd. (10) 44,258 5.4 value 5111 Islesworth Country Club Dr. Windemere, Fl 34786 Preferred Stock, Series C Bryanston Group, Inc 135,162 100.0 $72.00 liquidation value Preferred Stock, Series D Societe Generale 2,100 100.0 $1,000.00 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 Series D Preferred Stock, which shares of Common Stock cannot be voted until the options are exercised or such Series D 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) Each beneficial owner's percentage ownership is determine by assuming that options, warrants and convertible securities that are held by such owner (but not those held by any other owner) and that are exercisable or convertible within 60 days from the date hereof have been exercised or converted. (3) Includes 500,000 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. Does not include any shares of Common Stock issuable upon the exercise of the right granted to Mr. Tollman to convert up to $2,000,000 of deferred compensation into shares of Common Stock at $2.00 per share since he is not currently entitled to exercise such right. 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. (4) Stanley S. Tollman is the spouse of Beatrice Tollman. Stanley S. Tollman disclaims beneficial ownership of the shares beneficially owned by 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. (5) Includes 90,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Walker, all of which options are currently exercisable. (6) Includes 420,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Aro, all of which options are currently exercisable. (7) Includes 390,000 shares of Common Stock issuable upon the exercise of options granted to 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) Includes 255,000 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 Series B Preferred Stock owned by Bryanston; and (ii) 3,243,888 shares of Common Stock issuable upon conversion of 135,162 shares of Series C Preferred Stock owned by Bryanston. 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 1,519,000 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 of Common Stock were issued on January 5, 1999. During 2000, the Company declared and issued 426,000 and 1,831,000 additional shares of common stock in lieu of cash dividends payable with respect to Bryanston's shares of Series B Preferred Stock for the 1999 and 1998 calendar years, respectively. As of January 30, 2001, the Company became obligated to issue to Bryanston approximately 2,996,000 additional shares of Common Stock in lieu of the cash dividend payable with respect to Bryanston's shares of Series B Preferred Stock for the 2000 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 Group, Ltd ("BP") with respect to, and in lieu of the cash dividend accrued on, the outstanding shares of Series B Preferred Stock held by BP in 1997. Such shares of Common Stock were issued on January 5, 1999. In addition, during 2000, the Company declared and issued to BP approximately 24,000 and 111,000 additional shares of Common Stock in lieu of the cash dividend payable with respect to BP's shares of Series B Preferred Stock for the 1999 and 1998 calendar years, respectively. As of January 30, 2001, the Company became obligated to issue to BP approximately 171,000 additional shares of common stock in lieu of the cash dividend payable with respect to BP's shares of Series B Preferred Stock for the 2000 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 Series B Preferred Stock owned by BP. All of such shares of Preferred Stock are currently convertible into shares of Common Stock. (11) Includes 200,000 shares of Common Shares issuable upon the exercise of options granted to Mr. Kozlov, all of which options are currently exercisable. (12) Includes 85,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Kendziera, 52,500 of which options are currently exercisable. (13) Includes 85,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Steenhuisen, 52,500 of which options are currently exercisable. (14) Includes an additional 1,912,922 shares of Common Stock issuable to Societe Generale to reach the maximum issuable of 3,300,000 in connection with its remaining 2,100 shares of the Company's Series D Preferred Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Bryanston Bryanston is an affiliate of the Company and Beatrice Tollman, Mr. Stanley S. Tollman's spouse, is a 50% stockholder of Bryanston. On June 26, 1996, Bryanston converted the amount due on a Working Capital Loan (approximately $19,165,000) into shares of Series B Preferred Stock. The Company was charged a 5% transaction fee (approximately $958,000), which was also converted into shares of Series B Preferred Stock. The conversion was effective June 26, 1996, and the total of approximately $20,123,000 was converted into 693,905 shares of Series B Preferred Stock based on the fair market value of a share of Common Stock on the date of conversion ($3.625). On September 30, 1997, the Company issued 83,333 shares of Series B Preferred Stock in settlement of $2,000,000 due to Bryanston. Each share of outstanding Series B 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 the liquidation value, which rate increases to 13% of the 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; 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 1,519,000 shares of Common Stock, which were issued on January 5, 1999. During 2000, the Company declared and issued 426,000 and 1,831,000 additional shares of common stock in lieu of cash dividends payable with respect to Bryanston's shares of Series B Preferred Stock for the 1999 and 1998 calendar years, respectively. As of January 30, 2001, the Company became obligated to issue to Bryanston approximately 2,996,000 additional shares of Common Stock in lieu of the cash dividend payable with respect to Bryanston's shares of Series B Preferred Stock for the 2000 calendar year. On June 30, 1998, the Company restructured its existing 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 $3,098,000, in exchange for the issuance of Series C Preferred Stock, and a $3,000,000 mortgage note on the Company's idle gaming vessel located in Mobile, Alabama. The Series C Preferred Stock has voting rights of twenty-four votes per preferred share, is convertible to twenty-four shares of Common Stock and carries an annual 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 that realize a profit in excess of $5,000,000. Upon contribution of the idle gaming vessel in July 1999 to Casino Ventures (see "Certain Relationships and Related Transactions - Casino Ventures"), the $3,000,000 mortgage note was converted to a promissory note. Casino Ventures On July 8, 1999, the Company contributed its inactive vessel, the Jubilation Casino, to Casino Ventures. Matthew Walker, a director of the Company, is a partner in Casino Ventures and serves as its General Manager. At the time of the contribution, the vessel (including its gaming equipment, furniture and other items) had a net book value of approximately $4,149,000. In exchange, the Company received $150,000 in cash, a promissory note in the principal amount of $1,350,000 and a membership interest in Casino Ventures. The promissory note accrues interest at an initial rate of 8.75% per annum, payable quarterly, with the principal balance due July 8, 2002. The initial interest rate of 8.75% is adjusted daily to prime plus one percent with a minimum rate of 8.75%. Upon repayment of the promissory note and certain other funding to the venture, the Company's membership interest in Casino Ventures will decrease from its current percentage of 93% to 15%. Mr. Walker advanced funds to Casino Ventures in 1999 and 2000, which were used for site and vessel improvements. As of December 31, 2000, the loan payable to Mr. Walker amounted to $804,000. The loan accrues interest at 8% and is payable in April 2002. In addition, $100,000 and $12,000 of the Casino Venture start-up costs in 2000 and 1999, respectively, were made to entities in which Mr. Walker has an ownership interest. The consolidated financial statements of the Company will include the accounts of Casino Ventures until such time as the Company's membership interest decreases therein to less that 50%. During the year ended December 31, 2000, the Company capitalized $1,859,000 of costs related to the relocation and refurbishing of the vessel and improvements to its site in Tunica, Mississippi. An additional $268,000 of start-up costs were incurred during 2000. During the year, the vessel was used as collateral to obtain funding of $650,000 towards the aforementioned costs of Casino Ventures. BP Group Ms. Patricia Cohen, a director of the Company from February 1, 1994 to December 12, 1997, is the sole shareholder of BP. On June 26, 1996, BP converted the amount due on a BP Loan (approximately $1,222,000) into shares of Series B Preferred Stock. The Company was charged a 5% transaction fee (approximately $61,000), which was also converted into shares of Series B Preferred Stock. The conversion was effective June 26, 1996, and the total of approximately $1,283,000 was converted into 44,258 shares of Series B Preferred Stock, based on the fair market value of a share of Common Stock on the date of conversion ($3.625). The terms of the shares of Series B Preferred Stock, issued to BP are identical to those of the shares of Series B Preferred Stock 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 of Common Stock, 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 Common Stock, which were issued on January 5, 1999. In addition, during 2000, the Company declared and issued to BP approximately 24,000 and 111,000 additional shares of Common Stock in lieu of the cash dividend payable with respect to BP's shares of Series B Preferred Stock for the 1999 and 1998 calendar years, respectively. As of January 30, 2001, the Company became obligated to issue to BP approximately 171,000 additional shares of common stock in lieu of the cash dividend payable with respect to BP's shares of Series B Preferred Stock for the 2000 calendar year. Other On September 15, 1998, $250,000 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 $250,000 reserve was recorded as of December 31, 1998. James Cutler, a member of the Board of Directors of the Company, formerly served as Southern's Chief Financial Officer. 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. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS 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 Statements 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, 2000, 1999 and 1998 S-1 3. EXHIBITS *2 Deleted *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 4(d) Omitted 4(e) Certification of Designation - Series D Preferred Stock 4(f) Registration Rights Agreement 5 Opinion of Parker Duryee Rosoff & Haft, P.C. *10(a) Form of Employment Agreement between the Company and Stanley S. Tollman 10(b) Deleted *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) Deleted *10(g) Deleted *10(h) Deleted *10(i) Deleted *10(j) Form of Warrant Agreement among the Company, the Transfer Agent and the Underwriters *10(k) Deleted *10(l) Deleted *10(m) Deleted *10(n) Deleted *10(p) Deleted *10(q) Deleted *10(r) Deleted *10(s) Deleted *10(t) Deleted *10(u) Form of Limited Standstill Agreement of the Existing Stockholders f/b/o the Underwriters *10(v) Deleted *10(w) Deleted *10(x) Deleted *10(y) Deleted *10(z) Deleted *10(aa) Deleted *10(ab) Deleted *10(ac) Deleted *10(ad) Deleted *10(ae) Deleted *10(af) Form of Underwriters' Warrant ***10(ag) Deleted ***10(ah) Deleted ***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 ***10(an) Deleted ****10(ao) Asset Purchase Agreement between Alpha Gulf Coast, Inc. and Alpha Greenville Hotel, Inc. and Greenville Casino Partners, L.P. 10(ap) Deleted 10(aq) Deleted 10(ar) Securities Purchase Agreement dated February 8, 2000 *****10(as) 1998 Stock Option Plan ******10(at) Securities Purchase Agreement, dated February 8, 2000, between the Company and Societe Generale with respect to the issuance and sale of shares of the Company's Series D Preferred Stock ******10(au) Certificate of Designations of the Company's Series D Preferred Stock ******10(av) Registration Rights Agreement, dated February 8, 2000, between the Company and Societe Generale with respect to the shares of common stock underlying the Company's Series D Preferred Stock *******10(aw) Securities Purchase Agreement, dated July 31, 2000, between the Company and Societe Generale with respect to the issuance and sale of the Company's 4% Convertible Notes due July 31, 2003 and warrants *******10(ax) Registration Rights Agreement, dated July 31, 2000, between the Company and Societe Generale with respect to the shares of common stock underlying the Company's 4% Convertible Notes due July 31, 2003 and the warrants *******10(ay) Form of the Company's 4% Convertible Notes due July 31, 2003 *******10(az) Form of the Warrants 23(a) Consent of Rothstein Kass & Co. 23(b) Consent of Parker Duryee Rosoff & Haft, P.C. (Included in Exhibit 5) *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. Such Registration Statement was further amended by Post Effective Amendment filed on August 20, 1999. ** 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. ***** Incorporated by reference, filed with Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended filed with the Commission on August 25, 1999. ******Incorporated by reference, filed with the Company's Current Report on Form 8-K as filed with the Commission on February 15, 2000. *******Incorporated by reference, filed with the Company's Registration Statement on Form S-3 as filed with the Commission on October 12, 2000. Schedule 21. List of Subsidiaries: Name State of Incorporation/Formati on 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 (including its 93% owned subsidiary) Casino Ventures, L.L.C. Mississippi Alpha Greenville Hotel, Inc. Delaware Alpha Entertainment, Inc. Delaware Alpha Florida Entertainment, Inc. Florida Alpha Peach Tree Corporation Delaware Alpha Florida Entertainment, L.L.C. Florida Alpha Casino Management Inc. Delaware 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 23, 2001 By: /s/ Robert Steenhuisen Robert Steenhuisen Title: Chief Accounting Officer Date: March 23, 2001 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 23, 2001 Stanley S. Tollman Chief Executive Officer /s/ Thomas W. Aro Vice President, Secretary March 23, 2001 Thomas W. Aro and Director /s/ Brett G. Tollman Vice President and Director March 23, 2001 Brett G. Tollman /s/ James A. Cutler Director March 23, 2001 James A. Cutler /s/ Matthew B. Walker Director March 23, 2001 Matthew B. Walker /s/ Herbert F. Kozlov Director March 23, 2001 Herbert F. Kozlov 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 23, 2001 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (In thousands, except for per share data)
2000 1999 ASSETS CURRENT ASSETS: Cash, including restricted cash of $373 in 1999 $ 1,263 $ 1,464 Other current assets 696 90 Total current assets 1,959 1,554 PROPERTY AND EQUIPMENT, net 2,311 448 ASSETS OF CASINO VENTURES 6,448 4,587 DEPOSITS AND OTHER ASSETS 2,815 1,539 $ 13,533 $ 8,128 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,329 $ 1,121 Accrued payroll and related liabilities 178 53 Current liabilities of Casino Ventures 1,597 60 Total current liabilities 3,104 1,234 LONG-TERM DEBT 2,473 1,407 OTHER LIABILITIES 2,490 2,076 LONG-TERM LIABILITIES OF CASINO VENTURES 804 650 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 1,086 STOCKHOLDERS' EQUITY: Common stock, $.01 par value,75,000 shares authorized, 20,748 and 16,803 issued and outstanding in 2000 and 1999, respectively 207 168 Preferred stock, 5,000 shares authorized: Series B, $.01 par value, 821 issued and outstanding 8 8 Series C, $.01 par value, 135 issued and outstanding 1 1 Series D, $.01 par value, 2 issued and outstanding in 2000 0 Common stock to be issued 50 Capital in excess of par value 85,959 78,527 Accumulated deficit (82,599) (75,993) Total stockholders' equity 3,576 2,761 $ 13,533 $ 8,128
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2000, 1999 and 1998 (In thousands, except for per share data)
2000 1999 1998 REVENUES: Casino $ 324 $ $ 4,923 Food and beverage, retail and other 548 185 501 Total revenues 872 185 5,424 COSTS AND EXPENSES: Casino 215 1,901 Food and beverage, retail and other 26 91 Noncash compensation (3,251) 3,251 Selling, general and administrative 2,424 1,649 5,097 Interest 251 168 1,062 Depreciation and amortization 113 38 909 Pre-opening and development costs 1,400 842 359 Provision for loss on note receivable 250 Write-down of property and equipment 327 Total costs and expenses 1,178 5,948 9,996 OTHER INCOME (LOSS): Loss from equity investee (8,500) Gain (loss) on sale of assets (341) 6,048 Total other loss, net (341) (2,452) LOSS FROM OPERATIONS BEFORE DEFERRED INCOME TAX AND MINORITY INTEREST (647) (5,763) (7,024) DEFERRED INCOME TAX (6,375) NET LOSS BEFORE MINORITY INTEREST (647) (5,763) (13,399) MINORITY INTEREST 235 NET LOSS (412) (5,763) (13,399) DIVIDENDS ON PREFERRED STOCK 6,194 2,861 LOSS APPLICABLE TO COMMON SHARES $ (6,606) $(5,763) $(16,260) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted 18,679 16,770 14,966 LOSS PER COMMON SHARE, basic and diluted $ (.35) $ (.34) $ (1.09)
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998 (In thousands, except for per share data)
Common Preferred Stock Preferred Stock Preferred Stock Capital in Stock Series B Series C Series D Common Stock Excess of To be Accumulated Shares Amount Shares Amount Shares Amount Shares Amount Par Value Issued Deficit 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 821 8 135 1 15,183 152 72,371 2,861 (70,230) Common stock issued in settlement of preferred stock dividend payable 1,605 16 2,845 (2,861) Common stock issued from exercise of warrants 15 60 Common stock to be issued in settlement of certain liabilities 50 Noncash compensation 3,251 Net loss (5,763) Balances, December 31, 1999 821 8 135 1 16,803 168 78,527 50 (75,993) Preferred stock issued in private placement 4 0 3,867 Preferred stock converted to common stock (2) 1,387 14 (14) Common stock issued from exercise of options 135 1 147 Preferred stock dividend payable in common stock 2,393 24 6,170 (6,194) Common stock issued in settlement of certain liabilities 30 50 (50) Warrant issued 213 Noncash compensation (3,251) Compensation expense, services contributed 250 Net loss (412) Balances, December 31, 2000 821 $ 8 135 $ 1 2 $ 0 20,748 $ 207 $85,959 $ -- $(82,599)
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999 and 1998 (In thousands, except for per share data)
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (412)$ (5,763)$ (13,399) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest (235) -- -- Depreciation and amortization 113 38 909 Noncash compensation (3,251) 3,251 -- Interest amortized on loan discount 29 -- -- Provision for loss on note receivable -- -- 250 Other compensation adjustment 250 -- -- Deferred tax -- -- 6,375 Loss from equity investee -- -- 8,500 (Gain) loss on sale of assets 341 -- (6,048) Write-off of property and equipment -- -- 327 Changes in operating assets and liabilities: (Increase) decrease in other current assets (574) 81 388 Increase (decrease) in accounts payable and accrued expenses (86) 360 (2,824) Increase (decrease) in accrued payroll and related liabilities 126 75 (398) NET CASH USED IN OPERATING ACTIVITIES (3,699) (1,958) (5,920) CASH FLOWS FROM INVESTING ACTIVITIES: Hotel construction costs -- -- (1,086) Purchases of property and equipment (3,087) (385) Payment on note receivable -- -- (250) Proceeds from hotel construction escrow -- -- 1,700 Proceeds from sale of assets, net of related costs -- -- 11,388 Proceeds from (payments for) deposits and other assets (771) (39) 13 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,858) (424) 11,765 CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributed by holders of minority interest 1,321 -- -- Proceeds from sale of preferred stock, net 3,867 -- -- Payments to affiliate -- -- (3,294) Proceeds from exercised warrants and stock options 148 60 -- Proceeds from long-term debt and warrants, net of loan costs 2,020 650 Payments on long-term debt -- (701) (925) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,356 9 (4,219) NET INCREASE (DECREASE) IN CASH (201) (2,373) 1,626 CASH, beginning of year 1,464 3,837 2,211 CASH, end of year $ 1,263 $ 1,464 $ 3,837
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued) Years Ended December 31, 2000, 1999 and 1998 (In thousands, except for per share data)
2000 1999 1998 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, cash paid for interest during the year. . . . . . . . . . . . . $ 110 $ 158 $ 425 SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Increase in other liabilities related to an investment in real property which the Company received from an affiliate . $ 456 Issuance of stock warrants with debt. . . $ 213 Common stock to be issued in settlement of certain liabilities. . . . . $ 50 Increase in other current assets related to receivable from sale of equipment. . . . . $ 35 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 GCP. . . . . . $ 8,500 Assumption by GCP of net proceeds of pre-financing. . . . . . . . . $ 17,900 Assumption by GCP of certain accounts payable, accrued expenses, payroll liabilities and capital lease obligation . . . . . . . $ 2,000 Common stock issued in settlement of preferred stock dividends . . . . . . $ 6,194 $ 2,861 $ 1,391 Increase in property and equipment included in Accounts payable . . . . . . $ 1,110
See accompanying notes to consolidated financial statements 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. ("GCP") (see Note 3). Included in the consideration, the Company received a 25% limited partnership interest in GCP, whose assets include an additional casino and hotel located in Greenville, Mississippi. In October 2000, the Company became a 75% member of Alpha Florida Entertainment, L.L.C. ("Alpha Florida LLC"). In November 2000, Alpha Florida LLC, launched its gaming day cruise vessel (the Ella Star Casino ("Ella Star")) operations out of Miami-Dade County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. In addition, the Company is pursuing 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. ("AMI"), Alpha Rising Sun, Inc.("Alpha Rising Sun"), Jubilation Lakeshore, Inc. ("Jubilation Lakeshore") (including Jubilation Lakeshore's 93% owned subsidiary Casino Ventures, L.L.C. ("Casino Ventures") (see Note 7)), Alpha Entertainment, Inc.("Alpha Entertainment"), Alpha Casino Management, Inc. ("Alpha Casino") and Alpha Peach Tree Corporation ("Alpha Peach Tree"). Note 2. Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-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 and improvements 20 years Leasehold and improvements 10-20 years Gaming equipment 5-7 years Furniture, fixtures and equipment 5-7 years Investments. The Company's 25% limited partnership interest in GCP 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 GCP's undistributed earnings or losses (see Note 3). The Company's 5% investment in real property holdings on Monticello Raceway is being accounted for under the cost method of accounting. Pre-opening and Development Costs. The Company incurs costs in connection with start-up casino operations 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) and joint ventures. The Company's policy is to expense pre-opening and development costs as incurred. Earnings (Loss) Per Common Share. Earnings (loss) per common share is based on the weighted average number of common shares outstanding. The Company complies with Statement of Financial Accounting Standards ("SFAS") No. 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. Since the effect of outstanding options and warrants is antidilutive,they have been excluded form the Company's computation of loss per common share. Therefore, basic and diluted loss per common share for the years ended December 31, 2000, 1999 and 1998 were the same. Income Taxes. The Company complies with SFAS No. 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 consists of food and beverage furnished gratuitously to customers. Revenues do not include the retail amount of food and beverage of $44 and $496 for the years ended December 31, 2000 and 1998, respectively, provided gratuitously to customers. The cost of these items of $39 and $418 for the years ended December 31, 2000 and 1998, respectively, are included in casino expenses. Fair Value of Financial Instruments. The fair values of the Company's assets and liabilities that qualify as financial instruments under SFAS No. 107 approximate their carrying amounts presented in the consolidated balance sheets at December 31, 2000 and 1999. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 2000 presentation. 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 GCP for approximately $40,200. Specifically, the Company received cash of $11,800 and a 25% limited partnership interest in GCP. Additionally, GCP 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 of $17,900. The Company recognized a gain on the sale of $6,048. Subsequent to the acquisition of substantially all of the assets of Alpha Gulf and Greenville Hotel, management was advised that GCP incurred significant operating losses resulting in a substantial working capital deficiency and a partners' deficiency through December 31, 1998. In light of these developments and in accordance with its policy on impairment of long-lived assets, the Company adjusted the carrying value of its remaining 25% limited partnership interest in GCP to zero in 1998. Note 4. Property and Equipment At December 31, 2000 and 1999, property and equipment is comprised of the following (see Note 8):
2000 1999 Boat and improvements 9,034 $ 5,322 Leasehold and improvements 88 82 Gaming equipment 2,224 3,023 Furniture, fixtures and equipment 1,970 1,837 13,316 10,264 Less accumulated depreciation and amortization 4,622 5,287 Less amounts included in assets of Casino Ventures (see Note 7) 6,383 4,529 $ 2,311 $ 448
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) Note 5. Long-Term Debt Long-term debt at December 31, 2000 and 1999 was comprised of the following:
Interest Rate 2000 1999 Loan payable. . . . . . . . . . . . . . 4% $ 1,066 $ -- Loan payable to a director of the Company, due in April 2002. . . . . . . . . 8% 804 Note payable to Bryanston Group, Inc. ("Bryanston"), an affiliate, with interest payable monthly and principal payments, commencing January 1, 2001, not to exceed $1,000 per annum, with any unpaid balance due at maturity in April 2005. Bryanston has agreed, subject to certain terms and conditions, to subordinate its rights to repayment of principal and to payment of cash dividends to the prior payment of amounts due to the holders of the preferred stock, series D (see Notes 8 and 9). . . . . . . . . . 8% 1,407 1,407 Mortgage note collateralized by the Company's inactive vessel (see Note 7) with interest payable monthly and principal due in January 2001 . . . . . 8% 650 650 Promissory note payable, due March 2001. . . . 6% 29 3,956 2,057 Less amounts included in liabilities of Casino Ventures (see Note 7). . . . 1,483 650 $ 2,473 $ 1,407
Aggregate future required principal payments of long-term debt are as follows: Years Ending December 31: 2001 . . . . . . $ 679 2002 . . . . . . 804 2003 . . . . . . 1,250 2004 . . . . . . 2005 . . . . . . 1,407 $ 4,140 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) Note 6. Accounts Payable and Accrued Expenses At December 31, 2000 and 1999, accounts payable and accrued expenses are comprised of the following:
2000 1999 Property and equipment $ 1,110 $ -- Due to GCP -- 462 Insurance 167 202 Accrued professional fees 280 221 Accrued interest 114 13 Other 576 283 Less amounts included in liabilities of Casino Ventures (see Note 7) 918 60 $ 1,329 $ 1,121
Note 7. Investment in Casino Ventures, L.L.C. On July 8, 1999, the Company contributed its inactive vessel, Jubilation, to Casino Ventures (see Notes 1, 4 and 5). At the time of the contribution, the vessel (including gaming equipment, furniture and other items) had a net book value of $4,149. In exchange, the Company received $150 in cash, a promissory note of $1,350 and a membership interest in Casino Ventures. The promissory note accrues interest at an initial rate of 8.75% per annum, payable quarterly, with the principal balance due July 8, 2002. The initial interest rate of 8.75% is adjusted daily to prime plus one percent with a minimum rate of 8.75%. Upon repayment of the promissory note and certain other funding to the venture, the Company's membership interest in Casino Ventures decreases from its current percentage of 93% to 15%. The consolidated financial statements of the Company includes the accounts of Casino Ventures until such time as the Company's membership interest decreases to less than 50%. A director of the Company is a member in Casino Ventures and serves as its General Manager. That director advanced funds to Casino Ventures in 1999 and 2000 that were used for site and vessel improvements. As of December 31, 2000, the loan payable to the director amounted to $804. The loan accrues interest at 8% and matures April 2002. In addition, $100 and $12 of the Casino Ventures start up costs in 2000 and 1999, respectively, were paid to entities in which the director has an ownership interest. During the years ended December 31, 2000 and 1999, the Company capitalized $1,859 and $364 of costs, respectively, related to the refurbishment of the vessel and improvement to its site in Tunica, Mississippi and incurred $268 and $100 of start-up costs, respectively. Additionally, during the year ended December 31, 1999, the vessel was used as collateral to obtain funding of $650 towards the aforementioned costs of Casino Ventures (see Note 5). Total interest expense on Casino Venture debt for 2000 and 1999 amounted to $79 and $22, respectively. Pursuant to an amendment agreement effective April 18, 2000, the total maximum borrowings allowed to be collateralized by the vessel is $1,000. At December 31, 2000 and 1999, assets and liabilities of Casino Ventures consisted of the following:
2000 1999 Assets: Property and equipment $ 6,383 $ 4,529 Deposits 54 50 Other 11 8 6,448 4,587 Current liabilities: Long-term liability, current maturities 679 Accounts payable and accrued expenses 918 60 1,597 60 Long-term liabilities, Long-term debt, less current maturities $ 804 $ 650
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 The Company, through its wholly-owned subsidiary, AMI, is party to a General Memorandum of Understanding (the "Memorandum") with Catskill Development, LLC ("CDL" and, collectively with AMI, the "Parties") dated December 1, 1995, which among other things, provided for the establishment of Mohawk Management, LLC ("MML"), 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 "Mohawk Tribe"). The Memorandum also sets forth the general terms for the funding and management obligations of CDL (25% owned by Bryanston) and AMI with regard to MML. In January 1996, MML was formed with each of CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML entered into a Gaming Facility Management Agreement with the Mohawk 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 provided MML with the exclusive right to manage the Monticello Casino for seven (7) years from its opening and to receive certain fees for the provision of management and related services. By its terms, the Memorandum between CDL and AMI 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 MML. The Management Contract between MML and the Mohawk Tribe contains no such provision. Additionally, the Memorandum was silent as to the effect of such termination on the continued existence of MML on the Parties' respective 50% membership interests therein or on the Management Contract. On December 28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to resolve certain disputes between the Parties. In July 2000, the Parties completed a final settlement agreement whereby AMI will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing from the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitles AMI to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe while the settlement agreement covers all prospective federally recognized Native American Nations. Accordingly, Alpha Casino Management Inc. ("ACM") and Monticello Casino Management, L.L.C. ("MCM") were formed to facilitate such potential non-Mohawk Tribe arrangements. As part of and in conjunction with such settlement, AMI acquired five percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $456 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 200 acres of land. Bryanston has agreed to defer payment of this liability until the earlier of the liquidation of the asset or January 2002. The $456 is included in other assets and liabilities on the consolidated balance sheet as of December 31, 2000. Additionally, Bryanston has agreed to transfer its 25% ownership in the Raceway's parimutuel operations to AMI. Under the previous agreement, AMI did not participate in any of these sources of revenue. For the year ended December 31, 2000, the Company's share of the Raceway's parimutuel operations amounted to $72. Included in deposits and other assets as of December 31, 2000 and December 31, 1999, the Company capitalized $2,047 and $1,366, respectively towards the design, architecture and other costs of the development plans for the proposed Monticello Casino. On April 6, 2000, in a letter to New York Governor George Pataki, the U.S. Department of the Interior and its Bureau of Indian Affairs (the "Department") forwarded its initial Two-Part Determination, which included the Department's findings that: 1) the Monticello Casino was in the best interests of the Mohawk Tribe; and 2) there was local support for the project. The Department has requested the Governor's concurrence in its findings. Such concurrence is an integral step in establishing the trust lands on which the proposed casino would be developed. On April 19, 2000, MML received a letter from the National Indian Gaming Commission asking for additional information as it was completing its review of the underlying management and development agreements. As explained below, on June 5, 2000, MML notified the Department of the purported abandonment of the project by the Mohawk Tribe. On April 22, 2000, the Company was made aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment ("PPE"), which agreement (with two irrelevant exceptions) would purportedly give PPE the exclusive 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) rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. The validity of the aforementioned purported agreement is not clear at this time. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs' proposed casino in Monticello. The Company is obligated under operating leases relative to real property and equipment expiring through 2005. The Company made $392 of refundable payments to a lessor in connection with certain of these leases. The $392 receivable from that lessor is included in other current assets as of December 31, 2000. Future aggregate minimum annual rental payments under all of these leases are as follows: Years Ending December 31: 2001. . . . . . . . . .$ 1,505 2002. . . . . . . . . . 1,500 2003. . . . . . . . . . 1,395 2004. . . . . . . . . . 383 2005. . . . . . . . . . 116 $ 4,899 Rent expense under these operating and terminated leases amounted to $533, $375 and $501 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company is obligated under an employment contract with its Chairman and Chief Executive Officer ("CEO").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 his or its intention not to extend the term of the employment. In the event of termination of employment, the CEO will be retained to provide consulting services for two years at $175 per annum. The CEO has agreed to waive his rights to receive the $250 salary for the year 2000. The Company has reflected this waiver as a $250 increase in capital in excess of par value for services contributed. As of December 31, 2000 and 1999, deferred compensation payable to the CEO was approximately $1,530. During 1999, the Company agreed to afford the CEO the right to convert up to $2,000 of deferred compensation payable into up to 1,000 shares of the Company's common stock at a stock price of two dollars per share, the closing price on the agreement date. The CEO's right to convert deferred compensation to the Company's common stock shall only be exercisable if he continues to defer his salary and he remains employed through and including April 2002, or such later date as the Board of Directors may determine. In addition, these conversion rights shall not be exercisable before April 2002. During the year ended December 31, 1999, the Company recorded a noncash compensation charge of $3,251 reflecting the increase in the market price of the Company's common stock from the date of the agreement to the end of 1999. The $3,251 charge was reversed in 2000 to reflect the decrease in the market price of the Company's common stock during the year. On September 30, 1999, the CEO agreed to defer all cash payments owing pursuant to his employment contract with the Company until January 1, 2001, and further deferred in December 2000, until April 2002. This includes the $1,530 payable as of December 31, 2000, and future amounts accruing to the CEO. This does not effect the CEO's rights to convert up to $2,000 of deferred compensation payable into up to 1,000 shares of the Company's common stock. Additionally, a former officer of the Company also has agreed to defer all cash payments against a $266 liability owing pursuant to his previous employment contract with the Company until January 1, 2001 and in December 2000, agreed to further defer such cash payments until April 2002. Accordingly, other liabilities, on the Company's consolidated balance sheet as of December 31, 2000 and 1999, includes $1,796 of deferred compensation payable. 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) 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 was renewed in November 1999 for a two year period. The Company anticipates renewal of this finding of suitability in November 2001. 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 $17,100 and punitive damages aggregating $37,500. On March 1, 2000, mediation took place between the Company's insurance company and plaintiffs Amos, Batiste and Ducre with settlements being reached in all three cases for an aggregate amount of $110, of which $85 was covered by the Company's insurance. Although the Company's insurance company has initiated settlement discussions with plaintiffs Johnston and Rainey, neither case has been settled nor can there be any assurance that settlements can be reached. 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 remaining risk referred to in this paragraph is adequately covered by insurance. The Company is a party to various other legal actions that have arisen 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 or adverse effect on the consolidated financial position, results of operations or cash flows of the Company. The Company was involved in a dispute with Greenville Casino Partners, L.P. ("GCP") regarding an agreement dated December 17, 1997. In September 2000, an arbitrator awarded the Company a net amount of $136 in satisfaction of all claims and counterclaims of the dispute. Such amount is included in other current assets as of December 31, 2000 and in other revenues for the year ended December 31, 2000. On March 2, 1998, the Company entered into a supervisory hotel management agreement with GCP (see Note 1) for a term of ten years, pursuant to which the Company is entitled to receive $100 per annum for management services, payable monthly. Commencing July 2000, the Company no longer accrues the management fees as the likelihood of collection is remote. Supervisory management fees earned for the years ended December 31, 2000 and 1999, amounted to $50 and $100, respectively. On May 12, 1998, with shareholder approval granted in September 1999, the Board approved an annual compensation arrangement whereby each of the three outside directors will receive $6 per annum plus, pursuant to the 1998 Stock Option Plan (see Note 10), options to purchase up to 25 shares, and an additional 15 shares for each committee served upon, of the Company's Common Stock at an exercise price equal to the current market price on the date the option was granted. Accordingly, in 1999 and 1998 the Company granted to its outside directors options to purchase an aggregate amount of up to 150 and 285 shares, respectively, of its Common Stock at an exercise price of $4.25 and $1.063, respectively, per share, which can be exercised any time up to 2009 and 2008, respectively. The amount granted in 1999 is for services to be rendered in the year 2000. The amount granted in 1998 represents options to purchase aggregate amounts of up to 135 and 150 shares for the 1998 and 1999 years of service, respectively. As compensation to its employee directors, in December 1999 and 1998, the Company granted options to purchase an aggregate amount of up to 95 shares of its Common Stock for each of the 2000, 1999 and 1998 years. 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) Additionally, in both December 1999 and 1998, pursuant to the 1998 Stock Option Plan as approved by the Company's shareholders in September 1999, the Company granted to the Company's Chairman options to purchase 250 shares of the Company's common stock. All of the options to purchase the Company's common stock under the 1998 Plan, which were granted in 1998 to its outside and employee directors, excluding the Chairman, are exercisable at a price per share equal to the closing NASDAQ bid prices on the dates of the grants in December 1999 and 1998 of $4.25 and $1.063, respectively. The exercise price for the 250 options granted in 1999 and 1998 to the Chairman to purchase the Company's common stock are exercisable at prices per share of $4.25 and $1.13, respectively, which is equal to 100% and 110%, respectively, of the closing NASDAQ bid prices on the dates of the grants in December 1999 and 1998 (see Note 10). 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 was 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 that provides legal services to the Company. Fees to such firm in the years ended December 31, 2000, 1999 and 1998, has been recorded at approximately $200, $204 and $200, respectively, related to general corporate matters. Note 9. Stockholders' Equity Activity In June 1998, the Company issued 135 shares of Series C Preferred Stock (see description below) in settlement of $9,729 of obligations to Bryanston. During 1999 and 2000, 15 and 135 shares, respectively, of the Company common stock was issued upon the exercise of warrants and options. During 1999 and 2000, the Company recorded a $3,251 increase and decrease, respectively, to capital in excess of par value to reflect a noncash compensation adjustment (see Note 8). Further, in 2000, the Company's Chairman and CEO's election to waive $250 of salary has been reflected as an increase in capital in excess of par value for contributed services (see Note 8). In February 2000, the Company privately sold 4 shares of its 7% convertible Series D Preferred Stock (see description below) for an aggregate price of $3,867 net of closing costs of $133. During 2000, 1.9 shares of Series D Preferred Stock were converted into 1,387 shares of the Company's common stock. In August 2000, in connection with certain debt financing with the holder of the Company's Series D Preferred Stock, the Company has allocated $213 as the estimated value of warrants issued in connection with a loan advanced to the Company by such holder. Descriptions of Preferred Stock and Dividends The Company's Series B Preferred Stock has voting rights of eight votes 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 were issued in April 1998. On May 12, 1998, the Company declared a 1997 dividend of $2,861, payable in approximately 1,605 shares of common stock, which were issued in January 1999. On May 12, 2000, the Company declared dividends of $3,097 on the Series B Preferred Stock for both the 1999 and 1998 fiscal years, respectively, amounting to 450 and 1,943, respectively, of shares of the Company's common stock. These shares were issued in July 2000. As of December 31, 2000, dividends in arrears on the Series B Preferred Stock, amounted to approximately 3,167 shares. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) Note 9. Stockholders' Equity (CONTINUED) 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 preferred shares include a provision allowing the Company the option of calling the preferred shares based upon the occurrence of certain capital events that realize a profit in excess of $5,000. As of December 31, 2000, dividends in arrears on the Series C Preferred Stock, amounted to approximately $382, $763 and $763 for 1998, 1999 and 2000, respectively. The Series D Preferred Stock is convertible into shares of the Company's common stock at a conversion price of the lesser of $6 per share or a price based upon the prevailing market price of the Company's common stock, and accrues dividends at a rate of 7% per annum. In the event the preferred stock is not converted into shares of the Company's stock by February 8, 2005, there will be a mandatory redemption at that time, payable in shares of the Company's common stock at the same aforementioned conversion price. The dividends are payable in arrears on the earlier of the date of conversion of a share of Series D Preferred Stock or the date of redemption. At the Company's option, the dividends are payable in the form of cash or shares of the Company's common stock. The maximum aggregate total number of shares of the Company's common stock issuable relative to the conversions and payments of dividends is 3,300 shares. In the event such limitation prevents the conversion of any Series D Preferred Stock, the dividend rate will increase to 15% per annum to be payable in cash in arrears, semi-annually on June 30 and December 31. The Series D Preferred Stock has no voting rights prior to its conversion into common stock. Note 10. Stock Options and Warrants 1998 and 1993 Stock Option Plans In May 1998 and June 1993, the Company's Board of Directors adopted the 1998 (see Note 8) and 1993 Stock Option Plans providing for incentive stock options and non-qualified stock options. The Company has reserved 4,000 and 900 shares of common stock for issuance upon the exercise of options to be granted under the 1998 and 1993 Stock Option Plans, respectively. The exercise price of an ISO or NQSO will not be less than 100% of the fair market value of the Company's common stock at the date of the grant. The 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. In October 2000 and December 1998, the Company determined that the purposes of the Stock Option Plans 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 in 2000 and 1998, respectively, the Company cancelled all outstanding options , not "in the money" at the respective dates, and reissued the options at an exercise price of $1.375 and $1.063, respectively, the closing NASDAQ bid prices on October 12, 2000 and December 12, 1998. On November 30, 2000, the Company repriced certain stock options which, under Financial Accounting Standards Board Interpretation Number 44 ("FIN44"), requires them to be accounted for under variable plan accounting. The application of FIN 44, which was effective July 1, 2000, can result in the recognition of non-cash compensation expense. Although there was no compensation expense in the year ended December 31, 2000 as a result of applying FIN 44, FIN 44 could result in significant future non-cash compensation expense. 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) The following table summarizes common stock option activity, excluding the simultaneous cancellations and reissuances on November 30, 2000, as noted above:
Weighted Average Range of Exercise Number of Exercise Price Per Shares Price Share Options outstanding at December 31, 1997 409 $1.063-$1.375 $1.090 Granted 1,065 $1.063-$1.17 1.088 Cancelled (200) $1.063-2.000 1.063 Options outstanding at December 31, 1998 1,274 $1.063-1.375 $1.088 Granted in 1999 1,389 $1.375 1.375 Options outstanding at December 31, 1999 2,663 $1.063-1.375 $1.238 Exercised in 2000 135 $1.063-2.000 $1.098 Options outstanding at December 31, 2000 2,528 $1.063-1.375 $1.245
The following table summarizes information regarding stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable Weighted Weighted Number Average Average Number Weighted Range of Outstanding Remaining Exercise Exercisable Average Exercise at Contractual Price Per at Exercise Prices Dec 31, 2000 Life in Years Share Dec 31, 2000 Price $1.063 876 6.67 $1.063 876 $1.063 1.17 250 7.92 1.17 250 1.17 1.375 1,402 8.60 1.375 1,327 1.375
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) Other Stock Options During the years ended December 31, 2000, 1999 and 1998, options to purchase 348, 50 and 600 shares, respectively, of the Company's common stock at exercise prices of $5.375, $5.00 and $14.00, respectively, expired. No other options were outstanding at December 31, 2000. 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. During the year ended December 31, 1999, 15 warrants were exercised. In connection with a loan to the Company (see Note 6), the holder of the Company's Series D Preferred Stock (see Note 9) received 125 warrants exercisable at a price of $2.40 per share, which expire in July 2003. As of December 31, 2000, 973 warrants were outstanding, including the 125 warrants outstanding to the holder of the Company's Series D Preferred Stock. 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 Stock Option Plans. Had compensation cost for such Plans been determined based on the fair value at the grant date of awards in the years ended December 31, 1999 and 1998 consistent with the provisions of SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below:
1999 1998 Net loss, as reported $ (5,763)$ (16,260) Net loss, pro forma (9,918) (17,473) Loss per common share, basic and diluted as reported (.34) (1.09) Loss per common share, basic and diluted, pro forma (.59) (1.17)
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expensed on future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions: volatility was calculated at 114% for 1999 and 100% for 1998; risk-free interest rate of five percent for 1999 and 1998; no dividend yield and option life of ten years. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) Note 11. Income Taxes The Company and all of its subsidiaries file a consolidated federal income tax return. At December 31, 2000 and 1999, the Company's deferred income tax asset is comprised of the tax benefit associated with the following items based on the statutory tax rates currently in effect:
2000 1999 Net operating loss carryforwards . . . . . $ 18,236 $ 19,310 Differences between financial and tax bases of assets and liabilities . . . . . 7,758 7,756 Other . . . . . . . . 277 385 Deferred income tax asset, gross . . . . . . . . 26,271 27,451 Valuation allowance. . . . . . . . (26,271) (27,451) Deferred income tax asset, net $ -- $ --
During 1998, upon termination of its obligation under a lease in Lakeshore, Mississippi, the Company exercised a tax write-off of leasehold and improvements, written-off for book purposes in 1996. The tax write-off from operations 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 events skewed deferred (taxes) benefit in relationship to loss before deferred (taxes) benefit in the year ended December 31, 1998. As of December 31, 2000, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $45,590 expiring in the years 2008 through 2020. Note 12. Liquidity The Company has incurred and current net losses of approximately $82,599 and $412, respectively, used approximately $2,589 in operations during 2000 and has a working capital surplus (excluding Casino Ventures which is not expected to be paid by the Company during the next twelve months) of approximately $452 at December 31, 2000. While the Company's 2000 efforts were geared primarily at capital raising and pre-opening activities relating to the November 2000 launching of the Ella Star, the Company anticipates positive cash flows from the Ella Star during 2001. Further, the Company anticipates the 2001 repayment of the $1,350 promissory note and all other advances to Casino Ventures (see Note 7) and an approximate $250 cash infusion from the minority member of Alpha Florida LLC. Long-term liquidity is dependent on the Company's ability to attain profitable operations. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) Note 13. Unaudited Quarterly Data
First Second Third Fourth Quarter Quarter Quarter Quarter 2000 Total revenue. . . . . . $ 36 $ 52 $ 132 $ 652 Net loss applicable to common shares . . . . . $ (129) $ (4,444) $ (120) $ (1,913) Net loss per common share. . . . . . . . $ (.01) $ (.26) $ (.01) $ (.07) 1999 Total revenue. . . . . . $ 43 $ 27 $ 25 $ 90 Net loss applicable to common shares . . . . . $ (495) $ (828) $ (706) $ (3,734) Net loss per common share. . . . . . . . $ (.03) $ (.05) $ (.04) $ (.22)
SCHEDULE II ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998 (In thousands)
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, 1998: $ 635 -- -- -- 635 Allowance for doubtful accounts Year Ended December 31, 1999: $ 635 -- -- -- 635 Allowance for doubtful accounts Year Ended December 31, 2000: $ 635 -- -- -- 635 Allowance for doubtful accounts Year Ended December 31, 1998: $ -- 250 -- -- 250 Allowance for doubtful note Year Ended December 31, 1999: $ 250 -- -- -- 250 Allowance for doubtful note Year Ended December 31, 2000: Allowance for doubtful note $ 250 -- -- -- 250
EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements of Alpha Hospitality Corporation on Forms S-3 (File Nos. 333-45610, 333-33204, 333-39887 and 333-43861), S-8 (File Nos. 333-37293 and 333-90611) and Post Effective Amendment of Form S-3 to Registration State on Form SB-2 (File no. 33-64236) of our report dated February 23, 2001, on our audits of the consolidated financial statements and financial statement schedule of Alpha Hospitality Corporation as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998, which report is included in this Annual Report on Form 10-K. /S/ ROTHSTEIN, KASS & COMPANY, P.C. ROSELAND, NEW JERSEY March 30, 2001