8-K/A 1 e8ka210.txt ALPHA HOSPITALITY CORPORATION FORM 8K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 10, 2002 ALPHA HOSPITALITY CORPORATION (Exact Name of Registrant as Specified in Charter) Delaware 1-12522 13-3714474 (State or other jurisdiction (Commission File No.) (IRS Employer of incorporation) Identification No.) 707 Skokie Boulevard, Suite 600, Northbrook, Illinois 60062 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (847) 418-3804 This form 8-K/A amends and restates the current report on Form 8-K dated December 11, 2002, and as amended on January 16, 2003, and filed by the Registrant on such dates. ITEM 2. ACQUISITION OF ASSETS Pursuant to the terms of a recapitalization agreement (the "Recapitalization Agreement"), on December 10, 2002, Alpha Hospitality Corporation (the "Company") issued 1,394,200 shares of its Series E Preferred Stock to the Bryanston Group, Inc. ("Bryanston"), its largest stockholder, in exchange for Bryanston's voting membership interest and preferred capital account in Catskill Development, LLC ("Catskill"). These preferred shares have a liquidation value of $10 per share, are non-voting and non-convertible, have no fixed date of redemption or liquidation, and provide for cumulative dividends at the rate of 8% per annum. Dividends on the Company's common stock and other uses of the Company's net cash flow are subordinate to the payment of the accrued dividends on these preferred shares. As a result of this transaction, the Company obtained a 25% ownership interest in Catskill and will account for its investment using the equity method of accounting. ITEM 5. OTHER EVENTS On December 10, 2002, pursuant to the Recapitalization Agreement, the Company also (i) issued an aggregate 336,496 shares of its Series E Preferred Stock to each of Bryanston, Stanley Tollman ("Tollman") and Monty Hundley ("Hundley") in full satisfaction of an outstanding note and as deferred compensation, (ii) received a three year option to redeem all or any portion of (a) the Series E Preferred Stock issued to Bryanston, Tollman and Hundley, as described above, at its liquidation value plus all accrued and unpaid dividends and (b) subject to stockholder approval, Bryanston's 2,326,857 and Beatrice Tollman's 66,000 shares of Company common stock at a price of $2.12 per share, in either case, payable in cash or by delivery of a promissory note for the aggregate purchase price of the stock being redeemed. Such promissory note is to be unsecured, bear interest at the rate of 7% per annum, and be payable in fixed installments over a three year period. Each such promissory note is to be subordinate to the Bank Note (as defined below) and may be prepaid by the Company at any time, without notice. Nevertheless, during the three year redemption period, each of Bryanston and Beatrice Tollman have granted Robert Berman, the Company's Chief Executive Officer, an irrevocable proxy to vote their shares of common stock, with full powers of substitution and revocation. On December 10, 2002, the Company also entered into an agreement with Societe Generale (the "Bank"), the holder of the Company's Series D Preferred Stock and a Note due July 2003 in the cumulative amount of $2,400,000. Under this agreement, the Note and all outstanding Series D Preferred Stock were cancelled, and the Company issued the Bank a new $1,600,000 Note (the "Bank Note") due June 30, 2003, which provides for discounts in the event of prepayment. This Bank Note is a first priority senior obligation of the Company. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES UNADUDITED PRO FORM FINANCIAL DATA The unaudited pro forma financial statements of Alpha Hospitality Corporation (the "Company") below give effect to several agreements, whereby the Company changed its capital structure and ownership so to comply with NASDAQ Marketplace Rule 4310 (c)(2)(B) pertaining to the minimum stockholders' equity. These agreements consist of the following elements: (1) the purchase of the voting membership and other assets in Catskill Development, LLC ("Catskill") owned by Bryanston Group, Inc. ("Bryanston") in exchange for shares of Series E Preferred Stock with a liquidation value of $13,942,000; (2) the exchange of a note with a principal amount of $1,600,000 for the Company's Series D Preferred Stock and a Note due July 2003, which had an outstanding cumulative balance of approximately $2,400,000, held by Societe Generale (the "Bank"); and (3) an agreement with Bryanston and certain other affiliates to exchange certain obligations due from the Company with shares of Series E Preferred Stock with a liquidation value of $3,364,960. The unaudited pro forma balance sheet has been prepared as if all transactions had been completed as of November 30, 2002. The transactions with the Bank and settling obligations due to Bryanston and certain other affiliates have been separated from the acquisition of the interest in Catskill as discussed in Note A to the unaudited pro forma financials statements. The pro forma Statement of Operations has been prepared as if the acquisition of the interest in Catskill was completed as of January 1, 2002. These unaudited pro forma financial statements do not necessarily reflect the results of operations of financial position of the Company that would have resulted had such transactions actually been consummated as of such dates. Also, they are not necessarily indicative of the future results of operations of the future financial position of the Company. The unaudited pro forma financial statements should be read together with financial statements and notes of the Company, which are incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and Quarterly Report on Form 10-QSB for the quarter period ended September 30, 2002. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data)
November 30, 2002 Pro Forma Capital Pro (Unaudited) Adjustments Adjustments(A) Forma ASSETS CURRENT ASSETS: Cash $ 287 (50)(B) $ 237 Other current assets 57 57 Total current assets 344 294 PROPERTY AND EQUIPMENT, net 0 0 INVESTMENT AND ADVANCES IN CATSKILL DEVELOPMENT, LLC 2,947 3,490(D) 6,437 ASSETS OF CASINO VENTURES, including idle property and equipment of $7,805 and $7,063 7,955 7,955 DEPOSITS AND OTHER ASSETS 27 (13)(B) 14 $ 11,273 $ 14,700 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable June 30, 2003 $ 0 1,600(B) $ 1,600 Related party debt 2,560 (990)(B) (1,570)(C) 0 Accounts payable and accrued expenses 1,797 (267)(C) 1,530 Accrued payroll and related liabilities 407 407 Current liabilities of Casino Ventures 4,015 4,015 Total current liabilities 8,779 7,552 LONG-TERM RELATED PARTY DEBT, including accrued interest 0 0 LONG-TERM RELATED PARTY LIABILITIES OF CASINO VENTURES 0 0 OTHER LIABILITIES 0 0 RELATED PARTY LIABILITIES TO BE SETTLED WITH COMMON STOCK 1,529 (1,529)(C) 0 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 790 790 STOCKHOLDERS' EQUITY: Preferred stock, 17,312 shares authorized: Series B, $.01 par value, 44 issued and outstanding in 2002 and 2001 0 0 Series D, $.01 par value, 1 issued and outstanding in 2002 0 0 Series E, $.01 par and $10.00 redemption value, 1,731 issued and outstanding in 2002 0 3,490(D) 3,366 (C) 6,856 Common stock, $.01 par value, 7,500 shares authorized, 4,879 issued and outstanding in 2002 49 49 Capital in excess of par value 107,386 (716)(B) 106,670 Accumulated deficit (107,260) 44 (I) (107,216) Total stockholders' equity 175 6,358 $ 11,273 $ 14,700
See accompanying notes to unaudited pro forma financial statements. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except for per share data)
Eleven Months Ended November 30 2002 Adjustments Pro Forma REVENUES: Casino $ 0 $ 0 Food and beverage, retail and other 0 0 0 0 COSTS AND EXPENSES: Casino 0 0 Food and beverage, retail and other 0 0 Selling, general and administrative 2,223 2,223 Depreciation and amortization 21 21 Interest 391 32(F) 423 Pre-opening and development costs 44 44 Total costs and expenses 2,679 2,711 OTHER INCOME (LOSS): Gain on sale of investment and related management contract 3,277 3,277 Loss from equity investments -- (441)(E) (441) Loss on investment - Catskill (6,934) (6,934) Miscellaneous - debt extinguishment 3 291(G) 294 NET LOSS BEFORE MINORITY INTEREST (6,333) (6,515) MINORITY INTEREST 18 18 NET LOSS (6,315) (6,497) DIVIDENDS ON PREFERRED STOCK 518 144(H) 1,022(J) 1,684 NET LOSS APPLICABLE TO COMMON SHARES (6,833) (8,181) WEIGHTED AVERAGE COMMON SHARES, basic and diluted 4,588 4,588 LOSS PER COMMON SHARE, basic and diluted $(1.49) $ (1.78)
See accompanying notes to unaudited pro forma financial statements. Notes to Unaudited Pro forma Condensed Consolidated Financial Statements (in thousands, except for per share data) (A) Capital adjustments reflect certain transactions related to the Company's recapitalization and having minimal effect on net income (loss), are not included in the unaudited pro forma Statement of Operations. The interest related to the short tem debt incurred in the transaction with the Bank, as discussed in Note B, is not included because that interest would not have a long-term effect on the company. The transaction settling certain obligations due to Bryanston and certain other affiliates, as discussed in Note C, is also not included in the unaudited Statement of Operations. (B) To reflect the cancellation of the Company's convertible note payable and the accrued interest due July 2003 recorded at $990 and the exchange of the Bank's Series D Preferred Stock recorded at $1,080 (less the gain related to the retirement of the instrument presented in Note G) by the issuance of the 16% Note due June 2003 in the principal amount of $1,600. This transaction included recognition of accrued dividends of $215, write off of capitalized loan costs of $13 and a cash payment of $50. (C) To reflect the issuance of Series E Preferred Stock with a liquidation value of $3,366 in exchange for deferred compensation due to Stanley Tollman recorded at $1,529 and Monty Hundley at $267 and current related party debt due to Bryanston recorded at $1,570. (D) To reflect a related party transaction transferring Bryanston's interests and voting rights in Catskill to the Company in exchange for the issuance of $13,942 liquidation value of Series E Preferred stock. The transaction was recorded using Bryanston's cost basis of $3,490. The Company's prior value of Catskill of $2,947 was based upon the original cost and the estimated recoverability of its investment. (E) To reflect the 25% interest in Catskill's net loss for the eleven months ended November 30, 2002. (F) To reflect the recognition of the unamortized portion of the loan costs, $32, associated with the Bank's convertible debt and Series D Preferred Stock. (G) To reflect the prorated gain on the exchange of the related convertible debt plus accrued interest and the Series D Preferred Stock in exchange for the $1,600 Note due June 2003. The gain was prorated as follows: Gain on extinguishment $655 Gain related to convertible debt 291 Gain related to retirement of Series D Pref. Stock 364 (H) To reflect the cumulative dividends balance at January 1, 2002 in the amount of $144 on the Series D Preferred Stock. The Series D Preferred Stock accrued dividends were disclosed, but not recognized in the consolidated financial statements for the year ended December 31, 2001. (I) To reflect the $291 gain related to convertible debt (Note G) less preferred dividends of $215 (Note B) and write off of $13 of capitalized loan costs (Note B), and $19 of various accruals (Note C). (J) To reflect the cumulative dividends related to the 1,394 shares of the Series E Preferred stock, issued in exchange for the 25% voting interest in Catskill, on the Company's earnings per share. The cumulative dividends are based on an 8% rate on the total liquidation value of $13,942. See accompanying notes to unaudited pro forma financial statements. Catskill Development, LLC Consolidated Balance Sheets September 30, 2002 and December 31, 2001
September 30, December 31, 2002 2001 ASSETS Current Assets: Cash & Cash Equivalents $ 955,504 1,358,469 Restricted Cash 114,578 78,070 Accounts Receivable 566,800 645,931 Inventory 7,533 7,428 Prepaid Expenses 272,608 135,774 Other Current Assets 15,746 17,173 Total Current Assets 1,932,769 2,242,845 Property, Plant and Equipment: Land 770,000 770,000 Buildings and Improvements 8,447,824 8,414,664 Furniture, Fixtures and Equipment 1,301,489 1,195,613 Subtotal 10,519,313 10,380,277 Less: Accumulated Depreciation 4,495,570 3,936,857 Net Property, Plant and Equipment 6,023,743 6,443,420 Real Estate Development 5,776,206 5,740,599 Total Assets $ 13,732,718 14,426,864 LIABILITIES AND MEMEBERS' EQUITY Current Liabilities: Accounts Payable $ 2,394,691 1,436,971 Other Current Liabilities 701 179,743 Accrued Expenses 90,736 103,513 Total Current Liabilities 2,486,128 1,720,227 Long-Term Debt: Notes Payable - Senior Obligation 5,000,000 5,000,000 Accrued Interest Payable 1,655,000 1,201,250 Total Long-Term Debt 6,655,000 6,201,250 Members' Equity 4,591,590 6,505,387 Total Liabilities and Members' Equity $ 13,732,718 14,426,864
Bachrach, Waschitz & Waschitz, LLP See Notes To Consolidated Financial Statements Catskill Development, LLC Consolidated Income Statements For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001
September 30, December 31, 2002 2001 Race Track Revenues: Gross Wagering and Simulcasting $ 8,520,953 10,285,654 Non- Wagering 176,925 216,765 Total Race Track Revenues 8,697,878 10,502,419 Racetrack Costs and Expenses: Purses, Awards and Other 3,001,331 3,700,717 Operating Costs 1,736,805 2,216,592 General and Administrative 2,339,930 3,038,589 Depreciation 566,390 743,716 Total Racetrack Costs and Expenses 7,644,456 9,699,614 Net Profit From Racing Operations 1,053,422 802,805 Real Estate Development Expenses: General and Administrative 42,371 113,320 Legal Expenses 2,476,420 2,228,077 Interest Expense 454,230 564,024 Total Real Estate Development Expenses 2,973,021 2,905,421 Other Income: Interest Income 5,802 31,384 Net (Loss) $ (1,913,797) (2,071,232)
Bachrach, Waschitz & Waschitz, LLP See Notes To Consolidated Financial Statements Catskill Development, LLC Consolidated Statements of Changes in Member's Equity For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001
Preferred Other Total Capital Capital Accumulated Members Contributions Contributions Deficit Equity Balance December 31, 2000 $ 15,703,893 400 (8,152,474) 7,551,819 Capital Contributions 1,024,800 - - 1,024,800 Net (Loss) - - (2,071,232) (2,071,232) Balance December 31, 2001 16,728,693 400 (10,223,706) 6,505,387 Net (Loss) - - (1,913,797) (1,913,797) Balance September 30, 2002 $ 16,728,693 400 (12,137,503) 4,591,590
Bachrach, Waschitz & Waschitz, LLP See Notes To Consolidated Financial Statements Catskill Development, LLC Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001
September 30, 2002 December 31, 2001 Operating Activities: Net Loss $ (1,913,797) (2,071,232) Adjustments to reconcile net loss to net cash Provided(Used) by operating activities: Depreciation 566,390 743,716 Accrued Interest Not Paid 453,750 563,750 Loss on Asset Disposal 2,819 - (Increase) Decrease in: Restricted Cash (36,508) 213,052 Accounts Receivable 79,131 (131,449) Inventory (105) 590 Prepaid Expenses (136,834) (5,568) Other Current Assets 1,427 9,920 Increase (Decrease) in: Accounts Payable 957,720 (78,884) Other Current Liabilities (179,042) 219,934 Accrued Expenses (12,777) 3,075 Net Cash Used by Operating Activities (217,826) (533,096) Investing Activities: Purchase of Property, Plant and Equipment (149,532) (143,521) Real Estate Development (35,607) (111,465) Net Cash Used in Investing Activities (185,139) (254,986) Financing Activities: Member Contributions - 1,024,800 Net Cash Provided by Financing Activities - 1,024,800 Net Increase (Decrease) in Cash (402,965) 236,718 Cash at Beginning of Year 1,358,469 1,121,751 Cash at End of Year $ 955,504 1,358,469 Supplemental Disclosures: Interest Paid $ 480 274
Bachrach, Waschitz & Waschitz, LLP See Notes To Consolidated Financial Statements Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 1. Significant Accounting Policies This summary of significant accounting policies of Catskill Development, LLC (the Company) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. A. Organization and Business Activity In October 1995, Catskill Development, LLC, a New York limited liability company, was formed to pursue the development of a proposed Native American Casino in Monticello, New York (the "Casino Project"). The Company's business plan envisioned three distinct lines of business: a) casino activities; b) real estate related activities; and c) the gaming operations related to Monticello Raceway (the "Raceway") including pari-mutuel and any potential future Video Lottery Terminal ("VLT") operations. Monticello Raceway Management, Inc. (MRMI), a New York Corporation, is a wholly owned subsidiary and was formed to hold the pari-mutuel license. Currently, the Company conducts pari-mutuel wagering on live race meetings for Standardbred horses and participates in intrastate and interstate simulcast wagering at the Raceway in Monticello, New York. The Company's operations are subject to regulation by the New York State Racing and Wagering Board. The Company continues to pursue a Native American Casino Project at the Raceway. However, to this point it has been unsuccessful (see Note 6). B. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Monticello Raceway Managements, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 C. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimated. D. Concentrations of Credit Risk The Company maintains significant cash balances with financial institutions in excess of the insurance provided by the Federal Deposit Insurance Corporation (FDIC). The Company, in the normal course of business, settles wagers for other racetracks and is thereby exposed to credit risk. However, receivables are generally not a significant portion of the Company's total assets and are comprised of a large number of accounts. E. Cash and Cash Equivalents Cash and cash equivalents include cash on account, demand deposits and certificates of deposits with original maturities of less than three months at acquisition. F. Restricted Cash Under New York States Racing, Pari-Mutuel Wagering and Breeding Law the track is obliged to withhold a certain percentage of certain types of wagers towards the establishment of a pool of money the use of which is restricted to the funding of approved capital improvements, repairs and/or certain advertising expenses. Periodically during the year the track petitions the Racing and Wagering Board to certify that the noted expenditures are eligible for re-imbursement from the capital improvement fund. The unexpended balance is shown as restricted cash on the balance sheet. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 G. Property, Plant and Equipment Plant and equipment are recorded at cost. Depreciation is calculated using the straight-line basis over the estimated useful lives of the related assets as follows: 15 years for grandstands and buildings, 5 to 7 years for equipment and 7 years for furniture and fixtures. H. Real Estate Development In connection with its real estate activities, the Company capitalizes certain legal, architectural, engineering and environmental study fees as well as other costs directly related to the development of its real estate. (See Note 2) I. Impairment of Assets In the event that facts and circumstances indicate that the carrying amount of tangible assets or groups of assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimate future undiscounted cash flows associated with the assets would be compared to the assets' carrying amount to determine if a write-down to market value or discounted cash flow value is required. Management has determined that no impairment of assets has occurred. J. Inventory Inventory is recorded at the lower of cost or market on a first in, first out basis. K. Revenue Recognition Wagering revenues are recognized gross of purses, stakes and awards and pari-mutual wagering taxes. The costs relating to these amounts are shown as "Purses, Awards and Other" in the accompanying Income Statements. Revenues from simulcasts are recognized as of the day of the race. L. Advertising The Company expenses the costs of general advertising, promotion and marketing programs at the time the costs are incurred. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 M. Income Taxes The Company was formed as a limited liability company and elected to be treated as a partnership for tax purposes, and thus no income tax expense is recorded in the statements. Income of the Company is taxed to the members in their respective returns. All income from the 100% owned subsidiary is passed to the Company because of an agency agreement between the companies. Therefore no tax accrual is needed on the subsidiary's records. 2. Fixed Assets Depreciation expense was $566,390 for the nine months ended September 30, 2002 and $743,716 for the year ended December 31, 2001. The Company is in the business of developing real estate for additional gaming activities. As of September 30, 2002 and December 31, 2001, the Company had capitalized $47,515 and $111,645, respectively to continue its efforts. 3. Members Equity and Senior Obligation The members of the Company have contributed considerable amounts of money to the Company to fund the purchasing of the Raceway and pursuing the approval and development of a Native American Casino on a portion of the Raceway property. These contributions (and a priority return of 10% per annum) and the mortgage described below, (with interest compounded at 10% per annum) must be repaid before any net earnings from operations would be available for distribution to the Company's other members. As of September 30, 2002 the aggregate amount needed to satisfy the payment of said contributions (with priority returns) to certain members of the Company is $29,304,137. These preferred capital balances are subordinate to a mortgage, payable to two members, (the "Senior Obligation"), which at September 30, 2002, and December 31, 2001 was $6,665,000 and $6,201,250 respectively including accrued interest at 10% per annum. All payments accrue and the principal and accrued interest totaling $8,052,550 is due September 15, 2004. Currently, any cash flow from the operations of the Raceway are being retained by the Company for working capital purposes and to fund litigation and development expenses in conjunction with other potential gaming operations at the track. As a result, the Company is not expected to make any distributions with respect to certain other members' interests until the Company has achieved additional net revenues sufficient to discharge the payment of the Senior Obligation, accrued interest, preferred capital balance and priority returns. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 The Company was formed as a limited liability company, therefore its members individual liability is limited under the appropriate laws of the State of New York. The Company will cease to exist July 1, 2025. The Company's distinct lines of business: (A) casino development; (B) real estate related activities; and (C) the gaming operations related to Monticello Raceway including pari-mutuel and any potential future Video Lottery Terminal operations are owned as follows: (after the transaction of February 12, 2002 noted below and the transaction of December 12, 2002 described in Note 8 - Subsequent Events) On February 12, 2002, Alpha Monticello, Inc. (a wholly owned subsidiary of Alpha Hospitality Corporation ("Alpha"), a member of the Company, entered into an agreement with Watertone Holdings LP ("Watertone"), also a member of the Company, providing for the acquisition of 47.5% of Watertone's economic interests in the casino and racetrack business components of the Company. The transaction contemplated by this agreement closed on March 12, 2002. 4. Related Party Transactions As explained in Notes 1H and 2 the Company is in the business of developing real estate for additional gaming activities. In connection with this development the Company has paid various consulting fees to related parties consisting of members or directors of Catskill Development. LLC. For the nine months ended September 30, 2002 and the year ended December 31, 2001 the Company expensed in general and administrative expenses $111,000 and $113,668 respectively of such costs. From inception through September 30, 2002 the Company has capitalized as development costs $600,574 of such related party consulting fees. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 5. Operating Leases At September 30, 2002 the Company had commitments under operating leases which end in 2006 for various pieces of equipment requiring annual lease payments for the twelve months ending September 30th as follows: Lease expense was $148,539 for the nine months ended September 30, 2002 and $153,208 for the year ended December 31, 2001. 6. Commitments and Contingencies The Monticello Harness Horsemen's Association, Inc. has brought an action against Monticello Raceway Management, Inc. and one of the members of the Company seeking the sum of $1,300,0000 to be credited to the horsemen's purse account. The suit claims that revenues received by the Raceway from various simulcasting sources were not properly credited to their horsemen's purse account. Management has responded vigorously to contest the case after attempts at out-of-court settlement proved fruitless. A motion is pending to dismiss the action for lack of subject matter jurisdiction. Such dismissal would not prevent the Plaintiff from bringing suit in the proper court or to seek alternative dispute resolution. There are disputed issues of fact between the parties, which makes an estimate of the outcome or the amount or range of loss difficult to gauge. In accordance with Statement of Financial Accounting Standards No. 5, the amount of the loss, if any that may be ultimately realized has not been reflected in the accompanying financial statements. In July 1996, the Company and its members entered into a series of agreements with the Mohawk Tribe related to the development of a casino on land adjacent to the Monticello Raceway in Monticello, New York. Pursuant to such agreements, the Mohawk Tribe was to purchase certain land from the Company and various affiliates of the Company were to help with the development of a casino on the land and manage any resulting casino. More particularly, the Tribe entered into a Gaming Facility Management Agreement with Mohawk Management LLC ("MM"). Pursuant to such Agreement, MM was to be provided 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. Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 Completion of the project contemplated by the agreements with the Mohawk Tribe was subject to certain conditions, including the obtaining of relevant federal and State governmental approvals. The Company, in conjunction with its affiliates, assumed responsibility for and undertook, seeking and obtaining all local, state and federal approvals required or necessary to construct and operate the Casino Project. By letter dated April 6, 2000, addressed to Governor George Pataki, Kevin Gover, Assistant Secretary of the Department of the Interior, advised and notified the Governor of New York that the Company's proposed casino project with the Mohawk Tribe had been approved and specifically requested that the Governor concur. However, on April 22, 2000, the Company became aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment Corporation ("PPE"), which agreement (with two irrelevant exceptions) purportedly gave PPE the exclusive rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. On November 13, 2000, the Company (also known as the "Plaintiffs") joined in a suit filed in United States District Court, Southern District of New York against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's wrongful interference with several agreements between Catskill and the Tribe pertaining to the proposed Casino Project. The Plaintiffs alleged tortuous interference with contract and prospective business relationships, unfair competition and state anti-trust violations and sought over $6 billion in damages. On May 11, 2001, the District Court granted PPE's motion to dismiss three of the four claims made by Plaintiffs. However, on May 30, 2001, the Plaintiffs moved for reconsideration of that ruling, and, on reconsideration, the Court reinstated one of the dismissed claims, with Plaintiffs' claims of tortuous interference with contract and prospective business relationship remaining after such decision. On August 22, 2002, U.S. District Court Judge Colleen McMahon granted PPE's motion for summary judgment. The Company has filed a notice of appeal with respect to the dismissal of its case against PPE and has retained the firm of Mayer, Brown, Rowe and Maw to represent it in the appeal. It is expected that briefs in the appeal will be filed within the next four months and that a decision on the appeal should be rendered within eighteen months. Although management believes that the Company and its related parties have meritorious arguments in the appeal, no assurance can be given that the appeal will be successful or that, even if the appeal is successful as a whole or in part, the litigation will ultimately be resolved in a manner advantageous to the Company. The Company is also a party to a various non-environmental legal proceedings and administrative actions, all arising from the ordinary course of business. Although it is impossible to predict the outcome of any legal proceeding, the Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 Company believes any liability that may finally be determined with respect to such legal proceedings should not have a material effect on The Company's consolidated financial position, results of operations or cash flows. 7. Video Lottery Terminals In October 2001, the New York State Legislature passed a bill that expanded the nature and scope of gaming in the state ("VLT Legislation"). The bill was signed by the Governor on October 31, 2001. The provision of the VLT Legislation relevant to the Company include: a) authority given to the Governor to negotiate casino licenses for up to three Native American casinos in the Catskills; and b) the authority for several of New York's racetracks, including the Raceway, to operate video lottery terminal ("VLT") in their facilities. The VLT operation will be conducted by the New York State Lottery (the "Lottery") with the racetracks functioning largely as agents for the Lottery. The Company is currently working with the New York State Lottery to explore the feasibility of installing VLT's at the Raceway. The Company received a letter from the Lottery, dated March 21, 2002, advising the Raceway that the Lottery has completed its initial review of the Raceway's business plan for the operation of VLT's at the Raceway during the initial three year trial period approved by the State Legislature. Based on such review, the Lottery has made an initial allocation of 1,800 VLT's to the Raceway and has approved the maximum permitted rate for compensation of 25% of revenues generated after payout of prizes for the Raceway. The law currently provides that the Raceway must apply 35% in the first year, escalating to 45% in years two and three, of its compensation to enhance purses at the Raceway and each year must dedicate 5% of its compensation to a State Breeding Development Fund. The business plan was submitted at the request of the Lottery, and in accordance with Lottery procedures, does not represent a final decision with respect to the implementation of VLT's by the Company. The business plan includes certain assumptions recommended by the Lottery and other estimates considered preliminary by the Company. Using these estimates and assumptions, the plan does not show levels of operating income currently considered adequate by the Company to go forward with the project. The Company continues to evaluate the appropriateness of making the required expenditures necessary for VLT operations relative to the length of the test period, the ultimate level of return on investment, and the implementation date for the program. The Lottery has not yet established a firm start date or adopted regulations with regard to the program. On May 16, 2002, the New York State Legislature passed a bill that further expanded the October 2001 VLT Legislation. This bill extends the test period under the current law from three years to a Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 period ending December 31, 2007. Further, the bill authorizes each track to enter into an agreement with the organization representing its horsemen to reduce the percentage of its vendor fees dedicated to enhancing purses at such track during the initial three years, to an amount not less than 25 percent. That bill was signed by the Governor on May 29, 2002. In addition, the Company's ability to proceed with the VLT program may be impacted by its plans with respect to casino development at the site. Currently, the legislature is considering an additional bill, which if passed, could extend the operating hours for VLT's and provide a larger percentage of revenues to the racetracks. Accordingly, no assurance can be given that the Company will decide to proceed with the operation of VLT's at the Raceway. 8. Subsequent Events In October 23, 2002, the Company retained CIBC World Markets Corporation to help it review its strategic alternatives and assist in maximizing the value of its assets. The Company is in negotiations with a federally recognized Native American tribe in New York and various casino management and development entities with respect to the development of a Native American Casino. The development of a casino at the Raceway will require consummation of arrangements with these parties and various reviews and approvals. No assurances can be given that such arrangements will be entered into or that any approvals will be obtained. On December 10, 2002, Alpha reached an agreement with Bryanston Group, Inc. ("Bryanston") (a former member of the Company) and certain other affiliates regarding certain obligations due from and claims against the Company. Included in the agreement with Bryanston is the acquisition of Bryanston's interest in Catskill Development, including its voting membership interest and preferred capital account in the Company. Bryanston has agreed to transfer such interests to Alpha. On February 4, 2003 Catskill Development, LLC entered into a Letter of Intent with Alpha Hospitality Corporation ("Alpha"), its partner in developing gaming activities at the Monticello Raceway (the "Raceway") and other related entities. The agreement provides for Alpha to acquire a 48 year ground lease on the Raceway and contiguous properties, together with all of Catskill's development and management rights with respect to the site and related gaming activities, in exchange for an 80.25% position in Alpha's common stock. The Letter of Intent provides for Catskill to lease its 230- acre Raceway property to Alpha for a period of 48 years for an annual base rent of $1,800,000. Lease terms are to contain certain options for Alpha to acquire title to portions of the property. Alpha will have the right to purchase a 29-acre parcel for the purpose of placing it in trust for a Native American Tribe or Nation at the purchase price of Catskill Development, LLC Notes to Consolidated Financial Statements September 30, 2002 and December 31, 2001 $1. The exercise of such option will require obtaining necessary federal and state approvals. In addition, the remaining property may be purchased within two years of the opening of a casino at the present value of the ground lease at the time of such exercise. The agreement is subject to the execution of definitive agreements, approvals by Alpha's Board of Directors and an opinion that the transaction will be tax-free to all parties and other technical requirements, including a fairness opinion. No assurance can be given that the transactions provided for in the Letter of Intent will ultimately occur or will occur at the times and on the terms and conditions contained in the Letter of Intent. Bachrach, Waschitz & Waschitz, LLP CERTIFIED PUBLIC ACCOUNTANTS 598 WEST BROADWAY P.O. BOX 871 MONTICELLO, NEW YORK 12701 NORMAN BACHRACH, CPA (845) 794-5210 MICHAEL WASCHITZ, CPA FAX(845) 794-5628 GARY WASCHITZ, CPA E-Mailacct@bwwcpa.com REPORT OF INDEPENDENT AUDITORS To the Members of Catskill Development, LLC We have audited the accompanying consolidated balance sheets of Catskill Development, LLC as of September 30, 2002 and December 31, 2001, and the related consolidated statements of income, changes in members equity and cash flows for the nine months ended September 30, 2002 and the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Catskill Development, LLC at September 30, 2002 and December 31, 2001, and the consolidated results of its operations and its cash flows for the nine months ended September 30, 2002 and the year ended December 31, 2001, in conformity with United States generally accepted accounting principles. Bachrach, Waschitz & Waschitz, LLP February 5, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: February 10, 2003 ALPHA HOSPITALITY CORPORATION (Registrant) By:/s/Scott A. Kaniewski Scott A. Kaniewski Chief Financial Officer EXHIBIT 99.1 RECAPITALIZATION AGREEMENT THIS RECAPITALIZATION AGREEMENT is made and entered into this 10th day of December, 2002, by and between ALPHA HOSPITALITY CORPORATION, a Delaware corporation (the "Company"), ALPHA MONTICELLO, INC., a Delaware corporation and a wholly owned subsidiary of the Company ("Alpha"), BRYANSTON GROUP, INC., a Georgia corporation ("BG"), STANLEY TOLLMAN, BEATRICE TOLLMAN and MONTY HUNDLEY (together with BG, Stanley Tollman and Beatrice Tollman, the "Stockholders"). RECITALS WHEREAS, BG is the owner of 2,326,857 shares of common stock, $.01 par value per share (the "Common Stock") and Beatrice Tollman is the owner of 66,000 shares of Common Stock (the "Stockholder Shares"); WHEREAS, BG is the holder of a note issued to it by the Company with an unpaid balance of $1,570,126 (the "BG Note") and the Company is indebted to each of Stanley Tollman and Monty Hundley for $1,528,167 and $266,667, respectively, for unpaid compensation (together with the BG Note, the "Stockholder Debt"); WHEREAS, BG is the holder of a membership interest in Catskill Development L.L.C., a New York limited liability company ("Catskill Development"); WHEREAS, the Company desires to reconstitute its capital structure through (i) the issuance of a newly created series of redeemable preferred stock in full satisfaction of the Stockholder Debt, (ii) being granted the option to repurchase the Stockholder Shares and (iii) acquiring, in exchange for additional such preferred stock, BG's ownership interests in Catskill Development, in each case subject to the terms and conditions set forth herein ((i), (ii) and (iii) above are referred to collectively herein as the "Recapitalization"); and WHEREAS, the Stockholders desire (i) to receive the newly created series of preferred stock in exchange for the Stockholder Debt and the interests in Catskill Development, and (ii) the opportunity to receive a redemption price for the Stockholder Shares that currently represents a significant premium on the Common Stock's most recent closing bid price. NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: recapitalization Closing. The Closing under this Agreement (the "Closing") shall be held simultaneously with the execution of this Agreement. Such date on which the Closing is to be held is herein referred to as the "Closing Date." The Closing shall be held at the offices of Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue, New York, New York 10022, at 10:00 A.M. on such date, or at such other time and place as the Company, Alpha and the Stockholders may agree upon in writing. Creation of Preferred Stock. A Certificate of Designation, setting forth the designation, preferences and other rights and qualifications of a new series of preferred designated Series E Preferred Stock (the "Preferred Stock"), in the form attached hereto as Exhibit A, has been filed with the Secretary of State of the State of Delaware and the Company has authorized the issuance and sale of up to 1,730,697 shares of such Preferred Stock. Purchase of Membership Interests and Amendment of Catskill Operating Agreement. BG hereby irrevocably sells, assigns and transfers all of its rights, title and interests in and to Catskill Development, including its Voting Membership and Preferred Capital Account and any other interests which it may have in and to the business and properties of Catskill Development (the "Catskill Interest"), to the Company in exchange for 1,394,200 shares of the Preferred Stock (representing a purchase price of $13,942,000 (the "Catskill Price"). BG agrees to take such further actions and execute and deliver such documents as may be necessary or reasonable to further effectuate and secure such sale, assignment and transfer to the Company and to comply with any regulatory or other government requirements in connection therewith. Societe General Restructuring. The Company has restructured its indebtedness to Societe Generale by issuing Societe Generale a new promissory note in the principal amount of $1,600,000. Debt Restructuring. Subject to the terms and conditions of this Agreement, at the Closing, the Company shall restructure its indebtedness to certain of the Stockholders by issuing to each of them that number of shares of Preferred Stock set forth opposite such Stockholder's name on Schedule 1.5, which is attached hereto and made a part hereof, in exchange for forgiveness of the Stockholder Debt. At the Closing, the Company shall deliver to each such Stockholder a certificate or certificates, registered in such Stockholder's name as is set forth on Schedule 1.5, representing the number of shares of Preferred Stock being acquired hereunder, against cancellation of their respective obligations. The Stockholders shall acknowledge such cancellation by delivery, as the case may be, by BG of the BG Note and/or by Stanley Tollman and/or Monty Hundley of a letter in the form attached hereto as Exhibit B evidencing forgiveness of the Stockholder Debt. Common Stock Repurchase Right. Subject to the terms and conditions of this Agreement, each of the Stockholders hereby grants a three (3) year option in favor of the Company (the "Common Purchase Option") to reacquire, at any time, or from time to time, and without prior notice, up to that number of shares of Common Stock (appropriately adjusted for any subsequent stock split, dividend, combination, or other recapitalization) (the "Common Option Shares") and at the purchase price (appropriately adjusted for any subsequent stock split, dividend, combination, or other recapitalization) (the "Common Repurchase Price") set forth opposite such Stockholder's name on Schedule 1.6, attached hereto and made a part hereof; provided, however, that the Common Purchase Option shall not become effective until the Company receives stockholder approval of this Agreement. The Common Purchase Option shall be exercised by delivery to the Stockholder of a written notice signed by an officer or director of the Company. The Company shall pay for the Common Option Shares it has elected to repurchase by cash or, in its sole discretion, delivery to the Stockholder of a promissory note, in the form attached hereto as Exhibit C (a "Note"), in the principal amount of the aggregate Common Repurchase Price for the number of shares of Common Stock being repurchased. Payment of the Common Repurchase Price shall be completed within five business days after notice of the exercise of the Common Purchase Option has been delivered to the Stockholder. Upon receipt of the Common Repurchase Price, whether in the form of cash or a Note, then, notwithstanding that any certificates for the shares of Common Option Shares so called for repurchase shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, and all rights with respect to such Common Option Shares shall immediately cease and terminate. All certificates representing any Common Option Shares subject to the provisions of this Agreement shall be delivered to the Company's transfer agent upon closing so that a legend referencing the restrictions imposed by this Agreement can be placed on such certificates. Irrevocable Proxy. For three (3) years commencing on the date hereof, each of the Stockholders holding Common Option Shares irrevocably constitutes and appoints Robert Berman, the Company's Chief Executive Officer, or, in the event that Mr. Berman shall become incapacitated or deceased, Scott Kaniewski (the "Designee"), whether or not the Common Option Shares have been transferred into the name of the Designee or his nominee, as such Stockholder's proxy with full power, in the same manner, to the same extent and with the same effect as if such Stockholder were to do the same, in the sole discretion of the Designee, to vote such Common Option Shares, giving such Designee full power of substitution and revocation (the "Proxy"). The Proxy is coupled with an interest sufficient in law to support an irrevocable power and shall be irrevocable and shall survive the death, incapacity, dissolution or liquidation, as the case may be, of any Stockholder. Each Stockholder hereby revokes any proxy or proxies heretofore given to any person or persons and agrees not to give any other proxies in derogation hereof until such time as this Agreement is no longer in full force and effect. Preferred Stock Repurchase Right. Subject to the terms and conditions of this Agreement, each of the Stockholders hereby grants an option in favor of the Company (the "Preferred Purchase Option") to reacquire, at any time, or from time to time, and without prior notice, up to that number of shares of Preferred Stock (appropriately adjusted for any subsequent stock split, dividend, combination, or other recapitalization) (the "Preferred Option Shares") being issued to him/her/it pursuant to Section 1.3 and/or 1.5 above, for the purchase price of $10.00 per share (the "Preferred Repurchase Price") plus accrued dividends. The Preferred Purchase Option shall be exercised by delivery to the Stockholder of a written notice signed by an officer or director of the Company. The Company shall pay for the Preferred Option Shares it has elected to repurchase by cash or, in its sole discretion, delivery to the Stockholder of a Note, in the principal amount of the aggregate Preferred Repurchase Price for the number of shares of Preferred Stock being repurchased. Payment of the Preferred Repurchase Price shall be completed within five business days after notice of the exercise of the Preferred Purchase Option has been delivered to the Stockholder. Upon receipt of the Preferred Repurchase Price, then, notwithstanding that any certificates for the shares of Preferred Stock so called for repurchase shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, and all rights with respect to such Preferred Stock shall immediately cease and terminate. The Stockholders acknowledge that each Note delivered pursuant to this Section 1.8(a) shall be subordinate to the Societe Generale promissory note described in Section 1.4 and that no payments shall be made on any such Note until the Societe Generale promissory note shall have been fully paid and discharged. All certificates representing any Preferred Option Shares subject to the provisions of this Agreement shall bear a legend referencing the restrictions imposed by this Agreement. Distributions. Notwithstanding the foregoing, the Company shall apply any funds of the Company to be used for repurchases under Sections 1.5 and 1.8 toward the repurchase of the Common Option Shares, pro rata, and then to the repurchase of the Preferred Option Shares, pro rata. In addition, the Company agrees that so long as any of the Preferred Option Shares remain outstanding, no dividends shall be paid and no distributions shall be made from the Net Available Cash Flow of the Company for any purpose other than purchase of the Common Option Shares or the retirement of the Preferred Shares. For purposes of this Agreement, "Net Available Cash Flow" shall mean the net amounts received by the Company in connection with any sale of the Company's business assets after the date hereof, or the issuance of any stock or debt by the Company, or the net amount resulting from any business operation(s) conducted by the Company, but shall not include (i) any amount used or set aside to retire the outstanding promissory note issued by the Company to Societe Generale or (ii) such additional amount, not to exceed $1,000,000 in any calendar year, that the Company shall apply or set aside to apply to the payment of reasonable operating expenses of the Company. MUTUAL RELEASES Release of the Company by the Stockholders. For and in consideration of the promises, agreements and releases provided herein, each of the Stockholders hereby releases and discharges the Company, and any of its managers, directors, officers, partners, agents, attorneys, assureds, employees, past and present, heirs, executors, administrators, successors and assigns from any and all actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever, in law, admiralty or equity, which against the Company and its principals, managers, directors, officers, partners, agents, attorneys, assureds, employees, past and present, heirs, executors, administrators, successors and assigns such Stockholder ever had, now has, or hereafter can, shall or may have upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement. However, nothing contained herein (or in Section 2.2) shall in any way affect the right of the Stockholders to enforce their rights and remedies under this Agreement. Release of Company Affiliates by the Stockholders. The Company agrees to use its best reasonable efforts to obtain releases for the Stockholders from its affiliates in the form of the release contained in Section 2.3. As to each affiliate from which the Company has obtained such a release for the benefit of the Stockholders, Stockholders hereby agree to release and discharge such affiliate, and any of their managers, directors, officers, partners, agents, attorneys, assureds, employees, past and present, heirs, executors, administrators, successors and assigns from any and all actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever, in law, admiralty or equity, which against the Company and its principals, managers, directors, officers, partners, agents, attorneys, assureds, employees, past and present, heirs, executors, administrators, successors and assigns such Stockholder ever had, now has, or hereafter can, shall or may have upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement. For purposes of this Article II, the term "affiliates" means, without limitation, Catskill Development, Watertone Holdings, LP, a Delaware limited partnership, BKB, LLC, a New York limited liability company, Americas Tower Partners, a New York general partnership, Monticello Realty L.L.C., a Delaware limited liability company, Alpha Monticello, Inc., a Delaware corporation, Clifford A. Ehrlich, a resident of Sullivan County, New York, Shamrock Strategies, Inc., a Delaware corporation, and Fox Hollow Lane, LLC, a New York limited liability company. Release of the Stockholders by the Company. For and in consideration of the promises, agreements and releases provided herein, the Company and its managers, directors, and officers hereby release and discharge the Stockholders and their agents, attorneys, assureds, past and present, heirs, executors, administrators, successors and assigns from any and all actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever, in law, admiralty or equity, which against the Stockholders, their agents, attorneys, assureds, past and present, heirs, executors, administrators, successors and assigns the Company ever had, now has or hereafter can, shall or may have upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement. However, nothing contained herein shall in any way affect the right of the Company to enforce its rights and remedies under this Agreement. STOCKHOLDERS Representations and Warranties Each of the Stockholders hereby represents and warrants to the Company as follows: Organization; No Conflicts. To the extent indicated on the signature pages hereto, such Stockholder is either (i) a corporation duly organized and validly existing under the laws of its state of incorporation or (ii) an individual. Such Stockholder represents that it was not organized for the purpose of making an investment in the Company. None of the execution and delivery of this Agreement by such Stockholder, the consummation by such Stockholder of the transactions contemplated hereby or compliance by such Stockholder with any of the provisions hereof shall violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to such Stockholder or any of his/her/its properties or assets, in each such case except to the extent that any conflict, breach, default or violation would not interfere with the ability of such Stockholder to perform the obligations hereunder. Enforceability. The execution, delivery and performance of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby are within the powers of such Stockholder and have been duly authorized by all necessary individual or corporate action, as appropriate, on the part of such Stockholder. This Agreement has been duly executed and delivered by such Stockholder and constitutes a legal, valid and binding obligation of the Stockholder enforceable against such Stockholder in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization and moratorium laws, (ii) other laws of general application affecting the enforcement of creditors' rights generally and general principles of equity, (iii) the discretion of the court before which any proceeding therefor may be brought and (iv) as rights to indemnity may be limited by federal or state securities laws or by public policy. Approvals and Consents. No action, approval, consent or authorization, including, but not limited to, any action, approval, consent or authorization by any governmental or quasi- governmental agency, commission, board, bureau, or instrumentality is necessary or required as to such Stockholder in order to constitute this Agreement as a valid, binding and enforceable obligation of such Stockholder in accordance with its terms. Common Stock. Each Stockholder is the record and beneficial owner of all shares of Common Stock set forth opposite such Stockholder's name on Schedule 1.6, free and clear of any restrictions on transfer, taxes, liens, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. Such Stockholder is not a party to any option, warrant, purchase right, or other contract or commitment that could require such Stockholder to sell, transfer, or otherwise dispose of its Common Stock (other than this Agreement). Moreover, such Stockholder is not a party to any voting trust, proxy, or other agreement or understanding with respect to its Common Stock. Investment Representations. Such Stockholder is acquiring the Preferred Stock set forth opposite his/her/its name on Schedule 1.5 solely for his/her/its own account as an investment and not with a view to any distribution or resale thereof within the meanings of such terms under the Securities Act of 1933, as amended (the "Securities Act"). Such Stockholder has such knowledge, experience and skill in business and financial matters that such Stockholder is capable of evaluating the merits and risks of an investment in the Preferred Stock. Such Stockholder (i) has received all information that he/she/it deems reasonably necessary to make an informed investment decision with respect to an investment in the Preferred Stock; (ii) has had the opportunity to make such investigation as he/she/it desires regarding the Company and an investment therein and (iii) has had the opportunity to ask questions of representatives of the Company concerning the Company. Such Stockholders understands that he/she/it must bear the economic risk of an investment in the Company for an uncertain period of time because (i) the Preferred Stock has not been registered under the Securities Act and applicable state securities laws and (ii) the Preferred Stock may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Preferred Stock or an available exemption from registration under the Securities Act, the Preferred Stock must be held indefinitely. In particular, such Stockholder is aware that the Preferred Stock may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. In this connection, such Stockholder represents that he/she/it understands that under Rule 144, the Preferred Stock must be held for at least one year after purchase thereof from the Company prior to resale (two years in the absence of public current information about the Company) and that, under certain circumstances, the conditions for use of Rule 144 include the availability of public current information about the Company, that sales be effected through a "broker's transaction" or in transactions with a "market maker," and that the number of shares being sold not exceed specified limitations. Such public current information about the Company for purposes of Rule 144 is presently not available, and may not be publicly available in the future. Such Stockholder understands that, in addition the legends described above in Article I, the certificates evidencing the Preferred Stock may bear one or all of the following legends: "The shares represented by this certificate have not been registered under the United States Securities Act of 1933. They may not be sold, offered for sale, pledged, hypothecated or otherwise transferred in the absence of a registration statement in effect with respect to such shares under such Act or an opinion of counsel or other evidence satisfactory to Sporting Magic, Inc. and its counsel that such registration is not required." (i) Any legend required by any other jurisdiction. Broker's Fees. Neither such Stockholder nor any of its stockholders, directors, officers, employees or agents, if any, has retained, employed or used any broker or finder in connection with the transactions provided for herein or in connection with the negotiation thereof. ADDITIONAL REPRESENTATIONS AND WARRANTIES In addition to those representations made by BG in Article III, BG further represents and warrant to the Company as follows: Catskill Interest. BG is the record and beneficial owner of the Catskill Interest, free and clear of any restrictions on transfer, taxes, liens, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. BG is not a party to any option, warrant, purchase right, or other contract or commitment that could require it to sell, transfer, or otherwise dispose of its Catskill Interest (other than this Agreement). Moreover, BG is not a party to any voting trust, proxy, or other agreement or understanding with respect to its Catskill Interest. COMPANy Representations and Warranties Organization; No Conflicts. The Company is duly organized, validly existing and in good standing in its jurisdiction of organization and has all of the requisite power and authority to enter into this Agreement and to assume and perform its obligations hereunder. None of the execution and delivery of this Agreement by the Company, the consummation by the Company of the transactions contemplated hereby or compliance by the Company with any of the provisions hereof shall violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Company or any of its properties or assets, in each such case except to the extent that any conflict, breach, default or violation would not interfere with the ability of the Company to perform the obligations hereunder. Power, Authorization and Validity. The Company has the right, power, legal capacity and authority: (a) to carry on its business as now conducted and as proposed to be conducted and (b) subject to stockholder approval of this Agreement, to enter into and perform all of its obligations under this Agreement and all other agreements to which the Company is or will be a party that are required to be executed pursuant to this Agreement (collectively with this Agreement, the "Company Merger Agreements"). The Common Option Shares subject to the Proxy represent a sufficient number of shares to approve and adopt this Agreement. Catskill Interest. The Company is authorized to receive the Catskill Interest and exercise all of the rights of BG thereunder in accordance with the terms and conditions of the First Amended and Restated Operating Agreement between the members of Catskill Development, dated January 1, 1999. General Provisions Entire Agreement; Amendment and Waiver. This Agreement constitutes the entire agreement between the parties with respect to the subject matter contained herein and supersedes all prior oral or written agreements, if any, between the parties with respect to such subject matter. Any amendments hereto or modifications hereof must be made in writing and executed by each of the parties hereto. Binding Effect; Assignment. This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon the parties and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be transferred or assigned (by operation of law or otherwise) by any of the parties hereto. Any transfer or assignment of any of the rights, interests or obligations hereunder in violation of the terms hereof shall be void and of no force or effect. Governing Law; Venue, Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to conflict of laws principles. Each party hereto hereby irrevocably submits to the exclusive personal and subject matter jurisdiction of the United State District Court for the Southern District of New York and the Supreme Court of the State of New York located in the borough of Manhattan over any suit action or proceeding arising out of or relating to this Agreement. Each party hereby irrevocably waives to the fullest extent permitted by law, (a) any objection that they may now or hereafter have to the venue of such suit, action or proceeding brought in any such court; and (b) any claim that any such suit, action or proceeding has been brought in an inconvenient forum. Final judgement in any suit, action or proceeding brought in any such court shall be conclusive and binding upon each party duly served with process therein and may be enforced in the courts of the jurisdiction of which either party or any of their property is subject, by a suit upon such judgement. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by virtue of any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. [Signature Page Follows] [COUNTERPART SIGNATURE PAGE TO RECAPITALIZATION AGREEMENT BETWEEN ALPHA HOSPITALITY CORPORATION, ALPHA MONTICELLO, INC., BRYANSTON GROUP, INC., STANLEY TOLLMAN, BEATRICE TOLLMAN AND MONTY HUNDLEY DATED DECEMBER 10, 2002] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be made and executed on the date first above written. THE COMPANY: ALPHA HOSPITALITY CORPORATION By: ______________________________ Name: Title: ALPHA ALPHA MONTICELLO, INC. By: ______________________________ Name: Title: THE STOCKHOLDERS: BRYANSTON GROUP, INC. By: ______________________________ Name: Title: ______________________________ ___ Stanley Tollman ______________________________ ___ Beatrice Tollman ______________________________ ___ Monty Hundley EXHIBIT A CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF THE SERIES E PREFERRED STOCK ($.01 par value per share) of ALPHA HOSPITALITY CORPORATION a Delaware Corporation __________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware __________ ALPHA HOSPITALITY CORPORATION, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That, pursuant to authority conferred upon the Board of Directors of the Corporation (the "Board") by the Certificate of Incorporation of said Corporation, and pursuant to the provisions of Section 151 of the Delaware General Corporation Law, there hereby is created, out of the 5,000,000 shares of Preferred Stock of the Corporation authorized in Article FOURTH of the Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred stock consisting of 1,730,697 shares, $.01 par value per share, to be designated "Series E Preferred Stock," and to that end the Board adopted a resolution providing for the designations, powers, preferences and rights, and the qualifications, limitations and restrictions, of the Series E Preferred Stock, which resolution is as follows: RESOLVED, that the Certificate of the Designations, Powers, Preferences and Rights of the Series E Preferred Stock ("Certificate of Designation") be and is hereby authorized and approved, which Certificate of Designation shall be filed with the Delaware Secretary of State in the form as follows: 1. Designations and Amount. One Million Seven Hundred Thirty Thousand Six Hundred Ninety Seven (1,730,697) shares of the Preferred Stock of the Corporation, $.01 par value per share, shall constitute a class of Preferred Stock designated as "Series E Preferred Stock" (the "Series E Preferred Stock"). 2. Dividends. (a) The holders of shares of Series E Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation (the "Board") out of assets of the Corporation legally available for payment, a cash dividend at the rate of 8% of the Liquidation Value (or $.80) per annum per share of Series E Preferred Stock (the "Preferred Dividend"), payable only as provided in Section 2(b) hereof. The Preferred Dividend shall accrue and shall be cumulative from the date of initial issuance of such share of Series E Preferred Stock. The amount of the Preferred Dividend that shall accrue for the initial dividend period and for any period shorter than a full dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (b) The Preferred Dividend shall be payable (whether or not declared by the Board) upon the effective date of the earliest of a (i) redemption of the Series E Preferred Stock in accordance with Section 6 hereof or (ii) Liquidation (as hereinafter defined). 3. Rights on Liquidation, Dissolution or Winding Up, Etc. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (each, a "Liquidation"), no distribution shall all be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the holders of the Series E Preferred Stock unless, prior thereto, the holders of such shares of Series E Preferred Stock shall have received $10.00 per share (the "Liquidation Value"), plus an amount equal to all accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment. For purposes of this Certificate of Designation, each of (1) the sale, conveyance, exchange or transfer of all or substantially all of the property and assets of the Corporation or (2) the consolidation or merger of the Corporation with or into any other corporation, in which the stockholders of the Corporation immediately prior to such event do not own a majority of the outstanding shares of the surviving corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 4. Rank. The Series E Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, senior to all series of any other class of the Corporation's Preferred Stock. 5. Voting Rights. The holders of Series E Preferred Stock shall not be entitled to vote on any matter except as required by law. 6. Redemption. The Corporation, at the option of the Board, may redeem the whole or any part of the Series E Preferred Stock at any time outstanding, at any time or from time to time, by paying the redemption price of $10.00 per share, plus accrued dividends, in cash or, in its sole discretion, by delivery of a Note in the form attached hereto as Exhibit A, for each share of Series E Preferred Stock so to be redeemed plus dividends accrued thereon at the date fixed for redemption. In the case of the redemption of only a part of the Series E Preferred Stock at the time outstanding, the Corporation shall select by lot or in such other manner as the Board may determine the shares to be redeemed. The Board shall have full power and authority, subject to the limitations and provisions contained herein, to prescribe the manner in which and the terms and conditions upon which the Series E Preferred Stock shall be redeemed from time to time. If the Board has elected to redeem such Series E Preferred Stock by paying cash and on or before the date fixed by the Board for redemption the funds necessary for such redemption shall have been set apart so as to be and continue to be available therefor, then, notwithstanding that any certificates for the shares of Series E Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue from and after the date of redemption so fixed, and all rights with respect to such shares of Series E Preferred Stock so called for redemption shall immediately on such redemption date cease and terminate, except only the right of the holders thereof to receive the redemption price therefor, but without interest. None of the Series E Preferred Stock acquired by the Corporation by redemption or otherwise shall be reissued or disposed of but shall from time to time be retired in the manner provided by law. 7. No Pre-emptive Rights. No holder of shares of Series E Preferred Stock will possess any preemptive rights to subscribe for or acquire any unissued shares of capital stock of the Corporation (whether now or hereafter authorized) or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares of capital stock of the Corporation. IN WITNESS WHEREOF, Alpha Hospitality Corporation has caused this Certificate of Designation to be executed this 9th day of December, 2002. ALPHA HOSPITALITY CORPORATION By: Name: Title: EXHIBIT B [Letterhead of Stockholder] Certificate of Satisfaction December , 2002 Alpha Hospitality Corporation 707 Skokie Boulevard, Suite 600, Northbrook, IL 60062 Ladies and Gentlemen: This will confirm that upon receipt by [Full Name of Stockholder] ("Stockholder") of ___ shares of Series E Preferred Stock of Alpha Hospitality Corporation ("Alpha"), such receipt shall serve as full and complete satisfaction of the $[________________] in indebtedness currently due from Alpha to Stockholder. STOCKHOLDER By:___________________________ EXHIBIT C THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED. ALPHA HOSPITALITY CORPORATION Subordinated Promissory Note _________________, 2003 $______________ Alpha Hospitality Corporation, a Delaware corporation (together with its successors and assigns, the "Issuer"), for value received, hereby promises to pay to the order of __________________________________ (together with its successors, transferees and assigns, the "Noteholder") the principal sum of _____________________________ (the "Note Amount"), in the amounts and on the dates ("Note Amount Repayment Date") set forth below: Date Amount (1 Year Anniversary of (13.33% of the Note Note) Amount) (18 Month Anniversary of (17.78% of the Note Note) Amount) (2 Year Anniversary of (22.22% of the Note Note) Amount) (30 Month Anniversary of (26.67% of the Note Note) Amount) (3 Year Anniversary of (20.00% of the Note Note) Amount) Interest. The Issuer further promises to pay interest on the unpaid Note Amount from the date hereof until the Note is paid in full (whether at maturity or prepayment), payable on each Note Amount Repayment Date, at the simple interest rate of seven percent (7%) per annum. Prepayment. The Issuer may at its option, at any time or from time to time, prepay this Note (and accrued interest), in whole or in part, without premium or penalty. Any such optional prepayment shall be applied to reduce the unpaid Note Amount installments, in direct order of maturity (such that the Note Amount next due shall be repaid first). Issuer Register. The Issuer shall keep a register at its principal place of business (the "Register") in which it shall enter the Noteholder's name and address as set forth above. For the purpose of paying principal and any interest on this Note, the Issuer shall be entitled to rely on the name and address in the Register. Transfer. This Note is neither assignable nor transferable by the Noteholder without the Issuer's prior written consent. No Waiver. No failure by the Noteholder to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Acceleration. In case one or more of the following events ("Events of Default") (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: failure by the Issuer to pay all or any part of the Note Amount within ten (10) business days after the same shall become due and payable; or failure by the Issuer to pay all or any part of the interest on the Note within ten (10) business days after the same shall become due and payable; or the Issuer becomes the subject of any voluntary bankruptcy, insolvency or similar proceeding, or any involuntary bankruptcy, insolvency or similar proceeding not stayed or dismissed within sixty (60) days of filing, then: (i) except in the case of an Event of Default specified in Section 6(c) hereof, the Noteholder, by notice in writing to the Issuer, may declare the aggregate Note Amount to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable and (ii) if an Event of Default specified in Section 6(c) occurs, the Note Amount shall become and be immediately due and payable without any declaration or other act on the part of the Noteholder. No Action. The Issuer shall not by any action, including, without limitation, amending its certificate of incorporation through any reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, winding up, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be reasonably necessary or appropriate to protect the rights of the Noteholder against impairment. Costs; Expenses. Should the Noteholder initiate an action to enforce the provisions of this Note, then the prevailing party in such action, as determined by the court, agency, tribunal or other body with jurisdiction over the action, shall be reimbursed its reasonable fees and out-of-pocket expenses of counsel in connection with such action. Amendment. This Note may only be amended by a written instrument or instruments executed by both the Issuer and the Noteholder. Senior Debt. This Note shall be senior to all existing and future indebtedness of the Issuer other than indebtedness created pursuant to that certain promissory note issued by the Issuer to Societe Generale on December 9, 2002 for the principal sum of $1,600,000. Waivers. The Issuer hereby waives any requirements of demand, presentment for payment, notice of dishonor, notice of protest and protest. Governing Law; Forum. This agreement shall be governed by, and construed and interpreted in accordance with, the laws of the state of New York without reference to the choice of laws provisions thereof. Any action, suit or proceeding initiated by any party hereto against any other party hereto under or in connection with this Note shall be brought in any state or federal court in the State of New York. Each party hereto submits itself to the exclusive jurisdiction of any such court, waives any claims of forum non conveniens and agrees that service of process may be effected on it by the means by which notices are to be given pursuant to this Note. Notices. All notices (including other communications required or permitted) under this Note must be in writing and must be delivered (a) in person, (b) by registered or certified mail, postage prepaid, return receipt requested, (c) by a generally recognized courier or messenger service that provides written acknowledgment of receipt by the addressee or (d) by facsimile or other generally accepted means of electronic transmission with a verification of delivery. Notices are deemed delivered when actually delivered to the address for notices. Notices to the Noteholder must be given to its last known address appearing on the Register and notices to the Issuer must be given at its principal place of business. Any party may furnish, from time to time, other addresses for notices to it. IN WITNESS WHEREOF, Issuer has caused this Note to be executed by its officer thereunto duly authorized as of the date first above written. ALPHA HOSPITALITY CORPORATION By:________________________________ _ Name: Title: SCHEDULE 1.5 Debtholder Debt Being Number of Shares of Forgiven Preferred Stock to be at Closing Issued at Closing Bryanston $1,570,126 157,013 Group, Inc. Stanley Tollman $1,528,167 152,817 Monty Hundley $ 266,667 26,667 SCHEDULE 1.6 Stockholder Common Number of Principal Amount of Repurchase Common Option Notes to be Issued Price Shares Upon Exercise of Option Bryanston $2.12 2,326,857 $4,932,937 Group, Inc. Beatrice $2.12 66,000 $139,920 Tollman Exhibit 99.2 RESTRUCTURING AGREEMENT This RESTRUCTURING AGREEMENT (the "Restructuring Agreement"), dated as of December 9, 2002, is between ALPHA HOSPITALITY CORPORATION, a Delaware corporation (the "Company"), and SOCIETE GENERALE, a bank organized under the laws of France (the "Investor"). W I T N E S S E T H : WHEREAS, (x) on February 8, 2000, the Investor acquired for a purchase price of $4,000,000, 4,000 shares of the Company's Series D Preferred Stock having an aggregate face amount of $4,000,000 and certain warrants to purchase the Company's common stock and (y) on July 31, 2000, the Investor acquired for a purchase price of $1,250,000, $1,250,000 aggregate principal amount of the Company's 4% Convertible Notes Due July 31, 2003 and certain warrants to purchase the Company's common stock; WHEREAS, as of the date hereof approximately $1,295,000 aggregate face amount of the Company's Series D Preferred Stock is outstanding (inclusive of approximately $215,000 of accrued dividends thereon) (the "Series D Preferred") and approximately $1,032,000 aggregate principal amount of the Company's 4% Convertible Notes Due July 31, 2003 is outstanding (inclusive of approximately $88,000 of accrued interest thereon) (the "Convertible Notes") and all of the warrants originally issued to the Investor remain outstanding; WHEREAS, the Investor has alleged that certain defaults have occurred with respect to the Company's obligations in respect of the Series D Preferred and the Convertible Notes; WHEREAS, certain significant changes have occurred with respect to the Company's business and operations and representatives of the Company have advised the Investor that the Company currently has a need to reduce its total indebtedness in order to meet the requirements to remain listed on certain securities exchanges and that a restructuring of the Investor's investment in the Series D Preferred and the 4% Convertible Notes are critical to achieving that objective; WHEREAS, the Company has advised the Investor that it is desirous of restructuring its investment in the Series D Preferred and the Convertible Notes in accordance with the terms set forth in this Restructuring Agreement in exchange for the receipt of the waiver granted by the Investor set forth herein, the exchange of the Investor's current holdings of Series D Preferred and the Convertible Notes for a newly issued note of the Company and certain cash payments by the Company to the Investor and the Investor has agreed to accept such offer subject to the terms set forth in this Restructuring Agreement. NOW THEREFORE, in consideration of the premises, representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows: DEFINITIONS Certain Definitions. For purposes of this Agreement, the following terms shall have the following respective meanings: "Affiliate" of a Person means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first-mentioned Person. The term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock, of such Person. "Commission" means the United States Securities and Exchange Commission. "Governmental Authority" means any federal or state government or political subdivision thereof and any agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Material Adverse Effect" has the meaning set forth in Section 2.01. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind. "SEC Reports" means, collectively, the Company's Annual Report on Form 10-K for the year ended December 31, 2001, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, June 30, 2002 and September 30, 2002 and the Company's Current Reports on Form 8-K filed with the Commission during the calendar year 2002. ISSUANCE OF NOTES; PAYMENT OF CASH; CANCELLATION OF EXISTING SECURITIES Agreement to Issue Notes and Make Cash Payment and Consideration Therefor. On the terms and subject to the conditions set forth in this Agreement, the Company hereby agrees to issue to the Investor its 16% Note due June 30, 2003 in substantially the form set forth as Exhibit A hereto in the principal amount of $1,600,000 (the "New Note") and to pay the Investor the sum, in immediately available funds of $50,000 and in consideration therefor, the Investor hereby agrees to deliver to the Company for cancellation the Series D Preferred, and the Convertible Notes and to irrevocably waive any claims with respect to its holdings of the Series D Preferred and the Convertible Notes as set forth herein. Closing. The closing of the transaction set forth in Section 2.01 (the "Closing") shall be deemed to take place concurrently with the execution and delivery of this Restructuring Agreement by the parties hereto. At the Closing, the following closing transactions shall take place, each of which shall be deemed to occur simultaneously with the Closing and shall constitute a condition to the consummation of the Closing: (i) the Company shall execute, issue and deliver a certificate evidencing the 16% Notes Due June 30, 2003 to be issued to the Investor; (ii) the Company shall deliver to the Investor by wire transfer of immediately available funds the amount of $50,000, (iii) the Investor shall deliver to the Company certificates represents the Series D Preferred Stock and the Convertible Notes for cancellation; (iv) the Company shall pay the fees and expenses of Jones, Day, Reavis & Pogue of $10,000 by wire transfer of immediately available funds and (v) the Company shall deliver to the Investor a certificate executed by the Chief Executive Officer and Chief Financial Officer of the Company, signing in such capacity, dated the date of the Closing, among other confirmations contained therein, (a) certifying that attached thereto are true and complete copies of the resolutions duly adopted by the Board of Directors of the Company authorizing the execution and the consummation of the transactions contemplated this Restructuring Agreement, which authorization shall be in full force and effect on and as of the date of such certificate, (b) confirming the accuracy of the representations and warranties of the Company contained in this Restructuring Agreement and (c) certifying and attesting to the office, incumbency, due authority and specimen signatures of each Person who executed any document for or on behalf of the Company. This Agreement shall not be effective, however, until the Company shall have delivered to the Investor a copy of the Recapitalization Agreement, executed by Bryanston Group, Inc. ("Bryanston"), the Company and certain other parties (the "Recapitalization Agreement"), which agreement shall provide for the discharge of any existing indebtedness of Bryanston and such other parties owed by the Company, in form and substance satisfactory to the Investor and shall be in full force and effect as of the date of delivery thereof, it being understood that any obligations under such Recapitalization Agreement will be subordinate to the New Note and it being further understood that the representations and warranties of the Company in this Restructuring Agreement and the New Note shall give effect to the Recapitalization Agreement. REPRESENTATIONS AND WARRANTIES OF THE COMPANY As a material inducement to the Investor to execute this Restructuring Agreement and consummate the transactions contemplated hereby, the Company hereby represents and warrants to the Investor that on and as of the date hereof: Organization and Standing. The Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority, and all authorizations, licenses, permits and certifications necessary for it to own its material properties and assets and to carry on its material business as it is now being conducted (and as, to the extent described therein, described in the SEC Reports). The Company and each of its subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or the nature of its businesses makes such qualification necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on the business, assets, operations, properties, condition (financial or otherwise) or prospects of the Company and its subsidiaries, taken as a whole, or any material adverse effect on the Company's ability to consummate the transactions contemplated by, and to execute, deliver and perform its obligations under, each of the Transaction Documents (a "Material Adverse Effect"). Securities of the Company. The authorized and outstanding Capital Stock of the Company is as set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. The New Note has been duly and validly authorized. When issued against delivery of the consideration therefor as provided in this Restructuring Agreement, the New Note will be validly issued and will constitute a valid and enforceable obligation of the Company, enforceable against the Company in accordance with its terms (subject to the effects of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general principles of equity). The issuance of the New Note is not subject to any preemptive rights, rights of first refusal or other similar limitation. There are no agreements or other obligations (contingent or otherwise) that may require the Company to repurchase or otherwise acquire any shares of its Capital Stock. Authorization; Enforceability. The Company has the corporate power and authority to execute, deliver and perform the terms and provisions of the Restructuring Agreement and the New Note, and has taken all necessary corporate action to authorize the execution, delivery and performance by it of the Restructuring Agreement and the New Note and consummate the transactions contemplated by each of the Restructuring Agreement and the New Note. No other corporate proceedings on the part of the Company are necessary, and no consent of the shareholders of the Company is required, for the valid execution and delivery by the Company of the Restructuring Agreement and the New Note and the performance and consummation by the Company of the transactions contemplated by each of the Restructuring Agreement and the New Note. The Company has duly executed the Restructuring Agreement and the New Note. Assuming the due execution of the Restructuring Agreement by the Investor, the Restructuring Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with each of its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). No Violation; Consents. (a) The execution, delivery and performance by the Company of the Restructuring Agreement and the New Note and the consummation of the transactions contemplated thereby do not and will not (i) contravene the applicable provisions of any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or Governmental Authority to or by which the Company or any of its subsidiaries or any of its respective property or assets is bound, (ii) violate, result in a breach of or constitute (with due notice or lapse of time or both) a default or give rise to an event of acceleration under any contract, lease, loan or credit agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Company is a party or by which it or any of its subsidiaries is bound or to which any of its respective properties or assets is subject, nor result in the creation or imposition of any lien, security interest, charge or encumbrance of any kind upon any of the properties, assets or Capital Stock of the Company or any of its subsidiaries, or (iii) violate any provision of the organizational and other governing documents of the Company or any of its subsidiaries. (b) No consent, approval, authorization or order of, or filing or registration with, any court or Governmental Authority or other Person is required to be obtained or made by the Company for the execution, delivery and performance of this Restructuring Agreement and the New Note or the consummation by the Company of any of the transactions contemplated thereby to be performed by it except for those consents or authorizations previously obtained and those filings previously made. Solvency; No Default. (a) The Company is, and upon giving effect to the transactions contemplated hereby to be performed by it as of the Closing will be, Solvent (as defined below). "Solvent" means that, as of the date of determination, (i) the then fair saleable value of the assets of the Company (on a consolidated basis) exceeds the then total amount (on a consolidated basis) of its debts and other liabilities, (including any guarantees and other contingent, subordinated, unmatured or unliquidated liabilities whether or not reduced to judgment, disputed or undisputed, secured or unsecured), (ii) the Company expects to have sufficient funds and cash flow to pay its liability on its existing debts as they become absolute and matured, (iii) final judgments against the Company in pending or threatened actions for money damages will not be rendered at a time when, or in an amount such that, the Company will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account (a) the maximum reasonable amount of such judgments in any such actions (other than amounts that would be remote), (b) the earliest reasonable time at which such judgments would be rendered and (c) any reasonably expected insurance recovery with respect thereto), and (iv) the Company does not have unreasonably small capital with which to engage in its present business. (b) The Company is not, and immediately after the consummation of the transactions contemplated hereby to be performed by the Company will not be, in default under or in violation of (whether upon the passage of time, the giving of notice or both) its organizational and other governing documents, or any provision of any security issued by the Company, or of any agreement, instrument or other undertaking to which the Company is a party or by which it or any of its property or assets is bound, or the applicable provisions of any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or Governmental Authority to or by which the Company or any of its property or assets is bound, which default or violation, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. SEC Reports; Financial Condition; No Adverse Changes. (a) The audited consolidated financial statements of the Company and the related notes thereto as at December 31, 2001 reported on by Friedman, Alpren & Green, LLP, independent accountants, present fairly the financial condition, results of operations and cash flows of the Company (on a consolidated basis) at such date and for the periods set forth therein. The unaudited consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows at and for the period ended September 30, 2002 (such audited and unaudited consolidated financial statements, collectively, the "Financial Statements"), present fairly the financial condition, results of operations and cash flows of the Company (on a consolidated basis) at such date and for the periods set forth therein, subject to normal year-end adjustments with respect to the September 30, 2002 financial statements. The Financial Statements, including the related schedules and notes thereto, have been prepared in accordance with generally accepted accounting principles as set forth in the opinions and pronouncements of the Accounting Principles Board of American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board as in effect on the date of filing of such documents with the Commission, applied on a consistent basis (except for changes concurred in by the Company's independent public accountants) unless otherwise expressly stated therein. Since September 30, 2002 to and including the date hereof, there has been no sale, transfer or other disposition by the Company of any material part of the business, property or securities of the Company and no purchase or other acquisition of any business, property or securities by the Company material in relation to the financial condition of the Company except as set forth in Schedule 3.06(a) hereof. (b) Except as are fully reflected or reserved against in the Financial Statements and the notes thereto, there are no liabilities or obligations with respect to the Company or any of its subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) other than immaterial ordinary course accruals, except as set forth in Schedule 3.06(a) hereof. (c) Since September 30, 2002 there has been no development or event, nor any prospective development or event known to the Company or any of its subsidiaries, or any litigation, proceeding or other action seeking an injunction or other restraining order, damages or other relief from a court or administrative agency of competent jurisdiction pending, threatened or, to the knowledge of the Company, contemplated, or any action of any Governmental Authority, that has had or could reasonably be expected to have a Material Adverse Effect except as set forth in Schedule 3.06(a) hereof. (d) After giving effect to the transactions contemplated by this Agreement and the Recapitalization Agreement, the Company will have no indebtedness other than the New Note. The liabilities of the Company other than as contemplated by Section 3.06(b) hereof, has not materially increased from the amounts set forth in the unaudited financial statements referenced in Section 3.06(a) hereof. Subsidiaries. As of the date hereof, the Company has no subsidiaries other than those listed on Exhibit 21 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. No Litigation. No litigation or claim (including those for unpaid taxes), or environmental proceeding against the Company or any of its subsidiaries is pending, threatened or, to the Company's best knowledge, contemplated that, if determined adversely, would (after taking into consideration any reasonably expected insurance recovery with respect thereto), have a Material Adverse Effect on the Company or relates to or would otherwise impact the consummation of the transactions contemplated by this Restructuring Agreement. Environmental Matters. The Company and each of its subsidiaries is in compliance in all material respects with all applicable state and federal environmental laws, and no event or condition has occurred that may interfere in any material respect with the compliance by the Company or any of its subsidiaries with any environmental law or that may give rise to any liability under any environmental law that, individually or in the aggregate, would have a Material Adverse Effect. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. The Company has no reason to believe that it and its subsidiaries will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. Disclosure. The representations and warranties of the Company in the Restructuring Agreement and, as of the respective dates of filing thereof, the statements contained in the SEC Reports do not contain any untrue statement of a material fact and do not omit to state any material fact necessary to make the statements herein or therein not misleading. The SEC Reports contain all material information concerning the Company required to be set forth therein, and no event or circumstance has occurred or exists since September 30, 2002, that would require the Company to disclose such event or circumstance in order to make the statements in the SEC Reports not misleading as of the date of the Closing but that has not been so publicly disclosed except as set forth in Schedule 3.06(a) hereof. The Company hereby acknowledges that the Investor is and will be relying on the SEC Reports and the Company's representations, warranties and covenants contained herein in making an investment decision with respect to the matters contemplated by the Restructuring Agreement and will be relying thereon. COVENANTS OF THE COMPANY Restriction on Incurrence of Indebtedness and Other Limitation. (a) The Company (or any of its subsidiaries) will not issue or incur any indebtedness (or guarantee or otherwise become liable, directly or indirectly, whether contingent or otherwise, for obligations of any Person) prior to the payment in full of the New Note, unless such indebtedness is expressly subordinated to the New Note (pursuant to a subordination agreement executed by the lender in form and substance satisfactory to the Investor) and provides that no cash payments of interest or principal may be made until the New Note is paid in full. The Company (or any of its subsidiaries) may not issue any other security which provides for payment by the Company of cash in any form prior to such time as the New Note is paid in full or otherwise repurchase, retire, acquire, defease, redeem or otherwise in any manner directly or indirectly make any cash payments (whether as interest, dividends, principal or otherwise) in respect of any security (whether or not outstanding as of the date hereof) until the New Note is paid in full. (b) Neither the Company nor any of its subsidiaries will distribute cash or assets other than in the ordinary course of business, provided that the Company or any of its subsidiaries may transfer assets provided that the net cash proceeds received therefrom are applied to repay the New Note. In addition to the foregoing, neither the Company nor any of its subsidiaries may transfer cash or assets to Affiliates other than in connection with transactions in the ordinary course entered into on an arms-length basis. Neither the Company nor any of its subsidiaries will create or permit to exist any liens on any of its or its subsidiaries' properties which are not in existence as of the date of this Restructuring Agreement. Neither the Company nor any of its Significant Subsidiaries (as defined in the New Note) will consolidate or merge with or into any other Person. MISCELLANEOUS Arms Length Negotiation. Each of the Company and the Investor acknowledge and agree that the terms of this Restructuring Agreement and the New Note and were negotiated in good faith and on an arms length basis and that each party has freely entered into this transaction based upon its own independent evaluation of the transaction and has received such financial, legal and other professional advice as it deems appropriate in connection with the foregoing. The language used in this Restructuring Agreement and the New Note will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. Waiver by Investor and the Company. The Investor agrees that, upon consummation of the Closing and assuming the accuracy of the representations and warranties of the Company made in this Restructuring Agreement, it irrevocably waives any and all actions, suits, claims and demands whatsoever it had, has or may ever have against the Company and its officers, directors, employees and agents in connection with its acquisition, ownership and disposition of the Series D Preferred and the Convertible Notes and any and all matters relating to such securities. The Company agrees that, upon consummation of the Closing, it irrevocably waives any and all actions, suits, claims and demands whatsoever it had, has or ever may have against the Investor and its officers, directors, employees and agents in connection with its acquisition, ownership and disposition of the Series D Preferred and the Convertible Notes and any and all matters relating to such securities. Press Releases and Disclosure. No party hereto shall issue any press release or make any other public disclosure related to this Restructuring Agreement or any of the transactions contemplated hereby without the prior written approval of the other party hereto, except as may be necessary or appropriate in the opinion of the party seeking to make disclosure to comply with the requirements of applicable law or stock exchange rules. If any such press release or public disclosure is so required, the party making such disclosure shall consult with the other party prior to making such disclosure, and the parties shall use all reasonable efforts, acting in good faith, to agree upon a text for such disclosure that is satisfactory to all parties. The Company has advised the Investor that it intends to file a Form 8-K with the Commission in substantially the form contained in Schedule 3.06(a) hereof and to issue a press release announcing such filing and the Investor consents to the foregoing. Notices. All notices, demands, requests, consents, approvals or other communications required or permitted to be given hereunder or that are given with respect to this Agreement shall be in writing and shall be personally served or deposited in the mail, registered or certified, return receipt requested, postage prepaid or delivered by reputable air courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or to such other address as such party shall have specified most recently by written notice: (i) if to the Company, to: Alpha Hospitality Corporation, 707 Skokie Boulevard, Suite 600, Northbrook, IL 60062, Attention: Scott Kaniewski, Facsimile No.: (847) 418-3805, and (ii) if to the Purchaser: c/o SG Cowen Securities Corporation, 1221 Avenue of the Americas, New York, New York 10020, Attention: Francois Barthelemy, Facsimile No.: (212) 278- 5466, with copies (which shall not constitute notice) to: Jones, Day, Reavis & Pogue, 222 E. 41st St., New York, New York 10017, Attention: J. Eric Maki, Esq., Facsimile No. (212) 755-7306. Notice shall be deemed given on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given on the third business day following the date mailed or on the next business day following delivery of such notice to a reputable air courier service. Entire Agreement. This Agreement (together with the New Note and all other documents delivered pursuant hereto and thereto) constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations, understandings, negotiations and discussions between the parties, whether oral or written, with respect to the subject matter hereof. Amendment and Waiver. This Agreement may not be amended, modified, supplemented, restated or waived except by a writing executed by the party against which such amendment, modification or waiver is sought to been enforced. Waivers may be made in advance or after the right waived has arisen or the breach or default waived has occurred. Any waiver may be conditional. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof nor of any other agreement or provision herein contained. No waiver or extension of time for performance of any obligations or acts shall be deemed a waiver or extension of the time for performance of any other obligations or acts. Assignment; No Third Party Beneficiaries. The Restructuring Agreement and the rights, duties and obligations hereunder may not be assigned or delegated by either the Company, on the one hand, or the Investor, on the other hand, without the prior written consent of the other party hereto; provided that the Investor may assign or delegate its rights, duties and obligations hereunder to any Affiliate of the Investor. Except as provided in the preceding sentence, any purported assignment or delegation of rights, duties or obligations hereunder made without the prior written consent of the other party hereto shall be void and of no effect. This Agreement and the provisions hereof shall be binding upon and shall inure to the benefit of each of the parties and their respective successors and permitted assigns. This Agreement is not intended to confer any rights or benefits on any Persons other than as set forth above. Severability. This Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be valid and enforceable. Further Assurances. Each party hereto, upon the request of any other party hereto, shall do all such further acts and execute, acknowledge and deliver all such further instruments and documents as may be necessary or desirable to carry out the transactions contemplated by this Agreement. Titles and Headings. Titles, captions and headings of the sections of this Agreement are for convenience of reference only and shall not affect the construction of any provision of this Agreement. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, INTERPRETED UNDER, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF. Jurisdiction;Venue. Each party hereto hereby irrevocably submits to the exclusive personal and subject matter jurisdiction of the United States District Court for the Southern District of New York and the Supreme Court of the State of New York located in the borough of Manhattan over any suit, action or proceeding arising out of or relating to this Restructuring Agreement or the New Note. Each party hereby irrevocably waives to the fullest extent permitted by law (a) any objection that they may now hereafter have to the venue of such suit, action or proceeding brought in any such court and (b) any claim that any such suit, action or proceeding has been brought in an inconvenient forum. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. ALPHA HOSPITALITY CORPORATION By: Name: Title: SOCIETE GENERALE By: Name: Title: Authorized Signatory ALPHA HOSPITALITY CORPORATION 16% NOTE DUE JUNE 30, 2003 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAS BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED OTHER THAN PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. U.S. $1,600,000 FOR VALUE RECEIVED, Alpha Hospitality Corporation (the "Company"), a corporation duly organized and existing under the laws of the State of Delaware, hereby promises to pay to Societe Generale, or its registered assigns (the "Holder"), the principal sum of $1,600,000 pursuant to the amortization schedule set forth on the reverse hereof, and to pay interest on the unpaid principal amount of this Note in the manner set forth on the reverse hereof from the date of execution of this Note set forth below at the rate of 16% per annum. Reference is hereby made to the further provisions set forth on the reverse hereof, which provisions shall for all purposes have the same effect as if set forth in this place. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated: December , 2002 ALPHA HOSPITALITY CORPORATION By: ____________________________ ___ Name: Title: - REVERSE OF NOTE - 1. ISSUANCE. This Note is a duly authorized issue of the Company designated as its 16% Note Due June 30, 2003 in an original aggregate principal amount of $1,600,000. 2. INTEREST. The Company shall pay interest on the outstanding principal amount of this Note at the rate of 16% per annum, computed based on a 360-day year consisting of twelve 30-day months. Interest on this Note will accrue from the date of this Note set forth on the front of this Note until the payment in full of the principal amount hereof has been made in accordance with the provisions hereof. Interest on this Note shall be payable in arrears as set forth in Section 3 hereof. 3. PRINCIPAL. (A) The payment of the principal on this Note shall be due in such amounts and on such payment dates (each, a "Payment Date") as follows: (i) $400,000 shall be due and payable on February 28, 2003, (ii) $400,000 shall be due and payable on March 31, 2003 and (iii) $800,000 shall be due and payable on June 30, 2003. Accrued interest on the outstanding principal amount of this Note shall also be due and payable on each Payment Date. Interest will accrue on overdue payments of principal and interest at the rate of 16% per annum. (B) The Company shall at any time have the option to make a prepayment (a "Prepayment") of all but not less than all of the principal amount due on any Payment Date (together with interest accrued to the date of such Prepayment). If the amount of any Prepayment shall be less than the entire outstanding principal amount of this Note (plus accrued interest thereon), such Prepayment shall be applied against the next scheduled payment or payments due in chronological order. In addition, in the event of a Prepayment, the Company shall be entitled to a reduction of the principal amount payable (but not of the amount of accrued interest relating thereto) as follows: (x) as to the principal amount due on the February 28, 2003 Payment Date, a reduction of 5% of the principal amount otherwise payable if such payment is made by January 15, 2003, (y) as to the principal amount due on the March 31, 2003 Payment Date, a reduction of 10% of the principal amount otherwise payable if such payment is made by January 15, 2003 and a reduction of 5% of the principal amount otherwise payable if such payment is made by February 28, 2003, and (z) as to the principal amount due on the June 30, 2003 Payment Date, a reduction of 15% of the principal amount otherwise payable if such payment is made by February 28, 2003, a reduction of 10% of the principal amount otherwise payable if such payment is made between March 1, 2003 and March 31, 2003 and a reduction of 5% of the principal amount otherwise payable if such payment is made between April 1, 2003 and May 31, 2003. In the event of a Prepayment of less than the entire outstanding principal amount of this Note, accrued interest with respect to the remaining outstanding principal amount will be payable on each scheduled Payment Date as completed by Section 3(A) above. 4. RANKING. This Note constitutes senior unsecured indebtedness of the Company, ranks pari passu in right of payment with other unsubordinated and unsecured indebtedness of the Company and ranks senior in right of payment to all subordinated indebtedness of the Company. As of the date of this Note set forth on the front of this Note, the Company does not have, and prior to payment in full of this Note the Company may not incur, guarantee or otherwise become liable for, directly or indirectly, whether contingent or otherwise, indebtedness ranking pari passu in right of payment with this Note or secured by assets of the Company or any of its subsidiaries. 5. EVENTS OF DEFAULT. (a) An "Event of Default" under this Note occurs if: 1. the Company defaults in the payment of the principal of or interest on this Note when due and any such default continues for a period of 3 days; 2. the Company fails to comply in any material respect with any of its agreements in this Note (other than those referred to in clause (1) above) or the provisions of the Restructuring Agreement, and such failure continues for 15 days after the notice specified below (provided that the Company shall be entitled to such cure period only if it timely delivers to the Holder such notice specified below); 3. indebtedness of the Company or any subsidiary of the Company that, as of the date of this Note or at any subsequent time, constitutes a "significant subsidiary" as defined under Securities and Exchange Commission Regulation S-X and, as of the date of this Note or at any subsequent time, taken alone, has a net worth of at least $500,000 (a "Significant Subsidiary") is not paid within any applicable grace period after maturity or is accelerated by the holders thereof because of a default, the total amount of such indebtedness unpaid or accelerated exceeds $100,000 and such default continues for 5 days after the notice specified below; 4. the Company or any Significant Subsidiary pursuant to or within the meaning of any federal or state bankruptcy, insolvency or other law for the relief of debtors ("Bankruptcy Law"): 1. commences a voluntary case or proceeding; 2. consents to the entry of an order for relief against it in an involuntary case or proceeding; 3. consents to the appointment of any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law (a "Custodian") of it or for any substantial part of its property; or 4. makes a general assignment for the benefit of its creditors; or 5. takes any comparable action under any foreign laws relating to insolvency; 5. a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case or proceeding; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days; or 6. any final judgment or decree for the payment of money in excess of $500,000 (to the extent not covered by insurance) is rendered against the Company or any Significant Subsidiary and is not discharged and either (A) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (B) there is a period of 60 days following such judgment during which such judgment or decree is not discharged, waived or the execution thereof stayed and, in the case of (B), such default continues for 5 days after the notice specified below. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. A default under clause (2), (3) or (6) above is not an Event of Default until the Holder of this Note notifies the Company of such default and the Company does not cure such default within the time specified after receipt of such notice. Such notice must specify the default, demand that it be remedied and state that such notice is a "Notice of Default." The Company shall deliver to the Holder of this Note, within 5 days after the occurrence thereof, written notice of any event that with the giving of notice, the lapse of time or both would become an Event of Default under clause (2), (3) or (6) above, its status and what action the Company is taking or proposes to take with respect thereto. (b) If an Event of Default (other than an Event of Default specified in clause (4) or (5) above) occurs and is continuing, the Holder of this Note may declare the principal of and accrued interest on this Note to be immediately due and payable, and upon such declaration an amount equal to 125%, of the entire outstanding principal amount of this Note and 100% of such interest shall be immediately due and payable. If an Event of Default specified in clause (4) or (5) above occurs, the entire outstanding principal of and interest on this Note shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder of this Note. 6. NO AMENDMENT. No provision of this Note may be amended, altered or modified without the written agreement of the Holder and the Company. 7. LOST OR DESTROYED NOTE. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership thereof, and indemnity, if requested, all reasonably satisfactory to the Company. 8. GOVERNING LAW. This Note shall be governed by, enforced under and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. 9. NOTICE. Any notice or other communication required or permitted to be given hereunder shall be given as provided herein or delivered against receipt if to (i) the Company at 707 Skokie Boulevard, Suite 600, Northbrook, IL 60062, Facsimile No.: xxxxxxx, Attention: Scott Kaniewski (or to such other address of which notice has been given to the Holder in writing), and (ii) the Holder of this Note, to such Holder at its last address furnished to the Company in writing. Any notice or other communication mailed or otherwise delivered shall be deemed given at the time of receipt thereof. 10. WAIVER. (a) The Company hereby waives, except as provided herein, presentment for payment, notice of dishonor, protest and notice of protest and, in the event of default hereunder, the Company agrees to pay all costs of collection, including reasonable attorneys' fees. (b) Any waiver by the Holder hereof of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Holder hereof to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any waiver must be in writing. UNENFORCEABLE PROVISIONS. If any provision of this Note is invalid, illegal or unenforceable, the remaining provisions of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances.