-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ffe9zHL68UAb+Q7VXpZiLiSyHUe2135lMDKqwaW6dOE7VfCTB7vB9g4L+jtYUZIm NSzgplNOoO1LMtXqa2xUWQ== 0000912057-96-016661.txt : 19960809 0000912057-96-016661.hdr.sgml : 19960809 ACCESSION NUMBER: 0000912057-96-016661 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA HOSPITALITY CORP CENTRAL INDEX KEY: 0000906780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 133714474 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03606 FILM NUMBER: 96605906 BUSINESS ADDRESS: STREET 1: 12 E 49TH ST CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2127503500 MAIL ADDRESS: STREET 1: 12 EAST 49TH STREET CITY: NEW YORK STATE: NY ZIP: 10017 S-1/A 1 S-1/A FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1996 REGISTRATION STATEMENT NO. 333-3606 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ ALPHA HOSPITALITY CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 7011, 7993 13-3714474 - ------------------------------------------------------------------------------ (State or other (Primary Standard (IRS Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code) organization) 12 EAST 49TH STREET NEW YORK, NEW YORK 10017 (212) 750-3500 ----------------------- (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) JAMES A. CUTLER CHIEF FINANCIAL OFFICER ALPHA HOSPITALITY CORPORATION 12 EAST 49TH STREET NEW YORK, NEW YORK 10017 (212) 750-3500 ------------------------------ (Name, address, including zip code and telephone number, including area code, of agent for service) Copies To: ------------------------------ JAY M. KAPLOWITZ, ESQ. GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP 575 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 (212) 752-9700 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement and from time to time. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] * The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (ii) CALCULATION OF REGISTRATION FEE Proposed Proposed Title or Maximum Maximum Securities To Amount Being Offering Price Aggregate Amount of Be Registered Registered Per Share(1) Offering Price Registration Fee - -------------------------------------------------------------------------------- Common 791,880(2) $4.31 $3,413,002.80 $1,176.90 Stock, par value $.01 per Share 782,609(3) $4.31 $3,373,044.70 $1,163.12 24,000(4)(6) $11.50 $276,000 $95.17 385,000(5)(6) $3.25 $1,251,250 $431.47 701,017(7) $4.31 $3,021,383.20 $1,041.86 Total 2,684,506 $-- $11,334,680 $3,908.45(8) (1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended (the "Securities Act"). (2) Represents 791,880 shares of the Registrant's common stock, $.01 par value per share (the "Common Stock") of the 2,684,506 shares which may be sold by stockholders (the "Selling Stockholders' Shares") valued at 17.6 cents per share issued to B.C. of Mississippi, Inc. ("B.C.") and certain shareholders of B.C., pursuant to an agreement by and among the Registrant, the Registrant's subsidiary Alpha Gulf Coast, Inc. and B.C. (3) Represents 782,609 shares of Common Stock of the Selling Stockholders' Shares valued at $5.75 per share issued to an escrow agent on behalf of the Cotton Club of Greenville, Inc. in connection with the acquisition by the Registrant of all of the issued and outstanding shares of Cotton Club of Greenville, Inc. (4) Represents 24,000 shares of Common Stock of the Selling Stockholders' Shares to be issued upon the exercise of outstanding options granted pursuant to the Registrant's 1993 Stock Option Plan (the "Plan") exercisable at $11.50 per share. (5) Represents 385,000 shares of Common Stock of the Selling Stockholders' Shares to be issued upon the exercise of outstanding options granted pursuant to the Plan exercisable at $3.25 per share. (6) Pursuant to Rule 416(a), the Registration Statement also relates to an indeterminate number of additional shares of the Registrant's Common Stock, issuable upon the exercise of options pursuant to anti-dilution provisions contained therein, which shares of Common Stock are registered hereunder. (7) Represents 701,017 shares of Common Stock of the Selling Stockholders' Shares valued at $3.00 per share issued to an escrow agent on behalf of Bally Gaming, Inc. in connection with the restructuring of the mortgage on the Registrant's gaming vessel, the Bayou Caddy's Jubilee Casino. (8) No fee is due upon filing as $5,975.46 was paid upon the April 17, 1996 filing of the Registration Statement. (iii) ALPHA HOSPITALITY CORPORATION CROSS REFERENCE SHEET ------------------------------ FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS CAPTIONS 1. Forepart of Registration Cover Page of Registration Statement Statement and Outside Front and Outside Front Cover Page of Cover Page of Prospectus Prospectus 2. Inside Front and Outside Inside Front and Outside Back Cover Back Cover Pages of Prospectus Pages of Prospectus; Available Information 3. Summary Information, Risk Prospectus Summary - The Company; Factors and Ratio of Earnings Risk Factors to Fixed charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Calculation of Registration Fee 6. Dilution Inapplicable 7. Selling Security Holders Selling Stockholders 8. Plan of Distribution Plan of Distribution 9. Description of Securities Description of Securities to be Registered 10. Interests of Named Experts Legal Matters; Experts and Counsel 11. Information with Respect to Business; Properties; Certain Market the Registrant Information; Management's Discussion and Analysis of Financial Condition and Results of Operations. 12. Disclosure of Commission Undertakings Position on Indemnification for Securities Act Liabilities (iv) PROSPECTUS ALPHA HOSPITALITY CORPORATION 2,684,506 SHARES OF COMMON STOCK PAR VALUE, $.01 PER SHARE This Prospectus relates to up to 2,684,506 shares (the "Selling Stockholders' Shares") of common stock, $.01 par value (the "Common Stock"), of Alpha Hospitality Corporation (the "Company") which may be sold by certain stockholders (the "Selling Stockholders") who have acquired or will acquire such shares from the Company as follows: (i) 791,880 shares of Common Stock issued to B.C. of Mississippi, Inc. ("B.C.") (formerly known as Bayou Caddy, Inc.) and shareholders of B.C. pursuant to an agreement dated November 15, 1995 by and among the Company, the Company's subsidiary Alpha Gulf Coast, Inc. and B.C. (the "B.C. Agreement") (ii) 782,609 shares of Common Stock issued to an escrow agent on behalf of shareholders of the Cotton Club of Greenville, Inc. in connection with the acquisition by the Company of all of the issued and outstanding shares of Cotton Club of Greenville, Inc., (iii) 409,000 shares of Common Stock to be issued upon the exercise of options granted pursuant to the Company's 1993 Stock Option Plan, and (iv) 701,017 shares of Common Stock issued to an escrow agent on behalf of Bally Gaming, Inc. in connection with the restructuring of the mortgage on the Company's gaming vessel, the Bayou Caddy's Jubilee Casino. See "Certain Transactions - Bayou Caddy Acquisition", "Selling Stockholders," "Management - - 1993 Stock Option Plan" and "Plan of Distribution - Selling Stockholders' Shares." The Company's Common Stock is traded on the over-the-counter market on the Nasdaq Stock Market ("NASDAQ") under the symbol "ALHY" and on the Boston Stock Exchange ("BSE") under the symbol ("ALH"). On August 7, 1996, the closing bid and asked quotations for the Common Stock as reported by NASDAQ were $3 5/8 and $3 7/8 per share.
Underwriting Discounts and Price to Public Commissions Proceeds to Issuer - ------------------------------------------------------------------------------------------------------------ Per Share for 409,000 Selling Stockholders' Shares . . . . . . . At the market (1) --- $1,527,250 (2) Per Share for 2,275,506 Selling Stockholders' Shares . . . . . . . At the market (1) --- ---- - ------------------------------------------------------------------------------------------------------------
(1) The Selling Stockholders' Shares that may be offered from time to time by Selling Stockholders may be sold through ordinary brokerage transactions in the over-the-counter market or on the BSE, in negotiated transactions, or otherwise, at market prices prevailing at the time of the sale or at negotiated prices. (2) Represents amounts the Company may receive from Selling Stockholders upon the exercise of options for which the underlying shares are being registered hereunder. Based upon the current price of the Company's Common Stock and the exercise prices of the options for which the underlying shares are being registered hereunder, the Company does not anticipate that the Selling Stockholders will exercise such options in the immediate future. See "Use of Proceeds" and "Selling Stockholders." THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 10. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Selling Stockholders' Shares that may be offered from time to time by Selling Stockholders may be sold through ordinary brokerage transactions in the over-the-counter market or on the BSE, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. The Selling Stockholders' each may be deemed to be "an underwriter," as defined in the Securities Act of 1933 (the "Securities Act"). If any broker-dealers are used by the Selling Stockholders, any commissions paid to broker-dealers and, if broker-dealers purchase any shares of Common Stock as principals, any profits received by such broker-dealers on the resales of the shares of Common Stock may be deemed to be underwriting discounts or commissions under the Securities Act. In addition, any profits realized by the Selling Stockholders may be deemed to be underwriting commissions. All costs, expenses and fees in connection wi of the securities offered by the Selling Stockholders will be borne by the Company. All brokerage commissions, if any, attributable to the sale of the Securities offered by the Selling Stockholders will be borne by the Selling Stockholders. See "Selling Stockholders" and "Plan of Distribution - Selling Stockholders." The Company will not receive any of the proceeds from any sales by Selling Stockholders of Selling Stockholders' Shares, but will receive the exercise price upon the exercise of options by the Selling Stockholders. See "Plan of Distribution" and "Use of Proceeds." No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus in connection with the offer contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. 2 Under the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations thereunder, any person engaged in a distribution of the securities offered by this Prospectus may not simultaneously engage in market-making activities with respect to shares of the Common Stock during the applicable "cooling off" period (two or nine days) prior to the commencement of such distribution. In addition, and without limiting the foregoing, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Rule 10b-5, in connection with transactions in the securities, which provisions may limit the timing of purchases and sales of the securities by the Selling Stockholders. ---------------------------------------- The date of this Prospectus is , 1996 --------------- 3 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission ("Commission") a registration statement (as amended, the "Registration Statement") under the Securities Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, which may be inspected without charge at the principal office of the Commission, 450 Fifth Street, NW, Washington, DC, 20549, and copies of the material contained therein may be obtained from the Commission upon payment of applicable copying charges. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Except for material contracts or portions thereof accorded confidential treatment, all registration statements are available for public inspection, during business hours, at the principal office of the Commission in Washington, D.C. Electronic registration statements made through the Electronic Data Gathering, Analysis, and Retrieval System are publicly available through the Commission's Web site (http://www.sec.gov). The Company is subject to the reporting and other informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements, and other information with the Commission. Such reports, proxy statements, and other information can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511, and at 7 World Trade Center, New York, New York, 10048. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, at prescribed rates. The Company's Common Stock is listed on NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108, and the Company's periodic reports, proxy statements, and other information can be inspected at NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108. 4 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE STATED OR IS MADE OBVIOUS FROM THE CONTEXT, THE TERM THE "COMPANY" SHALL INCLUDE ITS SUBSIDIARIES ALPHA GULF COAST, INC., JUBILATION LAKESHORE, INC. (FORMERLY KNOWN AS THE COTTON CLUB OF GREENVILLE, INC.), ALPHA MISSOURI, INC., ALPHA MONTICELLO, INC., ALPHA RISING SUN, INC., ALPHA ST. REGIS, INC., AND ALPHA HOTEL MANAGEMENT COMPANY, INC. THE COMPANY Alpha Hospitality Corporation (the "Company"), through its seven subsidiaries, is engaged in (i) the ownership and operation of a gaming vessel, the Bayou Caddy's Jubilee casino (the "Jubilee Casino"), located in Greenville, Mississippi, which is operated by the Company's subsidiary Alpha Gulf Coast, Inc. ("Alpha Gulf"), (ii) the pursuit of gaming licenses for additional casinos in various states (which is accomplished through the Company's subsidiaries Alpha Missouri, Inc. ("Alpha Missouri"), Alpha Monticello, Inc. ("Alpha Monticello"), Alpha Rising Sun, Inc. ("Alpha Rising Sun") and Alpha St. Regis, Inc. ("Alpha St. Regis"), and (iii) the provision of management services to hotels owned by third-parties (which is conducted through the Company's subsidiary Alpha Hotel Management Company, Inc. ("Alpha Hotel")). From December 1995 to July 16, 1996, the Company, through its subsidiary Jubilation Lakeshore, Inc. ("Jubilation Lakeshore"), formerly known as the Cotton Club of Greenville, Inc. (the "Cotton Club"), operated a second gaming vessel, the Jubilation casino (the "Jubilation Casino") located in Lakeshore, Mississippi. See "Business - Casino Operations," "Business - Casino Operations - Development Activities" and "Business - Hotel Operations." In connection with its casino operations, the business strategy of the Company has been to increase return on the Company's existing gaming assets in Mississippi. Consistent with this strategy, in October 1995, the Company acquired the Jubilation Casino in connection with its acquisition of all of the issued and outstanding shares of the Cotton Club (the "Cotton Club Acquisition"). Specifically, the Company and the Cotton Club stockholders entered into an agreement (the "Cotton Club Agreement") pursuant to which the Company acquired 100% of the issued and outstanding shares of the Cotton Club, existing stockholder notes in the amount of approximately $8 million and certain additional assets of affiliates of the Cotton Club, which support the casino operations in exchange for $5,821,700 in cash and promissory notes in addition to 782,609 shares of the Company's Common Stock. After the Cotton Club Acquisition, the Company moved the larger Jubilee Casino, formerly operated at Lakeshore to Greenville (which site was acquired in the Cotton Club Acquisition) and moved the Jubilation Casino (which was acquired in the Cotton Club Acquisition) to Lakeshore. The Company relocated the Jubilee Casino and the Jubilation Casino as stated above in order to accommodate and better serve the larger market in Greenville. Although management is satisfied with results of operations of the Jubilee Casino since the relocation, the Jubilation Casino continued to operate at a deficit. As a result, in July 1996 management began to implement its plan to close the Jubilation Casino during August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. See "Business - Casino Operations - The Jubilation Casino" and "Business - Casino Operations - The Jubilee Casino." The Company's pursuit of additional gaming licenses is accomplished through the business of four of its subsidiaries, Alpha Missouri, Alpha Monticello, Alpha Rising Sun and Alpha St. Regis. Alpha Missouri has applications pending for site approval and a gaming license with respect to the development of a riverboat gaming facility in Missouri. The Company entered 5 into a memorandum of understanding with Catskill Development L.L.C. ("Catskill") pursuant to which Alpha Monticello is to participate in the development and management of a casino to be built adjacent to the Monticello Raceway in Sullivan County, New York. Alpha Rising Sun and Alpha St. Regis are currently inactive although they were previously utilized to explore the establishment of gaming facilities in Indiana and Hogansburg, New York, respectively. See "Business - Development Activities - New York," "Business - Development Activities - Missouri," and "Business - Development Activities - Indiana." In connection with its hotel operations, through Alpha Hotel, the Company provides management services to fifteen (15) hotels or motels. The Company provides management, financial, administrative and marketing services ("Management Services") to thirteen (13) of such hotels or motels primarily under a service agreement (the "Service Agreement") with Bryanston Group, Inc. ("Bryanston"). The Company provides Management Services to these thirteen (13) hotels on behalf of Bryanston (which is 50% owned by Mrs. Beatrice Tollman, the spouse of the Company's Chairman and co-Chief Executive Officer, and 50% owned by a trust for the benefit of a child of Mr. Monty D. Hundley, the Company's former President and co-Chief Executive Officer), pursuant to individual management agreements (the "Management Agreements"). The rights to provide the Management Services were acquired by the Company in partial consideration for the issuance of the Company's Common Stock to Bryanston. Such rights were recorded by the Company at no cost to the Company based on its predecessor's cost, which was $0. Pursuant to the Service Agreement, the Company is the sole provider to such hotels of Management Services required of Bryanston, and receives substantially all fees due to Bryanston under the Management Agreement. Under the Service Agreement, the Company is compensated for its services by receiving a percentage of total net revenues of the managed hotels. Additional fees may be earned from various incentive agreements and accounting fees. In addition, the Company provides Management Services to two (2) hotels located in Myrtle Beach, South Carolina and Branson, Missouri, respectively, under agreements with the hotel's respective owners. All of the fifteen (15) hotels are "mid-priced," ranging between $40 and $70 per night, and all but two are operated as Days Inns hotels. In addition to the provision of such Management Services, the Company is seeking to expand its management of hotels through its marketing efforts. See "Business - Hotel Operations," "Business - Hotel Operations - Marketing," and "Certain Transactions - Bryanston." The Company was incorporated in Delaware on March 19, 1993, Alpha Gulf was incorporated in Delaware on May 4, 1993, Jubilation Lakeshore was incorporated in Mississippi on December 8, 1992, Alpha Missouri was incorporated in Delaware in Delaware on March 17, 1995, Alpha Monticello was incorporated in Delaware on May 30, 1996, Alpha Rising Sun was incorporated in Delaware on August 6, 1993, Alpha St. Regis was incorporated in Delaware on June 24, 1994, and Alpha Hotel was incorporated in Delaware on March 19, 1993. The Company's principal executive offices are located at 12 East 49th Street, New York, New York, 10017 and its telephone number is 212-750-3500. 6 THE OFFERING SECURITIES OFFERED SELLING STOCKHOLDERS' SHARES................................... 2,684,506 shares of Common Stock which may be sold by the Selling Stockholders who have acquired or will acquire such shares from the Company as follows: (i) 791,880 shares of Common Stock issued to B.C. and certain shareholders of B.C. in connection with the B.C. Agreement, (ii) 782,609 shares of Common Stock issued to an escrow agent on behalf of shareholders of the Cotton Club of Greenville, Inc. in connection with the acquisition by the Company of all of the issued and outstanding shares of Cotton Club of Greenville, Inc., (iii) 409,000 shares of Common Stock to be issued upon the exercise of options granted pursuant to the Company's 1993 Stock Option Plan, and (iv) 701,017 shares of Common Stock issued to an escrow agent on behalf of Bally Gaming, Inc. in connection with the restructuring of the mortgage on the Company's gaming vessel, the Bayou Caddy's Jubilee Casino. See "Certain Transactions-Bayou Caddy Acquistion," "Plan of Distribution - Selling Stockholders' Shares," and "Selling Stockholders." The Company may receive approximately $1,527,250 from certain Selling Stockholders upon the exercise of options for which the underlying shares are being registered hereunder. Based upon the current market price of the Company's Common Stock and the exercise prices of the options for which the underlying shares are being registered hereunder, the Company does not anticipate that the Selling Stockholders will exercise 7 such options in the immediate future. See "Use of Proceeds." The exercise prices of the shares of Common Stock issuable upon the exercise of options, and the number of shares issuable, may be subject to adjustment in the event of a merger, stock split, stock dividend and similar transaction. See "Executive Compensation - 1993 Stock Option Plan" and "Description of Securities." COMMON STOCK OUTSTANDING AT THE DATE OF THIS PROSPECTUS(1) ....... 13,403,275 Shares AFTER THE OFFERING(2).................... 13,887,325 Shares COMMON STOCK SYMBOLS...................... NASDAQ: ALHY BSE: ALH USE OF PROCEEDS.................,,........ The Company may receive proceeds from certain Selling Stockholders upon the exercise of options for which the underlying shares are being registered hereunder which proceeds would be used for working capital purposes. See "Use of Proceeds." RISK FACTORS.............................. An investment in the Company's Common Stock involves a high degree of risk and should be made only after a careful consideration of the significant risk factors that may affect the Company. Such risks include special risks concerning the Company and its business, including among other risks, History of Losses; Explanatory Paragraph in Independent Auditor's Report, and Defaults in Outstanding Indebtedness; Loan Covenants and Security Interest. See "Risk Factors." - ------------------ (1) Includes 716,881 shares held as treasury stock of the 791,880 shares issued to B.C. and certain shareholders of B.C. pursuant to the B.C. Agreement. See "Certain Transactions - Bayou Caddy Acquisition." (2) Assumes the issuance of all 2,684,506 shares of Common Stock being offered hereby. 8 SUMMARY FINANCIAL INFORMATION The summary financial information set forth below is derived from the financial statements appearing elsewhere in this Prospectus. Such information should be read in conjunction with such financial statements, including the notes thereto.
Three Months Year Ending Period Ending Ended December 31, December 31, March 31, ------------------- ------------- ------------ 1996 1995 1994 1993 ---- ---- ---- ---- Statement of Earnings Data: Revenues $13,667,729 $ 30,520,276 $46,100,441 $876,977 Net loss $(2,827,505) $(17,993,633) $(9,900,543) $(4,704,714) Loss per share $(.22) $(1.69) $(.97) $(.53) Balance Sheet Data: Working capital (deficit) $(25,395,057) $(39,993,555) $(17,341,755) $(9,535,249) Total assets $65,251,403 $ 66,773,492 $45,490,305 $47,201,031 Total liabilities $64,072,076 $ 64,869,712 $32,347,801 $35,319,490 Total stockholders' equity $1,179,327 $ 1,903,780 $13,142,504 $11,881,541
9 RISK FACTORS AN INVESTMENT IN THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. 1. HISTORY OF LOSSES; EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITOR'S REPORT. Since its inception, the Company has suffered significant losses from operations. The Company had net losses of $17,993,633 in the fiscal year ended December 31, 1995, $9,900,534 in the fiscal year ended December 31, 1994, and $4,704,714 in the fiscal year ended December 31, 1993, of which $13,103,928, $11,270,048 and $0, respectively, were incurred by the Jubilee Casino. The Company had net losses of $2,827,505, and $2,807,072 for the three months ended March 31, 1996 and March 31, 1995, respectively, of which $601,892 and $2,835,555, respectively, were incurred by the Jubilee Casino. As of December 31, 1995 has a working capital deficit of $39,993,555 and an accumulated deficit of $32,598,881. As a result of the material uncertainties relating to the Company's ability to continue as a going concern and fund its operations, the Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements addressing such uncertainties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." 2. CLOSING OF THE JUBILATION CASINO; POSSIBLE INABILITY TO MEET OBLIGATIONS TO CREDITORS. In July 1996 the Company began to implement its plans to close the Jubilation Casino during August 1996 due to the losses sustained and the expectation of continued losses of the Jubilation Casino. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. The Company has had preliminary discussions with secured creditors of the Jubilation with regard to the liquidation of its secured obligations. There can be no assurance that the Jubilation will be able to repay all of its obligations to its creditors. In the event that the Jubilation is unable to repay its obligations to its creditors, the Jubilation may file a voluntary petition under the Bankruptcy Code, or creditors may initiate proceedings against the Jubilation thereby forcing the Jubilation into bankruptcy. In either event, creditors may assert claims against the Company seeking satisfaction of the Jubilation's debts. While the Company is not liable for the Jubilation's debts, there can be no assurance that creditors of the Jubilation will not assert claims against the Company, or that the Company will be able to successfully defend against any such claims. See "Business - Casino Operations - The Jubilation Casino." 3. GOVERNMENT REGULATION. GENERAL The Company's ownership and operation of its properties are subject to regulation by federal, state and local governmental and regulatory authorities, including regulation relating to environmental protection. While the Company has not been the subject of any complaints or other formal or informal proceedings alleging any violations of government regulations, no assurance can be given that the Company is, or in the future will be, able to comply with, or continue to comply with current or future governmental regulations in every jurisdiction in which it conducts or will conduct its business operations without substantial cost or interruption of its operations, or that any present or future federal, state or local regulations may not restrict the Company's present and possible future activities. In the event that the Company is unable to comply with any such requirements, the Company could be subject to sanctions, which could have a materially adverse effect upon the Company's business. See "Business - Government Regulation - General," and "Business - Casino Operations - - Current Operations." LICENSING; LOSS OF GAMING LICENSE The gaming industry is highly regulated by each of the states in which gaming is legal. The regulations vary on a state by state basis, but generally require the operator, each owner of a substantial interest (usually 5% or more) in the operator, members of the Board of Directors, each officer and all key personnel found suitable, and be approved, by the applicable governing body. 10 The failure of any present, or future, person required to be approved to be, and remain qualified to hold a license could result in the loss of license. In almost all instances, the governing body has broad discretion in granting, renewing and revoking licenses. The loss or suspension of any license would have a material adverse effect on the Company. The requirement that the governmental body approve substantial shareholders, directors, officers and key personnel could discourage, delay or prevent a change in control of the Company. The operations of the Jubilee Casino and the Jubilation Casino are regulated by the Mississippi Commission. In October 1995, the Company's original licenses to operate the Jubilee Casino and the Jubilation Casino were renewed until December 1997. Each Mississippi gaming license has a term of two years and is subject to renewal. In July 1996, the Company began to implement its plans to close the Jubilation Casino during August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. The Company's license to operate the Jubilation Casino will be withdrawn. The Company does not believe that the issues raised by the Mississippi Commission regarding the operation of the Jubilation Casino will adversely affect the license to operate the Jubilee Casino since the Jubilee Casino is operating in compliance with applicable regulations, including regulations relating to issues raised by the Mississippi Commission regarding the operation of the Jubilation Casino. There can be no assurance, however, that the issues raised by the Mississippi Commission will not adversely affect the license, or the renewal of the license, to operate the Jubilee Casino, or any future licenses for which applications may be submitted in Mississippi or elsewhere. In the event the Mississippi Commission were to revoke or fail to renew the Company's license to operate the Jubilee Casino, the Company's operations and financial condition would be materially adversely affected. The Company recently withdrew its application in Colorado since the Company does not intend to proceed with the acquisition for which such license was required. The Company applied for a gaming license in Missouri in the early part of 1995. At present the Company cannot predict when a final determination will be made regarding its license application in Missouri since the Missouri gaming authority (the "Missouri Commission") makes such determination at its discretion and is not required to do so within a fixed period of time. However, based upon discussions with the Missouri Commission, the Company does not anticipate receiving a final determination with respect to its license application within the next twelve months. The failure of the license to be granted could have a material adverse effect on the Company's expansion plans. See "Business - Casino Operations - Development Activities." 4. DEFAULTS IN OUTSTANDING INDEBTEDNESS; LOAN COVENANTS AND SECURITY INTEREST. The Company has incurred substantial indebtedness in connection with its operations and the acquisition of its casino properties; a substantial portion of this indebtedness is presently held by Bryanston, an affiliate of the Company. Substantially all of the Company's assets utilized in connection with its casino operations are pledged as security for these loans. The various loan documents contain covenants and restrictions which may limit or interfere with, the operation of the Company's business. See "Certain Transactions - Bryanston." At March 31, 1996, the Company was in default of (i) its mortgage notes payable for non-payment, (ii) the equipment notes relating to the Jubilation Casino aggregating approximately $3,433,000 for the breach of several loan covenants and certain loans payable aggregating approximately $3,655,000 for non-payment. The Company received a waiver of the defaults of the loan payable and mortgage note payable to Bryanston. Accordingly, the mortgage note payable ($3,656,000) and the equipment notes payable ($3,433,000) relating to the Jubilation Casino, in addition to another certain loan payable ($1,181,000) are reflected in current liabilities at March 31, 1996. In the event of a violation by the Company of any of the loan covenants, or upon the occurrence of any other events of default set forth in the loan documents, the lenders could exercise rights of foreclosure under the agreements, which would have a materially adverse effect on the 11 Company's financial condition. From time to time the Company has made late payments of certain installments of its indebtedness and is presently not current in payment of the debt due to the Cotton Club shareholders. While no default or acceleration has been declared by any of the lenders, no assurance can be given that a default will not be declared in the future. Declaration of a default would allow the lender whose indebtedness was in default to foreclose on any collateral for the loan and have a material adverse effect on the Company's business and operations. 5. INTENSE INDUSTRY COMPETITION. MISSISSIPPI GAMING OPERATIONS The Company believes that its major market area is approximately 150 miles around the Jubilee Casino, based upon analysis of customer records completed by marketing and operational employees at the site. Within the market area of the Jubilee Casino there are presently 6 other casinos in operation and two additional casinos in the planning stage. One of the existing casinos is immediately adjacent to the Company's casino. Substantially all of these competitors have significantly greater financial, and other, resources than the Company and more experience in the gaming industry. It is likely that the intense competition in the Company's market area may limit the profitability of its operations, or even render them unprofitable. In addition, the Company experienced declining revenues during the year ended December 31, 1995 with respect to the operation of the Jubilation Casino. In management's opinion, this decline was due to the remote location of the Jubilation Casino and the increasing casino development in the Biloxi and Gulfport markets, which have proven more attractive to casino patrons. Due to the current level of competition and the anticipated increase in the competition around the Jubilation Casino, in July 1996, management began to implement its plans to close the Jubilation Casino during August 1996. Thereafter, on July 16, 1996 the Jubilation Casino was closed at the direction of the Mississippi Commission. In view of the conditions required to reopen and the earlier decision to close the Jubilation Casino, the Company determined not to reopen the Jubilation Casino. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business - Casino Operations." HOTEL OPERATIONS There are many hotel management companies that provide services to hotels similar to the services provided by the Company. Many of the other companies are larger, better capitalized and have more experience in the management of hotels. While the Company believes that its management has expertise in operating major mid-market hotel franchises, economies of scale, innovative marketing strategies, there can be no assurance that the Company will be able to expand this segment of its business or that existing agreements will be renewed as they expire. 6. RELIANCE ON SIGNIFICANT CLIENTS; ADVERSE EFFECT OF TERMINATION OF AGREEMENTS. The Company provides Management Services to fifteen (15) hotels or motels. Of such hotels, thirteen (13) for which the Company provides Management Services are owned by five companies. These five companies accounted for 22.6%, 18.5%, 17.1%, 17.0%, and 12.7% of revenues from hotel operations, respectively, in the Company's most recent fiscal year. The 12 Management Agreements contain termination provisions which are consistent with hotel industry practice and may be terminated by either party due to an uncured default by the other party. One of the underlying Management Agreements is terminable at the discretion of the hotel owner, all are terminable upon a sale of the property by the owner and others are terminable if there is a material decrease in the hotel's operating results. The termination of a significant number of Management Agreements would have a material adverse effect on the Company's financial condition and results of operations. One of the management agreements, which accounted for 17.0% of Alpha Hotel's 1995 revenues, was terminated in 1995 due to the sale of the subject hotel and the new owner's termination of the agreement, as permitted by the terms of the agreement. One of the management agreements, which accounted for 12.7% of Alpha Hotel's 1995 revenues, expired in June 1996 and was not renewed by the owner. The remaining Management Agreements are terminable if there is a material decrease in the hotel's operating results and are all terminable on a sale of the property. If additional management agreements are not obtained during the remainder of 1996, future revenues of Alpha Hotel will be impacted adversely. In addition, because almost all of the Company's current hotel management clients are sub-contracted through Bryanston, any failure on the part of Bryanston to continue its business operations or to maintain its Management Agreements would adversely affect the business, financial condition and results of operations of the Company. The Service Agreement pursuant to which the Company provides Management Services expire on various dates, subject to renewal if the underlying Management Agreements are renewed. Three of the fifteen existing Management Agreements terminate in 1996, two during the month of October 1996, and one in December 1996. There can be no assurance that such agreements will be renewed. See "Business - Hotel Operations." 7. DEPENDENCE ON SUCCESS OF MANAGED HOTELS. As the Company's hotel management revenues are based upon a percentage of an individual managed hotel's net revenues, any decline in a particular hotel's revenues because of a decrease in the number of hotel guests or other significant profit center, such as a hotel's restaurant or bar, would adversely affect the Company's results of operations. Furthermore, any downturn in general economic conditions, or of economic conditions in the localities where such managed hotels are located could likewise have an adverse effect on the Company's results of operations. See "Business - Hotel Operations." 8. POSSIBLE INSUFFICIENCY OF LIABILITY INSURANCE. The Company maintains and intends to continue to maintain general liability insurance in amounts which management believes will be sufficient to cover casualty risks associated with the operation of its business, including fire property damage, personal injury, liquor liability, etc. At present, the Company is a defendant in two proceedings in each instance based upon the theory of "liquor liability" for the service of alcohol to a customer. The Company believes that its exposure in these two proceedings is adequately covered by the levels of insurance currently maintained. There can be no assurance, however, that such insurance will be adequate to cover unanticipated liabilities. See "Business -- Legal Proceedings." 13 9. TAXATION OF GAMING OPERATIONS. The Company believes that the prospect of significant additional revenue through taxation is one of the primary reasons why jurisdictions legalize gaming. As a result, gaming operators are typically subject to significant taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees would adversely affect the results of operations of the Company. Presently, the Company pays approximately 12% of gaming revenues in taxes and fees in Mississippi. With respect to any future operations in Missouri, the tax is 5% of the first $1,000,000, 12% of the next $2,000,000 and 20% of all adjusted gross receipts above $3,000,000. In addition there is a boarding tax of $1 payable to each of the local government and the state. See "Business - Casino Operations - Development Activities - Alpha Missouri." 10. SEASONAL FLUCTUATIONS. The results of the casinos' operations have been seasonal, with the greatest activity occurring during the months of May through September. Consequently, the Company's operating results during the calendar quarters ending in December and March are not as profitable as those quarters ending in June and September, and losses result from time to time. The seasonal nature of the casinos' operations increases the risk that natural disasters or the loss of the casinos for any other reason during the May through September period would have a material adverse effect on the Company's financial condition and results of operations. The hotel industry is in general seasonal. Though the hotels that receive Management Services from the Company are distributed through various regions of the country, the revenues generated by such hotels are anticipated to be typically lower in the first and fourth quarters of each year. Since fees received by the Company are based on a percentage of the total net revenues generated by such hotels, the Company's operations are susceptible to seasonal variations. 11. CONFLICTS OF INTEREST. Mrs. Beatrice Tollman, the spouse of Mr. Stanley S. Tollman, the Chairman of the Board, President and Chief Executive Officer of the Company, is one of the principal owners of Bryanston. Certain conflicts of interest may arise with regard to the negotiation of agreements and business opportunities between the Company and Bryanston. Furthermore, Stanley S. Tollman is one of the principal owners of the Tollman-Hundley Hotel Group (the "T-H Hotel Group"), the constituent companies of which own or manage hotel properties containing an aggregate of 5,593 rooms and which may be in direct competition with hotels that receive Management Services from the Company. While Stanley S. Tollman and the T-H Hotel Group have entered into agreements with the Company pursuant to which each has agreed that any opportunity to provide Management Services to hotel properties owned by third-parties will be offered first to the Company for a period of five years commencing September 1, 1993 and the Company has established a policy that any agreements between the Company and Bryanston or the T-H Hotel Group must be approved by a majority of disinterested members of the Company's Board of Directors, there can be no assurance that conflicts of interest will not arise 14 among such parties and the Company. See "Certain Transactions - Bryanston." 12. DEPENDENCE UPON KEY PERSONNEL; ABSENCE OF FULL-TIME MANAGEMENT. The success of the Company is largely dependent upon the personal efforts of Mr. Stanley S. Tollman, its President and Chief Executive Officer. The Company does not maintain and does not intend to obtain a key employee life insurance policy on the life of Mr. Stanley S. Tollman. Although Mr. Stanley S. Tollman is only required to devote approximately 20% of his business time to the operations of the Company, the loss of the services of Mr. Stanley S. Tollman would have a material adverse effect on the prospects of the Company. In addition, although the casino operations are managed by full-time personnel, the Company and its hotel management operations are managed by individuals who also work for Bryanston." See "Management" and "Certain Transactions - Bryanston." 13. NO ASSURANCE OF PUBLIC MARKET FOR SECURITIES. Although the Company's Common Stock is quoted on NASDAQ and listed on the Boston Stock Exchange, there can be no assurance that the Company will be able to maintain such quotation or listing, or that, if maintained, a significant public market will be sustained. For continued listing on NASDAQ, the Company is required to maintain a minimum stockholders' equity of $1,000,000 and assets of $2,000,000. The Boston Stock Exchange's maintenance criteria require the Company to have total assets of at least $1,000,000 and total stockholders' equity of at least $500,000. At March 31, 1996 (unaudited), the Company had stockholders' equity of $1,179,327 and assets of $65,251,403. The Company has continued to operate at a loss through the date of this Prospectus. In the event the Common Stock were delisted from NASDAQ, trading, if any, would be conducted on the Boston Stock Exchange and in the over-the-counter market on the NASD's electronic bulletin board, in what are commonly referred to as the "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. In addition, the Common Stock would be subject to Rules 15g1-15g6 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, a person with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with his or her spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, these rules may affect the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers in the Offering to sell their securities in the secondary market. The Commission has also recently adopted regulations that define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the regulations require the delivery, prior to the transaction, of a disclosure schedule prepared by the Commission relating to the penny stock market. The broker-dealer must also disclose the commissions payable to both the broker- dealer and the 15 registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. While many NASDAQ-listed securities are covered by the definition of penny stock, transactions in a NASDAQ-listed security are exempt from all but the sole market-maker provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if the issuer has not been in continuous operation for three years), (ii) transactions in which the customer is an institutional accredited investor, or (iii) transactions that are not recommended by the broker-dealer. In addition, transactions in a NASDAQ security directly with a NASDAQ market-maker for such security are subject only to the sole market-maker disclosure, and the disclosure with respect to commissions to be paid to the broker-dealer and the registered representative. Finally, all NASDAQ securities would be exempt from the recently-adopted regulations regarding penny stocks if NASDAQ raised its requirements for continued listing so that any issuer with less than $2,000,000 in net tangible assets or stockholders' equity would be subject to delisting. These criteria are more stringent than the current NASDAQ maintenance requirements. 14. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. The Company has 17,000,000 shares of Common Stock authorized, of which 13,403,275 are issued and outstanding. Of such 13,403,275 shares, 716,880 shares are being held as treasury shares in connection with the B.C. Agreement. In addition, 409,000 shares may be issued upon the exercise of outstanding and currently exercisable options. Of the 13,403,275 shares of Common Stock currently issued and outstanding, 3,114,501 shares of Common Stock are "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were issued and sold by the Company in transactions not involving a public offering and are, as of November 5, 1995, eligible for sale under Rule 144. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, after at least two years have elapsed from the sale by the Company or any affiliate of the restricted securities, can (along with any person with whom such individual is required to aggregate sales) sell, within any three-month period, a number of shares of restricted securities that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if the Common Stock is quoted on NASDAQ or a national securities exchange, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of the Company for at least three months, after at least three years have elapsed from the sale by the Company or an affiliate of the restricted securities, is entitled to sell such restricted shares under Rule 144 without regard to any of the limitations described above. The 3,114,501 shares are eligible for sale pursuant to Rule 144 by affiliates of the Company who are restricted as to the number of securities they can sell during any three-month period. Possible or actual sales of such Common Stock by stockholders of the Company under Rule 144 may 16 have a depressive effect upon the price of the Common Stock, and could also render difficult the sales of Common Stock by investors. See "Description of Securities." 15. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the issuance of 1,000,000 shares, par value $.01 per share, of "blank check" preferred stock (the "Preferred Stock") with such designations, rights and preferences as may be determined from time to time by the Board of Directors. The Company has outstanding 738,163 shares of Preferred Stock which is convertible into Common Stock (See "Certain Transactions - Bryanston" and "Certain Transactions - BP Group") and still has 261,837 shares of Preferred Stock available for issuance. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue the remaining Preferred Stock, or any Preferred Stock which becomes authorized but unissued after conversion into Common Stock, with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. The Preferred Stock could be utilized under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. There can be no assurance that additional shares of Preferred Stock of the Company will not be issued at some time in the future. See "Description of Securities - Preferred Stock" and "Certain Transactions - Bryanston" and "Certain Transactions - BP Group." 16. OTHER POSSIBLE ADVERSE EFFECTS OF PREFERRED STOCK The Company has 738,163 shares of Preferred Stock outstanding. These shares were issued to Bryanston and BP Group, Ltd. ("BP"), a corporation wholly-owned by Ms. Patricia Cohen, a director of the Company (See "Certain Transactions - Bryanston" and "Certain Transactions - BP Group") in connection with the conversion of indebtedness owed by the Company to them. Each share of outstanding Preferred Stock (i) entitles the holder to one vote; (ii) has a liquidation value of $29.00 per share; (iii) has a cash dividend rate of 10% of liquidation value, which increases to 13% of liquidation value if the cash dividend is not paid within 30 days of the end of each fiscal year and in such event is payable in Common Stock valued at the then market price, and (iv) is convertible into eight shares of Common Stock. At present the Company does not have sufficient authorized but unissued Common Stock to reserve for the conversion of the Preferred Stock. In the event that by December 31, 1996, the stockholders have not approved an amendment to the Company's Certificate of Incorporation to increase the authorized Common Stock to an amount sufficient to permit the reservation of Common Stock necessary for the conversion, the outstanding Preferred Stock will be entitled to eight votes per share thereafter. There are presently three debt instruments which prohibit the payment of cash dividends. Therefore, the Company, until payment in full of such indebtedness, will be required to pay a 13% Preferred Stock dividend in Common Stock. The conversion of Preferred Stock into Common Stock and/or the issuance of Common Stock in payment of the Preferred Stock dividend, may dilute the value of the outstanding shares of Common Stock, may adversely affect the Company's ability to obtain equity capital, and, if such Common Stock was sold in the public market, when permitted by law, may adversely affect the market price of the Common Stock. See "Description of Securities" and "Dividend Policy." 17 USE OF PROCEEDS The Company may receive approximately $1,527,250 from certain Selling Stockholders upon the exercise of options for which the underlying shares are being registered hereunder. However, there can be no assurance that any or all of such options will be exercised particularly since the Company cannot redeem or cancel such options to encourage their exercise. Should such options be exercised, any proceeds derived therefrom will be used by the Company for working capital purposes, which may include the repayment of debt and/or payables, depending upon if and when any such funds are received. Based upon the current market price of the Company's Common Stock and the exercise prices of the options for which the underlying shares are being registered hereunder, the Company does not anticipate that the Selling Stockholders will exercise such options in the immediate future. See "Selling Stockholders." 18 CERTAIN MARKET INFORMATION MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and its Redeemable Common Stock Purchase Warrants (the "Warrants") are traded on the Automated Quotation System of the National Association of Securities Dealers, Inc. ("NASDAQ") and the Boston Stock Exchange under the symbols "ALHY" and "ALHYW," and "ALH" and "ALHW." The following table sets forth the high and low sale prices for Common Stock and Warrants as reported by NASDAQ. COMMON STOCK WARRANTS 1996 QUARTERS HIGH LOW HIGH LOW - ------------- ---- --- ---- --- First $ 3 1/4 $2 3/8 $7/16 $1/8 Second 4 3/4 2.00 7/8 11/32 1995 QUARTERS First $6.875 $3.375 $9/16 $33/64 Second 4.250 2.250 3/8 3/16 Third 4.375 2.215 7/16 5/32 Fourth 6.125 4.00 9/16 5/16 1994 QUARTERS First $18.251 $11.75 $7 $4 5/8 Second 13.325 5.265 4 1/8 1 1/4 Third 6.75 5.50 2 1/8 7/8 Fourth 7.50 4.625 1 1/4 5/8 As of August 8, 1996, 13,403,275 shares of Common Stock and 738,163 shares of Preferred Stock of the Company were issued and outstanding. The outstanding shares of Common Stock were held of record by approximately 800 persons including ownership by nominees who may hold for multiple beneficial owners. 19 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1996 and December 31, 1995, and as adjusted to reflect the satisfaction of the obligations for which the Company Shares are being registered. This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included herein (in thousands, except par values). Actual and As Adjusted --------------------------------------- March 31, December 31, 1996 1995 ------ ------ (Unaudited) Current portion of long-term debt $11,910,435 $27,319,666 Long-term debt, less current maturities $14,507,463 $2,311,751 Stockholders' Equity Preferred Stock, $.01 par value, authorized 1,000,000 shares; none issued and outstanding $ -- $ -- Common Stock, $.01 par value, authorized 17,000,000 shares; issued and outstanding 12,702,308 and 12,354,482 shares at March 31, 1996 (unaudited) and December 31, 1995, respectively $127,022 $123,544 Capital in excess of par value $36,478,691 $32,779,117 Common Stock subscribed $ -- $1,600,000 Accumulated deficit $(35,426,386) $(32,598,881) Total Stockholders' equity $1,179,327 $1,903,780 Total capitalization $15,686,790 $4,215,531 20 DIVIDEND POLICY The Company has not paid any dividends, cash or otherwise, since its inception. The Company plans to use earnings, if any, to fund growth and presently has no intention to pay any cash dividends in the foreseeable future. Pursuant to the terms of a loan to the Company currently held by Bryanston (the "Term Loan"), the Company may not pay cash dividends without the consent of Bryanston until the Term Loan is paid in full. Two additional debt instruments are subordinate to the Term Loan and also prohibit the payment of cash dividends until paid in full. These are: (i) equipment leases originally held by Bally and subsequently sold to General Electric Credit Corp. which had an aggregate balance of approximately $3,433,000 at March 31, 1996, accrues interest at rates of 12% and 12.75%, and mature in 1997 and (ii) a mortgage held by Caterpillar on the Jubilation Casino which had an outstanding balance of approximately $3,656,000 at March 31, 1996, accrues interest based upon the 30 day commercial paper rate and matures at May 1, 2000. See "Certain Transactions - Bryanston" and "Management's Discussion and Analysis of Financial Condition and Results of Operation - -Liquidity and Capital Resources." 21 SELECTED FINANCIAL DATA Period ended December 31, 1993 and years ended December 31, 1994 and 1995 and the three months ended March 31, 1996. (DOLLARS IN THOUSANDS)
March 19, 1993 (Date of Inception) Three Months Ended to March 31, Year Ended December 31, December 31, ------------------------- ------------------------ ------------ 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (unaudited) (unaudited) Revenues $13,668 $ 7,098 $30,520 $46,100 $877 Net Loss $(2,828) $(2,807) $(17,994) $(9,901) $(4,705) Loss per common share $(0.22) $(0.26) $(1.69) $(.97) $(.53) March 31, December 31, ------------------------- ---------------------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (unaudited) (unaudited) Total assets $65,251 $44,353 $66,773 $45,490 $47,201 Long-term debt $26,418 $19,733 $29,631 $20,100 $24,874 Mandatorily redeemable common stock $ -- $582 $ -- $565 $ -- Stockholders' equity $1,179 $10,319 $1,904 $13,143 $11,882 SEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND CONSOLIDATED FINANCIAL STATEMENTS.
22 BUSINESS Alpha Hospitality Corporation (the "Company"), through its seven subsidiaries, is engaged in (i) the ownership and operation of gaming vessel the Bayou Caddy's Jubilee casino (the "Jubilee Casino"), located in Greenville, Mississippi, which is operated by the Company's subsidiary Alpha Gulf Coast, Inc. ("Alpha Gulf"), (ii) the pursuit of gaming licenses for additional casinos in various states (which is accomplished through the Company's subsidiaries Alpha Missouri, Inc. ("Alpha Missouri"), Alpha Monticello, Inc. ("Alpha Monticello"), Alpha Rising Sun, Inc. ("Alpha Rising Sun") and Alpha St. Regis, Inc. ("Alpha St. Regis"), and (iii) the provision of management services to hotels owned by third-parties (which is conducted through the Company's subsidiary Alpha Hotel Management Company, Inc. ("Alpha Hotel")). From December 1995 to July 16, 1996, the Company, through its subsidiary Jubilation Lakeshore operated a second gaming vessel, the Jubilation Casino. The Company was incorporated in Delaware on March 19, 1993, Alpha Gulf was incorporated in Delaware on May 4, 1993, Jubilation Lakeshore was incorporated in Mississippi on December 8, 1992, Alpha Missouri was incorporated in Delaware in Delaware on March 17, 1995, Alpha Monticello was incorporated in Delaware on May 30, 1996, Alpha Rising Sun was incorporated in Delaware on August 6, 1993, Alpha St. Regis was incorporated in Delaware on June 24, 1994, and Alpha Hotel was incorporated in Delaware on March 19, 1993. The Company's principal executive offices are located at 12 East 49th Street, New York, New York, 10017 and its telephone number is 212-750-3500. CASINO OPERATIONS CURRENT OPERATIONS From December 1995 through July 16, 1996, the Company operated two casinos in their respective new locations in an effort to increase return on such gaming assets. Although management is satisfied with the results of operation of the Jubilee Casino since the relocation, the Jubilation Casino continued to operate at a deficit. As a result, in July 1996 management began to implement its plans to close the Jubilation Casino during August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. See "The Jubilation Casino." THE JUBILATION CASINO The Jubilation Casino, located in Lakeshore, near Waveland, Hancock County, Mississippi on the Gulf of Mexico, is owned and operated by the Company's wholly-owned subsidiary, Jubilation Lakeshore. In October 1995, the Company consummated the Cotton Club Acquisition through which it acquired the Jubilation Casino and certain additional assets that support its operation as a casino, including leasehold interests incidental to the ownership of the Jubilation Casino relating to its original location in Greenville, Mississippi. Specifically, the Company acquired 100% of the outstanding stock of Cotton Club, existing shareholder notes in the amount of approximately $8 million and certain additional assets of affiliates of Cotton Club, which support its operation as a casino. The Company paid to the shareholders of Cotton Club $2,404,898 in cash and $3,293,020 in notes and transferred $4,500,000 worth of its Common Stock, consisting of 782,609 shares valued at $5.75 per share, as determined by the closing bid price of the Common Stock as of the day prior to the closing of the transaction. Prior to the Cotton Club Acquisition, the Company applied for and received the required license renewals and approvals from the Mississippi Commission. The operation of the Jubilation Casino is subject to state and local regulation. See "Business - Government Regulation - Licensing - Mississippi." 23 Following the consummation of the Cotton Club Acquisition, the Jubilation Casino was moved from Greenville to Lakeshore, where it reopened on December 21, 1995. Management believes that the Cotton Club Acquisition and the subsequent relocation of the Jubilation Casino to Lakeshore were consistent with its strategy to maximize the profitability of its gaming assets. In particular, management believed that the smaller Jubilation Casino could adequately service the existing Lakeshore market with substantially reduced cost of operations. However, based upon the Jubilation Casino's limited capacity, remote location and the increasing casino development in the Biloxi and Gulfport markets (which have proven more attractive to casino patrons), the Jubilation Casino was unable to overcome operating deficits. As a result, in July 1996 management began to implement its plans to close the Jubilation Casino during August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. In connection with the plan to close the Jubilation Casino, management believes it has taken the appropriate action required by federal law with respect to providing notice of such closing to its employees. In connection with the closing of the Jubilation Casino, management updated its assessment of the realizability of the leasehold improvements and related assets of the Jubilation Casino. This would result in an impairment loss of approximately $14,165,000 and stockholders' deficit of approximately $14,000,000 below the requirements for continued listing of the Company's securities on NASDAQ. In order to maintain continued listing on NASDAQ, the Company accepted proposals by Bryanston and BP to convert approximately $19,165,000 and $1,222,000, respectively, of debt to 693,905 and 44,258 shares of Preferred Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Certain Transactions - Bryanston" and "Certain Transactions - BP Group." THE JUBILEE CASINO The Jubilee Casino, located in Greenville, Mississippi, is owned and operated by the Company's wholly-owned subsidiary Alpha Gulf. On May 14, 1993, pursuant to an asset purchase agreement among Alpha Gulf, B.C. of Mississippi, Inc. ("B.C.") (formerly known as Bayou Caddy, Inc.), and certain shareholders of B.C., the Company acquired B.C.'s leasehold interests under certain lease agreements and certain other assets incidental to the development and ownership of the Jubilee Casino. The Company proceeded with this acquisition because it gave the Company the opportunity to enter the casino business in Lakeshore, Mississippi, the original site of the Jubilee Casino. Moreover, B.C. had already initiated the process of obtaining requisite approvals for casino operation in Lakeshore, thereby expediting the Company's ability to conduct casino operations in Mississippi. See "Certain Transactions - Bayou Caddy Acquisition." The Company initiated the Jubilee Casino's gaming operations on January 12, 1994, subsequent to its construction on a marine vessel in 1993, which construction received the requisite approvals from the U.S. Army Corps of Engineers and the Mississippi Department of Natural Resources. Prior to the initiation of the Jubilee Casino's gaming operations, the Company applied for and received the required license renewals and approvals from the Mississippi 24 Commission. See "Business - Government Regulation - Licensing - Mississippi." Following the Cotton Club Acquisition, the Company transferred the Jubilee Casino from Lakeshore to Greenville. The Jubilee Casino reopened in Greenville on November 17, 1995. The movement of the Jubilee Casino to Greenville increased the capacity at Greenville and brought an upscale facility to the Greenville market. Management believed that the relocation of the Jubilee Casino to Greenville was an appropriate action designed to increase the return on the Company's gaming assets in Mississippi. The Jubilee Casino has 838 slot machines and 29 table games. In addition to its gaming activities, the Jubilee Casino includes a 175 seat buffet, a 350 seat showroom, a 98 seat restaurant and parking to accommodate 950 customer vehicles. In January 1996, the Company completed renovation of its leased restaurant facility at Greenville in order to give customers a dining alternative, offering fine dining in an elegant setting. Management believes that the Jubilee Casino, which offers an attractive casino environment and significant casino capacity, will be able to capture a significant portion of the Greenville market. In addition, the Company believes that its management's experience, together with ongoing entertainment and promotional efforts, will enable it to expand the market for the Jubilee Casino to areas outside of Greenville. DEVELOPMENT ACTIVITIES NEW YORK In March 1994, the Company entered into a joint venture agreement relating to the operation and development of a gaming facility located on the reservation of the St. Regis Mohawk Tribe of Hogansburg, New York (the "Tribe"). The Company does not intend to proceed with the project at Hogansburg, New York since the Company and the Tribe are exploring a more suitable arrangement relating to the development of a casino in Sullivan County, New York, as discussed below. On January 19, 1996, the Company, through its subsidiary, Alpha St. Regis, entered into a memorandum of understanding with Catskill Development, L.L.C. ("Catskill") regarding the development and management of a casino to be built adjacent to the Monticello Raceway in Sullivan County, New York. The development and management of this casino will be undertaken by the Company's subsidiary, Alpha Monticello. It is intended that the casino will be owned by the Tribe and will be located on land to be placed in trust for the benefit of the Tribe. The Monticello Raceway is located 90 miles from New York City. The projected casino would be the closest casino to the metropolitan New York City area. The casino project is subject to approval by the U.S. Department of the Interior and its Bureau of Indian Affairs, the National Indian Gaming Commission and the Governor of the State of New York, as well as the execution of definitive agreements with the Tribe. It is contemplated that the Company will be required to contribute an amount preliminarily estimated at $250,000 toward the design, architectural and other costs of developing plans for the casino. Under the memorandum of understanding, Catskill and the Company commit to enter into a definitive agreement on the terms established in the memorandum, but there can be no assurance that such 25 an agreement will ever be consummated. Bryanston is a 25% member of Catskill. The casino project is also subject to Catskill, the prospective purchaser of the 225 acre Monticello Raceway, consummating the acquisition of the raceway. If the acquisition is consummated, Catskill plans to continue Monticello's racing program and to explore other development at the site in addition to the St. Regis Mohawk Casino. MISSOURI In February 1995, the City of Louisiana, Missouri, designated the Company as the exclusive designee to enter into negotiations with the city to develop a riverboat gaming facility at the city's Mississippi River shoreline. The City of Louisiana is currently competing with other cities in Missouri for the next gaming license to be granted in the state. In the event that the state gaming authorities select Louisiana, Missouri as the locality to receive the next gaming license to be granted, the Company, as the city's exclusive designee, would be the recipient of such license. Consequently, the Company's wholly-owned subsidiary Alpha Missouri entered into a lease agreement with the City of Louisiana relating to certain city-owned riverfront property required for the project. Except for certain preliminary payments to the city, the Company's obligation under the lease are conditioned on the grant a gaming license by the Missouri gaming authorities. Alpha Missouri has submitted to the Missouri Commission the initial applications for site approval and a gaming license. The Missouri Commission conducted meetings with the Company in the first quarter of 1996 at which time the Company presented its project for priority consideration. There are no objective criteria which the Missouri Commission is required to follow in making its determinations. However, based upon discussions with the Missouri Commission, the Company does not anticipate receiving a final determination with respect to its license application within the next twelve months. See "Risk Factors - Licensing and Regulation." The City of Louisiana is located approximately 60 miles north of metropolitan St. Louis and 70 miles from Springfield, Illinois, that state's capital. The Company anticipates that it will provide a gaming vessel with a capacity of approximately 750 gaming positions. The project cost is presently expected to be approximately $20 million. COLORADO On January 25, 1995, the Company entered into an agreement to acquire all of the outstanding common stock of Doc Holliday, Inc. ("Doc Holliday"), the owner and operator of an 18,000 square foot casino in Central City, Colorado. In the fall of 1995, the Company filed the requisite forms with the Colorado Division of Gaming for approval of the Company's operation of Doc Holliday's casino in Central City, Colorado. Since the Company's due diligence investigation revealed that the acquisition was not in the best interests of the Company, in early 1996 the Company decided not to proceed with the acquisition and exercised its contractual right to terminate the agreement. 26 INDIANA In February 1995, Alpha Rising Sun entered into two letters of intent with subsidiaries of Bally Entertainment Corporation ("Bally") to develop and manage a proposed casino and related upland development at the City of Rising Sun. Therefore, the Company, through its subsidiary Alpha Rising Sun, filed an application for a riverboat gaming license for the County of Ohio, City of Rising Sun, with the Indiana Gaming Commission in the first quarter of 1994. Since the license was awarded to another entity, the Company has discontinued its efforts to expand its casino operations in Indiana. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKETING The Company concentrates its sales, marketing and promotional activities for the Jubilee Casino in a target market within a 50 mile radius of the casino. The target markets (such as New Orleans, the communities on the north shore of Lake Pontchartrain, and Baton Rouge) are reached through a combination of billboards, radio, television, newspaper advertising, and direct mail. Also, casino brochures are placed in tourist information areas, local and regional hotels, restaurants and bars. The Company has developed an in-house mailing list in excess of 225,000 casino customers. These customers are made up of table game players and "Slot Club" members. Table game customers are identified through the casino's marketing representatives and their play is monitored to evaluate whether the customer warrants complimentary services provided by the casino. The award of complimentary services is consistent with standard industry practices and is based upon a customer's duration of play and average amount wagered. The "Slot Club" is an operation which allows the casino's computerized tracking system to identify customers, amount of play and other pertinent characteristics. The "Slot Club" is an ongoing promotion where members are issued cards and accumulate points based on the amount of their play. Such points are redeemable for food, beverages or merchandise. Tournaments for blackjack, craps and poker are held, along with other special events and promotions. The Company has established a bus program at the Jubilee Casino in order to facilitate travel to the casino from areas within a reasonable distance from the casino. The Company markets its bus program to generate business in areas extending both within and beyond the 150-mile radius of concentrated advertising. The marketing department coordinates with various tour groups, travel agencies and junket representatives who develop regular scheduled and chartered bus service to bring customers to the Jubilee Casino on a 24-hour basis. The Company seeks to maintain and upgrade its gaming vessel so that it is competitive in the industry. With the closing of the Jubilation Casino the Company is discontinuing its marketing activities relating to the Jubilation Casino. See "Business - Current Operations." 27 COMPETITION There are currently 16 casinos located on the Mississippi River. Next to the Jubilee Casino is the Las Vegas Casino. Currently, there is a proposed casino project which will be located north of the Jubilee Casino. This proposed casino project has not at this time received the necessary governmental approvals. Management believes that if this project is completed it will impact current revenue levels being realized at the Jubilee Casino. Approximately 90 miles south of Jubilee Casino is Vicksburg. Vicksburg has four casinos: the Isle of Capri, Harrahs Vicksburg, Ameristar, and Rainbow Casino. Approximately 90 miles north of the Jubilee Casino is Coahoma County with the Lady Luck Coahoma Casino. Tunica County is approximately 180 miles north of the Jubilee Casino and has eight casinos - Harrahs Tunica, Sams Town, Fitzgeralds, Sheraton, Hollywood Casino, Circus Circus, Horseshoe Casino and Ballys. Since casinos within a 90 or 180 mile radius of the Jubilee Casino are not considered by the Company to be within its competitive market, the Company does not deem the casinos in Vicksburg, Coahoma County, or Tunica County to be among its competitors. The Company has made efforts to remain competitive in the markets affecting the Jubilee Casino by keeping its gaming vessel well-maintained and by offering superior accommodations, entertainment programs and special events. In addition, the Company's advertising and marketing efforts have focused on maintaining the Company's presence in its market. Although the Jubilee Casino has remained competitive, the Jubilation Casino was unable to overcome recent operating deficits based upon its limited capacity, remote location and the increasing casino development in the Biloxi and Gulfport markets. This resulted in management's plans to close the Jubilation Casino during August 1996. See "Casino Operations - Current Operations - The Jubilation Casino." The Mississippi Gaming Control Act (the "Mississippi Act") does not limit the number of licenses that may be granted for an area, however, development throughout the state has slowed considerably. The Company believes that few, if any, new casinos will open on the Mississippi Coast, or if they do, such casinos will open in the Biloxi area since historically, casino development on the Mississippi Coast occurs in the Biloxi Coast, which is not in the Company's 28 primary market. Although any increase in supply in the general area dilutes the market, the Company believes that only two of the proposed New Orleans area facilities provide competition in the Company's primary target market. Louisiana approved unlimited stakes riverboat gaming in 1993 and set aside up to 15 licenses for issuance. The first of the New Orleans area riverboats opened in December 1993. A land-based casino in downtown New Orleans was also approved and its temporary facility opened in May 1995. That casino closed in December 1995 and filed for protection from creditors under Chapter 11 of the Bankruptcy Act. The Company understands that there are on-going discussions between the owner of the New Orleans casino, the State of Louisiana, City of New Orleans, and the casino's bondholders concerning the possible reorganization of that casino. SEASONAL FLUCTUATIONS The results of the casinos' operations have been seasonal, with the greatest activity occurring during the fair weather months of May through September. Consequently, the Company's operating results during the calendar quarters ended in December and March are not as profitable as those quarters ending in June and September, and losses result from time to time. The seasonal nature of the casinos' operations increases the risk that natural disasters or the loss of the casinos for any other reason during the May through September period would have a material adverse effect on the Company's financial condition and results of operations. GOVERNMENT REGULATION GENERAL The Company's ownership and operation of its properties are subject to regulation by federal, state and local governmental and regulatory authorities, including regulation relating to environmental protection. While the Company has not been the subject of any complaints or other formal or informal proceedings alleging any violations of government regulations, no assurance can be given that the Company is, or in the future will be, able to comply with, or continue to comply with current or future governmental regulations in every jurisdiction in which it conducts or will conduct its business operations without substantial cost or interruption of its operations, or that any present or future federal, state or local regulations may not restrict the Company's present and possible future activities. In the event that the Company is unable to comply with any such requirements, the Company could be subject to sanctions, which could have a materially adverse effect upon the Company's business. See "Business - Government Regulation - General," and "Business - Casino Operations - Current Operations." LICENSING The gaming industry is highly regulated by each of the states in which gaming is legal. The regulations vary on a state by state basis, but generally require the operator, each owner of a substantial interest (usually 5% or more) in the operator, members of the Board of Directors, each officer and all key personnel found suitable, and be approved, by the applicable governing body. The failure of any present, or future, person required to be approved to be, and remain qualified to hold a license could result in the loss of license. 29 MISSISSIPPI GENERAL The ownership and operation of casino facilities in Mississippi are subject to extensive state and local regulation, primarily the licensing and regulatory control of the Mississippi Commission and the Mississippi State Tax Commission (collectively, the "Mississippi Authorities"). The laws, regulations and supervisory procedures of Mississippi and the Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Authorities; (iv) prevent cheating and fraudulent practices; (v) provide a source of state and local revenues through taxation and licensing fees; and (vi) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and to extensive interpretation by the Mississippi Commission in view of their recent adoption. Changes in Mississippi law or regulations may limit or otherwise materially affect the types of gaming that may be conducted and could have an adverse effect on the Company and the Company's Mississippi gaming operations. The Mississippi Act provides for legalized dockside gaming at the discretion of the 14 counties that either border the Mississippi Gulf Coast or the Mississippi River, but only if the voters in such counties have not voted to prohibit gaming in that county. As of January 1, 1996, dockside gaming was permissible in 9 of the 14 eligible counties in the state and gaming operations had commenced in Adams, Hancock, Harrison, Tunica and Warren counties. The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space that may be utilized for gaming. There are no limitations on the number of gaming licenses that may be issued in Mississippi. REGISTRATION AND LICENSING The Company, a registered publicly-traded holding company under the Mississippi Act, is required periodically to submit detailed financial and operating reports to the Mississippi Authorities and to furnish any other information that the Mississippi Authorities may require. The Company and any subsidiary of the Company that operates a casino in Mississippi (a "Gaming Subsidiary"), is subject to the licensing and regulatory control of the Mississippi Commission. If the Company is unable to continue to satisfy the registration requirements of the Mississippi Act, the Company and its Gaming Subsidiaries cannot own or operate gaming facilities in Mississippi. Each Gaming Subsidiary must obtain gaming licenses from the Mississippi Commission to operate casinos in Mississippi. A gaming license is issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations and physical inspection of casinos prior to opening. A license for the operation of each of the casinos was granted by the Mississippi Commission. Gaming licenses are not transferable, are initially issued for a two-year period and are subject 30 to periodic renewal. No person may receive any percentage of profits from a gaming subsidiary of a holding company without first obtaining licenses and approvals from the Mississippi Commission. LICENSING OF OFFICERS, DIRECTORS AND EMPLOYEES Officers, directors and certain key employees of the Company and its Gaming Subsidiaries must be found suitable or be licensed by the Mississippi Commission, and employees associated with gaming must obtain work permits that are subject to immediate suspension under certain circumstances. In addition, any person having a material relationship or involvement with the Company may be required to be found suitable or be licensed, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Commission may deny an application for a license for any cause that it deems reasonable. Changes in licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for a license, the Mississippi Commission has jurisdiction to disapprove a change in corporate officers. The Mississippi Commission has the power to require any Gaming Subsidiary and the Company to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities. INVESTIGATION OF HOLDERS OF SECURITIES AND OTHERS Mississippi law requires any person who acquires beneficial ownership of more than 5% of the Common Stock to report the acquisition to the Mississippi Commission, and such person may be required to be found suitable. Also, any person who becomes a beneficial owner of more than 10% of the Common Stock, as reported in filings under the Exchange Act, must apply for a finding of suitability by the Mississippi Commission and must pay the costs and fees that the Mississippi Commission incurs in conducting the investigation. The Mississippi Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a company's stock. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of beneficial owners. Representatives of the Mississippi Commission have indicated that institutional investors may only be required to file summary information in lieu of a suitability finding. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Mississippi Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the securities of the Company beyond such time as the Mississippi Commission prescribes, may be guilty of a misdemeanor. The Company is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its Gaming Subsidiaries, the Company: (i) pays the unsuitable person any dividend or other distribution upon the voting securities of the Company; (ii) recognizes the exercise, directly or indirectly, of any voting rights conferred by securities held by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of the securities, including, if necessary, the 31 immediate purchase of the securities for cash at a fair market value. The Company may be required to disclose to the Mississippi Commission upon request the identities of the holders of any debt securities. In addition, the Mississippi Commission under the Mississippi Act may, in its discretion, (i) require disclosure of holders of debt securities of corporations registered with the Mississippi Commission, (ii) investigate such holders, and (iii) require such holders to be found suitable to own such debt securities. Although the Mississippi Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to a default, or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with such an investigation. REQUIRED RECORDS The Company must maintain a current stock ledger in Mississippi that the Mississippi Commission may examine at any time. If any securities of the Company are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company must also render maximum assistance in determining the identity of the beneficial owner. The Mississippi Act requires that the certificates representing securities of a publicly-traded corporation (as defined in the Mississippi Act) bear a legend to the general effect that such securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. The Mississippi Commission has the power to impose additional restrictions on the holders of the Company's securities at any time. APPROVAL OF CORPORATE MATTERS AND FOREIGN GAMING OPERATIONS Substantially all loans, leases, sales of securities and similar financing transactions by a Gaming Subsidiary must be reported to or approved by the Mississippi Commission. Changes in control of the Company through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without the prior approval of the Mississippi Commission. The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other takeover defense tactics that affect corporate gaming licensees in Mississippi and corporations whose stock is publicly-traded that are affiliated with those licensees, may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before the Company 32 may make exceptional repurchases of voting securities above the current market price of its Common Stock (commonly called "greenmail") or before a corporate acquisition opposed by management may be consummated. Mississippi's gaming regulations will also require prior approval by the Mississippi Commission if the Company adopts a plan of recapitalization proposed by its Board of Directors opposing a tender offer made directly to the stockholders for the purpose of acquiring control of the Company. Neither the Company nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require determinations that, among other things, there are means for the Mississippi Authorities to have access to information concerning the out-of- state gaming operations of the Company and its affiliates. SANCTIONS If the Mississippi Commission were to decide that a Gaming Subsidiary had violated a gaming law or regulation, the Mississippi Commission could limit, condition, suspend or revoke the license of the Gaming Subsidiary. In addition, the Gaming Subsidiary, the Company and the persons involved could be subject to substantial fines for each separate violation. Because of such violation, the Mississippi Commission could appoint a supervisor to operate the casino facilities, and, under certain circumstances, earnings generated during the supervisor's appointment (except the reasonable rental value of the casino facilities) could be forfeited to the State of Mississippi. Limitations, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's and the Gaming Subsidiary's gaming operations. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. The Company does not believe that the issues raised by the Mississippi Commission regarding the operation of the Jubilation Casino will adversely affect the license to operate the Jubilee Casino since the Jubilee Casino is operating in compliance with applicable regulations, including regulations relating to issues raised by the Mississippi Commission regarding the operation of the Jubilation Casino. There can be no assurance, however, that the issues raised by the Mississippi Commission will not adversely affect the license, or the renewal of the license, to operate the Jubilee Casino, or any future licenses for which applications may be submitted in Mississippi. FEES AND TAXES License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Mississippi and to the counties and cities in which a Gaming Subsidiary's operations will be conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon (i) a percentage of the gross gaming revenues received by the casino operation, (ii) the number of slot machines operated by the casino or (iii) the number of tables games operated by the casino. The license fee payable to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and less than $134,000 per month, and 8% of gaming receipts over $134,000. The foregoing license fees are allowed as a credit against the Company's Mississippi income tax liability for the year paid. MISSOURI AND NEW YORK Missouri law and the Federal Indian Gaming Law (as it relates to the Company's proposed operation in New York), each provide for a comprehensive, detailed scheme for the control of gaming operations in the state and the issuance of licenses for gaming, both to gaming facilities and to persons involved in certain gaming related activities. With respect to the Company's compact with the Tribe relating to the proposed casino to be built in Sullivan County, New 33 York, the State of New York has provided for regulation of Indian gaming casinos through the New York State Racing and Wagering Board. Each of the supervising governmental agencies is authorized to promulgate rules and regulations applicable to the administration of gaming related laws. In connection with its proposed operations in Missouri, the Company has commenced the application and approval process with the Missouri Gaming Commission. The Company does not anticipate receiving a final determination with respect to its license application within the next twelve months. In connection with its proposed operations in New York, the Company is preparing the documentation required to be filed with the National Indian Gaming Commission. HOTEL OPERATIONS GENERAL Through Alpha Hotel, the Company provides Management Services to fifteen (15) hotels or motels. The Company provides Management Services to thirteen (13) of such hotels or motels primarily under Service Agreements with Bryanston. The Company provides Management Services to these thirteen (13) hotels on behalf of Bryanston (which is 50% owned by Mrs. Beatrice Tollman, the spouse of the Company's Chairman and co-Chief Executive Officer, and 50% owned by a trust for the benefit of a child of Mr. Monty D. Hundley, the Company's former President and co-Chief Executive Officer), pursuant to individual Management Agreements. The rights to provide the Management Services were acquired by the Company in partial consideration for the issuance of the Company's Common Stock to Bryanston. Such rights were recorded by the Company at no cost to the Company based on its predecessor's cost, which was $0. Pursuant to the Service Agreement, the Company is the sole provider to such hotels of Management Services required of Bryanston, and receives substantially all fees due to Bryanston under the Management Agreements. In addition, the Company provides Management Services to two (2) hotels located in Myrtle Beach, South Carolina and Branson, Missouri, respectively, under agreements with the hotel's respective owners. All of the fifteen (15) hotels are "mid-priced," ranging between $40 and $70 per night, and all but two are operated as Days Inns. The Company and Bryanston have designed a financial management system whereby all accounting information is processed in a centralized accounting office in Hopewell Junction, New York. The system includes management of all cash, accounts payable and receivable, and generates detailed monthly financial statements. The Company provides each property with standardized forms and procedures in order that all accounting in the management system is uniform. In connection with the Service Agreement, effective September 1, 1993, the Company entered into an expense reimbursement agreement (the "Expense Reimbursement Agreement") with Bryanston for the use of certain office space at its Hopewell Junction, New York facility in connection with the Company's hotel management operations. Pursuant to the terms of the Expense Reimbursement Agreement, the Company reimburses Bryanston on a monthly basis for its share of rent, office expenses and direct payroll. The Expense Reimbursement Agreement allows for cost-effective centralization and management of the Company's operations, partly based on the Service Agreement and partly based on the fact that Bryanston, which employs some of the Company's employees, is also based at the Hopewell Junction office. See "Certain 34 Transactions" and "Management." Under the Service Agreement, the Company is compensated for its services in an amount equal to a percentage of total net revenues of the managed hotels (net of 1% of aggregate revenue retained by Bryanston). Such percentages range from 2% to 5%. Additional fees are earned from various incentive agreements and accounting fees. The Management Agreements typically have a term of 10 years and most have specified renewal terms. The majority of the initial terms expire between 1996 and the year 2000, three of which expire in 1996 (two in October and one in December). The Company intends to initiate negotiations regarding the renewal of the three agreements that expire in the fall of 1996, although such negotiations have not yet commenced. The Management Agreements contain termination provisions that are consistent with hotel industry practice and may be terminated by either party due to an uncured default by the other party. One of the Management Agreements is terminable at the discretion of the hotel owner and others are terminable if there is a material decrease in the hotel operating results or upon sale of the property. Management Agreements may also be terminated upon the sale of the managed hotels. Since January 1, 1991, nine Management Agreements have been terminated, six of which were terminated due to the sale of the subject hotels two of which were terminated due to the conversion of the subject hotels to different hotels and one of which was not renewed by the owner upon expiration of the agreement's term. In eight of the nine cases the new owners exercised their rights to terminate the agreements upon the occurrence of the above-stated events. As indicated above, many of the managed hotels are operated as Days Inns by arrangement with Bryanston, which is a Days Inns licensee. The terms of Bryanston's license provide for a special, partial exemption from the Days Inns license fees, which is ordinarily 8% of total net revenue for each of the hotels for which the Company provides management services. Each of the managed hotels is charged applicable fees for marketing and reservation service, but is exempt from the so-called "basic fee" of 5% since the elimination of the "basic fee" reduces the license fee to 3%, such reduction is economically significant to such hotels, and is favorable to the Company since the arrangement acts is an incentive for Days Inn licensees to enter into management agreements with the Company. The term of the special exemption is equal to the term of the related Management Agreement, including any extensions for which provision is made therein, plus a further five-year term (intended to cover a possible future extension). The discount is not available, however, for any hotels other than those hotels currently operated by Bryanston. There is no discretion in the licenser, absent breach, to eliminate or modify the discount. The Company's hotel management operations are organized under a regional management structure. The overall hotel operation is supervised by the president of Alpha Hotel and regional executives are utilized to oversee and monitor the operations. The Company believes this type of organization, coupled with extensive operational systems and procedures, is the most effective way to provide management services for the hotels. In addition to the regional managers, the Company has a support staff comprised of accounting, marketing, sales and supervisory personnel. This comprehensive support staff helps ensure that all of the managed hotels maximize potential revenue and profit opportunities by implementing financial controls, marketing the Company's services to existing and potential clients, and advising on programs related to hotel management services. 35 The fifteen hotels for which the Company currently provides Management Services are:
MANAGEMENT NUMBER AGREEMENT RENEWAL OF TERMINATION TERMINATION NAME AND LOCATION ROOMS DATE DATE ----------------- ----- ------- --------- Days Inn-Scottsdale, Scottsdale, AZ 167 2001 None Days Inn-Clearwater, Clearwater, FL 117 2001 None Days Inn-Buena Vista, Orlando, FL 245 1996 2001 Days Inn-Downtown, Atlanta, GA 262 2012 2022 Days Inn-Savannah, Savannah Bay, GA 253 1996 2001 Days Inn-Lakeshore, Chicago, IL 580 2006 2021 Days Inn-Kankakee, Kankakee, IL 98 2007 None Days Inn-Henderson, Henderson, KY 115 2002 None Days Inn-University, Minneapolis, MN 130 2001 None Days Inn-Roseville, Roseville, MN 114 2001 None Days Inn-Plymouth, Plymouth, MN 113 2001 None Days Inn-Butler, Butler, PA 133 1996 2011 Days Inn-Madisonville, Madisonville, KY 141 2002 None Sheraton - Myrtle Beach, SC 219 2004 None Peachtree Inn - Branson, MO 65 2001 2006 ----- 2,752 ----- -----
The Company is seeking additional management contracts directly with hotel owners who own properties in appropriate locations, allowing the Company to expand and benefit from the limited incremental costs of adding additional management activities. To date, the Company has only engaged in preliminary negotiations with such hotel owners. 36 SIGNIFICANT CLIENTS Thirteen of the hotels for which the Company provides Management Services are owned by five companies. These five companies accounted for 22.6%, 18.5%, 17.1%, 17.0% and 12.7% of Alpha Hotel's revenues in its most recent fiscal year. The Management Agreements contain termination provisions which are consistent with hotel industry practice and may be terminated by either party due to an uncured default by the other party. One of the management agreements, which accounted for 17.0% of Alpha Hotel's 1995 revenues, was terminated in 1995 due to the sale of the subject hotel and the new owner's termination of the agreement, as permitted by the terms of the agreement. One of the management agreements, which accounted for 12.7% of Alpha Hotel's 1995 revenues, expired in June 1996 and was not renewed by the owner. The remaining Management Agreements are terminable if there is a material decrease in the hotel's operating results and are all terminable on a sale of the property. In the first quarter of 1996, the Company entered into Management Agreement to manage a hotel in Branson, Missouri. If additional management agreements are not obtained during the remainder of 1996, future revenues of Alpha Hotel will be impacted adversely. In addition, because substantially all of the Company's current hotel management clients are sub-contracted through Bryanston, any failure on the part of Bryanston to continue its business operations or to maintain its Management Agreements would adversely affect the business, financial condition and results of operations of the Company. COMPETITION There are many hotel management companies that provide management services to hotels similar to the services provided by the Company. Many of such companies are larger and better capitalized and have more experience in the management of hotels. However, the Company believes that its expertise in operating major mid-market hotel licensees, economies of scale, its innovative marketing strategies and favorable arrangements between Bryanston and the Days Inn licensee will enable it to maintain a competitive position. The favorable arrangements with Days Inn extend for the duration of the Service Agreement, plus five years, and, absent breach, there is no discretion in the licenser to eliminate or to modify the discount. The discount is not available, however, for any hotels other than those hotels currently operated by Bryanston, which may inhibit the Company's ability to attract additional management clients. See "Business - Hotel Operations - General." The Company's advertising and marketing strategies enable the Company to remain competitive in the markets affecting its hotel operations. In addition, the Company's reputation of providing competent management services help maintain the Company's presence in this market. The terms of the Service Agreement also enable the Company to offer competitive rates for its services. See "Business - Hotel Operations - General". MARKETING The Company engages in marketing efforts at a national level and directs such marketing activities toward a wide range of affiliated and non-affiliated hotel facilities. The Company's marketing efforts for its hotel operations are focussed on maintaining and expanding its existing client base. In order to further develop existing accounts, as well as procure additional accounts, the Company works to maintain and improve its relationships with its existing clients. Besides actively soliciting business from these sources, the Company makes efforts to maintain 37 a public awareness of its management services. SEASONAL FLUCTUATIONS The hotel industry in general seasonal. Though the hotels that receive Management Services from the Company are distributed through various regions of the country, the revenues generated by such hotels are anticipated to be typically lower in the first and fourth quarters of each year. Since fees received by the Company are based on a percentage of the total net revenues generated by such hotels, the Company's operations are susceptible to seasonal variations. EMPLOYEES In connection with its casino operations, as of June 30, 1996 the Company employed approximately 1,065 employees, of which 908 are full-time employees. Management considers its employment relations to be satisfactory. In connection with the closing of the Jubilation Casino and pursuant to the Workers Adjustment and Retraining Notification Act, the Company provided the 320 employees of the Jubilation Casino with notice of its plans to close the Jubilation Casino within 60 days of the anticipated closing date, as required under the act. Therefore, management believes it has taken appropriate action required by federal law with respect to providing notice of the closing of the Jubilation Casino to the employees of the Jubilation Casino. See "Casino Operations." In connection with its hotel operations, although not directly employed by the Company, 1,030 individuals engaged in the operations of managed hotels are employed by Bryanston and Atlantic Shore Resort, the owner of the hotel located in Myrtle Beach, South Carolina, and are supervised by the Company. Approximately 15% of the 951 Bryanston employees are unionized. The Company believes that Bryanston's relations with its unions are satisfactory. PROPERTIES The Company maintains its executive office at leased premises located at 12 East 49th Street, New York, New York, 10017. This lease expires December 31, 2004. 38
CASINO OPERATIONS LOCATION PRINCIPLE USE APPROXIMATE OWNED/LEASED EXPIRES AREA Hancock County Mooring site of 25 acres Leased July 21, 2001 Waveland, MS casino vessel with option to extend 2 five year terms Hancock County Rights to 1,250 waterfront Leased December 31, 2003 Waveland, MS adjoining waters feet with option to to the mooring extend five years site of casino vessel Hancock County Sign location, 3 acres Leased April 30, 2003 Waveland, MS warehousing and with option to parking purchase Hancock County Accounting 1 acre Leased June 30, 1998 Waveland, MS office with option to extend 3 five year terms and right of first refusal to purchase Washington County Customer 2.0 acres Owned ---- Greenville, MS parking Washington County Mooring site of 1,000 Leased December 29, 1997 Greenville, MS casino vessel waterfront feet with 3 extensions of five years each Washington County Accounting 10,000 square Leased December 1, 1996 Greenville, MS offices and feet with option to warehouse extend two years
The Company considers its property to be suitable and adequate for its present needs. In connection with the original closing of the Jubilation Casino, the realizability of the capital leasehold and improvements related to the Jubilation Casino was reassessed. This would result in an impairment loss of approximately $14,165,000 and stockholders' equity would be reduced to a level below the requirements for continued listing of the Company's securities on NASDAQ. In order to avoid NASDAQ delisting, the Company accepted proposals from Bryanston and BP to convert certain debt owed to such entities into equity in the Company. See "Business - - Casino Operations," "Certain Transactions - Bryanston," "Certain Transactions - BP Group," "Management's Discussion and Analysis of 39 Financial Condition and Results of Operations." LEGAL PROCEEDINGS In October 1994, Alpha Gulf was named as a defendant in an action brought in the United States District Court for the Southern District of Mississippi (Susan E. Wolff, et al v. James C. Zamecnik, et al. on the theory of "liquor liability" for the service of alcohol to a customer, who subsequently was involved in an automobile collision with the Plaintiff. The principle theory of liability against Alpha Gulf is based on its service of alcohol to a customer when it knew, or should have known, he was intoxicated and then allowed him to drive his automobile from the casino. The Company was named as an additional defendant in May 1995 based primarily on the allegation that it is the alter-ego of its subsidiary, and secondarily on the theory of liquor liability. The Plaintiff initially sought $20,000,000. Early in the litigation Plaintiff sought a default judgment against Alpha Gulf relating to evidence that was destroyed. The court denied the motion, but granted Plaintiff attorney's fees, in an amount to be determined, but to date not yet determined. The Plaintiff also initiated a declaratory judgment action in the same court against Alpha Gulf and its insurance carriers seeking a determination as to the liability of such carriers under the insurance policies issued by the carriers to Alpha Gulf and the Company for any damages found against Alpha Gulf in the primary litigation up to the policy limits. The declaratory judgment action appears to have been brought in response to issues raised by the primary insurance carrier as to timely notice of the incident and possible spoilation of evidence. Subsequently, the primary insurance carrier initiated its own declaratory judgment action against Alpha Gulf and the Company (Commerce & Industry Company v. Alpha Gulf Coast, Inc. and Alpha Hospitality Corporation, Inc.: United States District Court for the Southern District of Mississippi, Jackson Division) seeking a determination that it is not liable under the subject insurance policy. The declaratory judgment action instituted by Plaintiff was dismissed in June 1996 and the declaratory judgment action instituted by the primary insurance carrier is subject to dismissal. In addition, a settlement has been reached between Plaintiff and the Company's insurance carrier with respect to the underlying personal liability action in the amount of $5,125,000, with respect to all issues relating to the underlying personal liability action, subject to completion of the settlement documents and the approval of the court. The principal insurance carrier which will pay the settlement may attempt to assert that the Company and Alpha Gulf have an obligation to reimburse it for payment of the settlement amount, which dispute may be litigated. Accordingly, no provision for any liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. In January 1996, the Company was named as a defendant in an action brought in the Circuit Court of Hinds County, Mississippi (Amos vs Alpha Gulf Coast, Inc.; Batiste vs Alpha Gulf Coast, Inc.; Dycre vs Alpha Gulf Coast, Inc.; Johnston vs Alpha Gulf Coast, Inc.; Rainey vs Alpha Gulf Coast, Inc.). Based on the theory of "liquor liability" for the service of alcohol to a customer, Plaintiffs alleged that on January 16, 1995, a vehicle operated by Mr. Amos collided with a vehicle negligently operated by Mr. Rainey, an individual that was served alcoholic beverages by the Company. Plaintiffs alleged that they suffered personal injuries and seek compensatory damages aggregating $17.1 million and punitive damages aggregating $37.5 million. The ultimate outcome of this litigation cannot presently be determined as this case is presently in the early phases of discovery. Accordingly, no provision for liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. The Company believes that the risk referred to in this paragraph is adequately covered by insurance. 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CASINO OPERATIONS MISSISSIPPI On May 14, 1993, the Company acquired certain of the assets of B.C., including B.C.'s leasehold interests under certain lease agreements, certain other assets incidental to the development and ownership of the Jubilee Casino, and B.C.'s interest in certain related license applications, approvals and permits. The Jubilee Casino commenced gaming operations in Lakeshore, near Waveland, Hancock County, Mississippi, on January 12, 1994. In October 1995, the Company consummated the Cotton Club Acquisition, through which it acquired the Jubilation Casino in its original location in Greenville, Mississippi. Immediately following the Cotton Club Acquisition, the Company relocated the Jubilee Casino to Greenville, and the Jubilation Casino to Lakeshore. Management believed that these relocations were appropriate in order to increase the return on the Company's gaming assets, since management believed that the Jubilee Casino would better serve the larger Greenville market, and that the Jubilation Casino would adequately serve the smaller Lakeshore market. The Jubilee Casino reopened in Greenville on November 17, 1995, and the Jubilation Casino reopened in Lakeshore on December 21, 1995. In July 1996, the Company began to implement its plans to close the Jubilation Casino during August 1996 due to the Jubilation Casino being unable to overcome operating deficits. Considering the impact of the aforementioned factor, management updated its assessment of the realizability of the leasehold improvements and related assets of the Jubilation Casino. In accordance with its accounting policy for long-lived assets, effective for the second quarter ended June 30, 1996, management will record an impairment loss of $14,165,000 to property and equipment. Since this recordation would result in the reduction of stockholders' equity to a level below the requirements for continued listing of the Company's securities on NASDAQ, the Company accepted proposals by Bryanston and BP to convert an aggregate of approximately $20,400,000 of debt owed by the Company to Bryanston and BP into shares of the Company's Preferred Stock. Thereafter, on July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. See "Certain Transactions - Bryanston" and " Certain Transactions - BP Group." RESULTS OF OPERATIONS - ALPHA GULF The following table sets forth the statement of operations for the Alpha Gulf's Jubilee Casino's operations before income taxes for the three months ended March 31, 1996 and for the years ended December 31, 1995 and 1994 and the period May 3, 1993 (date of inception) to December 31, 1993 (in thousands): 41
Period May 3, 1993 Year Ended (Date of Inception) Three Months Ended December 31, March 31, ---------------------------- ------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- (unaudited) (unaudited) Revenues: Casino $ 9,562 6,233 $ 25,713 $ 41,344 $ -- Food, beverage and other 276 320 1,122 1,921 19 ------- ------ --------- ------- ------- Total revenues 9,838 6,553 26,835 43,265 19 ------- ------ --------- ------- ------- Operating expenses: Casino 3,227 3,856 14,933 20,989 Food, beverage and other 181 193 729 1,223 Selling, general and administration 4,534 3,413 15,190 20,769 -- ------- ------ --------- ------- ------- Total operation expenses 7,942 7,462 30,852 42,981 -- ------- ------ --------- ------- ------- Income (loss) from operations 1,896 (909) (4,017) 284 19 ------- ------ --------- ------- ------- Other expenses: Interest 510 498 2,178 2,317 375 Other non-operating 2,620 1,535 5,439 Depreciation and amortization 1,229 978 4,161 3,763 ----- ------- ------ --------- ------- ------- Total other expense 1,739 1,476 8,959 7,615 5,814 ------- ------ --------- ------- ------- Loss before intercompany charges and deferred income tax credit $157 $(2,385) $ (12,976) $(7,331) $(5,795) ------- ------ --------- ------- ------- ------- ------ --------- ------- -------
YEARS ENDED DECEMBER 31, 1995 AND 1994: Alpha Gulf generated revenues of $26,835,000 and $43,265,000 in 1995 and 1994, respectively. The Jubilee Casino revenues were $25,713,000 and $41,344,000 in 1995 and 1994, respectively. Food, beverage, retail and other revenues were $1,122,000 and $1,921,000 in 1995 and 1994, respectively. The Company experienced declining revenues during the year ended December 31, 1995. To overcome such declining revenues, management attempted many different marketing programs, some of which showed moderate results. However, upon the acquisition of the Jubilation Casino, and the leasehold interests incidental to the ownership of the Jubilation Casino relating to its original location in Greenville, Mississippi, the Company announced plans to relocate the Jubilee Casino to Greenville so that the larger Jubilee Casino could better serve the larger Greenville market, and thereby combat the declining revenues. This relocation caused the Jubilee Casino to close for four weeks, reopening on November 17, 1995 in Greenville. During its first six weeks of operations in Greenville, the Jubilee Casino had casino revenues of $5,270,000 compared to $3,787,000 of gaming revenue achieved by its predecessor's gaming 42 vessel at this site during the same period in 1994. Alpha Gulf's casino operating expenses were $14,933,000 and $20,989,000, for the fiscal years ended December 31, 1995 and 1994, respectively, which amounts, constituted 58% and 51% of casino revenues during each respective period. The increase in casino expenses as a percentage of revenue (7%) was due to the combination of the cost, payroll and overhead of food and beverage, provided gratuitously to customers, not decreasing at the same rate as revenues (4%) and other operating expenses not decreasing at the same rate as revenues (3%). Food, beverage, retail and other expenses were $729,000 and $1,223,000 for the fiscal years ended December 31, 1995 and 1994, respectively, which amounts constituted 65% and 64% of food, beverage, retail and other revenues during each respective period. Food and beverage revenue does not include the retail value of food and beverage of approximately $3,514,000 and $4,884,000 provided gratuitously to customers for the fiscal years ended December 31, 1995 and 1994, respectively. The reduced casino expenses incurred in 1995 when compared to 1994 of approximately $6,000,000 was the results of the following factors, (i) reduced gaming taxes of $1,876,000 due to reduced gaming revenue, and (ii) management's reduction of staffing levels to more closely match the volume of business. The reduction of food, beverage and other costs are directly related to the reduced volume of business. Selling, general and administrative expenses consists primarily of payroll and related benefits of approximately $5,700,000 and $7,300,000, marketing and advertising of approximately $4,200,000 and $6,200,000, and occupancy costs of approximately $1,100,000 and $3,500,000 for the fiscal years ended December 31, 1995 and 1994, respectively. The reduced payroll and related costs of $1,600,000 was a direct result of management's cost cutting measures instituted during the first quarter of 1995. The $2,000,000 reduction in marketing and advertising was principally the result of management focusing on marketing programs that had previously demonstrated successful results and elimination of unsuccessful programs. The reduction of occupancy costs of $2,400,000 is primarily due to the renegotiated terms of the Lakeshore ground lease and reduced insurance costs. Other non-operative expenses of $2,620,000, $1,535,000 and $5,439,000 for the fiscal years ended December 31, 1995, 1994, and 1993, respectively, consist primarily of pre-opening and development costs. Interest expense was primarily related to the first mortgage on the gaming vessel, equipment financing and various capitalized leases. Depreciation and amortization was $4,161,000 and $3,763,000 in 1995 and 1994, respectively. The increase was directly related to a corresponding increase in capital expenditures. THREE MONTHS ENDED MARCH 31, 1996 AND 1995: Alpha Gulf generated revenues of $9,838,000 and $6,553,000 in 1996 and 1995, respectively. Casino revenues were $9,562,000 and $6,233,000 in 1996 and 1995, respectively. Food, beverage and other revenues were $276,000 and $320,000 in 1996 and 1995, respectively. This increase in casino revenues is primarily due to the relocation of the Alpha Gulf's Bayou Caddy's Jubilee Casino from Lakeshore, Mississippi to Greenville, Mississippi in November 1995. During this period the Jubilee Casino achieved 50% market share in the Greenville market. In addition the Greenville market increased by 15% over the same period last year. 43 At the locations referred to above, Alpha Gulf's casino operating expenses were $3,227,000 and $3,230,000, (34% and 52% of Casino revenues) in 1996 and 1995, respectively. Food, beverage, retail and other expenses were $181,000 and $197,000 (66% and 62% of food, beverage, retail and other revenues) in 1996 and 1995, respectively. Food and beverage revenue does not include the retail value of food and beverage of approximately $1,066,000 and $917,000 provided gratuitously to customers in 1996 and 1995, respectively. The reduction of food, beverage and other costs are directly related to the reduced volume of business. Selling, general and administrative expenses consists primarily of payroll and related benefits of approximately $2,900,000 and $3,300,000, marketing and advertising of approximately $1,500,000 and $800,000, and occupancy costs of approximately $150,000 and $275,000 in 1996 and 1995, respectively. The reduced payroll and related costs of $400,000 was a direct result of management's cost-cutting measures instituted during the first quarter of 1995. The $700,000 increase in marketing and advertising was principally the result of management focusing on marketing programs that continue to demonstrate successful results and elimination of unsuccessful programs. The reduction of occupancy costs of $125,000 is primarily due to less ground lease costs assumed in Greenville and reduced insurance costs. Interest expense was primarily related to the first mortgage on the gaming vessel, equipment financing and various capitalized leases. Depreciation and amortization was $1,200,000 and $1,000,000 in 1996 and 1995, respectively. The increases was directly related to a corresponding increase in capital expenditures. FUTURE OPERATIONS - ALPHA GULF Alpha Gulf's Jubilee Casino's operating results have improved since its relocation to Greenville. During January, February and March of 1996, the Jubilee Casino obtained gaming revenues of $2,733,000, $3,132,000 and $3,600,000, respectively. The gaming revenues achieved to date by the Jubilee Casino in Greenville exceeded the revenues of the operations of the prior vessel by its then owners as reported to the Mississippi Gaming Commission for the same period in the prior year by 26.5%. Alpha Gulf's casino operations in Greenville have increased its market share to approximately 51% from approximately 36% for the prior owner's vessel, while the market itself has shown an increase of approximately 15%. The Company attributes the increase in its market share, in part, to the Jubilee Casino's attractive casino environment and significant casino capacity. Based upon the operations in fiscal 1996 to date, the Company projects that Alpha Gulf will earn income before taxes and intercompany charges of approximately $4,000,000 for the year ending December 31, 1996. RESULTS OF OPERATIONS - JUBILATION LAKESHORE The Company acquired the Jubilation Casino on October 26, 1995. The Jubilation Casino's operations in Greenville was terminated on October 30, 1995. After its relocation to Lakeshore, the Jubilation Casino reopened for business on December 21, 1995. The following table sets 44 forth the statement of operations for the Company's Jubilation Casino operations before intercompany charges and deferred tax credits for the three months ended March 31, 1996 and for the period October 26, 1995 (date of acquisition) to December 31, 1995 (in thousands):
October 26, 1995 (date of Three Months inception) ended March 31, to December 1996 31,1995 ---- ------- Revenues: Casino $3,276 $ 806 Food, beverage and other 101 16 ------- -------- Total revenues 3,377 822 ------- -------- Expenses: Casino 1,986 797 Food, beverage and other 84 89 Selling, general and administrative 2,554 1,718 ------- -------- Total operating expenses 4,624 2,604 ------- -------- Loss from operations (1,247) (1,782) ------- -------- Other expenses (Income): Interest 245 120 Other non-operating (344) 223 Depreciation and amortization 574 333 ------- -------- Total other expenses 475 676 ------- -------- Loss before intercompany charges and deferred tax credit $(1,722) $(2,458) ------- -------- ------- --------
During the second quarter of 1996, management became uncertain as to whether the Jubilation Casino would be profitable during the remainder of fiscal 1996. Management reduced operating costs and monitored the operation very closely. To overcome the Jubilation Casino's declining revenues, the Company would have to construct additional amenities which would require a substantial investment of funds. Since revenues did not improve during May and June 1996, which are part of the peak season, a continued decline was expected by management in the third quarter. Therefore, in July 1996 the Company began to implement its plans to close the Jubilation Casino during August 1996. In connection with the original plan to close of the Jubilation Casino, the realizability of the capital leasehold and improvements related to the Jubilation Casino were reassessed. Effective for the second quarter ended June 30, 1996, management will record an impairment loss of $14,165,000 to property and equipment. THREE MONTHS ENDED MARCH 31, 1996 The Jubilation Casino experienced a loss from operations of $1,247,000 during the three month period ended March 31, 1996. Although the Company had preliminary discussions with potential purchases of the Jubilation Casino, none of the discussions have been successful to date. In July 1996, the Company began to implement its plans to close the Jubilation Casino during August 1996. 45 CASINO DEVELOPMENT INDIANA - ALPHA RISING SUN Alpha Rising Sun proposed to build a destination resort hotel, entertainment and riverboat casino facility located in Rising Sun, Ohio County, Indiana. This project was awarded to another developer in 2nd quarter 1995. During 1994, $260,000 preopening costs were incurred in this project. During 1995, Alpha Rising Sun was not selected to be the casino developer on its proposed site in Indiana. Accordingly, all costs (approximately $914,000 in 1995) associated with this project has been expensed. NEW YORK - ALPHA ST. REGIS In March 1996, the Company entered into a joint venture agreement relating to the operation and development of a gaming facility located on the reservation of the St. Regis Mohawk Tribe of Hogansburg, New York. Upon formation of the joint venture, the Company paid $485,000 for the reimbursement of certain expenses and will be obligated for an additional $400,000 upon approval by the Tribe. The Company believes that upon receiving the Class 3 gaming license, there will be funds available through the public debt or equity markets to complete this project, however, there can be no assurance that such funds will be available or, if available, will be on terms acceptable to the Company. However, the Company does not intend to proceed with the project at Hogansburg, New York, since the Company and the tribe are exploring a more suitable arrangement relating to the development of a casino in Sullivan County, New York, as discussed below. In 1994, St. Regis incurred $509,000 in expenses related to a proposed Class 3 casino located on the St. Regis Mohawk Reservation in Hogansburg, New York. NEW YORK - ALPHA MONTICELLO On January 19, 1996, the Company, through its subsidiary, Alpha St. Regis, entered into a memorandum of understanding with Catskill Development, L.L.C. ("Catskill") regarding the development and management of a casino to be built adjacent to the Monticello Raceway in Sullivan County, New York. The development and management of this casino will be undertaken by the Company's subsidiary, Alpha Monticello. It is intended that the casino will be owned by the Tribe and will be located on land to be placed in trust for the benefit of the 46 Tribe. During 1996 and 1995, Alpha St. Regis incurred approximately $189,000 and $197,000, respectively, of costs primarily associated with its participation with Catskill to develop a casino adjacent to the Monticello Raceway in Sullivan County, New York. Upon completion of the project, and subject to governmental and Tribal approvals, Alpha Monticello will be the operator of the casino. Pursuant to an agreement with Catskill Alpha Monticello will receive 50% of all management fees plus certain administrative fees related to management of the casino. MISSOURI - ALPHA MISSOURI Alpha Missouri has not commenced operations. It has incurred development costs of approximately $68,000 and $179,000 in 1996 and 1995, respectively, related to its proposed development of a riverboat casino in Louisiana, Missouri. HOTEL MANAGEMENT - ALPHA HOTEL The following table sets forth selected financial data of Alpha Hotel for the three months ended March 31, 1996 and for the years ended December 31, 1995, 1994 and 1993 (1993 includes eight months of the Company's predecessor Bryanston Group, Inc.) (in thousands).
Three Months Ended YEAR ENDED DECEMBER 31, March 31, ------------------------------------ ------------------- 1996 1995 1995 1994 1993 ----- ---- ---- ---- ---- (unaudited) (unaudited) Income Statement Data: Management fees $ 450 $545 $2,863 $2,835 $3,091 ------ ---- ------ ------ ------ Operating expenses: Direct payroll and related expenses 308 330 1,236 1,474 1,291 Selling, general and administrative 23 69 276 236 550 ------ ---- ------ ------ ------ 331 399 1,512 1,710 1,841 ------ ---- ------ ------ ------ Income from management fees before intercompany charges and income taxes $ 119 $146 $1,351 $1,125 $1,250 ------ ---- ------ ------ ------ ------ ---- ------ ------ ------
RESULTS OF OPERATIONS GENERAL Effective as of September 1, 1993, the Company, through its subsidiary Alpha Hotel, entered into a Service Agreement with respect to hotels managed by Bryanston Group, Inc. Hotel 47 Division. DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994: Total management fees increased during the year ended December 31, 1995 compared to the twelve months ended December 31, 1994 by approximately $28,000 (1.0%). The increase was principally the result of increases in the hotels' gross revenues on which the management fees are based. The factors that influence such gross revenues are general economic conditions, competitive changes in geographic regions, foreign exchange rates relative to the strength of the U.S. dollar, the price of gasoline, air fares and general weather conditions. Direct payroll and related costs decreased 16.1% to $1,236,000 for the year ended December 31, 1995 from $1,474,000 for the year ended December 31, 1994. The decrease was the result of reduced central office staff due to operating efficiencies achieved. Selling, general and administrative expenses increased to $276,000 for the year ended December 31, 1995 from $236,000 for the year ended December 31, 1994. This increase is a result of travel to the managed hotels by regional and corporate management and costs incurred to obtain additional management contracts. In 1995, Alpha Hotel entered into a management agreement for a Sheraton Hotel in Myrtle Beach, South Carolina directly with the hotel owner. DECEMBER 31, 1994 COMPARED TO DECEMBER 31, 1993: Total management fees decreased during the year ended December 31, 1994 compared to the twelve months ended December 31, 1993 by approximately $256,000 (8.3%). This net decrease in total hotel management fees was the result of a decrease in revenues due to the loss of three management agreements during 1993 and one during 1994 (all of which related to the hotels) and the addition of a management agreement for a property under receivership for the first three months of 1993, and the increase in management fees of $156,000 from the hotels subject to ongoing management agreements. This increase in management fee revenues of $156,000 resulted from increases in the hotels' gross revenues on which the management fees are based. The factors that influence such gross revenues are general economic conditions, competitive changes in geographic regions, foreign exchange rates relative to the strength of the U.S. dollar, the price of gasoline, air fares and general weather conditions. Direct payroll and related costs increased 14.1% to $1,473,666 for the year ended December 31, 1994 from $1,291,582 for the year ended December 31, 1993. The increase was the result of a mid-year increase in salaries and wages of 3% to 4% for the office personnel. Selling, general and administrative expenses decreased to $235,238 for the year ended December 31, 1994 from $549,917 for the year ended December 31, 1993. This decrease is a result of the office rent allocation, increase in reserve for bad debt and travel to the managed hotels by regional and corporate management. 48 MARCH 31, 1996 COMPARED TO MARCH 31, 1995 Total management fees decreased during the three months ended March 31, 1996 compared to the three months ended March 31, 1995 by approximately $95,000 (17.49%). The decrease was principally from the net result of $24,000 increase in fees from continuing management agreements and a decrease of $119,000 related to the loss of five management agreements (which related to hotels whose ownership changed). The increase in fees earned was the result of increases in the hotels' gross revenues on which the management fees are based. The factors that influence such gross revenues are general economic conditions, competitive changes in geographic regions, foreign exchange rates relative to the strength of U.S. dollar, the price of gasoline, air fares and general weather conditions. Direct payroll and related costs decreased 6.7% to $308,000 for the three months ended March 31, 1996 from $330,000 for the three months ended March 31, 1995. The decrease was the result of a reduction in staffing to accommodate the decrease in management contracts being serviced. Selling, general and administrative expenses decreased to $23,000 for the three months ended March 31, 1996 from $69,000 for the three months ended March 31, 1995. This decrease is a result of office relocation to a less expensive area. RESULTS OF OPERATIONS - GENERAL The Company complies with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. At December 31, 1993 the Company recorded a deferred tax asset of $1,716,000. During the Company's first years of operation, it experienced a volatile and competitive market on the Gulf Coast of Mississippi that was not anticipated. As a result, the Company experienced a significant net loss and has established a valuation reserve (approximately $12,671,000) equal to the deferred tax asset as of December 31, 1995. (See Notes to Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES The Company continues to suffer significant losses from operations and has a working capital deficit and accumulated deficit. In addition, the Company was not in compliance with certain long-term debts which are included in current liabilities. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management plans include continuing to operate the Jubilee Casino profitably (See Future Operations - Alpha Gulf), developing future casino locations in Missouri and New York and continuing to reduce and monitor operating expenses. In early July 1996 the Company began implementation of a plan to close the Jubilation Casino in August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. During the three months ended March 31, 1996 cash used in operations of $171,182 was primarily attributable to the net loss of $2,827,505, less depreciation and amortization of $1,802,582 a decrease in prepaid insurance of $716,993, an increase in accrued payroll and related liabilities of $773,147 and a decrease in accounts payable and accrued expenses of $709,149. 49 In October 1994, Alpha Gulf was named as a defendant in an action brought in the United States District Court for the Southern District of Mississippi (Susan E. Wolff, et al v. James C. Zamecnik, et al. on the theory of "liquor liability" for the service of alcohol to a customer, who subsequently was involved in an automobile collision with the Plaintiff. The principle theory of liability against Alpha Gulf is based on its service of alcohol to a customer when it knew, or should have known, he was intoxicated and then allowed him to drive his automobile from the casino. The Company was named as an additional defendant in May 1995 based primarily on the allegation that it is the alter-ego of its subsidiary, and secondarily on the theory of liquor liability. The Plaintiff initially sought $20,000,000. Early in the litigation Plaintiff sought a default judgment against Alpha Gulf relating to evidence that was destroyed. The court denied the motion, but granted Plaintiff's attorney fees in an amount to be determined, but to date not yet determined. The Plaintiff also initiated a declaratory judgment action in the same court against Alpha Gulf and its insurance carriers seeking a determination as to the liability of such carriers under the insurance policies issued by the carriers to Alpha Gulf and the Company for any damages found against Alpha Gulf in the primary litigation up to the policy limits. The declaratory judgment action appears to have been brought in response to issues raised by the primary insurance carrier as to timely notice of the incident and possible spoilation of evidence. Subsequently, the primary insurance carrier initiated its own declaratory judgment action against Alpha Gulf and the Company (Commerce & Industry Company v. Alpha Gulf Coast, Inc. and Alpha Hospitality Corporation, Inc.: United States District Court for the Southern District of Mississippi, Jackson Division) seeking a determination that it is not liable under the subject insurance policy. The declaratory judgment action instituted by Plaintiff was dismissed in June 1996 and the declaratory judgment action instituted by the primary insurance carrier is subject to dismissal. In addition, a settlement has been reached between Plaintiff and the Company's insurance carrier with respect to the underlying personal liability action in the amount of $5,125,000, with respect to all issues relating the underlying personal liability action, subject to completion of the settlement documents and the approval of the court. The principal insurance carrier which will pay the settlement may attempt to assert that the Company and Alpha Gulf have an obligation to reimburse it for payment of the settlement amount, which dispute may be litigated. Accordingly, no provision for any liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. In January 1996, the Company was named as a defendant in an action brought in the Circuit Court of Hinds County, Mississippi (Amos vs Alpha Gulf Coast, Inc.; Batiste vs Alpha Gulf Coast, Inc.; Dycre vs Alpha Gulf Coast, Inc.; Johnston vs Alpha Gulf Coast, Inc.; Rainey vs Alpha Gulf Coast, Inc.). Based on the theory of "liquor liability" for the service of alcohol to a customer, Plaintiffs alleged that on January 16, 1995, a vehicle operated by Mr. Amos collided with a vehicle negligently operated by Mr. Rainey, an individual that was served alcoholic beverages by the Company. Plaintiffs alleged that they suffered personal injuries and seek compensatory damages aggregating $17.1 million and punitive damages aggregating $37.5 million. The ultimate outcome of this litigation cannot presently be determined as this case is presently in the early phases of discovery. Accordingly, no provision for liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. The Company believes that the risk referred to in this paragraph is adequately covered by insurance. 50 The Company was obligated under a $20,000,000 non-revolving promissory note ($19,413,856 and $17,360,861 outstanding at March 31, 1996 and December 31, 1995, respectively) with Bryanston. Effective June 26, 1996, this note was converted into shares of the Company's Preferred Shares. See "Certain Transactions - Bryanston." The note bore interest at prime rate (8.25% at March 31, 1996) plus 2%, and was payable at the lesser of the outstanding principal amount of $2,000,000 per annum through December 31, 1999. Beginning 1996, interest accrued monthly shall be due and payable by the following month. All remaining principal and accrued interest (approximately $437,000 and $503,000 at March 31, 1996 and December 31, 1995, respectively) was due December 31, 2000. At March 31, 1996, the Company was in default of (i) its mortgage notes payable for non-payment, (ii) the equipment notes relating to the Jubilation Casino aggregating approximately $3,433,000 for the breach of several loan covenants and certain loans payable aggregating approximately $3,655,000 for non-payment. The Company received a waiver of the defaults of the loan payable and mortgage note payable to Bryanston. Accordingly, the mortgage note payable ($3,656.000), and the equipment notes payable ($3,433,000) relating to the Jubilation Casino in addition to another certain loan payable ($1,181,000) are reflected in current liabilities at March 31, 1996. 51 MANAGEMENT The table below sets forth certain information with respect to the directors and executive officers of the Company. NAME AGE POSITION WITH THE COMPANY - ---- --- ------------------------- Stanley S. Tollman 64 Chairman of the Board, President and Chief Executive Officer Sanford Freedman 59 Vice President, Secretary and Director Howard D. Zukerman 50 Vice President and Assistant Secretary Thomas W. Aro 52 Vice President and Director Brett G. Tollman 33 Vice President and Director James A. Cutler 44 Treasurer, Chief Financial Officer and Director Patricia Cohen 41 Director Matthew B. Walker 46 Director STANLEY S. TOLLMAN has served as Chairman of the Board of Directors and Co-Chief Executive Officer of the Company since its formation. Since March 1995 Mr. Tollman has served as President and Chief Executive Officer. He served as Chairman of the Tollman-Hundley Hotel Group from 1979 to June 1996. He currently serves as Chairman of Bryanston Group, Inc., a hotel management company, and of Trafalgar Tours International, a tour operator. He has also served as Chairman of the Board of Directors of Buckhead America Corporation, which was formerly the franchiser of Days Inns hotels. SANFORD FREEDMAN has served as a Director, Vice President and Secretary of the Company from its formation until October 29, 1993 and was re-elected to those positions on February 1, 1994. He has served as Executive Vice President of the Tollman-Hundley Hotel Group since 1983, and served as a Director, Executive Vice President and Secretary of Bryanston Group, Inc. from 1983 through March 1996. HOWARD D. ZUKERMAN currently serves as the Company's Vice President and Assistant Secretary, positions he held from March 1993 through October 1993, and from February 1994 to date. Mr. Zukerman serves as the Senior Vice President of the Tollman-Hundley Hotel Group, a position he has held since 1985. 52 THOMAS W. ARO has served as a Director of the Company since February 1, 1994 and a Vice President of the Company since its formation. Mr. Aro also serves as Chairman of the Board of Directors and Chief Executive Officer of the Company's subsidiary Alpha Gulf Coast, Inc. He has served as Executive Vice President of the Tollman-Hundley Hotel Group since 1982, and Executive Vice President of the Bryanston Group, Inc. BRETT G. TOLLMAN served as a Vice President of the Company from its formation until October 29, 1993 and was re-elected to that position and was elected a Director of the Company on February 1, 1994. Mr. Tollman also serves as President of the Company's subsidiary, Alpha Hotel Management Company, Inc. He has served as Executive Vice President of the Tollman-Hundley Hotel Group from 1984 to June 1996 and currently serves as Executive Vice President and Secretary of Bryanston Group, Inc. He is also a Director of HMG Worldwide Corporation, a publicly held corporation. Mr. Tollman is the son of Stanley S. Tollman, the Chairman and Chief Executive Officer of the Company. JAMES A. CUTLER has served as Treasurer and Chief Financial Officer of the Company since its formation. He also served as Secretary of the Company from October 29, 1993 to February 1, 1994. Mr. Cutler was elected a Director of the Company on June 12, 1995. He served as Senior Vice President and Treasurer of the Tollman-Hundley Hotel Group until June 1996 and currently serves as Executive Vice President and Chief Financial Officer of Bryanston Group, Inc. PATRICIA COHEN was elected a Director of the Company on February 1, 1994. She is a principal shareholder of Westfield Financial Corporation, one of the underwriters of the Company's initial public offering and has been engaged for more than the past five years as a private investor. Westfield Financial Corporation is no longer operating as a broker-dealer. MATTHEW WALKER has served as a director of the Company since December 4, 1995, when he was elected by the Board to fill the vacancy resulting from the resignation of Charles Gargano in September 1995. He is an independent businessman involved in international business ventures including the Brazilian based Walker Marine Oil Supply Business, which he has been a consultant to since 1988. Mr. Walker co-founded the Splash Casino in Tunica, Mississippi in February 1993, where he remained employed until October 1995. In February 1994, he co- founded the Cotton Club Casino in Greenville, Mississippi, where he remained employed and a shareholder of until October 1995. In addition, since 1972, Mr. Walker has been involved in numerous real-estate transactions in the capacity of consultant, and has managed E.B. Walker & Son Lumber Company, a family-owned lumber business based in Alabama, since such time. Each Director is elected for a period of one year at the Company's annual meeting of stockholders and serves until his/her successor is duly elected by the Stockholders. Vacancies and newly created directorships resulting from any increase in the number of authorized directors may be filled by a majority vote of Directors then in office. Officers are elected by and serve at the pleasure of the Board of Directors. Directors are reimbursed for expenses incurred in connection with the performance of their duties. 53 CERTAIN PROCEEDINGS INVOLVING MANAGEMENT Bryanston Group, Inc. was formerly known as Buckhead Hotel Management Company, Inc. ("BHMC"), and prior to February 1, 1992, BHMC was known as Days Inns Management Company, Inc. BHMC was formerly a subsidiary of Buckhead America Corp. ("BAC") which, prior to February 1, 1992, was known as Days Inn of America, Inc. Messrs. Stanley S. Tollman, Thomas W. Aro, Brett G. Tollman, Sanford Freedman and James A. Cutler, each directors and/or officers of the Company, were officers and/or directors of BAC and certain of its subsidiaries. On September 27, 1991, BAC, BHMC and certain affiliates and subsidiaries thereof filed petitions for protection from creditors under the Bankruptcy Code, commencing proceedings in the United States Bankruptcy Court, in the District of Delaware (the Bankruptcy Court). ("In re Buckhead America Corporation, et al., f/k/a Days Inn of America Inc. et al., Debtors"-case numbers 91-978 through 91-986.) The Plan of Reorganization for BAC and its subsidiaries was filed and approved in December 1992 and became effective on December 28, 1992. Under the Plan of Reorganization, BHMC was relieved of certain obligations (and assigned certain assets) not related to its business of hotel management. Messrs. Stanley S. Tollman and Sanford Freedman are limited partners in and directors and officers of the corporate general partner of Pacific Shore Associates Limited Partnership ("Pacific Shore"). Messrs. Brett G. Tollman and James A. Cutler are officers of the corporate general partner of Pacific Shore. In connection with and in response to a foreclosure proceeding instituted by the first deed of trust holder of the hotel owned by Pacific Shore, it filed a voluntary petition under the Bankruptcy Code, Case No. La-91-81347-KL in the United States Bankruptcy Court for the Central District of California. Subsequently, the Bankruptcy Court lifted the automatic stay in the proceeding, thereby allowing foreclosure, and dismissed the Chapter 11 proceeding. Messrs. Stanley S. Tollman, Brett G. Tollman and Sanford Freedman were limited partners of six limited partnerships, each of which was the owner of an individual hotel, which filed Chapter 11 proceedings in 1991. Mr. Stanley S. Tollman was the stockholder of the corporate general partners of the limited partnerships. Messrs. Stanley S. Tollman, Brett G. Tollman, Sanford Freedman, James A. Cutler and Howard Zukerman were directors and/or officers of such corporate general partners. The six hotels, together with a seventh which is the subject of a pending foreclosure proceeding in the state courts of Florida, received mortgage financing from Security Pacific Commercial Mortgage Trust VII (the Trust) which was formed for the purpose of financing the seven hotels. The Trust defaulted on its debt obligations and Financial Security Assurance (FSA), which had guaranteed the obligations of the Trust, proceeded to initiate foreclosure proceedings against the seven hotels. Faced with the threat of foreclosure, the six limited partnerships filed for protection under the Bankruptcy Code. Kissimmee Lodge, Ltd. ("KLL"), a Florida limited partnership, filed a Chapter 11 proceeding in the United States Bankruptcy Court for the Middle District of Florida. The proceeding was filed to prevent the imminent foreclosure of the Days Suites hotel owned by KLL. Messrs. 54 Stanley S. Tollman, Brett G. Tollman and Sanford Freedman hold limited partnership interests in KLL and Mr. Stanley S. Tollman is a stockholder of the corporate general partner of KLL. Messrs. Stanley S. Tollman, Howard Zukerman and James A. Cutler were directors and or officers of such corporate general partner. The Plan of Reorganization was confirmed by the Bankruptcy Court and has been declared effective. Emeryville Days Limited Partnership ("Emeryville"), a California limited partnership filed a Chapter 11 proceeding in the United States Bankruptcy Court for the Eastern District of California in May 1996. The proceeding was filed to prevent the imminent foreclosure of the Days Inn hotel owned by Emeryville. Messrs. Stanley S. Tollman, Brett G. Tollman and Sanford Freedman hold limited partnership interests in Emeryville and Mr. Stanley S. Tollman is a stockholder of the corporate general partner of Emeryville. Messrs. Stanley S. Tollman, Howard Zukerman and James A. Cutler were directors and/or officers of such corporate general partner. 55 EXECUTIVE COMPENSATION EMPLOYMENT AGREEMENTS The Company and Mr. Stanley S. Tollman entered into an employment agreement dated June 1, 1993, whereby Mr. Stanley S. Tollman agreed to serve as Chairman of the Board and Co-Chief Executive Officer of the Company for a term of three years from the date of the agreement. Thereafter, the agreement is automatically renewable for successive 12 month periods, unless either party shall advise the other on 90 days written notice of his or its intention not to extend the term of the employment. Mr. Stanley S. Tollman's employment agreement provides for a salary in the amount of $250,000 per year, none of which has been paid under the agreement since the date thereof. The unpaid salary accumulates and the Company does not pay any interest or other penalty thereon. The agreement provides for Mr. Stanley S. Tollman to devote no less than 20% of his business time to the affairs of the Company and its subsidiaries. The agreement contains a non-disclosure provision pursuant to which Mr. Stanley S. Tollman agrees not to use or disclose any information, knowledge or data relating to or concerning the Company's operations, sales, business or affairs to any individual or entity, other than the Company or its designees, except as required in connection with the business and affairs of the Company. The agreement also contains a limited non-competition clause pursuant to which Mr. Stanley S. Tollman has agreed not to own, manage, operate, or otherwise be connected with any entity or person (other than Bryanston or Alpha Hotel) (i) that renders management services to hotels of the same kind, class and character, as the hotels for which Alpha Hotel provides management services or (ii) that owns, manages or operates a gaming casino within a 100 mile radius of the Jubilation Casino. CONSULTING AGREEMENTS The Company and Mr. Sanford Freedman entered into a consulting agreement dated March 1, 1996, whereby Mr. Freedman agreed to render consulting services to the Company with respect to development activities relating to the Company's casino and hotel operations. Mr. Freedman's services as Vice President, Secretary and Director of the Company do not relate to the Company's development activities and are not compensated under the consulting agreement. Mr. Freedman serves as an independent contractor at will pursuant to the agreement and will be compensated at the rate of $300 - $350 per hour. The agreement may be terminated at any time by either party. The Company has indemnified Mr. Freedman against any claims, losses, expenses or liabilities, including reasonable attorney fees, Mr. Freedman may incur arising out of the performance of any services rendered by Mr. Freedman pursuant to the agreement. 56 SUMMARY COMPENSATION TABLE The following table sets forth all cash compensation for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 1995, December 31, 1994, and December 31, 1993, paid to the Company's Chief Executive Officer, the four other most highly compensated executive officers (the "Named Executive Officers") at the end of the above fiscal years whose total compensation exceeded $100,000 per annum, and up to two persons whose compensation exceeded $100,000 during the above fiscal years, although they were not executive officers at the end of such years.
RESTRICTED ALL OTHER NAME AND PRINCIPAL STOCK COMPEN- POSITION YEAR SALARY(1) BONUS AWARDS OPTIONS/SARS SATION - ----------------------------------------------------------------------------------------------------------- Stanley S. Tollman, 1995 $250,000 -- -- -- -- Chairman of the Board of 1994 $250,000 -- -- -- -- Directors, Co-Chief 1993 $250,000 -- -- -- $31,250(2) Executive Officer Monty D. Hundley, 1995 $ 62,500 -- -- -- -- President and Co-Chief 1994 $250,000 -- -- -- -- Executive Officer 1993 $250,000 -- -- -- $31,250(2)
(1) No portions of the cash salaries to which each of the Co-Chief Executive Officers were entitled were paid during the periods indicated; the expense, and liability, have been accrued, without interest. (2) Represents shares of the Company's Common Stock equal to $31,250 issued as additional compensation. (3) As of March 23, 1995, Mr. Hundley resigned as an officer and director of the Company as which time Mr. Hundley waived any present or future claim to all accrued and unpaid salaries. 57 OPTION/SAR GRANTS IN LAST FISCAL YEAR During the last completed fiscal year, the Company did not grant any options or stock appreciation rights to any Named Executive Officers. 1993 STOCK OPTION PLAN The purpose of the 1993 Stock Option Plan is to provide additional incentive to the officers and employees of the Company who are primarily responsible for the management and growth of the Company. Each option granted pursuant to the 1993 Stock Option Plan shall be designated at the time of grant as either an "incentive stock option" or as a "non-qualified stock option." The following description of the 1993 Stock Option Plan is qualified in its entirety by reference to the 1993 Stock Option Plan. ADMINISTRATION OF THE PLAN The 1993 Stock Option Plan is administered by a Stock Option Committee consisting of Messrs. Freedman and Walker and Ms. Cohen which determines whom among those eligible will be granted options, the time or times at which options will be granted, the number of shares to be subject to options, the durations of options, any conditions to the exercise of options and the manner in and price at which options may be exercised. The Stock Option Committee is authorized to amend, suspend or terminate the 1993 Stock Option Plan, except that it cannot without stockholder approval (except with regard to adjustments resulting from changes in capitalization) (i) increase the maximum number of shares that may be issued pursuant to the exercise of options granted under the 1993 Stock Option Plan; (ii) permit the grant of a stock option under the 1993 Stock Option Plan with an option price less than 100% of the fair market value of the shares at the time such option is granted; (iii) change the eligibility requirements for participation in the 1993 Stock Option Plan; (iv) extend the term of any option or the period during which any option may be granted under the 1993 Stock Option Plan; or (v) decrease an option exercise price (although an option may be canceled and new option granted at a lower exercise price). SHARES SUBJECT TO THE PLAN The 1993 Stock Option Plan provides that options may be granted with respect to a total of 900,000 shares of Common Stock, subject to adjustment upon certain changes in capitalization without receipt of consideration by the Company. In addition, if the Company is involved in a merger, consolidation, dissolution or liquidation, the options granted under the 1993 Stock Option Plan will be adjusted or, under certain conditions, will terminate, subject to the right of each option holder to exercise his option or a comparable option substituted at the discretion of the Company prior to such event. If any option expires or terminates for any reason, without having been exercised in full, the unpurchased shares subject to such option will be available again for the purposes of the 1993 Stock Option Plan. All of the 409,000 shares of Common Stock underlying options granted pursuant to the 1993 Stock Option Plan are being registered in this Registration Statement. 58 PARTICIPATION Any employee is eligible to receive incentive stock options or non-qualified stock options granted under the 1993 Stock Option Plan. Non-employee directors may not receive stock options. OPTION PRICE The exercise price of each option will be determined by the Stock Option Committee, or the Board of Directors until such committee is constituted, but may not be less than 100% of the fair market value of the shares of Common Stock covered by the option on the date the option is granted. If an incentive stock option is to be granted to an employee who owns over 10% of the total combined voting power of all classes of the Company's stock, then the exercise price may not be less than 110% of the fair market value of the Common Stock covered by the option on the date the option is granted. TERMS OF OPTIONS The Stock Option Committee, or the Board of Directors until such committee is constituted, shall, in its discretion, fix the term of each option, provided that the maximum term of each option shall be 10 years. Incentive stock options granted to an employee who owns over 10% of the total combined voting power of all classes of stock of the Company shall expire not more than five years after the date of grant. The 1993 Stock Option Plan provides for the earlier expiration of options of a participant in the event of certain terminations of employment. RESTRICTIONS ON GRANT AND EXERCISE An option may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the option holder, may be exercised solely by him. The aggregate fair market value (determined at the time the option is granted) of the shares as to which an employee may first exercise incentive stock options in any one calendar year may not exceed $100,000. The Stock Option Committee, or the Board of Directors until such committee is constituted, may impose other conditions to exercise as it deems appropriate. OPTION GRANTS There were no options granted to either of the named executive officers in the fiscal year ended December 1, 1995. Options to purchase 409,000 shares of Common Stock have been granted to employees to date. 59 CERTAIN TRANSACTIONS BAYOU CADDY ACQUISITION Pursuant to an asset purchase agreement dated as of May 14, 1993 among Alpha Gulf, B.C. of Mississippi, Inc. ("B.C.") (formerly known as Bayou Caddy, Inc.) and certain stockholders of B.C., the Company acquired certain of the assets of B.C., including B.C.'s leasehold interests under certain lease agreements, certain other assets incidental to the development and ownership of the Jubilee Casino, and B.C.'s interest in certain related license applications, approvals and permits. As part of the purchase, the Company assumed liabilities aggregating approximately $1,100,000. The purchase price was $3,500,000, which was evidenced by a promissory note that bore interest at the rate of 10% per annum and was convertible into shares of Alpha Gulf (the "B.C. Note"). Pursuant to an agreement also dated May 14, 1993 among B.C., the Company, Stanley S. Tollman and Monty D. Hundley, the Alpha Gulf shares into which the B.C. Note was convertible were further convertible into shares of Company's Common Stock upon the happening of certain events. On November 15, 1995, the Company, Alpha Gulf and B.C. entered into an agreement (the "B.C. Agreement") under which (i) the B.C. Note was deemed converted on February 1, 1994 and (ii) B.C. received rights which, upon the effective date of the Registration Statement of which this Propsectus is a part, entitle B.C. to receive 791,880 shares of the Company's Common Stock. As contemplated by the B.C. Agreement, B.C. subsequently distributed rights to receive 700,000 of the shares of Company Common Stock to its shareholders and retained rights to receive 91,880 of such shares. The conversion of the B.C. Note into 791,880 shares was determined in accordance with a formula contained in the May 14, 1993 agreements that allowed for conversion of the note into 12% of the shares of the Company's Common Stock held by Messrs. Tollman and Hundley at the time the Company notified B.C. of its election to convert. In order to avoid further dilution to the Company's stockholders, and to enhance its position in the Company, Bryanston agreed to contribute a number of its shares of the Company's Common Stock to the Company in order to help satisfy the number of shares of Common Stock into which the B.C. Note converted. In accordance therewith, Bryanston made a capital contribution to the Company of 716,881 shares of Common Stock of the Company owned by Bryanston, which the Company is currently holding as treasury stock until the issuance to B.C. and the B.C. shareholders, promptly after the effective date of the Registration Statement. BRYANSTON In connection with the formation of the Company and the initial capitalization of the Company, Bryanston (i) contributed $626,004 in cash to the Company in exchange for 3,564,987 shares of the Company's Common Stock, valued at 17.6 CENTS per share, (ii) entered into the Service Agreements, and (iii) loaned the Company $4,009,740 (the "Bryanston Loan"). The Company utilized the $626,004 and the proceeds of the Bryanston Loan for the development and construction of the Jubilee Casino. Under the Service Agreement, effective as of September 1, 1993, between Alpha Hotel and Bryanston, the Company provides Management Services to hotels and motels on behalf of Bryanston. Bryanston is an affiliate of the Company, and Beatrice Tollman, Mr. Stanley S. Tollman's spouse, is a 50% stockholder of Bryanston. The Service Agreement, which is co-terminus with the last to expire of the Bryanston Management Agreements, states that the Company will provide certain management services for hotels managed by Bryanston for certain unaffiliated owners. Pursuant to the Service Agreement, Bryanston receives a fee of 1% of the aggregate compensation paid to the Company pursuant to the Management Agreements. The 60 Bryanston Hotel Division is the provider of direct services to all managed hotels pursuant to the Management Agreements with the individual hotels. Through its subsidiary Alpha Hotel, the Company provides management, financial, administrative and marketing services on behalf of Bryanston. Pursuant to the Management Agreements, the Company is compensated for its services in an amount equal to a percentage of total net revenues of the managed hotels, ranging between 2% and 5%. In connection with the Service Agreement, effective September 1, 1993, the Company entered into an expense reimbursement agreement (the "Expense Reimbursement Agreement") with Bryanston for the use of certain office space at its Hopewell Junction, New York facility in connection with the Company's hotel management operations. Pursuant to the terms of the Expense Reimbursement Agreement, the Company reimburses Bryanston on a monthly basis for its share of rent, office expenses and direct payroll. The Bryanston Loan had an initial interest rate of 12% per annum and payment is subordinated to payment of the Term Loan, described below. A portion of principal and accrued interest in the aggregate amount of $1,012,500 was repaid from the proceeds of the Company's initial public offering (the "IPO") and principal and accrued interest in the aggregate amount of $1,206,355 was repaid from the proceeds of the underwriters' over-allotment option exercised in connection with the IPO. The balance of the Bryanston Loan ($1,972,532) accrued interest at the rate of 12% per annum, which accrued until the second anniversary of the opening of the Jubilee Casino, and thereafter, together with such accrued interest amount ($501,294), interest accrues at the rate of 9% per annum, payable quarterly in equal installments over a 10-year period, and will be prepaid pro rata with the BP Loan, described below, from the proceeds of the exercise, if any, of the Company's outstanding warrants and the HFS Options, described below, provided the Company is current under the Term Loan. At March 31, 1996 and December 31, 1995, the principal balance (which includes accrued interest through the second anniversary) was $2,473,826 and accrued interest at March 31, 1996 was $59,176. In August and October 1993, Bryanston advanced a bridge loan (the "Bryanston Bridge Loan"), in the aggregate amount of $7,419,000, which was also applied to the development and construction of the Jubilee Casino. The Bryanston Bridge Loan bore interest at the rate of 10% per annum from the date advanced and was originally due and payable on the earlier of October 31, 1993 or the closing of the IPO. A portion of the principal and accrued interest on the Bryanston Bridge Loan, in the aggregate amount of $3,625,000, was repaid from the proceeds of the Term Loan and a $4,000,000 bridge loan (the "HFS Bridge Loan") from HFS Gaming Corp. ("HFS") (which was repaid from the proceeds of the IPO), and the balance was repaid from the proceeds of the IPO. As of January 1, 1994, Bryanston agreed to loan the Company up to $9,000,000 (the "Initial Working Capital Loan") to meet working capital requirements of the Company. The note bore interest at price rate plus 2%, per annum, and had a maturity date of December 31, 1995. On December 31, 1994 the Company authorized the issuance of 625,222 shares of its preferred stock, valued at $6.625 per common share, in settlement of $8,284,196 due Bryanston, pursuant to the Initial Working Capital Loan, which amount includes approximately $349,000 of accrued interest. In October 1995, the 625,222 shares of preferred stock were converted into 1,250,444 shares of the Company's Common Stock. On November 15, 1995, the Company, Alpha Gulf and B.C. entered into the B.C. Agreement under which (i) the B.C. Note was deemed converted on February 1, 1994, and (ii) B.C. received rights which, upon the effective date of the Registration Statement of which this Prospectus is a part, entitle B.C. to receive 791,880 shares of the Company's Common Stock. Bryanston agreed to contribute 716,881 shares of Common Stock of the Company owned by Bryanston, in order to help satisfy 61 the number of shares of Common Stock into which the B.C. Note converted. Bryanston agreed to make this capital contribution to the Company in order to avoid further dilution to the Company's stockholders and to enhance its position in the Company. As of January 5, 1995, Bryanston agreed to loan the Company up to $20,000,000 (the "Working Capital Loan") to meet the working capital requirements of the Company. Therefore, the Company is obligated under a $20,000,000 non-revolving promissory note ($19,413,856 and $17,360,861 outstanding at March 31, 1996 and December 31, 1995, respectively) with Bryanston. The note, which bears interest at prime rate (8.5% at March 31, 1996 and December 31, 1995) plus 2%, is payable at the lesser of the outstanding principal amount or $2,000,000 per annum through December 31, 1999. Beginning 1996, interest accrued monthly is due and payable by the following month. All remaining principal and accrued interest (approximately $437,000 and $503,000 at March 31, 1996 and December 31, 1995, respectively) shall be due on December 31, 2000. Additionally, commencing May 1, 1996 and for each of the next succeeding three years thereafter, the Company will be required to make additional principal payments equal to "Available Cash Flow of Maker" as defined in the note to mean an amount equal to the consolidated annual net income of the Company before depreciation but after provision for taxes and principal payments on account of all debt, less an amount equal to the sum of (a) an annual replacement reserve equal to 3% of the consolidated revenues of the Company and its subsidiaries, excluding Alpha Hotel, and (b) $1,000,000. On September 22, 1995, Bryanston purchased an outstanding loan to the Company (the "Term Loan") which was then held by HFS, having a balance of $7,816,000 from HFS, which was in default at such time. The Company received the Term Loan from HFS in the original principal amount of $8,000,000 for a five-year term, in October 1993. The Term Loan bears interest at a rate of 10% per annum and requires monthly payments of principal and interest through November 1998. The Term Loan is secured by a first preferred ship mortgage on the Jubilee Casino. As consideration for Bryanston purchasing the Term Loan (which was then in default), and for Bryanston agreeing to make the Working Capital Loan, in October 1995, the Company issued 347,826 shares of Common Stock, valued at $4.50 per share, and an option to purchase 347,826 shares of Common Stock at an exercise price of $4.50 per share, to Bryanston. In addition, Bryanston acquired 96,429 shares of the Company's Common Stock from an affiliate of HFS. At March 31, 1996 and December 31, 1995, the balance due on the Term Loan is $7,8000,000 and accrued interest is $640,724 and $446,789, respectively. As of November 1, 1995, Bryanston had sold all of the Common Stock of the Company it had previously held. Since the Company began to implement its plans to close the Jubilation Casino in July 1996, the Company updated its assessment of the realizability of the leasehold improvements and related assets of the Jubilation Casino. This resulted in an impairment loss of approximately $14,165,000 and stockholders' deficit of $14,000,000 below the requirements for continued listing of the Company's securities on NASDAQ. In order to avoid the delisting of the Company's securities from NASDAQ, Bryanston proposed that the Company convert the Working Capital Loan into Preferred Stock, which would enable the Company to maintain its NASDAQ listing. Therefore, effective June 26, 1996, Bryanston converted the amount due on the Working Capital Loan (approximately $19,165,000) into shares of the Company's Preferred Stock. The Company was charged a 5% transaction fee (approximately $958,000), which was also converted into shares of the Company's Preferred Stock. The conversion was effective June 26, 1996 and the total of approximately $20,123,000 converted into 693,905 shares of Preferred Stock based on the fair market value of the Company's Common Stock on the date of conversion ($3.625). Each share of outstanding Preferred Stock (i) entitles the holder to one vote; (ii) has a liquidation value of $29.00 per share; (iii) has a cash dividend rate of 10% of liquidation value, which increases to 13% of liquidation value if the cash dividend is not paid within 30 days of the end of each fiscal year and in such event is payable in Common Stock valued at the then market price; and (iv) is convertible into eight shares of Common Stock. At present the Company does not have sufficient authorized but unissued Common Stock to reserve for the conversion of the Preferred Stock. In the event that by December 31, 1996, the stockholders have not approved an amendment to the Company's Certificate of Incorporation to increase the authorized Common Stock to an amount sufficient to permit the reservation of Common Stock necessary for the conversion, the outstanding Preferred Stock will be entitled to eight votes per share thereafter. BP GROUP BP advanced $1,927,759 to the Company, representing the proceeds of the BP loan (the "BP Loan"). The BP Loan had an initial interest rate of 12% per annum and payment is subordinated to payment of the Term Loan. Principal and accrued interest in the aggregate amount of $487,500 was repaid from the proceeds of the Company's IPO and principal and accrued interest in the aggregate amount of $575,560 was repaid from the proceeds of the underwriters' over-allotment option. The balance of the BP Loan, $864,699, accrues interest at 62 the rate of 12% per annum, which shall accrue until the second anniversary of the opening of the Jubilee Casino, and thereafter, together with such accrued interest, at the rate of 9% per annum, payable quarterly in equal installments over a 10-year period, and will be prepaid, pro rata with the Bryanston Loan, from the proceeds of the exercise, if any, of the Company's outstanding warrants and the HFS Options, provided the Company is current under the Term Loan. BP also advanced a bridge loan (the "BP Bridge Loan") in the amount of $2,200,000, which was applied to the development of the Casino. The BP Bridge Loan bore interest at the rate of 10% per annum from the date advanced and was originally due and payable on the earlier of October 31, 1993 or the closing of the Offering. The BP Bridge Loan was repaid in full, from the proceeds of the Term Loan and the HFS Bridge Loan, which was repaid by the Company from the proceeds of the IPO. In July 1993 Ms. Cohen, a director of the Company and the sole stockholder of BP, contributed $511,961 to the capital of the Company for which she was issued 1,544,182 shares of Common Stock valued at 33.2 CENTS per share. Ms. Cohen was also a principal stockholder of Westfield Financial Corporation, one of the underwriters of the Company's IPO. Westfield Financial Corporation is no longer operating as a broker-dealer. Since the Company began to implement its plans to close the Jubilation Casino in July 1996, the Company updated its assessment of the realizability of the leasehold improvements and related assets of the Jubilation Casino. This resulted in an impairment loss of approximately $14,165,000 and stockholders' deficit of $14,000,000 below the requirements for continued listing of the Company's securities on NASDAQ. In order to avoid the delisting of the Company's securities from NASDAQ, BP proposed that the Company convert the BP Loan into Preferred Stock, which would enable the Company to maintain its NASDAQ listing. Therefore, effective June 26, 1996, BP converted the amount due on the BP Loan (approximately $1,222,000) into shares of the Company's Preferred Stock. The Company was charged a 5% transaction fee (approximately $61,000), which was also converted into shares of the Company's Preferred Stock. The conversion was effective June 26, 1996, and the total of approximately $1,283,000 was converted into 44,258 shares of Preferred Stock based on the fair market value of the Company's Common Stock on the date of conversion $3.625). The terms of the Preferred Stock issued to BP are identical to those of the Preferred Stock issued to Bryanston in June 1996. All current transactions between the Company, and its officers, directors and principal stockholders or any affiliates thereof are, and in the future such transactions will be, on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 63 OWNERSHIP OF SECURITIES The following table sets forth certain information as of March 29, 1996 with respect to each beneficial owner of five percent (5%) or more of the outstanding shares of Common Stock of the Company, each officer and director of the Company and all officers and directors as a group. Unless otherwise indicated, the address of each such person or entity is c/o Alpha Hospitality Corporation, 12 East 49th Street, New York, New York, 10017.
Percent of Number of Percent of Class Class After Name and Address Shares (1)(11) Before Offering Offering - ---------------- -------------- --------------- -------- Stanley S. Tollman(2)(3)(5) 498,975 3.72 3.59 Beatrice Tollman(4)(5) 1,852,890 13.82 13.34 Sanford Freedman(6) 271,158 2.02 1.95 Thomas W. Aro(7) 100,200 .75 .72 Brett G. Tollman(8) 493,078 3.68 3.55 James A. Cutler(9) 116,000 .86 .84 Howard Zukerman(10) 90,908 .68 .65 Patricia Cohen 1,544,182 11.52 11.12 Bally Gaming, Inc. 701,017 5.23 5.05 6601 South Bermuda Road Las Vegas, Nevada All officers and directors as a group (7 persons) 3,114,501 23.24 22.43
- ---------------------------- (1) Each person exercises sole voting and dispositive power with respect to the shares reflected in the table, except for those shares issuable upon the exercise of options, which shares cannot be voted until the options are exercised by the holders. (2) Includes 498,975 shares owned by the Tyler Windfield Hundley Living Trust of which trust Mr. Tollman is the sole trustee. Mr. Tollman exercises voting power with respect to such shares. Tyler Windfield Hundley is the son of Monty D. Hundley, a former officer and director of the Company who resigned from such positions as of March 23, 1995. 64 (3) Does not include 1,852,890 shares of Common Stock owned by Mr. Stanley S. Tollman's spouse, Beatrice Tollman. Mr. Stanley S. Tollman disclaims beneficial ownership of the shares held by his spouse. (4) Beatrice Tollman is the wife of Stanley S. Tollman. Mrs. Tollman disclaims beneficial ownership of the shares held by Stanley S. Tollman. (5) Mr. Stanley S. Tollman and Mrs. Beatrice Tollman, in the aggregate, beneficially own 2,351,865 shares of Common Stock, which constitutes 18.01% of the class outstanding. Mr. and Mrs. Tollman each disclaim beneficial ownership of one another's shares. (6) Includes options granted to Mr. Freedman to purchase 60,000 shares of the Company's Common Stock, all of which have vested and none of which have been exercised. (7) Includes options granted to Mr. Aro to purchase 60,000 shares of the Company's Common Stock, all of which have vested and none of which have been exercised. (8) Includes options granted to Mr. Tollman to purchase 60,000 shares of the Company's Common Stock, all of which have vested and none of which have been exercised. (9) Includes options granted to Mr. Cutler to purchase 40,000 shares of the Company's Common Stock, all of which have vested and none of which have been exercised. Does not include 4,000 shares owned by Mr. Cutler's children of which he disclaims beneficial ownership. (10) Includes options granted to Mr. Zukerman to purchase 35,000 shares of the Company's Common Stock, all of which have vested and none of which have been exercised. (11) Due to certain distributions of the 3,564,987 shares of the Company's Common Stock owned by it, Bryanston no longer owns any shares of the Company's Common Stock. See "Certain Transactions - Bayou Caddy Acquisition." The Company has converted the 625,222 shares of Preferred Stock into 1,250,444 shares of Common Stock and has distributed these shares and all other shares previously held of the Company as of November 1, 1995. 65 SELLING STOCKHOLDERS The 2,684,506 of the Selling Stockholders' Shares to which this Prospectus relates may be sold by the Selling Stockholders who have acquired or will acquire such shares from the Company (i) upon the exercise of issued and outstanding options granted pursuant to the Company's 1993 Stock Option Plan (the "Plan"), or (ii) in connection with acquisition agreements or debt restructuring agreements. The Company will not receive any of the proceeds from the sales of the Selling Stockholder's Shares, but will receive the exercise price upon the exercise of options by certain Selling Stockholders. There can be no assurance that any or all of such options will be exercised. Pursuant to the Plan, options for up to 900,000 shares of Common Stock may be granted, of which options to purchase 409,000 shares have been issued to date, all of which are being offered hereby. Of such 409,000 options, 385,000 options have an exercise price of $3.25 per share and 24,000 options have an exercise price of $11.50 per share. The Selling Stockholders received registration rights with respect to the shares offered hereunder pursuant to verbal or written agreements with the Company. All costs, expenses and fees in connection with the registration of the Selling Stockholders' Shares will be borne by the Company. All brokerage commission, if any, attributable to the sale of Selling Stockholders' Shares by Selling Stockholders will be borne by such Selling Stockholders. The following table sets forth (a) the name of each Selling Stockholder and relationship to the Company; (b) the number of shares of Common Stock beneficially owned by each Selling Stockholder at the time of this offering; (c) the number of shares to be acquired by each Selling Stockholder that are being acquired or registered hereunder and may be sold pursuant to this Prospectus; and (d) the number of shares of Common Stock and the percentage of the total class of Common Stock outstanding to be beneficially owned by each Selling Stockholder following this offering, assuming the sale of all of the Selling Stockholders' Shares. 66
Selling Stockholder and Number of Shares Number of Shares of Common Relationship of Common Stock Stock Beneficially Owned After Company Beneficially This Offering ----------- Owned Before ------------------- This Offering(1) ------------- Offered Hereby Number Percent -------- ------ ------- Sanford Freedman(2) 271,158 60,000 211,158 1.6% (Vice President, Secretary and Director) Brett G. Tollman(2) 458,973 60,000 398,973 1.0% (Vice President and Director) Howard D. Zukerman(2) 90,908 35,000 55,908 * (Vice President and Assistant Secretary) Thomas W. Aro(2)(7) 102,840 62,640 40,200 * (Vice President and Director) James A. Cutler(2)(7) 118,640 42,640 76,000 * (Chief Financial Officer) Victor Appleby(2) 28,400 18,000 10,400 * (Employee) Charlie Goldman(2) 18,000 18,000 0 * (Employee) Gavin Tollman(2) 18,300 18,000 300 * (Employee) Thomas Wilson(2) 18,000 18,000 0 * (Employee) Craig Kendziera(2) 12,300 12,000 300 * (Employee) Jeffrey Crowley(2) 54,500 10,000 44,500 * (Employee) Robert Steenhuisen(2) 8,000 8,000 0 * (Employee) Thomas Damewood(2) 8,000 8,000 0 * (Employee) Peter Rost(2) 5,000 5,000 0 * (Employee) Alice Abalos(2) 5,300 5,000 300 * (Employee) Betty Drake(2) 6,300 5,000 1,300 * (Employee) Margaret O. Young(2) 5,000 5,000 0 * (Employee) 67 Selling Stockholder and Number of Shares Number of Shares of Common Relationship of Common Stock Stock Beneficially Owned After Company Beneficially This Offering ----------- Owned Before ------------------- This Offering(1) ------------- Offered Hereby Number Percent -------- ------ ------- Paul Hitselberger(3) 3,334 5,000 0 * (Employee) Kevin Kurpick(3) 3,334 5,000 0 * (Employee) Thaddeus Rickards(3) 3,334 5,000 0 * (Employee) Ann Williams(3) 1,667 2,500 0 * (Employee) Sherry Kosack(3) 1,667 2,500 0 * (Employee) Danka Maricic(3) 1,733 2,000 400 * (Employee) Kenneth Terry(3) 1,300 1,500 300 * (Employee) Claudia Bowman(3) (Employee) 333 500 0 * Escrow Agent for Cotton Club Shareholders(4) 782,609 782,609 0 * Bally Gaming, Inc.(5) 701,017 701,017 0 * B.C. of Missisippi(6) 91,880 91,880 0 * John E. Kingsbury(6) 121,397 121,397 0 * Jon R. Turner(6) 71,313 71,313 0 * David Altman(6) 13,424 13,424 0 * Hyun Sil Enomoto(6) 15,840 15,840 0 * Jin Ho Kang(6) 15,840 15,840 0 * James D. and Cherie Kingsbury(6) 11,880 11,880 0 * Merle A. and Sharon A. Reed(6) 10,560 10,560 0 * Patricia C. Derry(6) 2,640 2,640 0 * Kyong Soon Cho(6) 47,520 47,520 0 * Eugene J. and Patricia A. Lang(6) 39,105 39,105 0 * Michael Bach(6) 1,320 1,320 0 * Roger L. and Carol J. Johnson(6) 2,640 2,640 0 * Alvin H. Bishop, Jr.(6) 10,560 10,560 0 * James Gavin(6) 5,280 5,280 0 * Keiko S. Palmero(6) 7,260 7,260 0 * Ray Eaton(6) 29,700 29,700 0 * Robert M. James(6) 65,313 65,313 0 * Stuart Schube(6) 13,200 13,200 0 * William Lady(6) 14,080 14,080 0 * James M. Lady(6) 14,080 14,080 0 * Steven Lady(6) 14,080 14,080 0 * Mas Hiraike(6) 4,078 4,078 0 * David and Karen Uyekawa(6) 2,000 2,000 0 * Ronald Hirano(6) 960 960 0 * Katsuyi and Yasoyo Kawakubo(6) 4,078 4,078 0 * Ralph and Barbara Myers(6) 4,078 4,078 0 * Leo Benavidez(6) 2,000 2,000 0 * Carl Feldman(6) 4,078 4,078 0 * Thomas Nishi(6) 8,236 8,236 0 * Craig and Mable Takenska(6) 4,078 4,078 0 * Adrianne Tong(6) 6,157 6,157 0 * Robert and Dorothy Takasugi(6) 10,315 10,315 0 * Masayoshi and June Morioka(6) 3,039 3,039 0 * Domingo and Pauline Sauceda(6) 960 960 0 * Alice Brzkcy(6) 4,078 4,078 0 * Gary and Susan Zimmerman(6) 2,000 2,000 0 * Stacy Hobson(6) 3,039 3,039 0 * Yami and Yasuyo Serizawa(6) 4,078 4,078 0 * Jon Robert Takasugi(6) 2,000 2,000 0 * Leslie Takasugi(6) 2,000 2,000 0 * James Fitzsimons(6) 4,078 4,078 0 * The Sandra S. Monaldi Living Trust(6) 7,920 7,970 0 * Michael D. and Jospeh Cure, Cynthia C. Rutherford and Susan Gollott(6) 84,438 84,438 0 *
- ------------------------- * represents less than 1% of the total outstanding shares of Common Stock. 1. Includes all shares of Common Stock obtainable by the Selling Stockholder upon exercise of options granted pursuant to the Plan. Such options are exercisable as set forth in footnotes 2 and 3 below. 2. Includes the shares of Common Stock issuable upon the exercise of options. One-third of such Selling Stockholders' options vested on June 10, 1994, one-third vested on December 10, 1994 and the remainder vested on June 10, 1995. 3. Includes the shares of Common Stock issuable upon the exercise of options. One- third of such Selling Stockholders' options vested on December 10, 1994, one- third vested on June 10, 1995 and the remainder vested on December 10, 1995. 4. Represents 782,609 shares issued to an escrow agent on behalf of the former shareholders of the Cotton Club in connection with the Cotton Club Acquisition. 5. Represents shares issued to an escrow agent on behalf of Bally Gaming, Inc. in connection with the restructuring of the mortgage on the Jubilee Casino. 6. Represents a portion of the 791,880 shares of Common Stock issued to the Selling Stockholder in connection with the B.C. Agreement. 7. Includes 2,640 shares of Common Stock issued to the Selling Stockholder in connection with the B.C. Agreement. 68 PLAN OF DISTRIBUTION The securities offered hereby are the 2,684,506 Selling Stockholders' Shares. SELLING STOCKHOLDERS' SHARES The 2,684,506 of the Selling Stockholders' Shares to which this Prospectus relates may be sold by the Selling Stockholders who have acquired or will acquire such shares from the Company (i) upon the exercise of issued and outstanding options granted pursuant to the Company's 1993 Stock Option Plan (the "Plan"), or (ii) in connection with acquisition agreements or debt restructuring agreements. The Company will not receive any of the proceeds from any sales by Selling Stockholders of Selling Stockholders' Shares, but will receive the exercise price upon the exercise of options by the Selling Stockholders. See "Selling Stockholders." The Selling Stockholders' sales of shares of Common Stock may be effected from time to time in transactions (which may include block transactions) in the over-the-counter market or the Boston Stock Exchange, in negotiated transactions, through the writing of options on the Common Stock, or a combination of such methods of sale, at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Selling Stockholders' may effect such transactions by selling Common Stock directly to purchasers or to or through broker-dealers which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Stockholders and/or the purchasers of Common Stock for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Stockholders and any broker-dealers that act in connection with the sale of the Common Stock might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act. The Selling Stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act. Because the Selling Stockholders may each be deemed to be an "underwriter" within the meaning of Section 2(11) of the Securities Act, the Selling Stockholders will be subject to prospectus delivery requirements under the Securities Act. Furthermore, in the event of a "distribution" of its shares, the Selling Stockholders, any selling broker or dealer and any "affiliated purchasers" may be subject to Rule 10b-6 under the Exchange Act until its participation in that distribution is completed. At the time a particular offer of Selling Stockholders' Shares, made by or on behalf of any of the Selling Stockholders, to the extent such offer constitutes as distribution under the Securities 69 Act, a supplement to this Prospectus will be distributed which will set forth the type and number of securities being offered by such Selling Stockholders and the terms of such offering, including the name or names and addresses of any underwriters, dealers or agents, the purchase price paid by any underwriter for securities purchased from the Selling Stockholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers, and the proposed selling price to the public. The Company will bear all costs and expenses of the registration under the Securities Act and certain state securities laws of the Selling Stockholders' Shares. However, all brokerage commissions, if any, attributable to the sale of such shares by holders thereof will be borne by such holders. 70 DESCRIPTION OF SECURITIES COMMON STOCK The authorized capital stock of the Company includes 17,000,000 shares of Common Stock, $.01 par value per share. The holders of Common Stock (i) have equal ratable rights to dividends from funds legally available therefor, when, as and if declared by the Board of Directors of the Company; (ii) are entitled to share ratably in all of the assets of the Company available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of the affairs of the Company; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto; and (iv) are entitled to one vote per share on all matters on which stockholders may vote at all meetings of stockholders. All shares of Common Stock now outstanding are fully paid and non-assessable, and all shares of Common Stock offered hereby and underlying the Warrants and Options, when issued, will be fully paid and non-assessable. The holders of shares of Common Stock of the Company do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares, voting for the election of Directors, can elect all of the Directors to be elected, if they so choose and in such event, the holders of the remaining shares will not be able to elect any of the Company's Directors. 71 PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares, $.01 par value, of "blank check" Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. The Company has outstanding 738,163 shares of Preferred Stock which is convertible into Common Stock and still has 261,837 shares of Preferred Stock available for issuance. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue the remaining Preferred Stock, or any Preferred Stock which becomes authorized but unissued after conversion into Common Stock, with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. Any authorized but unissued Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. The Company has no present intention to issue any additional shares of its Preferred Stock. For a description of the issued and outstanding shares of Preferred Stock see "Certain Transactions - Bryanston" and "Certain Transactions - BP Group." TRANSFER AND WARRANT AGENT The Company's transfer agent for the Common Stock and warrant agent for the Warrants is Continental Stock Transfer & Trust Company, Two Broadway, New York, New York 10007. 72 SHARES ELIGIBLE FOR FUTURE SALE The Company has 17,000,000 shares of Common Stock authorized, 13,403,275 of which are issued and outstanding. Of such 13,403,275 shares, 716,881 shares are being held as treasury shares in connection with the B.C. Agreement. In addition, 409,000 shares may be issued upon the exercise of outstanding and currently exercisable options. Of the 13,403,275 shares of Common Stock currently issued and outstanding, 3,114,501 shares of Common Stock are "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were issued and sold by the Company in transactions not involving a public offering and are, as of November 5, 1995, eligible for sale under Rule 144. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, after at least two years have elapsed from the sale by the Company or any affiliate of the restricted securities, can (along with any person with whom such individual is required to aggregate sales) sell, within any three-month period, a number of shares of restricted securities that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or, if the Common Stock is quoted on NASDAQ or a national securities exchange, the average weekly trading volume during the four calendar weeks preceding the sale. A person who has not been an affiliate of the Company for at least three months, after at least three years have elapsed from the sale by the Company or an affiliate of the restricted securities, is entitled to sell such restricted shares under Rule 144 without regard to any of the limitations described above. The 3,114,501 shares of Common Stock are eligible for sale pursuant to Rule 144 by affiliates of the Company who are restricted as to the number of securities they can sell during any three-month period. Possible or actual sales of such Common Stock by stockholders of the Company under Rule 144 may have a depressive effect upon the price of the Common Stock currently outstanding, and could also render difficult the sales of Common Stock by investors. 73 INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificate of Incorporation of the Company provides that no director of the Company shall be liable to the Company for monetary damages for breach of fiduciary duty or care as a director except for liability for breach of the director's duty of loyalty, for acts not in good faith, intentional misconduct or knowing violations of law, for unlawful payment of dividends or stock purchases or redemptions or for transactions in which the directors derived an improper personal benefit. The By-Laws of the Company provide for the indemnification of officers and directors to the fullest extent permitted by Delaware law. The Company does not have directors' and officers' liability insurance but may secure such insurance in the future. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 74 LEGAL MATTERS Certain legal matters, including the legality of the issuance of the Selling Stockholders' Shares being offered hereby, are being passed upon for the Company by Gersten, Savage, Kaplowitz, & Curtin, LLP, 575 Lexington Avenue, New York, New York 10022, special counsel to the Company. EXPERTS The financial statements included in this Prospectus have been audited by Rothstein, Kass & Company, P.C., independent certified public accountants, Roseland, New Jersey, to the extent and for the periods set forth in their reports appearing elsewhere herein, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission ("Commission") a registration statement (as amended, the "Registration Statement") under the Securities Act with respect to the securities offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, which may be inspected without charge at the principal office of the Commission, 450 Fifth Street, NW, Washington, DC, 20549, and copies of the material contained therein may be obtained from the Commission upon payment of applicable copying charges. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Except for material contracts or portions thereof accorded confidential treatment, all registration statements are available for public inspection, during business hours, at the principal office of the Commission in Washington, D.C. Electronic registration statements made through the Electronic Data Gathering, Analysis, and Retrieval system are publicly available through the Commission's Web site (http:\\www.sec.gov). The Company is subject to the reporting and other informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements, and other information with the Commission. Such reports, proxy statements, and other information can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511, and at 7 World Trade Center, New York, New York, 10048. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549, at prescribed rates. The Company's Common Stock is listed on NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, 75 Boston, Massachusetts, 02108, and the Company's periodic reports, proxy statements, and other information can be inspected at NASDAQ and the BSE at the offices of NASDAQ at 1735 K Street, NW, Washington, DC, 20006 or the offices of the BSE at 1 Boston Place, Boston, Massachusetts, 02108. 76 INDEX TO FINANCIAL STATEMENTS ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES Independent Auditors' Report...............................................F-1-2 Consolidated Balance Sheets..................................................F-3 Consolidated Statements of Operations........................................F-4 Consolidated Statements of Stockholders' Equity............................F-5-6 Consolidated Statements of Cash Flows......................................F-7-9 Notes to Consolidated Financial Statements...............................F-10-30 BRYANSTON GROUP, INC. Independent Auditors' Report................................................F-31 Statement of Income Before Taxes............................................F-32 Notes to Financial Statement.............................................F-33-35 COTTON CLUB OF GREENVILLE, INC. Independent Auditors' Report................................................F-36 Balance Sheets...........................................................F-37-38 Statements of Operations....................................................F-39 Statements of Shareholders' Deficit.........................................F-40 Statements of Cash Flows....................................................F-41 Notes to Financial Statements............................................F-42-48 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Alpha Hospitality Corporation and Subsidiaries New York, New York We have audited the accompanying consolidated balance sheets of Alpha Hospitality Corporation and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended and the period March 19, 1993 (date of inception) to December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alpha Hospitality Corporation and Subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for the years then ended and the period March 19, 1993 (date of inception) to December 31, 1993, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered significant losses from operations and has a working capital deficit and an accumulated deficit at December 31, 1995. In addition, the Company was not in compliance with certain long-term debt which is included in current liabilities. Management's plans in regard to these matters are also described in Note 14. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-1 As discussed in Note 9 to the consolidated financial statements, the Company is a defendant in lawsuits involving automobile accidents, wherein plaintiffs are seeking compensatory and punitive damages. The ultimate outcome of such litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying consolidated financial statements. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed on Page S-1 is presented for purposes of complying with the Securities and Exchange Commissions's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Rothstein, Kass & Company, P.C. - ----------------------------------- Roseland, New Jersey February 16, 1996, except for Note 15 as to which the date is March 29, 1996 F-2 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, March 31, ----------------------------- 1996 1995 1994 -------------- -------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash, including restricted cash of $50,000 and $63,837 in 1996 and 1995, respectively $ 2,605,204 $ 2,315,719 $ 1,179,605 Accounts receivable, less allowance for doubtful accounts of $353,708 in 1996 and 1995 and $35,000 in 1994 631,093 702,800 1,091,594 Inventories 492,037 536,221 671,151 Prepaid insurance 1,079,139 1,796,132 1,044,139 Other current assets 1,048,547 1,349,535 380,777 ------------- ------------- ------------- Total current assets 5,856,020 6,700,407 4,367,266 PROPERTY AND EQUIPMENT, less accumulated depreciation and amortization of $15,187,624, $13,385,041 and $3,765,486 in 1996, 1995 and 1994, respectively 58,538,550 59,254,914 40,069,549 OTHER ASSETS, deposits and other 856,833 818,171 1,053,490 ------------- ------------- ------------- $ 65,251,403 $ 66,773,492 $ 45,490,305 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 11,910,435 $ 27,319,666 $ 10,026,377 Notes payable 3,838,843 3,815,887 880,051 Accounts payable and other accrued expenses 9,879,776 10,709,533 8,097,396 Accrued payroll and related liabilities 3,622,023 2,848,876 2,705,197 Due to affiliate, current maturity 2,000,000 2,000,000 ------------- ------------- ------------- Total current liabilities 31,251,077 46,693,962 21,709,021 ------------- ------------- ------------- LONG-TERM DEBT, less current maturities 14,507,463 2,311,751 10,073,870 ------------- ------------- ------------- DUE TO AFFILIATE, less current maturity, including accrued interest of $436,715 and $503,138 in 1996 and 1995, respectively 17,850,571 15,863,999 ------------- ------------- ------------- AMOUNT DUE UNDER REDEMPTION AGREEMENT, including accrued interest of $112,456 462,965 ------------- ------------- ------------- MANDATORILY REDEEMABLE COMMON STOCK, $.01 par value, 96,429 shares issued in 1994 564,910 ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized 1,000,000 shares, 625,222 issued in 1994 6,252 Common stock, $.01 par value, authorized 17,000,000 shares, 13,403,325, 12,354,482 and 10,225,000 shares issued in 1996, 1995 and 1994, respectively 134,032 123,544 102,250 Capital in excess of par value 36,471,681 32,779,117 27,639,250 Common stock subscribed 1,600,000 Accumulated deficit (35,426,386) (32,598,881) (14,605,248) ------------- ------------- ------------- Total stockholders' equity 1,179,327 1,903,780 13,142,504 ------------- ------------- ------------- $ 65,251,403 $ 66,773,492 $ 45,490,305 ------------- ------------- ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-3 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
March 19, 1993 (Date of Three Months Years Ended December 31, Inception) to Ended March 31, -------------------------- December 31, ---------------------- 1996 1995 1995 1994 1993 ---------- ----------- ------------ ------------ ------------- (Unaudited) (Unaudited) REVENUES: Casino $ 12,837,494 $ 6,233,334 $ 26,518,657 $ 41,343,854 $ - Food and beverage 347,297 297,448 1,008,940 1,713,057 Hotel management fees 449,733 544,941 2,863,345 2,835,234 858,500 Retail and other 33,205 21,811 129,334 208,296 18,477 ------------ ------------ ------------ ------------ ------------ Total revenues 13,667,729 7,097,534 30,520,276 46,100,441 876,977 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Casino 5,213,494 3,856,412 15,034,903 20,994,854 Food and beverage 264,171 192,529 789,086 1,113,093 Hotel management costs 319,794 382,938 1,511,786 1,710,060 633,315 Retail and other 21,101 103,276 Selling, general and administration 7,598,513 3,806,929 17,610,997 21,269,076 44,894 Interest expense 1,372,544 601,093 3,213,228 3,014,989 375,335 Depreciation and amortization 1,802,582 977,532 4,508,947 3,776,262 Pre-opening and development costs 268,265 87,173 1,290,312 2,303,365 5,394,147 Financial advisory services fees 1,690,000 Relocation expense 412,492 Buy-out of marketing agreement 1,500,000 Write-off of unamortized discount 931,057 Compensation to stockholders 500,000 Settlement of assumed liabilities 350,000 ------------ ------------ ------------ ------------ ------------ Total costs and expenses 16,839,363 9,904,606 48,513,909 54,284,975 7,297,691 ------------ ------------ ------------ ------------ ------------ NET LOSS FROM OPERATIONS (3,171,634) (2,807,072) (17,993,663) (8,184,534) (6,420,714) CAPITAL LEASE RESTRUCTURING 344,129 ------------ ------------ ------------ ------------ ------------ LOSS BEFORE DEFERRED INCOME TAX EXPENSE (CREDIT) (2,827,505) (2,807,072) (17,993,633) (8,184,534) (6,420,714) DEFERRED INCOME TAX EXPENSE (CREDIT) 1,716,000 (1,716,000) ------------ ------------ ------------ ------------ ------------ NET LOSS $ (2,827,505) $ (2,807,072) $(17,993,633) $ (9,900,534) $ (4,704,714) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN THOUSANDS) 13,055 10,947 10,617 10,225 8,833 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ LOSS PER COMMON SHARE $ (0.22) $ (0.26) $ (1.69) $ (.97) $ (.53) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Capital in Common -------------------- -------------------- Excess of Stock Accumulated Shares Amount Shares Amount Par Value Subscribed Deficit -------- -------- -------- ------- ------------ ------------ ------------ Sales of common stock - $ - 4,250,000 $ 42,500 $ 1,720,001 $ - $ - Stock exchanged for services 540,000 Issuance of shares in connection with 2 for 1 stock split 4,250,000 42,500 (42,500) Sales of common stock 1,725,000 17,250 12,811,499 Sale of options 1,455,005 Net loss (4,704,714) -------- -------- ---------- -------- ---------- ---------- ----------- Balances, December 31, 1993 10,225,000 102,250 16,484,005 (4,704,714) Conversion of long-term debt 2,882,926 Stock issued for settlement of note payable and accrued interest payable 625,222 6,252 8,277,944 Mandatorily redeemable common stock accretion (5,625) Net loss (9,900,534) -------- -------- ---------- -------- ---------- ---------- ----------- Balances, December 31, 1994 625,222 6,252 10,225,000 102,250 27,639,250 (14,605,248)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock Common Stock Capital in Common -------------------- -------------------- Excess of Stock Accumulated Shares Amount Shares Amount Par Value Subscribed Deficit -------- -------- -------- ------- ------------ ------------ ------------ Conversion of preferred stock to common stock (625,222) (6,252) 1,250,444 12,504 (6,252) Common stock issued pursuant to acquisition 782,609 7,826 4,492,174 Common stock exchanged for financial advisory services 90,000 1,600,000 Mandatorily redeemable common stock accretion (50,805) Exercise of options 96,429 964 614,750 Net loss (17,993,633) -------- -------- ---------- -------- ----------- ---------- ---------- Balances, December 31, 1995 12,354,482 123,544 32,779,117 1,600,000 (32,598,881) Common stock issued for payment of long-term debt 701,017 7,010 2,446,551 Issuance of subscribed common stock 347,826 3,478 1,596,522 (1,600,000) Amount due under redemption agreement (350,509) Net loss (2,827,505) -------- -------- ---------- -------- ----------- ---------- ---------- Balances, March 31, 1996 (unaudited) - $ - 13,403,325 $ 134,032 $36,471,681 $ - $ (35,426,386) -------- -------- ---------- -------- ----------- ---------- ---------- -------- -------- ---------- -------- ----------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
March 19, 1993 (Date of Three Months Years Ended December 31, Inception) to Ended March 31, ---------------------------- December 31, 1996 1995 1995 1994 1993 ---------- ----------- ------------- ------------- ---------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,827,505) $ (2,807,072) $ (17,993,633) $ (9,900,534) $ (4,704,714) ------------ ------------- ------------- ------------- -------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Brokerage commission 40,000 Common stock issued in exchange for financial advisory services 1,690,000 500,000 Depreciation and amortization 1,802,582 977,532 4,508,947 3,776,262 Write-off of deferred costs, Rising Sun 459,928 Provision for losses on accounts receivable 255,000 35,000 Imputed interest on long-term debt 70,088 336,920 505,680 Capital lease restructuring (344,129) Deferred income tax expense (credit) 1,716,000 (1,716,000) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 71,707 55,854 248,368 (886,034) (240,560) (Increase) decrease in inventories 44,184 (12,263) 200,799 (488,479) (182,672) (Increase) decrease in prepaid insurance 716,993 96,333 (230,850) 968,514 (Increase) decrease in other current assets 300,988 (143,624) (813,736) 514,715 (750,032) Increase (decrease) in accounts payable and other accrued expenses (709,149) 387,311 1,527,398 3,893,329 7,418,525 Increase (decrease) in accrued payroll and related liabilities 773,147 736,296 (186,474) 2,431,108 274,089 ------------ ------------- ------------- ------------- -------------- Total adjustments 2,656,323 2,167,527 7,659,380 12,297,335 5,849,030 ------------ ------------- ------------- ------------- -------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (171,182) (639,545) (10,334,253) 2,396,801 1,144,316 ------------ ------------- ------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,086,222) (440,631) (3,716,978) (3,139,651) (27,886,679) Cash acquired in connection with purchase of leasehold interest 11,041 Cash acquired in connection with purchase of Cotton Club 543,100 Proceeds from and payments for deposits and other assets (38,662) (126,667) 300,258 (713,039) (291,227) ------------ ------------- ------------- ------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (1,124,884) (567,298) (2,873,620) (3,852,690) (28,166,865) ------------ ------------- ------------- ------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
March 19, 1993 (Date of Three Months Years Ended December 31, Inception) to Ended March 31, --------------------------- December 31, ------------------------- 1996 1995 1995 1994 1993 ---------- ----------- ------------ ------------- ------------- (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from affiliate 2,052,995 17,863,999 Payments on construction and equipment notes payable (280,452) (4,845,810) Proceeds from sales of common stock 14,241,250 Proceeds from sale of options 1,455,005 Proceeds from notes payable 157,702 248,181 12,279,232 29,967,521 Payments on notes payable (134,746) (857,399) (3,994,904) Proceeds from long-term debt 2,176,102 8,190,632 Payments on long-term debt (490,400) (1,700,278) (10,820,974) (1,998,939) (17,445,312) ------------ ------------- ------------- ------------ ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,585,551 475,804 14,343,987 1,439,579 28,218,464 ------------ ------------- ------------- ------------ ------------- NET INCREASE (DECREASE) IN CASH 289,485 (731,039) 1,136,114 (16,310) 1,195,915 CASH, beginning of period 2,315,719 1,179,605 1,179,605 1,195,915 - ------------ ------------- ------------- ------------ ------------- CASH, end of period $ 2,605,204 $ 448,566 $ 2,315,719 $ 1,179,605 $ 1,195,915 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, cash paid for interest during the period $ 1,063,508 $ 202,299 $ 1,035,498 $ 1,889,212 $ 623,024 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease restructuring, includes accrued interest of $74,571 $ 344,129 ------------ ------------ Common stock issued for payment of long-term debt $ 2,453,561 ------------ ------------ Amount due under redemption agreement, includes accrued interest of $112,456 $ 462,965 ------------ ------------ Accrued interest capitalized to debt $ 1,765,005 $ 213,802 ------------- ------------- ------------- ------------- Common stock exchanged for financial advisory services $ 1,690,000 $ 540,000 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
March 19, 1993 (Date of Three Months Years Ended December 31, Inception) to Ended March 31, ---------------------------- December 31, ------------------------- 1996 1995 1995 1994 1993 ---------- ----------- ------------- ------------- ---------------- (Unaudited) (Unaudited) Acquisition of casino: Fair value of net assets acquired $ 21,880,810 Fair value of liabilities assumed 17,380,810 ------------- Equity investment $ 4,500,000 ------------- ------------- Convertible debt exercised $ 2,882,926 ------------- ------------- Capitalization of accounts payable for common stock $ 559,286 ------------- ------------- Note payable and accrued interest exchanged for preferred stock $ 8,284,196 ------------- ------------- Equipment recorded pursuant to obligations under capital lease and financing agreements $ 89,000 $ 8,998,000 ------------- ------------- ------------- ------------- Liabilities assumed in connection with purchase of leasehold interest: Fair value of net assets acquired $ 3,844,786 Convertible note payable issued, less discount of $1,166,097 (2,333,903) Equity investment by certain stockholders (350,000) ------------- Liabilities assumed $ 1,160,883 ------------- ------------- Capitalization of interest during construction $ 900,000 ------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS: Alpha Hospitality Corporation and Subsidiaries (the Company) was incorporated in Delaware on March 19, 1993 and has adopted a December year end. The Company owns and operates dockside casinos located in Lakeshore and Greenville, Mississippi. In addition, the Company provides services for the management of hotels and motels located nation-wide. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: OPERATIONS AND PRINCIPLES OF CONSOLIDATION - In 1993, the Company formed three wholly-owned subsidiaries, Alpha Gulf Coast, Inc. (Alpha Gulf), which commenced operations in January 1994 to own and operate the Lakeshore casino (SEE NOTE 3), Alpha Hotel Management Company, Inc. (Alpha Hotel), which commenced operations in September 1993 to provide hotel management services, and Alpha Rising Sun, Inc. (Alpha Rising Sun), which has not commenced operations. In 1994 and 1995, the Company formed Alpha St. Regis, Inc. (St. Regis) and Alpha Missouri, Inc. (Missouri), wholly-owned subsidiaries, respectively, which both have not commenced operations. Additionally, the Company acquired Cotton Club of Greenville, Inc. (subsequently renamed Jubilation Lakeshore, Inc. (Lakeshore) (SEE NOTE 3)) in November 1995, which owned and operated a casino located in Greenville, Mississippi. The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. CASH - The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not incurred any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. INVENTORIES - Inventories, which primarily consist of food and beverage and uniforms, are stated at the lower of cost or market, with cost being determined on the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost, less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives: ESTIMATED ASSETS USEFUL LIVES Barge and improvements 20 years Leasehold and improvements 10-20 years Gaming equipment 5-7 years Furniture, fixtures and equipment 5-7 years Transportation equipment 3 years PRE-OPENING AND DEVELOPMENT COSTS - The Company incurs start-up costs in connection with start-up casino operations and joint ventures. The Company's policy is to expense pre-opening and development costs as incurred. F-10 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): LOSS PER COMMON SHARE - Loss per common share is based on the weighted average number of common shares outstanding. In 1993, weighted average common shares outstanding include 8,500,000 shares issued within one year of the Company's initial public offering (IPO), with an issue price less than the IPO price. The Company's common stock subscribed is included in the computation and the outstanding stock options and warrants are excluded from the computation since they would have an antidilutive effect on loss per common share. All references to the number of shares and per share amounts have been adjusted for the stock split (SEE NOTE 11). INCOME TAXES - The Company complies with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts, and based on enacted tax laws and rates to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company does not provide for deferred taxes on the unremitted earnings of its wholly-owned subsidiaries since, under existing tax laws, its investment could be liquidated tax-free. As a result, any excess outside financial basis over tax basis will not be expected to result in taxable income upon reversal and thus will not be a temporary difference. CASINO REVENUE - Casino revenue is the net win from gaming activities, which is the difference between gaming wins and losses. PROMOTIONAL ALLOWANCES - Promotional allowances primarily consist of food and beverage furnished gratuitously to customers. Revenues do not include the retail amount of food and beverage of approximately $1,066,000 (unaudited), $3,514,000 and $4,884,000 for the three months ended March 31, 1996 and the years ended 1995 and 1994, respectively, provided gratuitously to customers. The cost of these items of $1,184,000 (unaudited), $4,308,000 and $5,138,000 for the three months ended March 31, 1996 and the years ended 1995 and 1994, respectively, are included in casino expenses. AMORTIZATION OF DEBT DISCOUNT - The Company amortizes the debt discount on the mortgage note using the interest method, which yields a constant rate of interest over the life of the note (NOTE 6). INTEREST CAPITALIZATION - Interest costs incurred during the construction and development of the dockside casino and related facilities is capitalized as part of the cost of such assets. LOAN FEES - Loan fees included in other assets are being amortized over the life of the equipment notes payable. F-11 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the Company's assets and liabilities which qualify as financial instruments under SFAS No. 107 approximate their fair values at March 31, 1996 (unaudited) and December 31, 1995. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEWLY ISSUED ACCOUNTING STANDARDS - In March 1995, Statement of Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment of Long-lived Assets and for the Long-lived Assets to be Disposed of" was issued. The Company will adopt SFAS 121 in the first quarter of 1996. Statement No. 121 requires that long-lived assets (and certain intangibles) to be held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically reviews the carrying value of certain of its assets in relation to historical results, as well as management's best estimate of future trends, events and overall business climate on the Gulf Coast. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would then estimate the future cash flows (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value. RECLASSIFICATIONS - Certain amounts have been reclassified in 1994 to conform to the 1995 presentation. NOTE 3 - BUSINESS COMBINATION: Effective October 30, 1995, the Company acquired all of the outstanding stock of Cotton Club of Greenville, Inc. ("CCG"), the owner and operator of a dockside gaming casino in Greenville, Mississippi in a business combination accounted for as a purchase. Accordingly, the results of operations of CCG are included in the accompanying financial statements from the date of acquisition. In addition to its dockside gaming vessel, CCG owned interests in certain real estate in Greenville, which was primarily used for automobile parking, and certain rights granted by the City of Greenville and the Greenville Yacht Club to locate its vessel at its present site on Lake Ferguson which is an inlet of the Mississippi River. The stock was acquired from a group of sixteen stockholders (former CCG stockholders) none of whom had any material relationship to the Company or any of its affiliates, directors or officers. Consideration for the acquisition consisted of: (a) cash at closing of $2,404,148; (b) notes due six months after closing of $1,396,510, bearing interest at 10% per annum; (c) notes due nine months after closing of $1,896,510, bearing interest at 10% per annum; and (d) 782,609 shares of the common stock of the Company valued at $5.75 per share. The cash paid at the closing was borrowed by the Company from Bryanston Group, Inc. (Bryanston), an affiliate. As part of the acquisition, all debt and accrued interest owed by CCG to its former stockholders, of approximately $9,600,000, is included in the consideration above and has been assigned to the Company. Subsequent to the sale and pursuant to approvals granted by the Mississippi Gaming Commission, certain lenders to CCG and to Alpha Gulf, Alpha Gulf transferred its casino gaming barge and its related operations to the CCG site in Greenville, Mississippi, and CCG transferred its riverboat casino to Alpha Gulf's former site at Lakeshore, Mississippi on the Gulf Coast. The casinos commenced operations at their new sites in November and December 1995. F-12 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - BUSINESS COMBINATION (CONTINUED): The excess of the purchase price over the net assets of CCG of approximately $3,043,000 was allocated to property and equipment and will be depreciated and amortized over the estimated remaining useful lives of the assets. The following summarized pro forma information assumes the acquisition had occurred on January 1, 1994 (in thousands): Year Ended Year Ended December 31, December 31, 1995 1994 ------------ ------------ Total revenues $ 55,927 $ 83,432 --------- --------- --------- --------- Net loss $ (18,518) $ (8,561) --------- --------- --------- --------- Loss per common share $ (1.64) $ (.78) --------- --------- --------- --------- The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the CCG acquisition had been in effect for the periods presented. Further, the pro forma results are not intended to be a projection of future results and do not reflect any integration costs, cost savings resulting from synergistic opportunities or the results of operations of other business acquired or disposed of in 1995 and 1994. The above amounts reflect adjustments for interest on notes payable issued as part of the purchase price and depreciation and amortization on revalued property and equipment. NOTE 4 - PROPERTY AND EQUIPMENT: Details of property and equipment at March 31, 1996 and December 31, 1995 and 1994 are as follows: 1996 1995 1994 ------------ ------------ ------------ (Unaudited) Land and building $ 214,068 $ 214,068 $ - Boat, barge and improvements 24,230,240 23,589,464 16,300,132 Leasehold and improvements 30,313,755 30,000,654 14,026,624 Gaming equipment 10,060,817 10,041,722 6,572,884 Furniture, fixtures and equipment 7,374,362 7,264,414 5,375,674 Transportation equipment 1,037,760 1,034,461 547,514 Construction in progress 495,172 495,172 1,012,207 ------------ ------------ ------------ 73,726,174 72,639,955 43,835,035 Less accumulated depreciation and amortization (15,187,624) (13,385,041) (3,765,486) ------------ ------------ ------------ $ 58,538,550 $ 59,254,914 $ 40,069,549 ------------ ------------ ------------ ------------ ------------ ------------ F-13 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - PROPERTY AND EQUIPMENT (CONTINUED): Included in equipment at March 31, 1996 (unaudited) and December 31, 1995 and 1994 was approximately $1,319,000 related to assets recorded under capital leases. Included in accumulated depreciation and amortization at March 31, 1996 (unaudited) and December 31, 1995 and 1994 was approximately $585,000, $422,000 and $208,000, respectively, of amortization related to assets recorded under capital leases. In 1993, the Company capitalized approximately $900,000 of interest, of which approximately $327,000 is included in barge and improvements and $573,000 is included in leasehold and improvements. NOTE 5 - LEASEHOLD INTEREST: On May 14, 1993, in connection with the development of a dockside casino in Lakeshore, Mississippi, Alpha Gulf acquired from an unrelated third party (Seller), a leasehold interest (the leasehold) and certain other assets, net of assumption of certain liabilities. The net purchase price was $3,500,000 and the Company issued a convertible promissory note with a stated interest rate of 10% and an effective rate of 30%. The difference in the interest rates represents the implicit economic risks inherent in the transaction. In addition, the Company charged approximately $350,000, resulting from the settlement of assumed liabilities, to operations in connection with the acquisition of the leasehold. Effective February 1, 1994, the Company exercised its right to convert the Seller's note and accrued interest (carrying amount of $2,882,926) to 791,880 shares of its outstanding common stock, of which 716,880 shares were contributed to the Company by a stockholder and the additional 75,000 shares will be issued in 1996. NOTE 6 - NOTES PAYABLE: Notes payable at March 31, 1996 and December 31, 1995 and 1994 are comprised of the following:
Interest Rate 1996 1995 1994 ------ ------------ ----------- --------- (Unaudited) Note payable to third party 12% $ - $ - $ 153,332 Revolving line of credit with payments of principal and interest due monthly, collateralized by funds held at the Company's casino and guaranteed by Prime an affiliate + 2% 97,510 144,699 685,719 Notes payable to former CCG stockholders (SEE NOTE 3) 10% 3,293,020 3,293,020
F-14 NOTE 6 - NOTES PAYABLE (CONTINUED):
Revolving line of credit of $500,000, with payments of principal and interest due March 1, 1996, collateralized by cash advances (SEE NOTE 16) 357,917 200,215 Note payable to third party with payments of principal and interest due monthly, collateralized by certain vehicles 11% 69,152 102,796 Unsecured note payable 53,221 Employee loans Various 21,244 21,936 41,000 ----------- --------- --------- $ 3,838,843 $ 3,815,887 $ 880,051 ----------- ----------- --------- ----------- ----------- ---------
NOTE 7 - LONG-TERM DEBT: Long-term debt at March 31, 1996 and December 31, 1995 and 1994 is comprised of the following:
Interest Rate 1996 1995 1994 ------ --------- -------- --------- (Unaudited) Mortgage note payable, Bryanston, principal and interest due monthly through November 1998, collateralized by the barge currently located in Greenville, Mississippi, and certain other assets 10% $ 7,800,000 $ 7,800,000 $ - Mortgage note payable, Hospitality Franchise Systems, Inc. (HFS), less unamortized discount based on imputed interest rate of 10%, paid in 1995 (see disclosure below) 6% 6,721,908 Mortgage note payable in monthly installments of $70,000 plus interest at 30-day commercial paper rate (5.83% at December 31, 1995) plus 3.5%, adjusted quarterly, funded with weekly deposits of $25,000 into a restricted cash account, collateralized by the barge and improvements currently located in Lakeshore, Mississippi 9% 3,656,272 3,736,383
F-15 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - LONG-TERM DEBT (CONTINUED):
Interest Rate 1996 1995 1994 (Unaudited) ------ ------- --------- ------------- Equipment notes payable monthly through November 1999 and collateralized by certain assets 11-14% 10,616,199 13,431,813 9,282,986 Capitalized lease obligations, payable monthly, expiring in various years through 2000 10-15% 616,100 924,764 1,106,225 Loans payable, no interest or principal due until January 1996, except for proceeds from exercise of warrants and options (NOTE 9). Remaining balance of loans are payable in equal quarterly installments over 10 years with interest at 9% per annum, commencing in January 1996. Loans are subordinated to the Bryanston mortgage note payable and will be repaid only if the Company maintains certain financial ratios. Approximately $2,474,000 and $1,973,000 is owed to Bryanston at December 31, 1995 and 1994, respectively 12% 3,654,973 3,654,973 2,914,333 Bank notes, payable monthly through 1997, collateralized by certain equipment 8-10% 74,354 83,484 74,795 ----------- ----------- ----------- 26,417,898 29,631,417 20,100,247 Less current portion 11,910,435 27,319,666 10,026,377 ----------- ----------- ----------- $14,507,463 $ 2,311,751 $10,073,870 ----------- ----------- ----------- ----------- ----------- -----------
Aggregate future required principal payments are approximately as follows: Year ending December 31: 1996 $ 27,320,000 1997 210,000 1998 189,000 1999 206,000 2000 226,000 Thereafter 1,480,000 ------------ $ 29,631,000 ------------ ------------ F-16 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - LONG-TERM DEBT (CONTINUED): In August 1995, Bryanston purchased the mortgage on the Lakeshore barge from HFS for $7,816,667. This transaction resulted in a write- off on the unamortized discount on the original note of approximately $930,000. In connection with agreement, Bryanston also acquired 96,429 shares of common stock owned by HFS (NOTE 14). At March 31, 1996 (unaudited), the Company was in default of (i) its mortgage notes payable for non-payment, (ii) the Lakeshore equipment notes aggregating approximately $3,433,000 for the breach of several loan covenants and certain loans payable aggregating approximately $3,655,000 for non-payment. The Company received a waiver of the defaults of the loan payable and mortgage note payable to Bryanston. Accordingly, the Lakeshore mortgage note payable ($3,656,000), the Lakeshore equipment notes payable ($3,433,000) and a certain loan payable ($1,181,000) are reflected in current liabilities at March 31, 1996. At December 31, 1995, the Company was in default of (i) its mortgage notes payable for non-payment, (ii) the equipment notes aggregating approximately $13,432,000 for the breach of several loan covenants and (iii) a capital lease of approximately $745,000 for non-payment. Subsequently, the Company has restructured the aforementioned capital lease (SEE NOTE 16). Certain loans payable aggregating approximately $3,655,000 went into default in 1996 due to non-payment. The Company received a waiver on the default with the loan payable to Bryanston (NOTE 16). Accordingly, the mortgage notes payable ($11,356,000), equipment notes payable ($13,432,000), capital lease ($745,000) and a certain loan payable ($1,181,000) are reflected in current liabilities at December 31, 1995. At December 31, 1994, the Company was not in compliance with several covenants under its lakeshore mortgage note payable for the encumbrance of the Company's barge, and for the default in payment of a capital lease. The Company had not received a notice of default under this capital lease, and believed that it will be able to cure the default within the permitted grace period. The default under the mortgage note payable resulted in a cross-default of a certain equipment note. Accordingly, both the mortgage note ($6,722,000) and the equipment note ($1,102,000) were reflected in current liabilities at December 31, 1994. Effective October 24, 1995, the Company restructured a certain equipment note of approximately $800,000 with an unrelated party. The amended terms call for 36 monthly installments of $26,000, which includes interest at 11.5% per annum, commencing November 24, 1995. F-17 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES: At March 31, 1996 and December 31, 1995 and 1994, accounts payable and other accrued expenses are comprised of the following: 1996 1995 1994 ----------- ------------ ----------- (Unaudited) Construction $ 1,425,000 $ 1,218,000 $ 1,498,000 Insurance financing 986,000 1,585,000 984,000 Accrued professional fees 903,000 851,000 375,000 Accrued property taxes 463,000 843,000 200,000 Accrued interest 1,169,000 974,000 561,000 Other 4,934,000 5,239,000 4,479,000 ----------- ------------ ----------- $ 9,880,000 $ 10,710,000 $ 8,097,000 ----------- ------------ ----------- ----------- ------------ ----------- NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS: Effective September 1, 1993, Alpha Hotel entered into a Service Agreement and an Expense Reimbursement Agreement with Bryanston. Under the Service Agreement, Alpha Hotel supplies services for the management of hotels and motels. Service fees are generated based upon a percentage of hotel and motel revenues, as defined in the respective agreements. At December 31, 1995 and 1994 Alpha Hotel managed 15 and 20 hotels and motels, respectively. Pursuant to the terms of the Expense Reimbursement Agreement, the Company will reimburse Bryanston, as the case may be, for direct payroll and related costs for use of certain office space (approximately $15,000 per month) and its share of office expenses. In 1993, the Company entered into an agreement with HFS, under which HFS will provide marketing services. The agreement was for ten years and could be canceled by the Company after five years. Prior to the finding of suitability of HFS by the Mississippi Gaming Commission, the marketing fees were set at $162,834 per month. In June 1994, the Mississippi Gaming Commission found HFS suitable and the marketing fees were changed to the greater of 3% of Alpha Gulf's Gaming Revenue or $1,650,000 per year, computed monthly, commencing July 1, 1994. On September 22, 1995, the Company arranged for the termination of the marketing agreement. The funds required to terminate this agreement ($1,500,000) and to pay amounts due under the agreement through the date of the termination were paid by Bryanston. Marketing services incurred under this agreement were $564,000 and $1,665,000 for the years ended December 31, 1995 and 1994, respectively. F-18 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED): The Company is obligated under a $20,000,000 non-revolving promissory note ($19,413,856 and $17,360,861 outstanding at March 31, 1996 (unaudited) and December 31, 1995, respectively) with Bryanston. The note, which bears interest at prime rate (8.5% at March 31, 1996 and December 31, 1995) plus 2%, is payable at the lesser of the outstanding principal amount or $2,000,000 per annum through December 31, 1999. Beginning 1996, interest accrued monthly is due and payable by the following month. All remaining principal and accrued interest (approximately $437,000 and $503,000 at March 31, 1996 (unaudited) and December 31, 1995, respectively) shall be due on December 31, 2000. Additionally, commencing May 1, 1996 and for each of the next succeeding three years thereafter, the Company will be required to make additional principal payments equal to "Available Cash Flow of Maker" as defined in the note. The Company is obligated under three property leases at their dockside casino located in Lakeshore, Mississippi. Two of these leases provide for changes in the minimum annual rent based on the Consumer Price Index. One of the leases provides for percentage rent of up to 6% of gross gaming revenue, as defined in the agreement. The leases expire between the years 2001 and 2003 and two of the leases have renewal options for two additional five year terms. The Company has options to purchase the leased properties for an amount not to exceed $10,200,000. Rent expense for the three months ended March 31, 1996 and the years ended 1995 and 1994 and the period March 19, 1993 (date of inception) to December 31, 1993 approximated $148,000 (unaudited), $576,000 (which has been reduced by approximately $500,000 as a result of renegotiated terms of the lease), $2,030,000 and $100,000, respectively. On October 13, 1995, the Company amended its ground lease at Lakeshore, Mississippi. The amended lease provides for rent of up to 4.5% of gross gaming revenue, as defined in the agreement, for the Company's vessel located on that leased property in Lakeshore, Mississippi and one quarter of one (0.25%) of gross gaming revenues of the Company's vessel which originally operated in Lakeshore, Mississippi, with a minimum annual rental of $800,000 per annum through March 31, 2000 and $950,000 per annum until the termination date of July 31, 2011. Effective January 1, 1994, the Company entered into a tideland lease which provides for an initial term of ten years expiring on December 31, 2003. Subject to certain conditions, the Company has the option to renew the lease for an additional five year term. Rent expense in 1995 and 1994 was $200,000 under this lease. In September 1995, the charter and lease agreement was extended on a month to month basis at the same terms. The Company entered into a charter and lease agreement in September 1994 with Bryanston Marine, Inc., a related party, to charter a vessel to be used for dining. The agreement provides for monthly rent of $9,250, expired in September 1995 and had a purchase option of $800,000 which expired July 1995. In September 1995, the charter and lease agreement was extended on a month to month basis at the same terms. F-19 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED): Approximate future aggregate minimum annual rental payments under these leases are as follows: Year ending December 31: 1996 $ 2,092,000 1997 1,813,000 1998 1,369,000 1999 1,157,000 2000 1,269,000 Thereafter 11,401,000 ------------- $ 19,101,000 ------------- ------------- On January 19, 1995, the Company, through its subsidiary, St. Regis, entered into a memorandum of understanding with Catskill Development, L.L.C. ("Catskill") pursuant to which St. Regis is to participate in the development of, and thereafter manage, a casino to be built adjacent to the Monticello Raceway in Sullivan County, New York. It is intended that the casino will be owned by the St. Regis Mohawk Indican Tribe (the "Tribe") and will be located on land to be placed in trust for the benefit of the Tribe. The casino project is subject to approval by the U.S. Department of Interior, the National Indian Gaming Commission and the State of New York, as well as the execution of definitive agreements with the Tribe. It is contemplated that the Company will be required to contribute an amount preliminarily estimated at $250,000 toward the design, architectural and other costs of development plans for the casino. Under the memorandum of understanding, Catskill and St. Regis commit to enter into a definitive agreement on the terms established in the memorandum, but there can be no assurance that such an agreement will ever be consummated. Bryanston is a 25% member of Catskill. The Company is obligated under a three year employment contract with a principal stockholder/officer. Under this agreement, the Company will accrue deferred compensation of $250,000 per year. In the event of termination of employment, the terminated officer will be retained to provide consulting services for two years at $175,000 per annum. In accordance with Mississippi law, the Company's casino licenses have initial terms of two years and will be subject to periodic renewal. In October 1995, the Company received renewals of their casino licenses through October 1997. Failure to retain the licenses could have a material adverse effect on the Company's operations. F-20 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED): The Company has been named as an additional defendant in an action brought in the United States District Court for the Southern District of Mississippi (Susan E. Wolff, et al v. James C. Zamecnik, et al.) The Plaintiff is seeking $20,000,000. However, in recent settlement discussions between the Plaintiff and the Company's insurance company, the Plaintiff has offered a settlement of $7,500,000. The Plaintiff has initiated a declaratory judgment action (Southern Division) against Alpha Gulf and its insurance carriers seeking a determination as to the liability of such carriers under the insurance policies issued by the carriers to Alpha Gulf and the Company for any damages found against Alpha Gulf in the primary litigation up to the policy limits. Subsequent to the initiation of the declaratory judgment action, the Company's primary insurance carrier initiated its own declaratory action to determine its liability under its insurance policy. The declaratory judgment action appears to have been brought in response to issues raised by the primary insurance carrier as to timely notice of the incident and possible spoilation of evidence. Subsequently, the primary insurance carrier initiated its own declaratory judgment action against Alpha Gulf and the Company (Commerce & Industry Company v. Alpha Gulf Coast, Inc. and Alpha Hospitality Corporation, Inc.: United States District Court for the Southern District of Mississippi, Jackson Division) seeking a determination that it is not liable under the subject insurance policy. The Company has moved to intervene in the declaratory judgment action brought by the Plaintiff. In both declaratory judgment actions, Alpha Gulf and the Company are asserting either cross claims or counterclaims against the insurance carriers involved. Alpha Gulf and the Company have also moved to consolidate the two declaratory judgment actions with the Plaintiff's original personal injury action. The ultimate outcome of this litigation cannot presently be determined. Accordingly, no provision for any liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. The Plaintiff and the Company's insurance carrier are currently conducting settlement negotiations, although there can be no assurance that a settlement will be reached. An unfavorable outcome of this matter will result in a material adverse effect on the Company's financial position and results of operations. As of March 31, 1996 (unaudited), a settlement has been reached between the Plaintiff and the Company's insurance carrier, in the amount of $5,125,000, subject to completion of the settlement documents and the approval of the court. The Plaintiff had brought a declaratory judgment action against the insurance carrier seeking a determination of the carrier's liability under the Company's insurance policies. Subsequently, the primary insurance carrier initiated a declaratory judgment action against Alpha Gulf and the Company (Commerce & Industry Company vs. Alpha Gulf Coast, Inc. and Alpha Hospitality Corporation, Inc.; United States District Court for the Southern District of Mississippi Jackson Division) seeking a determination that it is entitled to reimbursement from Alpha Gulf Coast, Inc. and the Company. The declaratory judgment action appears to have been brought in response to issues raised by the primary insurance carrier as to timely notice of the incident and possible spoilation of evidence. The Company has moved to intervene in the declaratory judgment action brought by the Plaintiff and has moved to dismiss the insurance carrier's declaratory judgment action on jurisdictional grounds. In both declaratory judgment actions, Alpha Gulf and the Company are asserting either cross claims or counterclaims against the insurance carriers involved. The ultimate outcome of the declaratory judgment litigation cannot presently be determined. Accordingly, no provision for any liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. However, the liability under the underlying personal liability action has been set by settlement at $5,125,000 subject to documentation and court approval. F-21 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED): In January 1996, the Company has been named as a defendant in an action brought in the Circuit Court of Hynds County, Mississippi (Amos vs Alpha Gulf Coast, Inc.; Batiste vs Alpha Gulf Coast, Inc.; Ducie vs Alpha Gulf Coast, Inc.; Johnson vs Alpha Gulf Coast, Inc.; Ramez vs Alpha Gulf Coast, Inc.). Mr. Amos alleges that on January 16, 1995, a vehicle operated by him collided with a vehicle negligently operated by an individual that was served alcoholic beverages by the Company. The defendant seeks compensating damages of $1,800,000 and punitive damages of $7,500,000. The remaining defendants allege that they were passengers in the vehicle operated by Mr. Amos and that they suffered personal injuries. They seek compensating damages of $1,800,000 each and punitive damages of $7,500,000 each. The ultimate outcome of this litigation cannot presently be determined. Accordingly, no provision for liability to the Company that may result upon adjudication has been made in the accompanying consolidated financial statements. The Company believes that the risk referred to in this paragraph is adequately covered by insurance and, therefore, will not have a material adverse effect on the Company's financial position and results of operations. The Company is a party to various other legal actions which arise in the normal course of business. In the opinion of the Company's management, the resolution of these other matters will not have a material adverse effect on the financial position of the Company. On January 25, 1995, the Company entered into an agreement to acquire all the outstanding common stock of Doc Holliday, Inc. ("Doc Holliday"), the owner and operator of an 18,000 square foot casino in Central City, Colorado. The Company will issue 92,000 shares of its common stock and a five year option to purchase up to 500,000 shares of common stock at an exercise price of $3.50 per share in payment for the Doc Holliday stock. The agreement may be terminated by the Company at any time prior to closing for any reason and by any of the parties upon written notice if the transaction is not consummated by March 31, 1996. The transaction will be accounted for as a purchase. The acquisition would not be material to the Company's consolidated financial statements and, therefore, pro forma information is not provided (Note 16). NOTE 10 - AMOUNT DUE UNDER REDEMPTION AGREEMENT (UNAUDITED): Effective October 15, 1995, the Company restructured certain equipment notes, aggregating approximately $9,000,000 with unrelated parties. Pursuant to the restructuring requirements, the Company will repay approximately $6,500,000 in 48 monthly installments of $166,000, which includes interest of 10% per annum, commencing December 15, 1995. The balance of $2,500,000 bears interest at 10% per annum, is due on November 15, 1999, and my either be partially or fully repaid, pursuant to an escrow agreement, from the net proceeds from the sale of approximately 701,000 shares of the Company's common stock held in escrow. To the extent that the net proceeds exceeds $2,500,000 plus accrued interest, the excess will be applied to the $6,500,000 portion of the debt. However, if the net proceeds are less than the $2,500,000 plus accrued interest, then the Company will be required to remit the balance due at maturity. The escrow agreement provides for the unrelated party to have full voting rights pertaining to the escrowed shares and the right to sell any or all of the shares. The Company has the right of first refusal to purchase the shares that the unrelated party desires to sell. The debt is collateralized by the Company's barge and certain gaming equipment. F-22 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - AMOUNT DUE UNDER REDEMPTION AGREEMENT (UNAUDITED) (CONTINUED): As of March 1996 (unaudited), the shares were issued and transferred into escrow and the related debt was reclassified to stockholders' equity. Stockholders' equity is adjusted for changes in the market value of the underlying common stock, not to exceed the original debt incurred under the common stock is sold by the unrelated party. At March 31, 1996 (unaudited), the amount due under the redemption agreement is $462,965, which includes $112,456 of accrued interest, resulting from the decrease in the fair market value of the stock at March 31, 1996 ($3.00) and the price at the date of the agreement ($3.50). NOTE 11 - STOCKHOLDERS' EQUITY: In May 1993, the Company sold to certain of its founding stockholders 4,935,013 shares of its common stock for an aggregate of approximately $1,136,000. Included in compensation and related expenses in 1993 is $500,000 relating to this transaction. In addition, the Company sold to Bryanston 3,564,987 shares of its common stock at approximately $.18 per share plus the rights to provide management services pursuant to the Service Agreement (NOTE 9). The rights under the Service Agreement are recorded at Bryanston's cost, which is zero. The Company issued 175,000 shares of its common stock in payment of the brokerage commission related to the purchase of the leasehold interest (NOTE 5). Included in other expenses in 1993 is $40,000 which is the amount management has ascribed to these shares. On June 3, 1993, the Company's Board of Directors adopted the 1993 Stock Option Plan (Plan) providing for incentive stock options ("ISO's") and non-qualified stock options (NQSO's). The Company has reserved 900,000 shares of common stock for issuance upon the exercise of options to be granted under the plan. The exercise price of an ISO or NQSO will not be less than 100% of the fair market value of the Company's common stock at the date of the grant. The Company granted options to purchase an aggregate of 384,500 shares of common stock at an exercise price of $3.25 through December 31, 1995. In addition, effective December 8, 1993, the Company granted options to purchase an aggregate of 24,000 shares of common stock at an exercise price of $11.50. The maximum term of each option granted under the plan is ten years, however, options granted to an employee owning greater then 10% of the Company's common stock will have a maximum term of five years. No options under this plan were exercised in 1996 (unaudited), 1995, 1994 and 1993. On August 20, 1993, the Company's stockholders and the Board of Directors authorized a 2 for 1 common stock split. As a result of the split, 4,250,000 additional shares were issued and capital in excess of par value was reduced by $42,500. On October 26, 1993, the Company entered into an option agreement with HFS for which the Company received $600. The agreement provides for HFS to receive an option, expiring on October 31, 1998, to purchase 600,000 shares of the Company's common stock at an exercise price of $14 per share. The value ascribed to the option and credited to capital in excess of par value was $1,455,005, which was the amount of the discount on the mortgage note payable to HFS (NOTE 7). F-23 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCKHOLDERS' EQUITY (CONTINUED): On November 5, 1993, the Company completed its public offering for the sale of 1,500,000 shares of common stock at $9.00 per share and 750,000 redeemable common stock purchase warrants at $.10 per warrant. Each warrant entitles the holder to purchase one share of common stock at the exercise price of $12.00, commencing November 5, 1993 until November 4, 1998. On November 18, 1993, the underwriter exercised its option to purchase 225,000 shares of the Company's common stock at $9.00 per share and 112,500 warrants at $.10 per warrant. As of December 31, 1995, no warrants were exercised. Effective December 31, 1994, the Company issued 625,222 shares of its preferred stock in settlement of $8,284,196 due to Bryanston, which includes approximately $349,000 of accrued interest. Effective November 1, 1995, the Company converted 625,222 shares of preferred stock to 1,250,444 shares of common stock in a 2 for 1 exchange. In consideration for services provided to the Company in the acquisition of the CCG (NOTE 3), the Company intends to issue 347,826 shares to Bryanston with a fair value of $1,600,000 and options to a third party with a fair value of $90,000. The Bryanston shares are included in common stock subscribed at December 31, 1995. In addition, the Company granted to Bryanston an option to acquire 347,826 shares of the Company's common stock at an exercise price per share equal to the closing NASDAQ bid price at of December 4, 1995 ($5.375 per share). The option expires on December 4, 2000. In 1996 (unaudited), the Company issued the 347,826 shares to Bryanston for services provided to the Company in the acquisition of the CCG. In 1996 (unaudited), the Company issued 701,017 shares, to be held in escrow, related to certain restructured equipment notes (SEE NOTE 10). F-24 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - INCOME TAXES: The Company and all of its subsidiaries file a consolidated federal income tax return. Income tax expense is allocated pursuant to the separate tax attributes of each subsidiary. At March 31, 1996 and December 31, 1995 and 1994, the Company's deferred federal tax asset is comprised of the tax benefit (cost) associated with the following items based on the 35% tax rate currently in effect (dollars in thousands):
1996 1995 1994 ---------- -------- --------- (Unaudited) Pre-opening costs currently deducted for financial reporting and amortized over 5 years for tax purposes $ 1,754 $ 1,788 $ 2,238 Net operating loss carryforward 13,108 11,524 3,368 Differences between financial and tax depreciation methods (1,862) (2,077) (150) Differences in basis of HFS debt due to discount for warrants received (403) Differences between financial and tax basis of assets and liabilities 1,756 1,737 573 Interest capitalized for financial reporting and expensed for tax purposes (221) (224) (234) Other (77) (77) --------- --------- ------- Deferred tax asset 14,458 12,671 5,392 Valuation allowance on deferred tax asset (14,458) (12,671) (5,392) --------- --------- ------- $ - $ - $ - --------- --------- ------- --------- --------- -------
For the year ended December 31, 1994, the Federal statutory tax rate and the Company's effective rate differs due to recording a valuation allowance for the entire deferred tax asset which includes the reversal of $1,716,000 recorded at December 31, 1993. The Company has available for federal income tax purposes, a net operating loss carryover of approximately $32,927,000 of which $883,000, $7,407,000 and $24,637,000 will expire in the years 2008, 2009 and 2010, respectively. At March 31, 1996 (unaudited), the Company has available for federal income tax purposes, a net operating loss carryover of approximately $37,450,000 of which $883,000, $7,407,000, $24,637,000 and $4,523,000 will expire in the years 2008, 2009, 2010 and 2011, respectively. F-25 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - SEGMENT INFORMATION: The Company's two business segments are operating casinos in Lakeshore and Greenville, Mississippi and hotel management services to hotels located in the United States. The following financial data is presented for the business segments of the Company for the years ended December 31, 1995, 1994 and 1993 (includes eight months of the Company's predecessor, Bryanston). Operating profit (loss) by segment is total revenue less operating expenses. In computing operating profit (loss) by business segment, casino revenue includes casino, food and beverage, and retail and other revenue and casino expenses include casino, food and beverage, retail and other, selling, general and administrative, depreciation and financial advisory services fees. Identifiable assets by business segment are those assets used in Company operations in each segment. Corporate assets are included in casino identifiable assets because they are principally utilized in casino operations. Capital expenditures include acquisitions of property and equipment. Hotel Casino Management -------- ---------- (in thousands) 1993: Total revenue $ - $ 3,092 (1) (2) Operating profit - 883 (1) Identifiable assets 45,241 242 Depreciation and amortization - 83 (1) Capital expenditures 40,607 - 1994: Total revenue $ 43,265 $ 2,835 (3) Operating profit (3,991) 1,125 Identifiable assets 44,812 678 Depreciation and amortization 3,776 - Capital expenditures 3,140 - 1995: Total revenue $ 27,657 $ 2,863 (4) Operating profit (loss) (11,998) 1,351 Identifiable assets 66,353 420 Depreciation and amortization 4,509 - Capital expenditures 23,680 - (5) (1) Total revenue, operating profit and depreciation and amortization in 1993 includes eight months of activity for Bryanston. (2) The Company and Bryanston had five major customers in the hotel operations segment which accounted for 21%, 18% 16%, 12% and 12% of revenue, respectively, in 1993. (3) The Company had five major customers in the hotel operations segment which accounted for 24%, 23%, 18%, 15% and 13% of revenue, respectively, in 1994. F-26 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - SEGMENT INFORMATION (CONTINUED): (4) The Company had five major customers in the hotel operations segment which accounted for 23%, 19%, 17%, 17% and 13% of revenue, respectively, in 1995. (5) Includes $19,963 of capital expenditures relating to the acquisition of CCG (NOTE 3). NOTE 14 - MANDATORILY REDEEMABLE COMMON STOCK: In November 1994, the Company entered into an agreement with HFS to settle approximately $559,000 owed pursuant to the marketing agreement (NOTE 9) by issuing 96,429 shares of its common stock. HFS was given a put option which is exercisable during the thirty day period commencing one year from the date of the agreement at $6.50 per share. The common stock was recorded at its fair value at the issuance date ($5.80 per share). The carrying amount was periodically increased for the amount which will be payable upon redemption. The accretion to the carrying amount ($50,805 and $5,625 in 1995 and 1994, respectively) was determined using the straight-line method (which did not materially differ from the interest method) and resulted in a corresponding decrease to capital in excess of par value. In October 1995, HFS exercised their put option, purchased 96,429 shares of common stock for approximately $616,000, and subsequently sold the shares to Bryanston. NOTE 15 - CONTINUING OPERATIONS: The financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered significant losses from operations and has a working capital deficit of $25,395,057 (unaudited) and $39,993,555 and an accumulated deficit of $35,426,386 (unaudited) and $32,598,881 at March 31, 1996 and December 31, 1995, respectively. Management of the Company recognizes that these conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include continuing to operate the Greenville Casino profitably, sell certain assets located in Lakeshore, develop future casino locations in Missouri and New York, and continue to reduce and monitor operating expenses. Accordingly, the Company's ability to continue as a going concern is dependent upon its ability to develop working capital, attain future profitable operations and meet its creditors' demands. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 16 - SUBSEQUENT EVENTS: As of March 29, 1996, Bryanston has advanced approximately $1,275,000 to the Company pursuant to a non-revolving promissory note effective January 5, 1995 (NOTE 9). On March 29, 1996, the Company received a waiver of default on the Bryanston note payable of $2,474,000. The waiver provides for the Company to cure the default by March 31, 1997. F-27 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - SUBSEQUENT EVENTS (CONTINUED): Effective April 12, 1996 (unaudited), the Company restructured its capital sign lease of approximately $745,000 with an unrelated party. The terms of this restructure reduces the lease principal amount to $475,000 and forgives approximately $74,000 of accrued interest. The effective rate of the restructured lease is 10% per annum, with a four year term. Effective May 1, 1996 (unaudited), the Company terminated its stock acquisition agreement with Doc Holliday, Inc., which owns an operates Doc Holliday Casino located in Central City, Colorado. On July 1, 1996 (unaudited), the management contract for the hotel located in Baltimore, Maryland expired and was not renewed by the owners. The contract accounted for 12.7 percent of Alpha Hotel's 1995 revenues. Effective June 26, 1996 (unaudited), Bryanston and the BP Group converted approximately $19,165,000 and $1,222,000, respectively of, their unsecured debt to 693,905 and 44,258, respectively, shares of the Company's Preferred Stock. The Company was charged a five percent transaction fee of approximately $1,020,000, which was also converted into shares of the Company's Preferred Stock. The conversion rate was based on the fair market value of the Company's Common Stock at the date of conversion ($3.625). Each Preferred Share is convertible into eight shares of the Company's Common Stock after December 31, 1996 and carries voting rights of one vote per Preferred Share. The Preferred Stock also carries a dividend of $3.05 per share, payable quarterly. Considering the impact of the aforementioned factors, management updated its assessment of the realizability of the leasehold improvements of the Jubilation Casino. In accordance with its accounting policy for impaired long-lived assets, effective for the second quarter ended June 30, 1996 (unaudited), management will record an impairment loss of approximately $14,165,000, representing the unamortized balance of these leasehold improvements. On July 2, 1996 (unaudited), the Company notified the Mississippi Gaming Commission and the employees of the Jubilation Casino of its plans to close the Jubilation Casino by the end of August 1996. On July 16, 1996, operation of the Jubilation Casino was suspended in compliance with a directive of the Mississippi Commission which raised certain issues with regard to the operation of the Jubilation Casino and asserted that the working capital available to the Jubilation Casino was not sufficient. On July 17, 1996, representatives of Jubilation Lakeshore met with the Mississippi Commission. As a result of that meeting, the non-working capital issues raised by the Mississippi Commission have been or are in the process of being resolved to the Mississippi Commission's satisfaction. However, the Mississippi Commission required that the Jubilation Casino's working capital be increased. This working capital requirement was reviewed by Jubilation Lakeshore in light of its previously announced plan to close the Jubilation Casino during August 1996 and the costs which would be incurred to reopen the Jubilation Casino. Based on this review, Jubilation Lakeshore decided not to reopen the Jubilation Casino. Below are the pro-forma consolidated Balance Sheet as of March 31, 1996 and the pro-forma consolidated statements of operations which give effect to the loss on impairment and the conversion of debt to equity as of January 1, 1995. F-28 ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET March 31, 1996 ----------------------------------------------- Historical Pro Forma Condensed Condensed Consolidated Consolidated Balance Pro Forma Balance Sheet Adjustments Sheet ------------ ------------ ------------ Current assets $ 5,856,020 $ $ 5,856,020 Property and equipment 58,538,550 (14,712,095) 43,826,455 Long-term assets 856,833 856,833 ------------ ------------ ----------- $ 65,251,403 $(14,712,095) $50,539,308 ------------ ------------ ----------- ------------ ------------ ----------- Due to affiliate, current portion $ 2,000,000 $ (2,000,000) $ 0 Current maturities of long-term debt 11,910,435 (1,181,147) 10,729,288 Other current liabilities 17,340,642 (28,254) 17,312,388 ------------ ------------ ----------- Total current liabilities 31,251,077 (3,209,401) 28,041,676 ------------ ------------ ----------- Due to affiliate, less current portion 17,850,571 (17,165,000) 685,571 Long-term debt, less current maturities 14,507,463 14,507,463 Other long-term liabilities 462,965 462,965 ------------ ------------ ----------- Total long-term liabilities 32,820,999 (17,165,000) 15,655,999 ------------ ------------ ----------- Equity 1,179,327 5,662,306 6,841,633 ------------ ------------ ----------- $ 65,251,403 $(14,712,095) $50,539,308 ------------ ------------ ----------- ------------ ------------ ----------- F-29
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1996 Year Ended December 31,1995 ---------------------------------------- ------------------------------------------- Historical Pro Forma Historical Pro Forma Condensed Condensed Condensed Condensed Consolidated Consolidated Consolidated Consolidated Statement of Pro Forma Statement of Statement of Pro Forma Statement of Operations Adjustments Operations Operations Adjustments Operations ---------- ----------- ---------- ---------- ----------- ---------- Revenues $13,667,729 $ $13,667,729 $30,520,276 $ $30,520,276 ----------- ---------- ----------- ------------ ----------- Costs and expenses 13,664,237 13,664,237 40,791,734 40,791,734 Interest expense 1,372,544 (495,254) 877,290 3,213,228 (616,154) 2,597,074 Depreciation amortization 1,802,582 (197,315) 1,605,267 4,508,947 (722,576) 3,786,371 Write-off of leasehold 0 14,664,906 14,664,906 and improvements 0 1,019,369 1,019,369 ---------- --------- ---------- ---------- ----------- ----------- Debt conversion fee 16,839,363 (692,569) 16,146,794 48,513,909 14,345,545 62,859,454 ---------- --------- ---------- ---------- ----------- ----------- Net loss from operations (3,171,634) 692,569 (2,479,065) (17,993,633) (14,345,545) (32,339,178) Capital lease restructuring 344,129 344,129 0 ---------- --------- ---------- ---------- ----------- ----------- Net loss $(2,827,505) 692,569 (2,134,936) $(17,993,633) (14,345,545) (32,339,178) ---------- --------- ---------- ---------- ----------- ----------- ---------- --------- ---------- ---------- ----------- ----------- Weighted average common shares outstanding (in thousands) $ 13,055 $ 5,905 $ 18,960 $10,617 $ 5,905 $ 16,522 ---------- --------- ---------- ---------- ----------- ----------- ---------- --------- ---------- ---------- ----------- ----------- Loss per common share $ (0.22) $ 0.12 $ (0.11) $(1.69) $ (2.43) $ (1.96) ---------- --------- ---------- ---------- ----------- ----------- ---------- --------- ---------- ---------- ----------- -----------
F-30 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Bryanston Group, Inc. f/k/a Buckhead Hotel Management Company, Inc.- Hotel Management Division Valhalla, New York We have audited the accompanying statement of income before income taxes for the eight months ended August 31, 1993 of the Hotel Division of Bryanston Group, Inc. f/k/a Buckhead Hotel Management Company, Inc. - Hotel Management Division (the Business). This financial statement is the responsibility of the management of the Business. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the results of operations before income taxes for the eight months ended August 31, 1993 of the business in conformity with generally accepted accounting principles. As more fully described in the notes to the financial statement, the Business was part of Bryanston Group, Inc., f/k/a Buckhead Hotel Management Company, Inc. and had no separate legal status. The method of determining the portion of the income and expenses of Buckhead included in the accompanying financial statement of the Business is described in Note 1. Accordingly, the accompanying financial statement is not indicative of the operating results of the Business as if it were on a stand-alone basis. /s/ Rothstein, Kass & company, P.C. Roseland, New Jersey February 1, 1994 F-31 BRYANSTON GROUP, INC. F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.- HOTEL MANAGEMENT DIVISION STATEMENT OF INCOME BEFORE INCOME TAXES Eight Months Ended August 31, 1993 REVENUES: Management fees $2,232,721 Interest 17,797 ---------- Total revenues $ 2,250,518 COSTS AND EXPENSES: Direct payroll and related items 868,933 Selling, general and administrative 457,435 Depreciation and amortization 82,930 ---------- Total costs and expenses 1,409,298 ------------ INCOME BEFORE INCOME TAXES $ 841,220 ------------ ------------ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENT F-32 BRYANSTON GROUP, INC. f/k/a BUCKHEAD HOTEL MANAGEMENT COMPANY, INC. HOTEL MANAGEMENT DIVISION NOTES TO FINANCIAL STATEMENT NOTE 1 - BASIS OF PRESENTATION: On May 17, 1993, Buckhead Hotel Management Company, Inc. (Buckhead) changed its name to Bryanston Group, Inc. (Bryanston). Effective September 1, 1993, Bryanston entered into a Service Agreement and an Expense Reimbursement Agreement with Alpha Hotel Management Company, Inc., (Alpha Hotel), a related party, whereby Alpha Hotel will supply services for the management of 21 hotels and motels (the Business) (NOTE 7). Tollman Hundley Hotel Group is also a party to the Expense Reimbursement Agreement. Service fees are generated based upon a percentage of hotel and motel revenues, as defined in the respective agreements. Pursuant to the terms of the Expense Reimbursement Agreement, Bryanston and Tollman Hundley Hotel Group, as the base may be, will be reimbursed by Alpha Hotel for direct payroll and related costs, use of certain office space (approximately $15,000 per month), and its share of office expenses. The Business, on a historical basis, had no separate legal status since it was a division of Bryanston. The accompanying financial statement has been prepared from the records of Bryanston and include only the operating results of the Business. The operating results of the Business do not include a provision for income taxes. However, the statement of income includes an allocation of selling, general and administrative expenses from Buckhead America Corporation (BAC), formerly the parent of Bryanston, (SEE NOTE 5). The statement of income excludes hotel and motel payroll and related costs, which are paid by Bryanston and reimbursed by the respective managed hotels and motels. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: DEPRECIATION AND AMORTIZATION - The Company provides for depreciation and amortization as follows: ESTIMATED ASSET USEFUL LIVES Computer equipment 5 Years Furniture and fixtures 7 Years Leasehold improvements 12 Years AMORTIZATION OF ASSUMED MANAGEMENT CONTRACTS - The cost of assuming management contracts is being amortized on the straight-line basis over a 5 year term. F-33 BRYANSTON GROUP, INC. F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.- HOTEL MANAGEMENT DIVISION NOTES TO FINANCIAL STATEMENT NOTE 3 - MANAGEMENT CONTRACTS AND CONTINGENCIES: Bryanston managed 24 hotels and motels during the eight months ended August 31, 1993, principally in the northeastern and southeastern parts of the United States. Management fees are based on a percentage of managed property revenues, as defined in the respective management agreements, and range between 2% and 5%. In addition, certain agreements provide for incentive fees which can be earned based on operating results. During the eight months ended August 31, 1993, management fee revenues included approximately $187,000 earned under incentive fee provisions. At August 31, 1993, the contracts, excluding extension options contained in certain agreements, expire as follows: ESTIMATED PERCENTAGE NUMBER OF OF ANNUAL CONTRACTS TERM REMAINING FEE REVENUES 15 1-5 Years 54% 3 6-10 Years 6% 3 Over 10 Years 40% Six contracts contain provisions whereby the owner may terminate the contract if certain performances are not met. NOTE 4 - FRANCHISE AGREEMENTS: At August 31, 1993, twenty of the twenty-one hotels managed by Bryanston are subject to franchise agreements. Pursuant to the franchise agreements, Bryanston is responsible for collecting reservation and other fees from the managed properties and remitting them to the franchisor. These franchise agreements expire simultaneously with the management contracts. NOTE 5 - RELATED PARTY TRANSACTIONS: BAC allocated selling, general and administrative expenses based upon (i) estimates of the time devoted to the Business by certain BAC employees, (ii) estimated occupancy of the buildings, (iii) sales, or (iv) a combination of these methods. BAC allocated costs and expenses to the business of approximately $175,000 in 1993. F-34 BRYANSTON GROUP, INC. F/K/A BUCKHEAD HOTEL MANAGEMENT COMPANY, INC.- HOTEL MANAGEMENT DIVISION NOTES TO FINANCIAL STATEMENT NOTE 6 - MAJOR CUSTOMERS: In 1993, management fees included revenues earned from each of three major customers in amounts ranging from $328,000 to $432,000 and aggregating $1,128,000. NOTE 7 - SUBSEQUENT EVENT: In October 1993, one of the management agreements was terminated. This contract generated management fees of approximately $256,000 for the eight months ended August 31, 1993. F-35 REPORT OF INDEPENDENT AUDITORS The Board of Directors Cotton Club of Greenville, Inc. We have audited the accompanying balance sheets of Cotton Club of Greenville, Inc. as of May 31, 1995 and December 31, 1994 and 1993, and the related statements of operations, shareholders' deficit, and cash flows for the five month period ended May 31, 1995, for the year ended December 31, 1994, and for the period from December 21, 1992 (inception) through December 31, 1993. 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 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 financial position of Cotton Club of Greenville, Inc. at May 31, 1995 and December 31, 1994 and 1993, and the results of its operations and its cash flows for the five month period ended May 31, 1995, for the year ended December 31, 1994, and for the period from December 21, 1992 (inception) through December 31, 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Cotton Club of Greenville, Inc. will continue as a going concern. As more fully described in Note 2, the Company's working capital deficiency raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP - --------------------- New Orleans, Louisiana July 7, 1995 F-36 COTTON CLUB OF GREENVILLE, INC. BALANCE SHEETS MAY 31 DECEMBER 31 1995 1994 1993 --------- -------- --------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 572 $ 831 $ 1,728 Restricted cash 101 - - Inventories 94 58 69 Prepaid expenses 448 574 360 Other current assets 2 10 47 --------- --------- -------- Total current assets 1,217 1,473 2,204 PROPERTY AND EQUIPMENT: Land 140 140 140 Parking lot improvements 1,379 1,379 1,350 Riverboat and related improvements 12,420 12,168 11,037 Gaming equipment 5,269 5,220 3,863 Furniture and fixtures 2,204 2,105 1,686 Vehicles 517 543 493 --------- --------- -------- 21,929 21,555 18,569 Less accumulated depreciation 3,921 2,716 193 --------- --------- -------- 18,008 18,839 18,376 --------- --------- -------- OTHER ASSETS: Land deposits 220 174 50 Deposits 267 265 512 Deferred licensing costs, net of accumulated amortization of $79,000 at May 31, 1995 and $60,000 at December 31, 1994 36 55 115 --------- --------- -------- 523 494 677 --------- --------- -------- $ 19,748 $ 20,806 $ 21,257 --------- --------- -------- --------- --------- -------- SEE ACCOMPANYING NOTES F-37 COTTON CLUB OF GREENVILLE, INC. BALANCE SHEETS (CONTINUED) MAY 31 DECEMBER 31 1995 1994 1993 --------- --------- -------- (IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 1,808 $ 2,213 $ 2,703 Conversion contract payable - - 1,268 Accrued expenses 1,586 1,838 965 Current portion of accrued interest to related parties 1,289 130 230 Current portion of notes payable to related parties 7,892 130 5,378 Current portion of long-term debt 3,404 2,454 4,040 --------- --------- -------- Total current liabilities 15,979 6,765 14,584 Accrued expenses 20 - - Accrued interest to related parties, less current portion - 701 - Notes payable to related parties, less current portion 256 7,972 2,000 Long-term debt, less current portion 5,604 6,939 7,070 --------- --------- -------- 5,880 15,612 9,070 --------- --------- -------- SHAREHOLDERS' DEFICIT: Common stock, no par value, authorized, issued and outstanding 10,000 shares 2,000 2,000 2,000 Accumulated deficit (4,100) (3,484) (4,310) --------- --------- -------- (2,100) (1,484) (2,310) Note receivable from shareholder (11) (87) (87) --------- --------- -------- Total shareholders' deficit (2,111) (1,571) (2,397) --------- --------- -------- Total liabilities and shareholders' deficit $ 19,748 $ 20,806 $ 21,257 --------- --------- -------- --------- --------- -------- SEE ACCOMPANYING NOTES F-38 COTTON CLUB OF GREENVILLE, INC. STATEMENTS OF OPERATIONS PERIOD FROM DECEMBER 21, 1992 FIVE MONTH (INCEPTION) PERIOD ENDED YEAR ENDED THROUGH MAY 31, DECEMBER 31, DECEMBER 31, 1995 1994 1993 ------------ ---------- ------------- (IN THOUSANDS) REVENUE: Casino $ 12,258 $ 37,332 $ 2,076 Food and beverage 1,158 3,110 262 Other 24 350 382 ----------- --------- -------- 13,440 40,792 2,720 Less promotional allowances 878 3,060 456 ----------- --------- -------- 12,562 37,732 2,264 ----------- --------- -------- COSTS AND EXPENSES: Casino 5,033 14,012 1,057 Food and beverage 360 1,434 165 Other operating expenses 1,172 4,029 448 Selling, general and administrative 4,415 12,360 1,055 Depreciation 1,211 2,527 193 Preopening costs - - 3,432 ----------- --------- -------- 12,191 34,362 6,350 ----------- --------- -------- INCOME (LOSS) FROM OPERATIONS 371 3,370 (4,086) ----------- --------- -------- OTHER INCOME (EXPENSE): Interest income 3 10 8 Interest expense, net of capitalized interest of $304,000 in 1993 (990) (1,729) (232) Loss on restaurant advances - (600) - ----------- --------- -------- (987) (2,319) (224) ----------- --------- -------- NET INCOME (LOSS) $ (616) $ 1,051 $ (4,310) ----------- --------- -------- ----------- --------- -------- SEE ACCOMPANYING NOTES F-39 COTTON CLUB OF GREENVILLE, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT NOTE RECEIVABLE COMMON ACCUMULATED FROM STOCK DEFICIT SHAREHOLDER TOTAL ------- --------- ----------- ------ (IN THOUSANDS) Issuance of 10,000 shares of common stock at $200 per share $2,000 $ - $ - $2,000 Note receivable from shareholder for purchase of common stock - - (87) (87) Net loss from December 21, 1992 through December 31, 1993 - (4,310) - (4,310) ------ ------- ------ ------- BALANCE AT DECEMBER 31, 1993 2,000 (4,310) (87) (2,397) Net income - 1,051 - 1,051 Cash dividends - (225) - (225) ------ ------- ------ ------- BALANCE AT DECEMBER 31, 1994 2,000 (3,484) (87) (1,571) Net loss - (616) - (616) Payments on note receivable - - 76 76 ------ ------- ------ ------- BALANCE AT MAY 31, 1995 $2,000 $(4,100) $ (11) $(2,111) ------ ------- ------ ------- ------ ------- ------ ------- SEE ACCOMPANYING NOTES F-40 COTTON CLUB OF GREENVILLE, INC. STATEMENTS OF CASH FLOWS PERIOD FROM DECEMBER 21, 1992 FIVE MONTH (INCEPTION) PERIOD ENDED YEAR ENDED THROUGH MAY 31, DECEMBER 31, DECEMBER 31, 1995 1994 1993 --------- ------------- -------------- (IN THOUSANDS) CASH FLOWS FROM OPERATION ACTIVITIES: Net income (loss) $ (616) $ 1,051 $ (4,310) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,270 2,652 193 Loss on disposal of fixed assets -- 3 -- Changes in operating assets and liabilities: Inventories (36) 11 (69) Prepaid expenses (199) 92 (109) Other current assets 8 37 (47) Deposits (2) 297 (512) Other assets -- -- (115) Accounts payable (157) 351 1,709 Accrued expenses (83) 591 714 Accrued interest, related parties 458 601 230 -------- --------- -------- Net cash provided by (used in) operating activities 643 5,686 (2,316) -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (139) (3,883) (14,454) Land deposits (46) (174) (50) -------- --------- -------- Net cash used in investing activities (185) (4,057) (14,504) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock -- -- 1,913 Proceeds from long-term debt - 606 11,635 Proceeds from notes payable to related parties 216 1,075 9,249 Payments of long-term debt (757) (3,630) (2,378) Payments of notes payable to related parties (151) (352) (1,871) Dividend paid to shareholder -- (225) -- Proceeds from payment of note receivable from shareholder 76 -- -- Restricted cash (101) -- -- -------- --------- -------- Net cash provided by (used in) financing activities (717) (2,526) 18,548 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259) (897) 1,728 CASH AND CASH EQUIVALENTS, beginning of period 831 1,728 -- -------- --------- -------- CASH AND CASH EQUIVALENTS, end of period $ 572 $ 831 $ 1,728 -------- --------- -------- -------- --------- -------- SEE ACCOMPANYING NOTES F-41 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 1 -ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS - Cotton Club of Greenville, Inc. (the "Company") was organized on December 21, 1992 and commenced operations in December 1993. The Company owns and operates a dock-side gaming, restaurant and lounge facility located on the Mississippi River in Greenville, Mississippi known as the Cotton Club Casino. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. INVENTORIES - Inventories, which consist principally of food, beverage and operating supplies, are stated at the lower of cost or market using the first-in, first-out method. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is computed on a straight-line basis over the following estimated useful lives: Parking lost improvements 15-30 years Riverboat and related improvements 10 years Gaming equipment 5 years Furniture and fixtures 7 years Vehicles 5 years INCOME TAXES - The Company has elected "S" Corporation status under the provisions of the Internal Revenue Code; accordingly, the Company's taxable income (loss) is included in the federal income tax returns of its shareholders. "S" Corporation status is also applicable to the Mississippi jurisdiction where the Company operates. DEFERRED LICENSING COSTS - Deferred licensing costs include costs incurred to obtain the Company's initial Mississippi gaming license. These costs are being amortized using the straight-line method over a two-year period. REVENUE RECOGNITION - The Company recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. PROMOTIONAL ALLOWANCES - Promotional allowances consist of food and beverage furnished gratuitously to customers. The retail value of such goods and services are included in the respective revenue classifications and then deducted as promotional allowances. The estimated costs of providing such promotional allowances of approximately $758,000 for the five month period ended May 31, 1995 and $818,000 in 1994 are included in casino expenses. PREOPENING COSTS - Operating costs and expenses incurred prior to the opening of the gaming facility were capitalized as preopening costs. These costs were charged to expense at the commencement of operations in December 1993. RECLASSIFICATION - Certain amounts in 1993 and 1994 have been reclassified to conform to the May 31, 1995 presentation. F-42 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 2 -BASIS OF PRESENTATION: The Company's working capital deficiency of approximately $14,762,000 includes approximately $9,181,000 of obligations to related parties. The Company's current financial resources are insufficient to repay these obligations. As a result, substantial doubt exists as to whether the Company will be able to generate sufficient cash flow from operations to repay these obligations without restructuring or obtaining substantial additional financing. There can be no assurance that the Company will be able to restructure these obligations or obtain substantial additional financing on terms favorable to the Company. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; however, the uncertainty related to the matters described above raises substantial doubt about the Company's ability to continue as a going concern. The Company has entered into a letter of intent with an unrelated entity for the proposed sale of the Company in 1995. See Note 7 for information related to the proposed sale transaction. Management's intentions are to repay these obligations from the proceeds obtained from the planned sale of the Company. However, there can be no assurance that the proposed sale of the Company can be successfully accomplished on terms acceptable to the Company. NOTE 3 -LONG-TERM DEBT:
MAY 31 DECEMBER 31 1995 1994 1993 ----------- ----------- ---------- 9.58% note (30-day commercial paper rate plus 3.5%, adjusted quarterly), payable in monthly installments of $70,000 plus interest, funded by weekly deposits of $25,000 into a restricted cash account commencing May 8, 1995, collateralized by first preferred ship mortgage on the gaming vessel, net of unamortized loan fees of $61,000 in 1995, $64,000 in 1994 and $80,000 in 1993 $4,169,000 $4,336,000 $5,420,000 12.68% note, payable in monthly installments, including interest, of $90,000, collateralized by certain gaming equipment 1,832,000 1,966,000 2,453,000 13.52% note, payable in monthly installments, including interest, of $77,000, collateralized by first preferred ship mortgage on barge, net of unamortized loan fees of $37,000 in 1994 and $86,000 in 1993 1,391,000 1,476,000 1,861,000 12.68% note, payable in monthly installments, including interest, of $46,000, collateralized by slot machines 1,182,000 1,243,000 -
F-43 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 3 -LONG-TERM DEBT (CONTINUED): MAY 31 DECEMBER 31 1995 1994 1993 ----------- ----------- ---------- 10.25% note (prime plus 1.75%), payable in monthly installments, including interest, of $17,000, with a final payment of remaining principal and interest due July 1995, collateralized by vehicles 268,000 342,000 - 9% unsecured note, payable in monthly installments, including interest, of $29,000 158,000 - - 8% note (prime plus 2%), $250,000 due on demand with remaining principal and interest due April 1994, collateralized by restricted cash of $255,000 - - 500,000 13.5% note (prime plus 5%), payable in monthly principal payments of $22,000 with a final payment of remaining principal and interest due December 1994, collateralized by certain gaming equipment - 22,000 325,000 8% note, payable in monthly installments of $100 including interest, collateralized by certain property 8,000 8,000 8,000 10% note, due January 1994, collateralized by parking lot improvements - - 293,000 8.75% note (prime plus 2.75%), due July 1994, collateralized by vehicles - - 200,000 12% note, payable in monthly installments of $17,000 including interest, unsecured - - 50,000 ---------- ---------- ---------- 9,008,000 9,393,000 11,110,000 Less current portion 3,404,000 2,454,000 4,040,000 ---------- ---------- ---------- $5,604,000 $6,939,000 $7,070,000 ---------- ---------- ---------- ---------- ---------- ----------
F-44 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 3 -LONG-TERM DEBT (CONTINUED): Maturities of long-term debt for the twelve month periods following May 31, 1995 are as follows: 1996 $ 3,404,000 1997 2,794,000 1998 1,112,000 1999 847,000 2000 847,000 Thereafter 4,000 ----------- $ 9,008,000 ----------- ----------- See Note 4 for information regarding notes payable. NOTE 4 - RELATED PARTY TRANSACTIONS: The capitalization of the Company consists of 10,000 shares of authorized common stock issued to the shareholder at an agreed upon purchase price of $2,000,000. A note receivable in the amount of $87,000 was given to the Company by the shareholder in February 1993 for the balance due on such purchase. The note has been offset against shareholders' equity to reflect total consideration paid of $1,913,000. The note receivable is unsecured and bears annual interest at 8%. In February 1993, an agreement (the "Option Agreement") was entered into between the original shareholder and a group of individuals (the "Optionees") whereby the original shareholder received $1,653,000 in return for certain stock options granted to the Optionees. The terms of the Option Agreement grant the Optionees the right to acquire from the shareholder a portion of his common stock in the Company, contingent upon certain factors which include compliance with any law, rule or regulation imposed or enforced by the Mississippi Gaming commission which are applicable to owners of securities issued by an entity which holds a state gaming license. If all the Optionees fully exercise their rights under the terms of the Option Agreement, the shareholder will retain a 13% ownership interest in the Company with the remaining 87% held by the Optionees, with no one Optionee owning more than 18%. In March 1995, all but one of the Optionees exercised their options. In conjunction with the execution of the Option Agreement, certain Optionees advanced to the Company cash of $2,000,000 in 1993 in return for unsecured subordinated promissory notes which originally bore an annual interest rate of 8.5%. The terms of these notes provide for an escalated interest rate of 12.5% in the event the notes were not paid on the original maturity date of January 15, 1995. Additional cash advances of $250,000 were made during 1994 in return for unsecured subordinated promissory notes which bear an annual interest rate of 8.5% and mature in December 1995. In March 1995, additional cash advances of $142,000 were received from certain Optionees, in return for unsecured subordinated promissory notes which bear an annual interest rate of 10% and mature in March 1996. While the terms of these notes provide for the payment of accrued interest on July 15 and January 15 of each year, no interest has been paid to date and the Optionees have agreed not to demand repayment of any principal prior to January 1996 and certain Optionees have agreed not to demand repayment of the interest accrued thereon prior to January 1996. F-45 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 4 -RELATED PARTY TRANSACTIONS (CONTINUED): Further, as a condition precedent to the Option Agreement, the original shareholder and each of the Optionees agreed to guarantee the repayment of one or more loans by institutional lenders to the Company up to an aggregate principal sum of $4,000,000. As of May 31, 1995 and December 31, 1994 and 1993, loans totaling $2,530,000 have been guaranteed by the Optionees. During 1995, the original shareholder advanced a total of $74,000 in exchange for one unsecured subordinated promissory note bearing an annual interest rate of 10%. During 1995, the original shareholder advanced a total of $825,000 in exchange for one note in the amount of $400,000, secured by certain real property, bearing an annual interest rate of 10% and payable in monthly principal payments of $10,000 plus interest, and various other unsecured promissory notes, each bearing an annual interest rate of 8% with interest and principal due on various dates in 1995. During 1993, the original shareholder advanced to the Company $7,245,000 in exchange for various unsecured promissory notes, each bearing an annual interest rate of 8% with interest and principal due in August 1996. In 1995, 1994 and 1993, $145,000, $352,000 and $1,871,000, respectively, of principal and $10,000 of interest had been paid to the shareholder. Included in the 1995 principal payments is the book value of a vehicle in the amount of $19,000, the title of which was transferred to the shareholder. Further, with respect to the various unsecured promissory notes, the shareholder has agreed not to demand repayment of any principal or interest accrued thereon prior to January 1996. The balance of unpaid principal and interest due the shareholder and optionees is summarized as follows:
DECEMBER 31 MAY 31, 1995 1994 1993 -------------------- -------------------- -------------------- ACCRUED ACCRUED ACCRUED PRINCIPAL INTEREST PRINCIPAL INTEREST PRINCIPAL INTEREST ----------- --------- --------- -------- ---------- -------- Notes payable to shareholder $5,781,000 $ 685,000 $5,852,000 $492,000 $5,378,000 $ 75,000 Notes payable to optionees 2,367,000 604,000 2,250,000 339,000 2,000,000 155,000 Less current portion 7,892,000 1,289,000 130,000 130,000 5,378,000 230,000 ----------- --------- ---------- -------- ---------- -------- Noncurrent $ 256,000 $ - $7,972,000 $701,000 $2,000,000 $ - ----------- --------- ---------- -------- ---------- -------- ----------- --------- ---------- -------- ---------- --------
In March 1994, management began operating an adjacent restaurant facility owned by an affiliated entity. During 1994, the Company has included in casino expense in the statements of operations $368,000 paid to this entity for food and beverage services. Additionally, net advances totaling $750,000 were provided to this entity to meet working capital needs during 1994. In September 1994, this entity ceased its operations and transferred certain leasehold improvements and furniture with a net book value of $90,000 and $60,000, respectively, to the Company as partial repayment of these advances. In 1994, the remaining unpaid balance of $600,000 was classified in the accompanying statements of operations as loss on restaurant advances. F-46 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 4 -RELATED PARTY TRANSACTIONS (CONTINUED): The Company advanced $46,000 in 1995, $124,000 in 1994 and $50,000 in 1993 to an affiliated company formed for the acquisition of certain real property considered to be competitively beneficial to the Company. The uncollected balance of these unsecured, noninterest-bearing advances was $220,000 at May 31, 1995, $174,000 at December 31, 1994 and $50,000 at December 31, 1993, and are classified as land deposits in the accompanying balance sheets. In May 1993, the Company entered into an agreement with a shipbuilding and repair company, whose principal shareholder is an Optionee, for the conversion and refurbishment of the Company's riverboat vessel, the refurbishment and acquisition of a riverboat barge, and the purchase of a diesel generator. Total consideration under the terms of such agreement, including change orders, was $9,414,000 in 1993, of which $1,268,000 was paid in 1994 and $8,146,000 in 1993. The balance of $1,268,000 was reported as a conversion contract payable as of December 31, 1993. Further, the terms of the original contract provided for additional interest in the event of untimely payments. Consistent with this provision, additional interest in the amount of $50,000 and an additional amount of $25,000 relative to the original conversion, which had been previously unbilled, was billed to the Company in 1995. NOTE 5 -LEASES: The Company leases various real property and equipment under operating leases. The rental expense was approximately $337,000 for the five month period ended May 31, 1995, $744,000 in 1994 and $328,000 for the period ended December 31, 1993. Future minimum payments for noncancelable operating leases with initial terms of one year or more for the twelve month periods following May 31, 1995 are: 1996 $ 389,000 1997 305,000 1998 178,000 --------- $ 872,000 --------- --------- NOTE 6 - COMMITMENTS AND CONTINGENCIES: The Company is a defendant in a lawsuit arising out of the conduct of its business. Management believes the lawsuit is without merit and is vigorously defending the lawsuit. Management does not believe that the outcome of this matter will have a material adverse effect on the Company's financial position or results of operations. In 1994, the Mississippi State Tax commission completed its examination of the sales and use tax paid on items purchased in connection with the conversion of the gaming vessel to a dockside gaming facility. As a result, the Commission assessed additional taxes of approximately $330,000. The Company paid approximately $82,000 of this assessment in 1994 and agreed in 1995 to pay approximately $203,000 in twelve monthly installments, plus interest, beginning July 15, 1995. F-47 COTTON CLUB OF GREENVILLE, INC. NOTES TO FINANCIAL STATEMENTS May 31, 1995 NOTE 7 -PROPOSED SALE OF COMPANY: On June 23, 1995, the Company entered into a letter of intent with Alpha Hospitality Corporation (Alpha) for the proposed acquisition of all of the outstanding stock of the Company and certain promissory notes issued by the Company. The purchase price of approximately $10.3 million will be funded through cash, various notes receivable and the transfer of common stock of Alpha. The letter of intent is subject to due diligence procedures, negotiation of a definitive agreement, completion of financing for the acquisition by Alpha and approval of the Mississippi Gaming Commission. There can be no assurance that this transaction can be successfully accomplished on terms acceptable to the Company. NOTE 8 -SUPPLEMENTAL CASH FLOW INFORMATION: Included in accounts payable, long-term debt, and accrued expenses are purchases of property, plant and equipment and prepaid maintenance financed of approximately $391,000 for 1995, $1,434,000 for 1994 and $4,115,000 in 1993. Interest paid was approximately $362,000 in 1995, $1,140,000 in 1994 and $173,000, net of amounts capitalized of $304,000, in 1993. In 1995, long-term debt increased by approximately $333,000 due to the financing of accrued interest and certain accounts payable, and decreased by approximately $38,000 in 1994 in connection with the return of certain equipment. Notes payable to related parties was reduced by approximately $19,000 in 1995 in connection with the transfer of a vehicle to the shareholder. F-48 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ No underwriter, dealer, salesman or other person has been authorized to give any information or to make any representations other than those con- tained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer or solici- tation to any person in any juris- ALPHA HOSPITALITY diction where such offer or solici- CORPORATION tation would be unlawful. Neither delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implica- tion that there has been no change in the affairs of the Company since the date hereof. TABLE OF CONTENTS PAGE Prospectus Summary.................... 5 Risk Factors.......................... 10 Use of Proceeds....................... 18 Certain Market Information............ 19 Capitalization........................ 20 Dividends Policy...................... 21 Selected Financial Data............... 22 Business.............................. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations. 41 PROSPECTUS Management............................ 52 Certain Transactions.................. 60 Ownership of Securities............... 64 Selling Stockholders.................. 66 Plan of Distribution.................. 69 Description of Securities............. 71 Legal Matters......................... 75 Experts............................... 75 ___________, 1996 Additional Information................ 75 Financial Statements.................. F-1 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is a statement of the estimated expenses to be paid by the Company in connection with the issuance and distribution of the securities being registered: SEC Registration Fee $3,908.45 NASDAQ Filing Fee 7,500.00 Printing Engraving Expenses 3,500.00* Legal Fees and Expenses 50,000.00* Accounting Fees and Expenses -0- Blue Sky Fees and Expenses 5,000.00* Transfer Agent and Registrar Fees and Expenses 500.00* Miscellaneous 5,000.00* ---------- Total $75,408.45 ---------- *Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law, among other things, and subject to certain conditions, authorizes the Company to indemnify its officers and directors against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such an officer or director. The Certificate of Incorporation and By-Laws of the Company provide for indemnification of its officers and directors to the full extent authorized by law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Company has sold securities to a limited number of persons, as described below. There were no underwriters involved in the transactions and there were no underwriting discounts or commissions paid in connection therewith, except as disclosed below. The issuances of these securities were considered to be exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The purchasers of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the certificates for the securities issued in such transactions. All purchasers of securities in each such transaction had adequate access to information about the Registrant. COMMON STOCK Date of Purchase Name Shares Purchase Price Per Share - ----- ------ -------- --------------- HFS Gaming Corp.(1) 96,429 11/94 $5.75 Bryanston Group, Inc.(2) 1,250,444 10/95 6.625 Cotton Club of Greenville, Inc.(3) 782,609 10/95 5.75 Bally Gaming, Inc. 701,017 02/96 (4) II-1 - ------------------------------- (1) Issued in settlement of $559,285.59 owed by the Company to HFS. (2) Issued in settlement of $8,284,196.13 owed by the Company to Bryanston. (3) Issued in connection with the Cotton Club Acquisition. (4) Issued in settlement of $2,500,000 owed by the Company to Bally. PREFERRED STOCK Date of Purchase Name Shares Purchase Price Per Share - ---- ------ -------- --------------- Bryanston Group, Inc. 625,222 10/94 (1) Bryanston Group, Inc. 693,905 6/96 (2) BP Group 44,258 6/96 (3) - ----------------------------- (1) Issued in conversion of $8,284,196 owed by the Company to Bryanston and converted into 1,250,444 shares of Common Stock in October 1995. (2) Issued in conversion of $19,165,000 owed by the Company to Bryanston. (3) Issued in conversion of $1,222,370 owed by the Company to BP Group. STOCK OPTIONS 1993 STOCK OPTION PLAN Date Exercis Exercised Name Options Issued Price or Expired - ----- ------- ------ ---- ---------- Sanford Freedman 60,000 06/93 $3.25 None Brett G. Tollman 60,000 06/93 $3.25 None Howard D. Zukerman 35,000 06/93 $3.25 None Thomas W. Aro 60,000 06/93 3.25 None James A. Cutler 40,000 06/93 3.25 None Victor Appleby 18,000 06/93 3.25 None Charlie Goldman 18,000 06/93 3.25 None Gavin Tollman 18,000 06/93 3.25 None Thomas Wilson 18,000 06/93 3.25 None Craig Kendziera 12,000 06/93 3.25 None Jeffrey Crowley 10,000 06/93 3.25 None Robert Steenhuisen 8,000 06/93 3.25 None Thomas Damewood 8,000 06/93 3.25 None Peter Rost 5,000 06/93 3.25 None Alice Abalos 5,000 06/93 3.25 None Betty Drake 5,000 06/93 3.25 None Margaret O. Young 5,000 06/93 3.25 None Paul Hitselberger 5,000 12/93 11.50 None Kevin Kurpick 5,000 12/93 11.50 None Thaddeus Rickards 5,000 12/93 11.50 None Ann Williams 2,500 12/93 11.50 None Sherry Kosack 2,500 12/93 11.50 None Danka Maricic 2,000 12/93 11.50 None Kenneth Terry 1,500 12/93 11.50 None Claudia Bowman 500 12/93 11.50 None II-2 OTHER OPTIONS Date Exercise Exercised Name Options Issued Price or Expired - ---- ------- ------ ----- ---------- Bryanston Group, Inc. 347,826 10/95 4.50 None Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: 2.1 Bryanston Third Amended Joint Plan of Reorganization* 3.1 Certificate of Incorporation* 3.2 Form of Certificate of Amendment to Certificate of Incorporation* 3.3 By-Laws, as amended* 4.1 Form of Common Stock Certificate* 4.2 Form of Warrant Certificate* 5.1 Opinion of Gersten, Savage, Kaplowitz & Curtin, LLP 10.1 Form of Employment Agreement between the Company and Stanley S. Tollman* 10.2 Form of Employment Agreement between the Company and Monty D. Hundley* 10.3 Form of Indemnification Agreement between the Company and directors and executive officers of the Company* 10.4 1993 Stock Option Plan* 10.5 Form of Service Agreement between the Company and Bryanston* 10.6 Expense Reimbursement Agreement effective as of September 1, 1993, by and between the Company and Tollman-Hundley Hotel Group and Bryanston Group, Inc.* 10.7 Agreement of Purchase and Sale of Assets by and among BCI and Alpha Gulf, George Baxter, John Kingsbury, Jon Turner and Robert James, dated as of May 14, 1993* 10.8 Non-negotiable convertible Promissory Note of Alpha Gulf payable to BCI in the principal amount of $3,500,000, dated May 14, 1993* 10.9 Shareholders Agreement, dated as of May 14, 1993, between BCI, Alpha Gulf, the Company and Stanley S. Tollman and Monty D. Hundley.* 10.10 Form of Warrant Agreement among the Company, the Transfer Agent and the Underwriters* 10.11 Work Order, dated June 7, 1993, of American Marine Corporation* 10.12 Amended Sales and Security Agreement, dated July 8, 1993, between Bally Gaming, Inc. and Alpha Gulf d/b/a/ Bayou Caddy Casino* 10.13 Agreement, dated May 11, 1993, between Twenty Grand Marine Service, Inc. and BCI* 10.14 Agreement, dated as of June, 1993 between Alpha Gulf d/b/a Bayou Caddy Casino and Benchmark and Trustmark National Bank* 10.15 Lease Agreement, dated June 2, 1992, between Joseph E. Cure, Jr., Joseph R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott and BCI* 10.16 Development Agreement, dated September 17, 1992, between Joseph E. Cure, Jr., Joseph R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott and BCI* 10.17 Contract for First Right to Buy and Right of First Refusal for the Sale and Purchase of Real Estate, dated September 17, 1992, between Joseph E. Cure, Jr., Joseph R. Cure, II-3 Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott and BCI* 10.18 Lease Agreement, dated September 17, 1992, between Joseph E. Cure, Jr., Joseph R. Cure, Cynthia Cure Rutherford, Michael Cure and Susan Cure Gollott and BCI* 10.19 Lease, dated November 12, 1992, between Dallas Goodwin and BCI* 10.20 Form of Limited Standstill Agreement of the Existing Stockholders f/b/o the Underwriters* 10.21 Promissory Note reflecting the Bryanston Bridge Loan, dated July 27, 1993, of the Company payable to Bryanston in the amount of $6,555,000; Amendment to the Note dated September 29, 1993* 10.22 Promissory Note reflecting the BP Bridge Loan dated July 27, 1993 of the Company payable to BP in the amount of $2,200,000* 10.23 Amendment to the BP Bridge Note dated September 29, 1993* 10.24 Amendment to the Bryanston Bridge Note dated October 29, 1993* 10.25 Agreement between BP and the Company dated May 12, 1993, relating to the BP Loan, Amendments thereto dated August 5, 1993 and September 10, 1993* 10.26 HFS marketing Agreement dated October 27, 1993* 10.27 Amended Sales and Security Agreement between Bally and the Company dated July 8, 1993* 10.28 Documents related to HFS Loans dated October 27, 1993:* (i) Loan Agreement among the Company Alpha Gulf and HFS (ii) Leasehold Deed of Trust (form) (iii) First Preferred Ship Mortgage from Alpha Gulf to HFS (iv) Security Agreement between Alpha Gulf and HFS (v) Pledge and Security Agreement between Bryanston and HFS (vi) $8,000,000 Series A Secured Note (vii) $4,000,000 Series B Secured Note (viii) Guarantee Agreement of Bryanston in favor of HFS (ix) Guarantee Agreement of the Company in favor of HFS (x) HFS Option Agreement: HFS Option Certificate (xi) Bryanston Subordination Agreement (xii) BP Subordination Agreement (xiii) Bryanston Subordinated Promissory Note dated as of August 5, 1993 (Bryanston Loan) 10.29 Form of Underwriters' Warrant* 10.30 Amended Cure Lease** 10.31 Peoples Bank Loan Agreement** 10.32 Non-Revolving Promissory Note with Bryanston Group, Inc.** 10.33 $20,000,000 Non-Revolving Promissory Note dated January 5, 1995*** 10.34 Stock Purchase Agreement dated October 20, 1995*** 10.35 Agreement dated October, 1995 by and among Alpha Hospitality Corporation, Alpha Gulf Coast, Inc. and B.C. of Mississippi, Inc.*** 10.36 Stock Acquisition Agreement dated January 25, 1995*** 10.37 Form 8-K dated October 31, 1995*** 10.38 Restructure of Debt of Alpha Gulf Coast, Inc. with Bally Gaming, Inc.*** 10.39 Consulting Agreement dated March 1, 1996 between Sanford Freedman and the Company**** II-4 11.1 Statement Re: Computation of Per Share Earnings**** 21.1 List of Subsidiaries**** 23.1 Consent of Rothstein Kass & Company, P.C. 23.2 Consent of Ernst & Young, LLP 24.1 Consent of Gersten, Savage, Kaplowitz & Curtin, LLP counsel for the Registrant, (included in Exhibit 5.1) * Incorporated by reference; filed with the Company s Registration Statement filed on Form SB-2 (File No. 33-64236) with the Commission on June 10, 1993 and as amended on September 30, 1993, October 25, 1993, November 2, 1993 and November 5, 1993. ** Incorporated by reference; filed with the Company s Form 10-KSB for the year ended December 31, 1994. *** Incorporated by reference; filed with the Company s 10-KSB for the year ended December 31, 1995 **** Previously filed as part of this Registration Statement. (b) Financial Statements and Schedules: The Financial Statements are included in the Prospectus and Schedule VIII is included at the end of this Part II. All other Schedules are omitted for the reason that they are not required or are not applicable or the required information is shown in the financial statements or notes thereto. Item 28. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the issuer pursuant to any charter provision, by-law contract arrangements statute, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned issuer hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post- effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; II-5 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to suit information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) For determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement, relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering hereof II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirement for filing on Form S-1 and has duly caused this Pre-Effective Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on August 8, 1996. ALPHA HOSPITALITY CORPORATION By: /s/ Stanley S. Tollman ---------------------------------- Stanley S. Tollman, President, Chief Executive Officer and Chairman (Principal Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----- /s/ Stanley S. Tollman - ------------------------------- President, Chief Executive Officer August 8, 1996 Stanley S. Tollman and Chairman (Principal Executive Officer) /s/ Sanford Freedman - ------------------------------- Vice President, Secretary August 8, 1996 Sanford Freedman and Director /s/ Thomas W. Aro - ------------------------------- Vice President and Director August 8, 1996 Thomas W. Aro /s/ Brett G. Tollman - ------------------------------- Vice President and Director August 8, 1996 Brett G. Tollman /s/ James A. Cutler - ------------------------------- Treasurer, Chief Financial Officer August 8, 1996 James A. Cutler and Director (Principal Financial and Accounting Officer) /s/ Patricia Cohen - ------------------------------- Director August 8, 1996 Patricia Cohen ** - ------------------------------- Director August 8, 1996 Matthew W. Walker * By: /s/ Stanley S. Tollman --------------------------------- Stanley S. Tollman Attorney-in-fact ** By: /s/ James A. Cutler -------------------------------- James A. Cutler Attorney-in-fact
SCHEDULE VIII ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES VALUATION ACCOUNTS Years Ended December 31, 1995 and 1994 and the Period March 19, 1993 (Date of Inception) to December 31, 1993
Additions --------------------- Balance at Charged to Charged Balance Beginning Cost and to Other at End Description of Period Expenses Accounts Deductions of Period ----------- --------- -------- -------- ---------- --------- MARCH 19, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993: Allowance for doubtful accounts - - - - - YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts - $ 35,000 - - $ 35,000 YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts $ 35,000 $ 255,000 $ 63,708 (A) - $ 353,708
(A) Assumed in conjunction with the October 1995 acquisition of the Cotton Club of Greenville, Inc. S-1 EX-5.1 2 EXHIBIT 5.1 EXHIBIT 5.1 [GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP LETTERHEAD] August 8, 1996 Alpha Hospitality Corporation 12 East 49th Street, 24th Floor New York, New York 10017 Gentlemen: You have requested our opinion, as counsel for Alpha Hospitality Corporation, a Delaware corporation (the "Company"), in connection with pre-effective amendment no. 4 to the registration statement on Form S-1 (the "Registration Statement"), under the Securities Act of 1933 (the "Act"), File No. 333-3606 being filed by the Company with the Securities and Exchange Commission. The Registration Statement relates to up to 2,684,506 shares (the "Selling Stockholders' Shares") of the Company's common stock, $.01 par value (the "Common Stock"), which may be sold by certain stockholders who have acquired or will acquire such shares from the Company as follows: (a) 791,880 shares of Common Stock issued to B.C. of Mississippi, Inc. and certain of its shareholders, (b) 782,609 shares of Common Stock issued to an escrow agent on behalf of shareholders of the Cotton Club of Greenville, Inc. in connection with the acquisition of all of the issued and outstanding shares of Cotton Club of Greenville, Inc., (c) 409,000 shares of Common Stock to be issued upon the exercise of options granted pursuant to the Company's 1993 Stock Option Plan, and (d) 701,017 shares of Common Stock issued to an escrow agent on behalf of Bally Gaming, Inc. in connection with the restructuring of the mortgage on the Company's gaming vessel, the Bayou Caddy's Jubilee Casino. We have examined such records and documents and made such examinations of law as we have deemed relevant in connection with this opinion. It is our opinion that when there has been compliance with the Act, the Selling Stockholders' Shares, when issued, delivered, and paid for, will be fully paid, validly issued and nonassessable. Alpha Hospitality Corporation August 8, 1996 Page 2 No opinion is expressed herein as to any laws other than the laws of the State of New York, of the United States and the corporate laws of the State of Delaware. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act of the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ GERSTEN, SAVAGE, KUPLOWITZ & CURTIN, LLP ------------------------------ GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated February 16, 1996 (except with respect to Note 15 as to which the date is March 29, 1996) of Alpha Hospitality Corporation and our report dated February 4, 1994 of Bryanston Group, Inc. in the Registration Statement of Alpha Hospitality Corporation (Registration No. 333-3606) on Form S-1 appearing in the Prospectus. We also consent to the reference to our Firm under the heading "Experts" in such Prospectus. /S/ ROTHSTEIN, KASS & COMPANY, P.C. - ----------------------------------- Roseland, New Jersey August 1, 1996 EX-23.2 4 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Auditors We consent to the use of our report dated July 7, 1995, with respect to the financial statements of Cotton Club of Greenville, Inc. included in the registration statement (Form S-1 No. 333-3606) of Alpha Hospitality Corporation for the registration of 2,684,506 shares of its common stock. /S/ ERNST & YOUNG LLP - ----------------------- New Orleans, Louisiana August 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----