U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-12522
ALPHA HOSPITALITY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3714474
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
707 Skokie Boulevard, Suite 600, Northbrook, IL 60062
(Address of principal executive offices)
(847) 418-3804
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be
filed by Sections 13 or 15 (d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
November 10, 2002
Common Stock, $0.01 par value: 4,898,651 shares
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September
30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 4-5
Notes to Condensed Consolidated Financial Statements 6-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
All items that are not applicable or to which the answer is
negative have been omitted from this report.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 486 $ 20
Other current assets 80 56
Total current assets 566 76
PROPERTY AND EQUIPMENT, net 0 11
INVESTMENT AND ADVANCES IN
CATSKILL DEVELOPMENT, LLC 2,947 2,947
ASSETS OF CASINO VENTURES,
including idle property and
equipment of $7,805 and $7,063 7,875 7,176
DEPOSITS AND OTHER ASSETS 27 178
$ 11,415 $ 10,388
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Related party debt $ 2,560 $ 2,594
Accounts payable and accrued expenses 1,775 1,715
Accrued payroll and related liabilities 329 229
Current liabilities of Casino Ventures 3,874 1,453
Total current liabilities 8,538 5,991
LONG-TERM RELATED PARTY DEBT,
including accrued interest 0 1,101
LONG-TERM RELATED PARTY LIABILITIES
OF CASINO VENTURES 0 1,480
OTHER LIABILITIES 0 267
RELATED PARTY LIABILITIES TO BE SETTLED WITH
COMMON STOCK 1,529 3,683
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 790 808
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, 5,000 shares authorized:
Series B, $.01 par value, 44 and 821
issued and outstanding
in 2002 and 2001, respectively 0 8
Series C, $.01 par value, 135 issued
and outstanding in 2001 0 1
Series D, $.01 par value, 1 issued and
outstanding in both 2002 and 2001 0 0
Common stock, $.01 par value, 7,500
shares authorized, 4,879 and
2,629 issued and outstanding
in 2002 and 2001, respectively 49 26
Capital in excess of par value 107,358 92,196
Accumulated deficit (106,849) (95,173)
Total stockholders' equity
(deficiency) 558 (2,942)
$ 11,415 $ 10,388
See accompanying notes to condensed consolidated financial
statements
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Nine Months Ended
September 30
2002 2001
REVENUES:
Casino $ 0 $ 2,657
Food and beverage, retail and other 0 313
0 2,970
COSTS AND EXPENSES:
Casino 0 1,577
Food and beverage, retail and other 0 65
Selling, general and administrative 1,869 4,528
Depreciation and amortization 21 572
Interest 354 324
Pre-opening and development costs 24 88
Total costs and expenses 2,268 7,154
OTHER INCOME (LOSS):
Gain on sale of investment and
related management contract 3,277 0
Loss on investment - Catskill (6,934) 0
Miscellaneous 3 8
NET LOSS BEFORE MINORITY INTEREST (5,922) (4,176)
MINORITY INTEREST 18 747
NET LOSS (5,904) (3,429)
DIVIDENDS ON PREFERRED STOCK 518 3,097
NET LOSS APPLICABLE TO COMMON SHARES (6,422) (6,526)
WEIGHTED AVERAGE COMMON SHARES,
basic and diluted 4,533 2,171
LOSS PER COMMON SHARE, basic and diluted $ (1.42) $ (3.01)
See accompanying notes to condensed consolidated financial
statements
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
September 30,
2002 2001
REVENUES:
Casino $ 0 $ 575
Food and beverage, retail and other 0 106
0 681
COSTS AND EXPENSES:
Casino 0 544
Food and beverage, retail and other 0 13
Selling, general and administrative 486 1,455
Depreciation and amortization 6 187
Interest 117 144
Total costs and expenses 609 2,343
OTHER INCOME (LOSS)
Loss on investment - Catskill 6,934 0
NET LOSS BEFORE MINORITY INTEREST (7,543) (1,662)
MINORITY INTEREST 0 316
NET LOSS (7,543) (1,346)
DIVIDENDS ON PREFERRED STOCK 68 0
NET LOSS APPLICABLE TO COMMON SHARES (7,611) (1,346)
WEIGHTED AVERAGE COMMON SHARES,
basic and diluted 4,866 2,466
LOSS PER COMMON SHARE, basic and diluted $ (1.56) $ (.55)
See accompanying notes to condensed consolidated financial
statements
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,904) $ (3,429)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of investment and
related management contract (3,277) 0
Loss on investment - Catskill 6,934 0
Minority interest (18) (747)
Depreciation and amortization 21 572
Interest amortized on loan discount 60 54
Changes in operating assets and liabilities:
Other current assets (24) 376
Other non-current assets 194 0
Accounts payable and accrued expenses and
other liabilities 167 (21)
Accrued payroll and related liabilities 100 (38)
NET CASH USED IN OPERATING ACTIVITIES (1,747) (3,233)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment and related
management contract 3,277 0
Purchases of property and equipment (639) (793)
(Increase) decrease in deposits and other assets 0 (435)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,638 (1,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributed by holders of minority interest 0 550
Proceeds from stock options 33 (4)
Repayment of related party long-term debt (1,136) 0
Proceeds from related party long-term debt 678 2,791
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (425) 2,170
NET INCREASE (DECREASE) IN CASH 466 (535)
CASH, beginning of period 20 1,263
CASH, end of period $ 486 $ 728
See accompanying notes to condensed consolidated financial
statements
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period $ 129 $ 57
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in conversion of
long-term debt and accrued interest 188 0
Common stock issued in settlement of
preferred stock dividends 5,770 0
Common stock issued in settlement of liabilities 2,154 0
Agreement to issue common stock in settlement
of accrued payroll 0 1,529
Common stock issued for investment in
Catskill Development, LLC 6,934 0
Common stock issued in conversion of
preferred stock 9 0
Agreement to issue share of the Company's
common stock in settlement of liabilities
to Bryanston:
Long-term debt $ 1,407
Account payable and accrued expenses 42
Other liabilities 455
$ 1,904
See accompanying notes to condensed consolidated financial
statements
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
NOTE 1. NATURE OF BUSINESS
Alpha Hospitality Corporation (the "Company") incorporated in Delaware
on March 19, 1993, is engaged in the development of prospective gaming
operations in New York. In November 2001, the Company ceased operating its
gaming day cruise vessel operating in Florida. On March 15, 2002, the
General Partner of Greenville Casino Partners, L.P. successfully concluded
the sale of its primary asset, a casino located in Greenville, Mississippi,
in which the Company held a limited partnership interest. The Company's
current major effort is investing in the development and management of
potential gaming operations in Monticello, New York. To continue this
effort and to help the Company meet its operating expenses, Management is
seeking to restructure Casino Ventures, LLC ("Casino Ventures") in a
fashion to generate working capital for the Company. There is no assurance
that this restructure will be successful. The Company intends to consider
the acquisition of other operating businesses or other investments in
fields other than the gaming industry.
The Company is not currently actively involved in any operating
businesses. If the Company continues to have no active business activities
and is deemed to be engaged solely in the business of investing or trading
in securities, the Company could be subject to regulation under the
Investment Company Act of 1940. In such event, the Company would be
required to register as an investment company and could be expected to
incur significant registration and compliance costs. Management has
obtained no formal determination from the Securities and Exchange
Commission as to the status of the Company under the Investment Company Act
of 1940, and consequently, any violation of such Act could subject the
Company to materially adverse consequences.
NOTE 2. GOING CONCERN
The Company currently has no operations and has a working capital
deficit of $ 7,046 at September 30, 2002. In addition, Casino Ventures, a
subsidiary of the Company, is in default of a mortgage on its gaming boat.
The Company's principal current investment is in the development of its
interest in proposed casino gaming activities in Monticello, New York,
which is discussed in Note 5. Such investment is not expected to contribute
to the Company's cash flow during the foreseeable future and does not
include interest in any securities or other interest for which there is a
liquid market. The Company is seeking to restructure Casino Ventures to
generate working capital for the Company and cure the default of the
mortgage on its gaming boat, but there is no assurance that any significant
working capital will be generated for the Company.
Future liquidity could come from a debt or equity offering, future
acquisition of new business operations, future monitization of remaining
assets or certain tax attributes or favorable resolution of the appeal of
prior litigation (see Note 5). To continue this effort and to help the
Company meet its operating expenses, Management is seeking to restructure
Casino Ventures in a fashion to generate working capital for the Company.
There is no assurance that this restructure will be successful. If the
Company is unable to secure the required funding or implement another
liquidity generating transaction on a timely basis, it could have a
material adverse effect on the Company's ability to meet it's obligations
and continue as a going concern.
The Company's condensed consolidated financial statements have been
presented on the basis that the Company is a going concern. Accordingly,
the condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities or any other
adjustments that might result should the Company be unable to continue as a
going concern.
NOTE 3. BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 2001 annual report to the
shareholders. The results of operations for the period ended September 30,
2002 are not necessarily indicative of the operating results for the full
year.
Investments. The Company's investment in Catskill Development, LLC
("CDL") is limited to access to certain net earnings and, if applicable,
liquidation. Because it does not have significant influence in operating
CDL, the Company accounts for its investment in CDL using the cost method.
The Company increased its investment in the future revenue stream of CDL in
February 2002 by acquiring 47.5% of Watertone Holdings, L.P.'s
("Watertone") economic interest in certain CDL business components. The
investment in CDL was subsequently determined to be impaired and was
written down in the third quarter of 2002 (see Note 5).
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 3. BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) Per Common Share. The Company complies with Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share",
which requires dual presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Outstanding
options and warrants have been excluded from the Company's computation of
loss per common share for the nine months and quarter ended September 30,
2002 because they are antidilutive.
Income Taxes. The Company applies the asset and liability approach to
financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax
laws and rates to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The Company does not provide for deferred taxes on the unremitted
earnings of its wholly-owned subsidiaries since, under existing tax laws,
its investment could be liquidated tax-free. As a result, any excess outside
financial basis over tax basis is not expected to result in taxable income
upon reversal and thus is not a temporary difference.
Promotional Allowances. Promotional allowances primarily consisted of
food and beverage furnished gratuitously to customers. Revenues did not
include the retail amount of food and beverage of $616 for the nine months
ended September 30, 2001 provided gratuitously to customers. The cost of
these items of $337 for the nine months ended September 30, 2001 are
included in casino expenses.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain estimates used by management are particularly susceptible to
significant changes, such as the recoverability of the idle property and
equipment of Casino Ventures and the investment and advances in CDL. The
Company is seeking to restructure Casino Ventures to generate working
capital for the Company and cure the default of the mortgage on its gaming
boat. There is no assurance that this restructure will be completed and, if
completed, any working capital will be generated for the Company. Further,
the success or the failure to complete a restructure could affect
management's estimate of the recoverability of the idle property and
equipment of Casino Ventures (see Notes 5 and 6).
Impairment of Long-Lived Assets. Effective January 1, 2002, the Company
adopted FASB Statement No. 144, "Accounting for the Impairment of Disposal
of Long-Lived Assets". Pursuant to Statement 144, the Company is accounting
for the assets owned by its Casino Ventures, L.L.C. subsidiary in conformity
with the prior pronouncements. The adoption of Statement 144 required the
Company to review the carrying value of its remaining long-lived assets in
relation to historical results, as well as management's best estimate of
future trends, events and overall business climate. Such review indicated
that the carrying value of its investment in CDL may not be recoverable in
full and the Company then estimated the future cash flows (undiscounted and
without interest charges). The Company determined that such future cash
flows are insufficient to recover the full carrying amount of the asset,
which triggered an impairment loss and the reduction of the carrying value
of CDL to its estimated fair value (see Note 5).
Recent Accounting Pronouncements. On April 30, 2002, the FASB issued
Statement 145, which, among other things, limits the classification of gains
and losses from extinguishment of debt as extraordinary items. The Company
does not expect provisions of this statement to have a significant effect on
the Company's financial position or operating results.
In June 2002, FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities" (Statement No. 146). Statement
No. 146 requires that a liability for costs associated with exit or disposal
activities be recognized when the liability is incurred. Existing generally
accepted accounting principles provide for the recognition of such costs at
the date management's commitment to an exit plan. In addition, Statement
No. 146 required that the liability be measured at fair value and be
adjusted for changes in estimated cash flows. The provisions of the new
standard are effective for exit or disposal activities initiated after
December 31, 2002. The Company has not determined the effect that Statement
No. 146 will have on the financial statements.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
NOTE 3. BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Reclassifications. Certain prior period amounts have been reclassified
to conform to the 2002 presentation.
NOTE 4. INVESTMENT IN GREENVILLE CASINO PARTNERS
On March 2, 1998, the Company sold substantially all of the assets of
Alpha Gulf and Greenville Hotel, consisting of the Bayou Caddy's Jubilee
Casino, the Greenville Hotel and other related assets to Greenville Casino
Partners, L.P. ("GCP"). As part of that transaction, the Company was
granted a 25% interest (subsequently reduced to approximately 19% for
capital call adjustments) in GCP and entered into a management contract with
GCP. Subsequent to that sale, management was advised that GCP had incurred
significant operating losses resulting in a substantial working capital
deficiency and a partners' deficiency through December 31, 1998. In
accordance with its policy on impairment of long-lived assets, the Company
adjusted the carrying value of its 19% limited partnership interest in GCP
to zero in 1998. The Company was not responsible for any of GCP's
liabilities and, accordingly, did not record its share of any of GCP's
losses.
On March 15, 2002, the General Partner of GCP sold the Bayou Caddy's
Jubilee Casino to JMBS Casino LLC for $42,200. In April 2002, after the
repayment of liabilities, the General Partner distributed approximately
$14,000 to the Limited Partners, including the Company's share of $2,767.
An additional $1,000 is being held in escrow for 18 months pending any
claims the purchaser may make against GCP. The Company's share of such
residuals is not recorded on the Company's books since receipt is subject to
any such claims and other contingencies.
In a separate transaction, the Company also sold its Hotel Management
Agreement for the Greenville Inn and Suites located adjacent to Bayou
Caddy's Jubilee Casino for $510, the proceeds of which were received by the
Company in March 2002.
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC
In October 1995, Catskill Development, LLC ("CDL"), a New York limited
liability company in which the Company (through a wholly owned subsidiary)
is a member, was formed to pursue the development of a proposed Native
American casino in Monticello, New York (the "Casino Project"). CDL's
business plan envisioned three distinct lines of business: a) casino
activities; b) real estate related activities; and c) the gaming operations
related to Monticello Raceway (the "Raceway") including parimutuel and any
potential future VLT operations. CDL's plan was to contract with a Native
American Tribe for the development and management of a casino to be located
in Monticello, New York, and to assist the Native American tribe in seeking
the approvals necessary for such a venture under federal, state and local
statutes, ordinances and regulations. This was an ambitious plan because
the land involved was not currently a part of the reservation and thus would
require unusual approvals that were typically required for the development
of Native American casinos.
On June 3, 1996, CDL acquired the Raceway property for $10,000. Of the
real property purchased, 29.31 acres adjacent to the Raceway were set aside
for proposed casino purposes to be deeded in trust to the United States
Government for the use and benefit of a Native American tribe. CDL's
negotiations with the St. Regis Mohawk Tribe (the "Tribe") were successful,
and in July, CDL, and various related entities set up by its members entered
into a series of agreements with the Mohawk Tribe, as more fully described
below, relating to the development and management of a proposed casino on
the land.
Tribe's and CDL's Federal Application. On August 2, 1996, the Tribe
submitted an application to the United States Department of the Interior
(the "Department"), Bureau of Indian Affairs ("BIA"), to place the 29.31-
acre tract of land for the proposed casino in trust status, to be held by
the United States Government as trustee. For approval, the Secretary of the
Interior of the United States had to determine that the proposed Casino
Project was in the best interest of the Tribe and was not detrimental to the
surrounding community. In addition, the Governor of New York had to concur
with these determinations in order for the land to be taken into trust by
the United States Government. While the application to the Department of
Interior took approximately one year to prepare, its review and processing
required an additional three and one-half years. As part of the process and
subsequent to the initial filing many of the agreements were amended,
restated and/or reaffirmed on several occasions. Part of that approval
process required the complex and lengthy environmental analysis required
under the State of New York's environmental review act ("SEQRA"), which was
successfully completed in March 1998. The SEQRA finding became an integral
component of the Federal application.
On December 9, 1998, the Acting Area Director of the Eastern Area
Office of the BIA (the "EAO") transmitted findings and conclusions with
respect to the land to trust application for the Tribe to the Indian Gaming
Management Staff (the "IGMS"), a department of the BIA. The memorandum
concluded that the proposed Casino Project was in the best interest of the
Tribe and was not detrimental to the surrounding community and that the
application satisfied all statutory requirements. By memorandum dated
February 10, 1999, the Deputy Commissioner of Indian Affairs advised the EAO
that she did not concur in the Director's recommendation. The application
and supporting documentation were returned to the EAO to address issues
enumerated by the Deputy Commissioner. In February 1999,
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
officials of the EAO, the IGMS and the National Indian Gaming Commission
("NIGC") made a site visit to Monticello to meet with representatives of the
State of New York, the Tribe and CDL to discuss specific concerns addressed
in the Deputy Commissioner's memorandum. On August 31, 1999, the NIGC
completed its preliminary review of the revised business plan for the
proposed Casino Project.
On October 29, 1999, the Director of the EAO again transmitted the
application back to the IGMS with findings of fact and a renewed
recommendation that the Secretary of the Interior find that the proposed
Casino Project was in the best interest of the Tribe and not detrimental to
the surrounding community. By letter dated April 6, 2000, addressed to
Governor George Pataki, Kevin Gover, Assistant Secretary of the Department
of the Interior, advised and notified the Governor of New York that the
proposed Casino Project had been approved and specifically requested that
the Governor concur. However, on April 22, 2000, the Company became aware
of a letter agreement between the Three Chiefs (see Tribal Leadership
Dispute) and Park Place Entertainment Corporation ("PPE"). Such agreement
provided for PPE to have the exclusive rights to develop and manage any
casino development the Tribe might have in the State of New York. The
ability of CDL to proceed with the proposed Casino Project has been affected
by the circumstances of the letter agreement and related activity by PPE and
are the subject of litigation (the "PPE Litigation") as described in the
Company's annual report on Form 10-K/A for the fiscal year ended December
31, 2001, filed with the Securities and Exchange Commission on May 22, 2002.
On August 22, 2002, U.S. District Court Judge Colleen McMahon granted
PPE's motion for summary judgment. CDL has filed a notice of appeal with
respect to the dismissal of its case against PPE and has retained the firm
of Mayer, Brown, Rowe & Maw to represent it in the appeal. It is expected
that briefs in the appeal will be filed within the next four months and that
a decision on the appeal should be rendered within eighteen months.
Although management believes that CDL and its related parties have
meritorious arguments in the appeal, no assurance can be given that the
appeal will be successful or that, even if the appeal is successful as a
whole or in part, the litigation will ultimately be resolved in a manner
advantageous to the Company.
Tribal Leadership Dispute. A dispute arose in the summer of 1996, when
certain individuals who identified themselves with the prior form of
government (known as the "Three Chiefs") challenged the result of a 1995
constitutional referendum establishing a tri-partite form of government (the
"Constitutional Government"). Following that referendum in 1995, the
Constitutional Government began operations and it held an election for
tribal officials on June 1, 1996. In a June 7, 1996 order, the Tribal Court
of the Tribe held that a separate referendum, also held on June 1, 1996, did
not have the effect of amending or repealing the 1995 Constitution. On June
10, 1996, the Three Chiefs took an action to rescind the certification of
the 1995 Constitution. The Three Chiefs then held their own election on
June 29, 1996, and sought recognition status from the BIA. In a July 12,
1996 order, the Tribal Court held that the action to rescind the
certification of the 1995 Constitution was illegal; that the 1995
Constitution was the law of the territory until amended or repealed; and
that the tribal officials elected at the June 1, 1996 election held by the
Constitutional Government were lawfully elected.
The Constitutional Government was recognized by the BIA of the
Department on July 26, 1996, by a decision of the Acting Eastern Area
Director, which recognized and accepted the two orders issued by the Tribal
Court concerning the status of the tribal constitution and the identity of
the tribal leaders.
The Three Chiefs appealed the recognition of the Constitutional
Government to the Interior Board of Indian Appeals. In their appeal,
representatives of the Three Chiefs asserted that the tribal members had
never adopted the 1995 Constitution, that they, rather than the individuals
identified in the Area Director's decision, were the rightful leaders of the
Tribe and that the Tribal Court decisions relied upon by the Area Director
were not valid judicial decisions. After the Board of Indian Appeals
affirmed the recognition decision of the Area Director, the Three Chiefs
challenged the recognition decision in the D.C. District Court.
On September 30, 1999, the D. C. District Court found the BIA's
recognition of the Constitutional Government to have been arbitrary and
capricious. Following this decision, in a letter dated February 14, 2000, a
BIA field representative indicated to tribal representatives that "subject
to the resolution of any appellate proceeding" as to the D.C. District Court
decision, "the BIA presently recognizes those individuals elected to the
Tribe's three chief system of government on June 29, 1996". The BIA has
subsequently recognized the Three Chiefs as representatives of the Tribe.
After the D.C. Court issued its September 30, 1999 decision,
individuals associated with the Constitutional Government made a motion in
that court to intervene in the case, in order to participate in an appeal.
The motion to intervene was initially denied on the grounds that it was
untimely. However, the petitioners appealed that ruling and the United
States Court of Appeals reversed the denial of their motion to intervene and
remanded the case to the D.C. District Court for consideration of the
appropriateness of the motion to intervene on other grounds. While the
intervention appeal was pending, the BIA's own Notice of Appeal from the
September 30, 1999 decision was withdrawn.
Upon reconsideration, the D.C. District Court, in a memorandum decision
filed March 18, 2002, indicated that its previous order was not a "final
order" because it had remanded the matter to the BIA for substantial further
proceedings. In particular that Court stated that "the Court did not
expressly order the BIA to recognize the Three Chief system of government
nor did the court identify, in the event
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
of such recognition, which three chiefs should be recognized". The Company
has been advised that the Constitutional Government continues to pursue
recognition by the BIA on the ground that the substantial further
proceedings referred to in the decision of the D.C. District Court have not
yet been completed and that no final decision on the merits with regard to
recognition of a government for the St. Regis Mohawks has been made since
the original order of the D.C. District Court.
In the same decision, that Court again found that the interveners had
no standing to appeal and denied the motion to intervene. That Court
indicated that the reason for the denial was that it did not believe that
the interveners had adequately established a "cognizable" legal interest in
the case because they had brought the action as individuals and not as the
Constitutional Government and because, had the interveners been parties to
the case, they would not have had a right to appeal the decision in the case
since the decision was not a "final order" for the reasons described above.
On June 5, 2002 Neal McCaleb, Assistant Secretary for Indian Affairs of
the Department of Interior, issued a letter to the attorney for the
Constitutional Government. The letter denied a request by the
Constitutional Government for a reconsideration of the recognition of the
Three Chiefs by the Department. The letter ends with the statement that
"this decision constitutes the final agency decision for the Department".
On August 19, 2002, the members of the Constitutional Government on behalf
of the St. Regis Mohawk Tribe filed suit in the Northern District of New
York against the Department of Interior, Bureau of Indian Affairs and Neil
McCaleb, as Assistant Secretary of the Department of the Interior. The suit
requests the court to recognize the Constitutional Government and the
validity of the Tribal Court System. The company can express no opinion as
to the likelihood of success of this litigation.
Status of Agreements with the Tribe. The Company is affected, as a
member of CDL or related entities, by the various arrangements and
agreements with the Tribe relating to the development and management of the
proposed casino. Pursuant to such agreements, that tribe was to purchase a
parcel of land at the Raceway site from CDL, as described above, and various
related entities were to assist with the development and management of a
casino to be built on the land.
A Development and Construction Agreement was entered into among the
Tribe, the St. Regis Mohawk Gaming Authority and Monticello Raceway
Development, LLC ("MRD"), a New York limited liability company. MRD is
owned 75% by Americas Tower Partners and 25% by BKB, LLC (owned by two
officers of the Company, Robert Berman and Scott Kaniewski, and Philip
Berman, Robert Berman's brother). That Agreement, as amended and restated,
called for the St. Regis Gaming Authority to retain and engage MRD as its
exclusive agent and grants it the exclusive right to design, engineer,
develop, construct and furnish the proposed casino, subject to certain
supervision by the Development Business Board ("Development Board"). The
Development Board consists of four representatives, two appointed by the St.
Regis Mohawk Gaming Authority and two appointed by MRD. Any action of the
Development Board must be a result of agreement by at least three members
with certain actions requiring a unanimous consent.
The Tribe also entered into a Gaming Facility Management Agreement with
Mohawk Management LLC ("MML"), a New York limited liability company. MML is
owned 60% by CDL, in which the Company has a membership interest, and 40% by
Alpha Monticello, Inc. ("AMI"), a wholly owned subsidiary of the Company.
Pursuant to such Agreement, MML was provided the exclusive right to manage
the proposed casino for seven (7) years from its opening and to receive
certain fees for the provision of management and related services. Under
that Agreement, MML was to be the exclusive agent for the purpose of
managing the proposed gaming enterprise, subject to certain supervision by
the Management Business Board. MML's representation on the Management Board
is controlled by MRD. As a result, the Company does not control the
operations of these entities or the development, construction or operations
of the proposed casino.
As amended and restated, the Gaming Facility Management Agreement calls
for the St. Regis Mohawk Gaming Authority to pay MML a fee equal to 35% of
Net Revenues which is defined as gross revenues, less all Operating
Expenses. Operating Expenses include (i) all accrued expenses, (ii)
depreciation and amortization expenses; (iii) any interest expense related
to the development of the proposed casino; and (iv) any payments pursuant to
any agreement with New York State.
Initially, representatives of the Constitutional Government executed
all such agreements. After the dispute with regard to tribal government
arose in 1996, the Three Chiefs entered into a Memorandum of Understanding
with the Constitutional Government under which both factions agreed to
support the casino project and representatives of the Three Chiefs also
executed all the relevant agreements.
Completion of the project contemplated by the agreements was subject to
certain conditions, including the obtaining of relevant federal and state
governmental approvals. CDL, in conjunction with its related entities,
assumed responsibility for and undertook, seeking and obtaining all local,
state and federal approvals required or necessary to construct and operate
the proposed casino project. By letter dated April 6, 2000, addressed to
Governor George Pataki, Kevin Gover, Assistant Secretary of the Department
of the Interior, advised and notified the Governor of New York that CDL's
proposed casino project with the Tribe had been approved and specifically
requested that the Governor concur. However, on April 22, 2000, the Company
became aware of a letter agreement between the Three Chiefs and which
agreement provided for PPE to have the exclusive rights to develop and
manage any casino development the Tribe might have in the State of New York.
The circumstances of this letter agreement and related activity by PPE are
the subject of litigation
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
as described in the Company's annual report on Form 10-K/A for the fiscal
year ended December 31, 2001, filed with the Securities and Exchange
Commission on May 22, 2002. On August 22, 2002, U.S. District Court Judge
Colleen McMahon granted PPE's motion for summary judgment.
CDL has filed a notice of appeal with respect to the dismissal of its
case against PPE and has retained the firm of Mayer, Brown, Rowe & Maw to
represent it in the appeal. It is expected that briefs in the appeal will
be filed within the next four months and that a decision on the appeal
should be rendered within eighteen months. Although management believes
that CDL and its related parties have meritorious arguments in the appeal,
no assurance can be given that the appeal will be successful or that, even
if the appeal is successful as a whole or in part, the litigation will
ultimately be resolved in a manner advantageous to the Company.
In November 2001, CDL, MML and MRD entered into a renewal agreement
with representatives of the Constitutional Government. This agreement
renews until December 31, 2002 the Amended and Restated Land Purchase
Agreement, the Amended and Restated Development and Construction Agreement,
and the Amended and the Restated Facility Management Agreement. The renewal
agreement contains various conditions that must be satisfied prior to
expiration of such renewal agreement on December 31, 2002. There can be no
assurance that all such conditions can be satisfied by that date. No similar
agreement has been entered into with the representatives of the Three
Chiefs. The renewal agreement was predicated upon the assumption that
judicial and administrative decisions favorable to the positions of CDL,
MML, MRD and the Constitutional Government would be preserved or achieved in
time for performance of these agreements prior to December 31, 2002. As
this assumption is no longer realistic, CDL, on October 25, 2002, notified
the representatives of the Constitutional Government that it was reviewing
and would pursue other alternatives for the development of the Raceway
property. CDL has advised the Company that it has commenced pursuing such
other alternatives, including the full range of options from developing a
casino for another Native American Nation to outright sale of the venture or
any of its related assets.
The Company's History Within CDL. The Company, through its wholly-owned
subsidiary, AMI, was party to a General Memorandum of Understanding (the
"Memorandum") with CDL (and, collectively with AMI, the "Parties") dated
December 1, 1995, which among other things, provided for the establishment
of MML, a New York limited liability company, for the purpose of entering
into an agreement to manage the proposed casino. The Memorandum also set
forth the general terms for the funding and management obligations of CDL
and AMI with regard to MML. In January 1996, MML was formed with each of
CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML
entered into a Gaming Facility Management Agreement (the "Management
Contract") with the Tribe for the management of the proposed casino. Among
other things, the Management Contract provided MML with the exclusive right
to manage the proposed casino for seven years from its opening and to
receive certain fees to provide management and related services.
By its terms, the Memorandum between CDL and AMI terminated on December
31, 1998, since all of the governmental approvals necessary for the
construction and operation of the proposed casino were not obtained by MML.
The Management Contract between MML and the Tribe contained no such
provision. Additionally, the Memorandum was silent as to the effect of such
termination on the continued existence of MML, on the Parties' respective
50% membership interests therein or on the Management Contract. On December
28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to
resolve certain disputes between the Parties.
In July 2000, the Parties completed a final settlement agreement
pursuant to which AMI (or another affiliate) became entitled to receive 40%
of any basic management fee income and 75% of any service fee income (which
is limited to 10% of casino revenues) (the "ASR fee"), accruing from the
operation of any Native American casino facility development at the Raceway.
The net result of such settlement entitled the Company (through its
affiliates) to receive approximately 47% of all casino management fee and
service income derived from the underlying casino management and development
contracts. The original Management Contract contemplated an arrangement
specific to the Tribe, while the settlement agreement covers all prospective
federally recognized Native American Nations. Accordingly, as part of the
settlement, Alpha Casino Management, Inc. ("ACM"), a subsidiary of the
Company, and Monticello Casino Management, L.L.C. ("MCM") were formed to
facilitate such potential non-Mohawk Tribe arrangements.
As part of and in conjunction with such settlement, AMI acquired from
Bryanston Group, Inc. ("Bryanston"), a shareholder of the Company, 5
percentage points of Bryanston's ownership interest in the real estate
component of CDL's business for $455 plus additional consideration if the
asset is liquidated. In June 2001, the Company agreed to satisfy this
obligation through the issuance of shares of its common stock, valued at
$8.00 per share (the then current market price.) Additionally, Bryanston
agreed to transfer to AMI Bryanston's 25% interest in the raceway component
of CDL's business. Under the previous agreement, AMI did not participate in
this source of revenue. As of September 30, 2002 and December 31, 2001,
excluding $6,934 recorded in February 2002 in connection with the
acquisition of 47.5% of Watertone's economic interest in the casino and
racetrack business components of the businesses of CDL, the Company
capitalized $2,492 towards the design, architecture and other costs of the
development plans for the proposed casino. Based on the August 22, 2002
court decision, the Company has conducted an impaired asset analysis in
regards to its investment in CDL. The Company believes that based on the
amount of preferred capital and priority returns due certain members of CDL,
its ability to recover the $6,934 recorded in February 2002 in connection
with the Watertone transaction is remote. Therefore the Company has written
it off
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
in the third quarter of 2002.
The Company and certain members of CDL have contributed considerable
amounts of money to CDL to fund the purchasing of the Raceway and pursuing
the approval and development of a Native American casino on a portion of the
Raceway property. These contributions and mortgage (together with interest
thereon compounded at 10% per annum) must be repaid before any net earnings
from CDL's operations would be available for distribution to the Company.
As of November 14, 20021, the aggregate amount needed to satisfy the payment
of said contributions (with interest) and certain other senior obligations
payable to certain members of CDL was approximately $45,596. As of November
14, 2002, the Company's preferred capital balance was approximately $4,778
out of a total preferred capital balance for all the members of
approximately $38,865. Currently the Company has capitalized approximately
$2,947 of these capital contributions on its balance sheet (on a cost
basis). These preferred capital balances are subordinate to a mortgage,
which at November 14, 2002, was approximately $6,731. Currently, any cash
flow from the operations of the Raceway are being retained by CDL for
working capital purposes and to fund litigation and development expenses in
conjunction with other potential gaming operations at the track.. As a
result, the Company is not expected to receive any distributions from CDL
with respect to its interests in CDL (other than with respect to its
preferred capital contributions and interest thereon), until CDL has
achieved additional net revenues sufficient to discharge the payment of all
of these priority returns.
Since all of the previous arrangements will respect to the development
of a casino for a Native American Nation at the Raceway are no longer being
pursued, the ability of MML or MCM to undertake the development and
management of the proposed casino in Monticello, New York will depend on the
ability to reach a definitive agreement with a federally recognized tribe,
as well as the obtaining of all requisite federal and state approvals for
the casino to be located on land to be placed in trust for the benefit of
such tribe and to be managed under any management arrangement. The Company
has been advised that CDL is currently involved in active negotiations to
develop new strategic alliances and arrangements with respect to the
development of such a casino. However, there can be no assurance that the
project will be revived or that it will receive all requisite approvals to
become operational.
In October 2001, the New York State Legislature passed a bill that
expanded the nature and scope of gaming in the state ("VLT Legislation").
That bill was signed by the Governor on October 31, 2001. The provision of
the VLT Legislation relevant to the Company and its development partner,
CDL, include: a) authority given to the Governor to negotiate casino
licenses for up to three Native American casinos in the Catskills; and b)
the authority for several of New York's racetracks, including the Raceway,
to operate video lottery terminal ("VLTs") in their facilities. The VLT
operation will be conducted by the New York State Lottery (the "Lottery")
with the racetracks functioning largely as agents for the Lottery.
CDL, in which the Company has a significant interest, is currently
working with the New York State Lottery to explore the feasibility of
installing VLTs at the Raceway. CDL provides its members with interests in
various business units. The Company has a 37% interest in one of these
business units, which is responsible for racing and gaming activities at the
Raceway. CDL has advised the Company that it has received a letter from the
Lottery, dated March 21, 2002, advising the Raceway that the Lottery has
completed its initial review of the Raceway's business plan for the
operation of VLTs at the Raceway during the initial three-year trial period
approved by the State Legislature. Based on such review, the Lottery has
made an initial allocation of 1,800 VLTs to the Raceway and has approved the
maximum permitted rate for compensation of 25% of revenues generated after
payout of prizes for the Raceway. The law currently provides that the
Raceway must apply 35% in the first year, escalating to 45% in years two and
three, of its compensation to enhance purses at the Raceway and each year
must dedicate 5% of its compensation to a State Breeding Development Fund.
The business plan was submitted at the request of the Lottery, and in
accordance with Lottery procedures, does not represent a final decision with
respect to the implementation of VLTs by CDL. The business plan includes
certain assumptions recommended by the Lottery and other estimates
considered preliminary by CDL and the Company. Using these estimates and
assumptions, the plan does not show levels of operating income currently
considered adequate by CDL to go forward with the project. CDL continue to
evaluate the appropriateness of making the required capital expenditures
necessary for VLT operations relative to the length of the test period, the
ultimate level of return on investment, and the implementation date for the
program. The Lottery has not yet established a firm start date or adopted
regulations with regard to the program. On May 16, 2002, the New York State
Legislature passed a bill that further expands the October 2001 VLT
Legislation. This bill extends the test period under the current law from
three years to a period ending December 31, 2007. Further, the bill
authorizes each track to enter into an agreement with the organization
representing its horsemen to reduce the percentage of its vendor fees
dedicated to enhancing purses at such track during the initial three years,
to an amount not less than 25 percent. That bill was signed by the Governor
on May 29, 2002. In addition, CDL's ability to proceed with the VLT program
may be impacted by its plans with respect to casino development at the site.
Accordingly, no assurance can be given that CDL will decide to proceed with
the operation of VLTs at the Raceway.
On February 12, 2002, the Company entered into an agreement with
Watertone providing for the acquisition of 47.5% of Watertone's economic
interests in the casino and racetrack business components of the business of
CDL. This agreement replaced and superseded an agreement previously entered
into with Watertone in August 2001 pursuant to which the Company had agreed
to acquire
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
all of Watertone's economic interest in the casino and racetrack business
components of CDL's business. The transaction contemplated by this
agreement closed on March 12, 2002. In consideration for such economic
interests, the Company issued 576 shares of its common stock for the benefit
of Watertone. In accordance with FASB Statement 123, "Accounting for Stock-
Based Compensation", the valuation of the economic interest in CDL
transferred by Watertone and held for the benefit of the Company has been
reported at an amount of $6,934, which is equal to the market value of the
shares of common stock of the Company (determined as of the close of
business on the date of issuance) issued in consideration for such economic
interests. However, the Company's ability to realize that amount (or any
other amount) with respect to its investment in such economic interests will
be dependent upon a variety of matters that are outside of the Company's
control. Generally, the Company would not be expected to realize any amount
with respect to such investment unless CDL generates net revenues or other
net proceeds that exceed the aggregate amount of the senior obligations
(which, as of November 14, 2002, amounted to approximately $6,731) and other
priority returns (which, as of November 14, 2002 amounted to approximately
$38,865) payable by CDL. CDL's ability to generate any such net revenues or
other net proceeds will in turn depend upon a variety of factors, which may
include, among others: (a) a successful resolution (by judgment, settlement
or otherwise) of the future appeal of the PPE Litigation; (b) successful
development of a casino at the Raceway (whether owned by the St. Regis
Mohawk or another Native American tribe); (c) the development or financing
of real estate owned by CDL; and/or (d) profitable operation or financing of
the Raceway. Further, in the event CDL is successful in generating any such
net revenues or other net proceeds, the Company's entitlement to receive a
portion thereof on account of such economic interests will depend upon the
amount of such excess net revenues or other net proceeds that is allocable
to the casino and raceway components of CDL's business. Based on the August
22, 2002 court decision, the Company has conducted an impaired asset
analysis in regards to its investment in CDL. The Company believes that
based on the amount of preferred capital and priority returns due certain
members of CDL, its ability to recover the $6,934 recorded in February 2002
in connection with the Watertone transaction is remote. Therefore the
Company has written it off in the third quarter of 2002. Additionally, as
part of the proposed transactions, the Company entered into employment
agreements with two principals of Watertone, Messrs. Robert Berman and Scott
Kaniewski, providing for annual aggregate salaries of $500 (which is subject
to deferral under certain circumstances) and options to purchase, at an
exercise price of $17.49 per share, up to an aggregate of 180 shares of the
Company's common stock (which number of shares will be subject to increase
to an aggregate of up to 591 upon shareholder approval).
As a consequence of the issuance of shares and the granting of options
as part of the transaction with Watertone and the issuance of shares in
connection with conversion of the Series B and C Preferred Stock and of
certain indebtedness owed to Bryanston, the Company's flexibility to issue
additional equity (for financing purposes, in conjunction with an
acquisition or otherwise) without negatively impacting the Company's ability
to achieve the maximum benefits associated with the Company's tax loss
carryforward may be limited. Additionally, as a consequence of such
transactions and related transactions, the Company may be obligated to issue
additional shares of common stock, which could result in dilution to current
shareholders as well as further limit the Company's flexibility in issuing
additional equity (for financing purposes, in conjunction with an
acquisition or otherwise) may be limited without negatively impacting the
Company's ability to achieve the maximum benefits associated with the
Company's tax loss carryforward.
Upon closing those transactions, before consideration of the ASR fee,
the Company's interest in any net revenues derived from CDL's business
component related to the casino and wagering operations increased
effectively from 40% to approximately 49% and its interest in net revenues
derived from the Raceway's parimutuel operation increased effectively from
25% to approximately 37%.
In April 2002, five (5) former officers or directors of the Company
were charged in an indictment with certain allegedly criminal activities.
These included: Monty Hundley, who resigned from the Company in March 1995;
Howard Zukerman who resigned in April 1997; Sanford Freedman who resigned in
March 1998; Stanley Tollman (father of Brett Tollman) who resigned as
Chairman, President and Chief Executive Officer in February 2002 and James
Cutler who resigned in February 2002. None of the acts they are charged
with relate to their roles or activities with the Company, and the Company
is not charged with any wrongdoing. However, ownership of Bryanston Group,
the Company's principal shareholder and a creditor of the Company, can be
associated with Monty Hundley and/or Stanley Tollman through their
relationships with its beneficial owners.
In June 2002, Brett Tollman, the son of former Chairman and Chief
Executive Officer Stanley Tollman, submitted his resignation as a member of
the Board of Directors and Vice President of the Company. Mr. Tollman
resigned following the filing of a Federal complaint alleging tax violations
against him. Mr. Tollman indicated that he had submitted his resignation
because he felt that, even though the allegations against him are unrelated
to the business of the Company, it was in the best interest of the Company
and expressed his view that the allegations are entirely unwarranted.
The Company and certain of its affiliates are subject to regulation by
various governmental agencies that regulate and license gaming activities.
As part of such regulation, the Company and its affiliates are generally
required to be licensed or otherwise approved in each such jurisdiction,
which is in turn generally subject to a determination of suitability with
respect to the Company and it affiliates, and their officers, directors and
significant investors. For example, the New York Racing Board upon a
determination that it is inconsistent with the public interest, convenience
or necessity or with the best interests of racing generally that any person
continue to be
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(In thousands, except for per share data)
NOTE 5. INVESTMENT IN CATSKILL DEVELOPMENT, LLC (CONTINUED)
a shareholder (of record or beneficially) in any entity that is licensed to
engage in racing activities or that owns 25% or more of such licensed
entity, may direct such shareholder to dispose of its interest in such
entity. The Company's Annual Report on Form 10-K for the year ended
December 31, 2001, on file with the Securities and Exchange Commission
contains additional information concerning state and federal regulation of
gaming activities that may affect the Company's gaming related activities in
Mississippi or New York. In the event that an officer, director, investor
or creditor of a regulated entity or an affiliated entity were not found to
be suitable, the license or other approval to conduct gaming activities
could be revoked or conditioned upon such officer or director resigning; and
in the event any such investor or creditor were not found to be suitable,
the license or other approval could be revoked or conditioned upon the
divestiture or termination of such investor's or creditor's interests.
In light of the fact that none of the individual's referred to above
who have been charged are currently serving as an officer or director of the
Company (or any of its subsidiaries) and the fact that none of the
activities they are charged with relate to any action they took as officers
or directors of the Company (or any of its subsidiaries) and in view of the
ability of the applicable regulatory authorities to require divestiture of
interest in licensed gaming entities, management does not believe that such
indictments should adversely affect any finding of suitability that has
previously been made with respect to the Company or any of its affiliates or
that may be required in order for the Company or any of its affiliates to
engage in gaming activities in the future.
NOTE 6. INVESTMENT IN CASINO VENTURES, L.L.C.
On July 8, 1999, the Company contributed its inactive vessel,
Jubilation, to Casino Ventures. At the time of the contribution, the vessel
(including gaming equipment, furniture and other items) had a net book value
of $4,149. In exchange, the Company received $150 in cash, a promissory
note of $1,350 and a membership interest in Casino Ventures. The promissory
note accrues interest at prime plus one percent with a minimum rate of
8.75%, payable quarterly, with the principal balance due July 8, 2002.
Under certain circumstances, the Company's current 93% membership interest
in Casino Ventures may be subject to reduction and dilution. The
consolidated financial statements of the Company includes the accounts of
Casino Ventures until such time as the Company's membership interest
decreases to less than 50%. A former director of the Company is a member in
Casino Ventures and serves as its General Manager. That former director
advanced funds to Casino Ventures in 2000, 2001 and 2002 that were used for
site and vessel improvements. As of September 30, 2002, the loan payable to
the former director amounted to $2,049. The loan accrues interest at 8% and
matures April 2003. During the nine months ended September 30, 2002 and
2001, the Company capitalized $742 and $596 of costs, respectively, related
to the refurbishment of the vessel and improvement to its site in Tunica,
Mississippi and incurred $24 and $88 of start-up costs, respectively.
The vessel was used as collateral to obtain funding of $650 towards the
aforementioned costs of Casino Ventures (see Note 8) in 1999. The $650
mortgage is currently in default. Total interest expense on Casino Venture
debt for the nine months ended September 30, 2002 and 2001 amounted to $152
and $113, respectively. Pursuant to an amendment agreement effective April
18, 2001, the total maximum borrowings allowed to be collateralized by the
vessel is $1,000.
The Company is seeking to restructure Casino Ventures to generate
working capital for the Company and cure the default of the mortgage on its
gaming boat. There is no assurance that this restructure will be completed
and, if completed, any working capital will generated for the Company.
Further, the success or the failure to complete a restructure could affect
management's estimate of the recoverability of the idle property and
equipment of Casino Ventures.
At September 30, 2002 and December 31, 2001, assets and liabilities of
Casino Ventures consisted of the following:
2002 2001
Assets:
Property and equipment, net $ 7,805 $ 7,063
Deposits 54 54
Other 16 59
7,875 7,176
Current liabilities:
Long-term liability, current
maturities 2,732 683
Accounts payable and accrued
expenses 1,142 770
3,874 1,453
Long-term liabilities:
Long-term debt $ 0 $ 1,480
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 7. PROPERTY AND EQUIPMENT
At September 30, 2002 and December 31, 2001, property and equipment in use
is comprised of the following:
2002 2001
Furniture, fixtures and equipment $ 141 $ 159
Less accumulated depreciation
and amortization 141 148
$ 0 $ 11
On July 8, 1999, the Company contributed idle equipment to Casino Ventures
(see Note 6). These assets are being held for disposal and are not being
depreciated. At September 30, 2002 and December 31, 2001, property and
equipment held for disposal is as follows:
2002 2001
Boat and improvements $ 8,614 $ 7,872
Gaming equipment 1,944 1,944
Furniture, fixtures and equipment 1,471 1,471
12,029 11,287
Less accumulated depreciation
and amortization (4,224) (4,224)
$ 7,805 $ 7,063
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited) (in thousands)
NOTE 8. LONG-TERM DEBT AND OTHER NON-CURRENT LIABILITIES
Long-term debt at September 30, 2002 and December 31, 2001 was comprised of
the following:
Interest
Rate 2002 2001
Related Party Debt
Loan payable (a), including
accrued interest of $84 and $55
as of September 30, 2002 and
December 31, 2001, respectively 4% $ 970 $ 1,101
Loan payable to a former director
of the Company, due in April 2003 8% 2,049 1,480
Note payable to Bryanston Group,
Inc. ("Bryanston"), a major
stockholder, with interest
payable monthly and principal
payments, commencing January 1, 2001,
not to exceed $1,000 per annum,
with any unpaid balance due at
maturity in April 2005 (b). 8% 0 1,407
Loan payable to Bryanston, due on
demand including accrued interest
of $57 and $75 as of September 30,
2002 and December 31, 2001,
respectively 8% 1,550 2,594
Accrued compensation (c) 1,529 1,529
Other payables and accrued expenses 0 747
Total related party debt 6,138 8,858
Mortgage note collateralized by
the Company's inactive vessel
(see Note 6) with interest payable
monthly and principal due in
January 2001 8% 650 650
Promissory note payable, due on
demand 6% 33 33
6,821 9,541
Less amounts included in:
Liabilities of Casino Ventures
(see Note 6) 2,732 2,163
Liabilities to settled in common stock 1,529 3,683
Related party current 2,560 2,594
$ 0 $ 1,101
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 8. LONG-TERM DEBT AND OTHER NON-CURRENT LIABILITIES (CONTINUED)
(a) On July 31, 2000, the Company received a $1,250 loan from the
holder of the Company's preferred stock, Series D (see Note 11).
Simultaneously with the closing of that loan, the lender also received 12.5
warrants exercisable at a price of $24.00 per share, which expire in July
2003. The loan accrues interest at a rate of 4% per annum, and Bryanston
has agreed, subject to certain terms and conditions, to subordinate its
entitlement to receive cash dividends in lieu of payment on the preferred
stock, Series B and C, owned by it and on the Company indebtedness owed to
it to the prior payment of such loan, as well as payments due with respect
to the preferred stock, Series D.
Relative to the $1,250 principal amount of the loan and warrants
issued, the Company has allocated approximately $213 as the estimated value
of the warrants issued with the loan. This amount is being amortized as
additional interest expense and an increase to notes payable over the life
of the loan using the effective interest method until such loan is repaid or
the warrants are converted into common stock. In the nine months ended
September 30, 2002, $180 of the principal amount was converted into 33
shares of the Company's common stock. At September 30, 2002, approximately
$168 has been amortized and the remaining balance of approximately $60 at
September 30, 2002 is reflected as a reduction of the loan payable.
(b) Bryanston agreed, subject to certain terms and conditions, to
subordinate its rights to repayment of principal and to payment of cash
dividends to the prior payment of amounts due to the holders of the
preferred stock, Series D.
(c) The Company was obligated under an employment contract with Stanley
S. Tollman, its former Chairman and Chief Executive Officer ("CEO"). Under
this agreement the Company accrued deferred compensation of $250 per year.
The CEO agreed to waive his rights to receive the $250 salary for the 2001
and 2000 years. As of September 30, 2002 and December 31, 2001, the CEO was
owed $1,529 of deferred compensation. Further on September 30, 2001, the
CEO agreed to be paid only in common stock and rescind any previous
conversion agreements.
Interest expense on related party debt totaled $116 and $44 for the
nine months ended September 30, 2002 and 2001, respectively.
The Company has classified $1,529 and $3,683, respectively, as of
September 30, 2002 and December 31, 2001 of long-term debt and other
liabilities as non-current because the creditors have agreed to accept
shares of common stock in settlement of the following debt and liabilities:
2002 2001
Note to Bryanston $ 0 $ 1,407
Accrued compensation 1,529 1,529
Other payables and
accrued expenses 0 747
$ 1,529 $ 3,683
In January 2002, the Company issued 238 shares of common stock
to settle the note to Bryanston and other liabilities totaling $1,904. In
May 2002, the Company issued 25 shares of common stock in settlement of $250
of other payables.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Lease and Other Commitments. The Company is obligated under operating
leases relative to real property and equipment expiring through 2003. Future
aggregate minimum annual rental payments under all of these leases are as
follows:
In December 2001, the Company vacated its office space in New York
City. The lease does not expire until 2004. Final lease settlement payment
due for the New York City office lease is $210. The Company currently rents
office space in Northbrook, Illinois and New York, New York, on a month-to-
month basis.
On December 19, 2001, the Company's subsidiary, Alpha Florida
Entertainment, L.L.C. ("Alpha Florida LLC"), terminated its lease with Miami-
Dade County, in connection with its Ella Star Casino. No provision has been
recorded for any future amounts related to any contractual agreements
entered into by Alpha Florida L.L.C. or Alpha Florida Entertainment, Inc.,
its predecessor.
On February 12, 2002, the Company's Board of Directors (the "Board")
accepted the resignations of Stanley S. Tollman and one of its other
directors. Robert A. Berman was appointed by the Board to fill the vacancy
left by Mr. Tollman's retirement and Scott Kaniewski was appointed by the
Board to fill the other Board vacancy. The Company entered into employment
agreements with Mr. Berman and Mr. Kaniewski providing for annual salaries
of $300 and $200, respectively, payment of which is subject to deferral
under certain circumstances. Additionally, each of Mr. Berman and Mr.
Kaniewski was granted options to purchase, at an exercise price of $17.49
per share, up to 95 shares of the Company's common stock, which number of
shares is subject to be increased to 296 shares for each of Mr. Berman and
Mr. Kaniewski, upon shareholder approval.
To comply with State requirements regarding the Company's interest in
Casino Ventures, LLC, the Company has received a finding of suitability from
the Mississippi Gaming Commission. The Company's finding of suitability was
renewed in October 2001 for a three year period.
Litigation. In January 1996, the Company was named as a defendant in an
action based on the theory of "liquor liability" for the service of alcohol
to a customer. This case was settled in 2002 with funds substantially
provided by the Company's insurance carrier.
The Company was named as a defendant in an action brought by Global
Trading Group, Inc. in the U. S. District Court for the Northern District of
Mississippi. The plaintiff alleged entitlement to a finder's fee arising
out of the sale of the Jubilee Casino and sought contractual and
compensatory damages of $1,563, punitive damages of $10,000 and costs,
attorneys' fees and interest. In March 2002, the Company reached, and
recorded on its books, a settlement on this case for approximately $118, of
which $53 was settled through the issuance of 5 shares of common stock.
The Company is a party to various other legal actions that have arisen
in the normal course of business. In the opinion of the Company's
management, the resolution of these other matters will not have a material
and adverse effect on the condensed consolidated financial position, results
of operations or cash flows of the Company.
Other Transactions. On May 12, 1998, with shareholder approval
granted in September 1999, the Board approved an annual compensation
arrangement whereby each of the three outside directors will receive $6 per
annum plus, pursuant to the 1998 Stock Option Plan), options to purchase up
to 2.5 shares, and an additional 1.5 shares for each committee served upon,
of the Company's Common Stock at an exercise price equal to the current
market price on the date the option was granted.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At September 30, 2002 and December 31, 2001, accounts payable and
accrued expenses are comprised of the following:
2002 2001
Property and equipment $ 752 $ 557
Lease (see Note 9 Lease
Commitment) 224 342
Advertising 0 143
Insurance 81 216
Accrued professional fees 847 546
Accrued interest 380 238
Other 633 443
Less amounts included in
liabilities of Casino Ventures
(see Note 6) (1,142) (770)
$ 1,775 $ 1,715
NOTE 11. STOCKHOLDERS' EQUITY
Activity
On June 13, 2001, the Company authorized the settlement of
liabilities to Bryanston aggregating $1,904 by agreeing to issue
approximately 238 shares of its common stock at a price of $8 per share,
which was the closing market price on that date. Such shares were issued in
January 2002.
In March 2002, $158 of debt and accrued interest was converted into
15 shares of the Company's common stock.
In September 2002, $30 of debt and accrued interest was converted
into 18 shares of the Company's common stock.
During the nine months ended September 30, 2002, 7.5 shares of the
Company's common stock was issued upon the exercise of options.
In February 2002, the Board of Directors authorized the issuance of
415 shares of common stock in payment of dividends due to holders of
preferred stock. The holders of Series B Preferred Stock received 241
common shares and the holders of the Series C Preferred Stock received 174
common shares.
In February 2002, the Company issued 576 shares of common stock for
the benefit of Watertone, and Watertone assigned to the benefit of the
Company 47.5% of its economic interest in the casino and horse racing
components of the business of CDL (see Note 5).
In January 2002, the Company issued 622 and 324 shares, respectively,
of common stock upon conversion of 777 shares of Series B Preferred Stock
and all of the Series C Preferred Stock.
During the nine months ended September 30, 2002, the Company issued
35 shares of common stock in settlement of other liabilities.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except for per share data)
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
Descriptions of Preferred Stock and Dividends
The Company's Series B Preferred Stock has voting rights of .8 votes
per preferred share, is convertible to .8 shares of common stock for each
share of preferred stock and carries a liquidation value of $29 per share, a
cumulative dividend of $2.90 per share, payable quarterly, which increases
to $3.77 per share if the cash dividend is not paid within 30 days of the
end of each quarter. In the event the dividend is not paid by January 30
next following the year for which such dividend has accrued, the dividend
will be payable in common stock. In January 2002, the Company declared and
issued dividends on the Series B Preferred Stock for the 2001 year amounting
to 241 shares of the Company's common stock. After the January 2002 common
stock issuance, there were no dividends in arrears. Additionally, in
January 2002, Bryanston, a major shareholder, converted its 777 shares of
the Company's Series B Preferred Stock into 622 shares of the Company's
common stock. As of September 30, 2002, dividends in arrears on the
remaining 44 shares of the Series B Preferred Stock amounted to
approximately $369.
The Series C Preferred Stock had voting rights of 2.4 votes per
preferred share, was convertible into 2.4 shares of common stock and carried
a cumulative dividend of $5.65 per share. In January 2002, the Company
declared and issued dividends for the 1998, 1999, 2000 and 2001 years
amounting to a total of 174 shares of the Company's common stock.
Additionally, in January 2002, Bryanston, the sole holder of the Company's
Series C Preferred Stock, converted its Series C Preferred Stock into 324
shares of the Company's common stock. As of September 30, 2002, dividends
in arrears on the Series C Preferred Stock amounted to approximately $63.
The Series D Preferred Stock is convertible into shares of the
Company's common stock at a conversion price of the lesser of $60 per share
or a price based upon the prevailing market price of the Company's common
stock, and accrues dividends at a rate of 7% per annum. In the event the
preferred stock is not converted into shares of the Company's stock by
February 8, 2005, there will be a mandatory redemption at that time, payable
in shares of the Company's common stock at the same aforementioned
conversion price. The dividends are payable in arrears on the earlier of
the date of conversion of a share of Series D Preferred Stock or the date of
redemption. At the Company's option, the dividends are payable in the form
of cash or shares of the Company's common stock. The maximum aggregate
total number of shares of the Company's common stock issuable relative to
the conversions and payments of dividends is 3,300 shares, which was
attained in November 2001. Accordingly, the dividend rate increased to 15%
per annum to be payable in cash in arrears, semi-annually on June 30 and
December 31. As of September 30, 2002, the dividends in arrears on the
Series D Preferred Stock amounted to approximately $238, of which $86
relates to the nine months ended September 30, 2002. The Series D Preferred
Stock has no voting rights prior to its conversion into common stock.
Public Market for the Company's Securities
The Company cannot assure that its common stock will continue to be
quoted on the NASDAQ SmallCap market or listed on the Boston Stock Exchange.
Even if these quotations or listings continue, the Company cannot assure you
that there will be a significant public market. Among other requirements
for continued listing on the NASDAQ SmallCap Market, a company must maintain
at least $2,500 in stockholder's equity. The Boston Stock Exchange's
maintenance criteria requires a company to have total assets of at least
$1,000 and total stockholder's equity of at least $500. At September 30,
2002, the Company had total assets of approximately $11,415 and
stockholder's equity of approximately $558. In the event the Company's
common stock were to be delisted from the NASDAQ SmallCap Market and the
Boston Stock Exchange, trading, if any, would be conducted on the OTC
Bulletin Board or Pink Sheets. Should this occur, an investor could find it
more difficult to dispose of or obtain accurate quotations for the price of
the company's common stock.
NOTE 12. RESIGNATION OF DIRECTOR
In September 2002, Herbert Kozlov submitted his resignation as a member of
the Board of Directors of the Company to pursue other interests.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
(in thousands)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the historical condensed consolidated
financial condition and results of the operations of the Company should be
read in conjunction with the Condensed Consolidated Financial Statements and
the Notes to such consolidated financial statements included elsewhere in
this Form 10-QSB. This Form 10-QSB contains forward-looking statements,
which involves risks and uncertainties primarily relative to the speculative
nature of the Company's proposed casino development projects and the
potential future acquisitions of new business operations, including those
that have not yet been identified. The Company's actual results may differ
significantly from the results discussed in these forward-looking
statements.
Casino Operations And Gaming Activities
Ella Star:
On May 7, 1999, Alpha Florida LLC was notified by Miami-Dade County (the
"County") that it had received the final approval on a lease to dock and
operate a day cruise vessel out of the County's Haulover Beach Park and
Marina adjacent to Bal Harbour, Florida. The exclusive lease was for five
years. The County could renew this exclusive agreement for two periods of
five years each. For this exclusivity, Alpha Florida LLC agreed to pay the
County a minimum guaranteed monthly base rent, a per-passenger fee and a
percentage of retail merchandise sold in the facility. The lease commenced
on November 26, 2000, the date of the vessel's inaugural cruise.
On June 15, 2000, Alpha Florida LLC entered into a Charter Agreement that
required that $1,250, including the application of a previously issued $400
promissory note, be paid towards the completion of construction of the
vessel and monthly payments over a three-year period commencing upon
completion. The monthly payments were to be $41 during the first year and
$47 during years two and three, with an additional surcharge for each month
of the three-year period amounting to one dollar per each passenger during
each previous month. At all times during the three-year period, Alpha
Florida LLC had the option to purchase the vessel at a cost of $4,500,
towards which all previous construction payments would be applied. In
November 2000, the interior design and construction was completed on the
vessel, the Ella Star Casino ("Ella Star"), with the inaugural cruise taking
place on November 26, 2000.
On September 7, 2000, Alpha Florida LLC entered into a three-year
agreement for the rental of certain furniture and equipment to be used in
the gaming day cruise vessel. Rental payments, which commenced in November
2000, approximated $36 per month.
Following the dramatic impact of the September 11th terrorist attack, the
passenger levels on the Ella Star fell dramatically from those enjoyed
immediately prior to the September 11th attack. It was the opinion of the
Company that this condition, further exacerbated by the crash of American
Airlines flight 587 out of New York's John F. Kennedy airport, would extend
into and possible through the upcoming high tourism season. On November 15,
2001, as a consequence of this assessment, Alpha Florida LLC decided to
suspend operations at the Ella Star and on December 19, 2001, the Company
terminated its leases with Miami-Dade County and the boat and equipment
lessors. No provision has been made for any future payments on any
contractual obligations entered into by Alpha Florida.
Results of Operations:
The following table sets forth the statements of operations for Alpha
Florida LLC's Ella Star before intercompany charges and minority interest
for the nine months ended September 30, 2002 and 2001:
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
(in thousands)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
2002 2001
Revenues: (IN THOUSANDS)
Casino . . . . . . . . . . . . $ 0 $ 2,657
Food and beverage, retail and other 0 105
Total revenues . . . . . . . 0 2,762
Operating expenses:
Casino . . . . . . . . . . . . 0 1,577
Food and beverage, retail and other 0 65
Selling, general and administrative 0 3,342
Total operating expenses . . 0 4,984
Other expenses:
Depreciation and amortization 0 540
Total other expenses . . . . 0 540
Loss before intercompany charges and minority
interest $ 0 $(2,762)
For the nine months ended September 30 2001, the Ella Star had its
revenues negatively impacted by the unusually poor winter weather conditions
in South Florida. Because of the severe weather, the Ella Star was forced
to cancel several cruises and the attendance on the cruises that did sail
were negatively impacted because of inclement conditions. To ameliorate the
negative impact of poor weather in the future, the Company pulled the vessel
out of the water for several days in January 2001 and installed bilge keel
stabilizers at a cost in excess of $100. The retrofitting of the
stabilizers improved the comfort of the passengers during rough weather.
Casino expenses, representing 50% of casino revenues, included $819 of
payroll and related expenses, $337 of expenses related to food and beverage
provided gratuitously to customers and other expenses of $421.
The continuing general and administrative expenses for the nine months
ended September 30, 2002 of $54 is substantially comprised of payroll and
related expenses incurred in terminating operations. Selling, general and
administrative expenses for the nine months ended September 30, 2001,
included $1,045 of payroll and related expenses, $664 of advertising and
marketing expenses, $1,020 of dock, vessel, equipment and office rental
expenses, $388 of insurance, utilities, fuel and maintenance costs and the
remaining $225 for professional fees, office expenses and other
miscellaneous general and administrative expenses.
Mississippi:
On March 2, 1998, the Company sold substantially all of the assets of
Alpha Gulf and Greenville Hotel, the Bayou Caddy's Jubilee Casino, the
Greenville Hotel and other related assets to Greenville Casino Partners,
L.P. ("GCP") and retained a 25% interest (subsequently reduced to
approximately 19% for capital call adjustments) and entered into a
management contract with GCP. Subsequent to the sale, management was
advised that GCP incurred significant operating losses resulting in a
substantial working capital deficiency and a partners' deficiency through
December 31, 1998. Accordingly, pursuant to its policy on impairment of
long-lived assets, the Company adjusted the carrying value of it 19% limited
partnership interest in GCP to zero in 1998. The Company was not
responsible for any of GCP's liabilities and, accordingly, did not record
its share of any of GCP's losses.
On March 15, 2002, the General Partner of GCP successfully sold the
Bayou Caddy's Jubilee Casino to JMBS Casino LLC for $42,200. In April 2002,
after the repayment of liabilities, the General Partner distributed
approximately $14,000 to the Limited Partners, including the Company's share
of $2,767. An additional $1,000 is being held in escrow for 18 months
pending any claims the purchaser may make against GCP. The Company's share
of such residuals is not recorded on the Company's books since receipt is
subject to any such claims and other contingencies.
In a separate transaction, the Company also sold it's Hotel Management
Agreement for the Greenville Inn and Suites located adjacent to Bayou
Caddy's Jubilee Casino, for $510, the proceeds of which were received by the
Company in March 2002.
The continuing costs incurred during the nine months ended September
30, 2002 and 2001 amounted to $8 of warehousing costs.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
(in thousands)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations -- Jubilation Lakeshore:
The Company acquired the Cotton Club of Greenville, Inc. (d/b/a Cotton
Club Casino) on October 26, 1995. The Cotton Club Casino's operations in
Greenville were terminated on October 30, 1995. After its relocation to
Lakeshore, the Cotton Club, renamed the Jubilation Casino, reopened for
business on December 21, 1995, but closed in August 1996. In August 1998,
the Company relocated the casino vessel to Mobile, Alabama, where it was
moored at a terminal. On July 8, 1999, the Company contributed the idle
gaming vessel to Casino Ventures in exchange for $150 cash, a promissory
note of $1,350 and a membership interest in Casino Ventures. Under certain
circumstances, the Company's current 93% membership interest in Casino
Ventures may be subject to reduction and dilution. The consolidated
financial statements of the Company will include the amounts of Casino
Ventures until such time as the Company's membership interest decreases to
less than 50%. See "Future Operations" for a discussion of Casino Ventures'
operating plan for the vessel.
Future Operations
General:
The Company currently serves as a holding company and a vehicle to
effect acquisitions, whether by merger, exchange of capital stock,
acquisition of assets or other similar business combination (a "Business
Combination") with an operating business (an "Business"). The business
objective of the Company will be to affect a Business Combination with a
Business that the Company believes has steady profitability potential. The
Company intends to seek to utilize available cash, equity, debt or a
combination thereof in effecting a Business Combination. While the Company
may, under certain circumstances, explore possible Business Combinations
with more than one prospective Business, in all likelihood, until other
financing provides additional funds, or its development stage projects
progress, the Company may be able to effect only a single Business
Combination in accordance with its business objective, although there can be
no assurance that any such transaction will be effected.
Casino Ventures:
As discussed above, the Company, through its subsidiary, Jubilation
Lakeshore, contributed its inactive gaming vessel, Bayou Caddy's Jubilation
Casino ("Jubilation") to Casino Ventures in exchange for various
considerations. Under certain circumstances, the Company's current 93%
interest in Casino Ventures may be subject to dilution or other reduction.
Matthew Walker ("Mr. Walker"), a former director of the Company, is a member
in Casino Ventures and serves as its General Manager.
The Jubilation vessel has been relocated to Mhoon Landing in Tunica,
Mississippi ("Tunica"), where it is anticipated it will be refurbished and
operated as a gaming vessel. To fund such costs, Casino Ventures was
loaned $569, $876 and $605 from Mr. Walker in 2002, 2001 and 2000,
respectively, $172 from the Company in 2000 and $29 and $4 in 2001 and 2000,
respectively, from the holder of a $650 mortgage on the vessel. The $650
mortgage is currently in default. An additional $550 and $350,
respectively, was received by Casino Ventures in the years 2001 and 2000,
respectively, as future equity investments. During the nine months ended
September 30, 2002 and 2001, the Company capitalized $745 and $596,
respectively, of costs related to the relocation and refurbishing of the
vessel and improvements to its redeployment site in Tunica. An additional
$24 and $88 of start-up costs were incurred for the nine months ended
September 30, 2002 and 2001, respectively. The Company is not required to
make any further capital contributions to Casino Ventures.
On January 18, 2001, Casino Ventures received site approval for the
casino in Mhoon Landing from the Mississippi Gaming Commission. If the
project is completed as approved, the casino will be supported by enhanced
existing land-based infrastructure, including restaurant and lodging
facilities, as well as the requisite back of house service areas.
Casino Ventures' interest expense for the nine months ended September
30, 2002 and 2001, not eliminated in consolidation, amounted to $153 and
$113, respectively. This was attributable to interest on the $650 mortgage
note payable secured by the vessel and on the loans from Mr. Walker.
The Company is seeking to restructure Casino Ventures to generate
working capital for the Company and cure the default of the mortgage on its
gaming boat. There is no assurance that this restructuring will be
completed and that, if completed any significant amount of working capital
will be generated for the Company. Further, the success or the failure to
complete a restructuring could significantly affect management's estimate of
the recoverability of the value of the idle property and equipment of Casino
Ventures.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
(Unaudited)
(in thousands)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
For the nine months ended September 30, 2002, the Company had net
cash used in operating activities of $1,747. The net cash used was the
result of a net loss of $5,904 adjusted for the gain on the sale of
investment and related contract of $3,277, loss on investment in CDL of
$6,934, depreciation and amortization of $21, minority interest of $18 and
interest amortized on loan discount of $60. The decrease in working
capital included a net decrease in other current and non-current assets of
$170, an increase in accounts payable and other accrued expenses and other
current liabilities of $167 and an increase in payroll and related
liabilities of $100.
Cash provided by investing activities of $2,638 consisted of $3,277
of proceeds from the sale of investments and related management contract
and $639 of payments for property and equipment.
Cash used in financing activities of $425 was attributable to $678 of
proceeds from related party long-term debt; repayments of related party
long-term debt of $1,136 and receipts of $33 from the exercise of stock
options.
The Company has a working capital deficit of $7,972 at September 30,
2002. In addition, Casino Ventures, a subsidiary of the Company, is in
default of a mortgage on its gaming boat.
The Company currently has no operations. Future liquidity could come
from a debt or equity offering, future acquisition of new business
operations, future monitzation of remaining assets or certain tax
attributes or resolution of the future appeal of litigation (see Note 5 to
the financial statements.). The Company is seeking to restructure Casino
Ventures to generate working capital for the Company and cure the default
of the mortgage on its gaming boat. There is no assurance that this
restructuring will be completed and that, if completed any significant
amount of working capital will be generated for the Company. Further, the
success or the failure to complete a restructuring could significantly
affect management's estimate of the recoverability of the value of the
idle property and equipment of Casino Ventures.
If the Company is unable to secure the required funding or other
liquidity generating transaction on a timely basis, it could have a
material adverse effect on the Company's ability to meet its obligations
and continue as a going concern.
The Company condensed consolidated financial statements have been
presented on the basis that the Company is a going concern. Accordingly,
the consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities or any other
adjustments that might result should the Company be unable to continue as
a going concern.
Although the Company is subject to continuing litigation, the
ultimate outcome of which cannot be predicted, management believes any
additional liabilities that may result from pending litigation in excess
of insurance coverage will not be in an amount that will materially
increase the liabilities of the Company as presented in the attached
consolidated financial statements.
On April 30, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement 145, which, among other things, limits the classification
of gains and losses from extinguishment of debt. The Company does not
expect provisions of this statement to have a significant effect on the
Company's financial position or operating results.
In June 2002, FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities" (Statement No. 146).
Statement No. 146 requires that a liability for costs associated with exit
or disposal activities be recognized when the liability is incurred.
Existing generally accepted accounting principles provide for the
recognition of such costs at the date management's commitment to an exit
plan. In addition, Statement NO. 146 required that the liability be
measured at fair value and be adjusted for changes in estimated cash
flows. The provisions of the new standard are effective for exit or
disposal activities initiated after December 31, 2002. The Company has
not determined the effect that Statement No. 146 will have on the
financial statements.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
(Unaudited)
(in thousands)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of the
Company have made an evaluation of the disclosure controls and procedures
relating to the quarterly report on Form 10QSB for the period ended
September 30, 2002 as filed with the Securities and Exchange Commission
and have judged such controls and procedures to be effective as of
September 30, 2002 (the "evaluation date"). There have not been any
significant changes in the internal controls of the company or other
factors that could significantly affect internal controls relating to the
Company since the evaluation date.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K/A for
the year ended December 31, 2001 on file with the Securities and Exchange
Commission and Forms 8-K filed on August 14, 2002, August 22, 2002 and
August 29, 2002, pertaining to the certification letter for the 2nd
Quarter Form 10QSB, the dismissal of CDL's case against Park Place
Entertainment Corporation and CDL's interest to hire an investment banker
to explore opportunities regarding the Monticello Raceway, respectively.
CDL has filed a notice of appeal with respect to the dismissal of its
case against PPE and has retained the firm of Mayer, Brown, Rowe & Maw to
represent it in the appeal. It is expected that briefs in the appeal will
be filed within the next four months and that a decision on the appeal
should be rendered within eighteen months. Although management believes
that CDL and its related parties have meritorious arguments in the appeal,
no assurance can be given that the appeal will be successful or that, even
if the appeal is successful as a whole or in part, the litigation will
ultimately be resolved in a manner advantageous to the Company.
The Company has been advised by CDL that, subsequent to retaining
CIBC World Markets Corporation, it has notified the representatives of the
Constitutional Government of the Mohawk Tribe that it does not intend to
continue to pursue the development of a Mohawk casino at the Raceway and
that it is in negotiations with another federally recognized Native
American tribe in New York and various casino management and development
entities with respect to the site originally planned to be used for the
Mohawks. The development of a casino at the site will require
consummation of arrangements with these parties and various reviews and
approvals. Although the Company believes that such reviews and approvals
will be able to be obtained more expeditiously because of the prior
applications that have been made with respect to the site, no assurance
can be given that such arrangement will be entered into or that any of
such approvals will be obtained.
In January 1996, the Company was named as a defendant in an action
based on the theory of "liquor liability" for the service of alcohol to a
customer. The case was settled in 2002 with funds substantially provided
by the Company's insurance carrier.
The Company was named as a defendant in an action brought by Global
Trading Group, Inc. in the U. S. District Court for the Northern District
of Mississippi. The plaintiff alleged entitlement to a finder's fee
arising out of the sale of the Jubilee Casino and sought contractual and
compensatory damages of $1,563, punitive damages of $10,000 and costs,
attorneys' fees and interest. In March 2002, the Company reached a
settlement on this case for approximately $118.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
1. August 14, 2002 is the certification letter for the 2nd Quarter 2002
Form 10 QSB;
2. August 22, 2002 reporting the dismissal of Catskill Development LLC's
case against Park Place Entertainment Corporation; and
3. August 29, 2002 press release reporting Catskill Development LLC's
desire to hire an investment banker to explore opportunities regarding
the Monticello Raceway.
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 14, 2002 /s/ ROBERT A. BERMAN
Robert A. Berman
Chairman and
Chief Executive Officer
Dated: November 14, 2002 /s/ SCOTT A. KANIEWSKI
Scott A. Kaniewski
Chief Financial Officer