10-Q 1 ed10q3rd01.txt ALPHA HOSPITALITY CORPORATION 3RD QTR 10Q U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 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 incorporation or organization) Identification Number) 12 East 49th Street, New York, NY 10017 (Address of principal executive offices) (212) 750-3500 (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 13, 2001 Common Stock, $0.01 par value: 2,542,284 shares ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 . . . . . . 1 Consolidated Statements of Operations for the Nine Months Ended September 30, 2001 and 2000 . . . . . . . . 2 Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2000 . . 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 . . 4-5 Notes to Consolidated Financial Statements . 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 14-20 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . 21 Signatures . . . . . . . . . . . 22 All items that are not applicable or to which the answer is egative have been omitted from this report. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
September 30, December 31, 2001 2000 (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash . . . . . . . . . . . . . . . . .$ 139 $ 1,263 Other current assets. . . . . . . . . . . 330 696 Total current assets. . . . . . . . . . . 469 1,959 PROPERTY AND EQUIPMENT, net. . . . . . . . . 1,957 2,311 ASSETS OF CASINO VENTURES. . . . . . . . . . .7,029 6,448 DEPOSITS AND OTHER ASSETS. . . . . . . . . . .3,259 2,815 $ 12,714 $ 13,533 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses. . $ 1,476 $ 1,329 Long-term debt, current maturity . . . . 2,063 Accrued payroll and related liabilities. 140 178 Current liabilities of Casino Ventures . 1,661 1,597 Total current liabilities . . . . . . 5,340 3,104 LONG-TERM DEBT, less current maturity. . . 1,121 2,473 OTHER LIABILITIES. . . . . . . . . . . . . 505 2,490 LONG-TERM LIABILITIES OF CASINO VENTURES . 1,276 804 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST. . . . . . . . . . . . . 889 1,086 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 7,500 shares authorized, 2,506 and 2,075 issued and outstanding in 2001 and 2000, respectively 25 21 Preferred stock, 5,000 shares authorized: Series B, $.01 par value, 821 issued and outstanding . . 8 8 Series C, $.01 par value, 135 issued and outstanding . . 1 1 Series D, $.01 par value, 1.5 and 2.1 issued and outstanding in 2001 and 2000, respectively . . . . 0 0 Common stock payable . . . . . . . . . . 3,443 -- Capital in excess of par value . . . . . 89,235 86,145 Accumulated deficit. . . . . . . . . . . (89,129) (82,599) Total stockholders' equity. . . . . . 3,583 3,576 $ 12,714 $ 13,533
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except for per share data)
Nine Months Ended September 30, 2001 2000 REVENUES: Casino . . . . $ 2,657 $ -- Food and beverage, retail and other . . . 313 187 2,970 187 COSTS AND EXPENSES: Casino . . . . . . . . 1,577 -- Food and beverage, retail and other. . . . . . . 65 -- Noncash compensation. . . . . . . . . . . -- (3,251) Selling, general and administrative . . . 4,528 1,206 Depreciation and amortization . . . . . . 572 33 Pre-opening and development costs . . . . 88 699 Total costs and expenses . . . . . . . 6,830 (1,313) OTHER INCOME (EXPENSE): Interest income. . . . . . . . . . . . . . . . . 8 144 Interest expense . . . . . . . . . . . . . . . . (324) (143) (316) 1 NET INCOME (LOSS) BEFORE MINORITY INTEREST . . . . (4,176) 1,501 MINORITY INTEREST. . . . . . . . . . . . . . . . 747 -- NET INCOME (LOSS). . . . . . . . . . . . . . . . . (3,429) 1,501 DIVIDENDS ON PREFERRED STOCK. . . . . . . . 3,097 6,194 NET LOSS APPLICABLE TO COMMON SHARES. . . . (6,526) (4,693) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. 2,171 1,815 NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ ( 3.01) $ (2.59)
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except for per share data)
Three Months Ended September 30, 2001 2000 REVENUES: Casino . . . . $ 575 $ -- Food and beverage, retail and other . . . 106 132 681 132 COSTS AND EXPENSES: Casino . . . . . . . . 544 -- Food and beverage, retail and other. . . . . . . 13 -- Noncash compensation. . . . . . . . . . . -- (465) Selling, general and administrative . . . 1,455 351 Depreciation and amortization . . . . . . 187 12 Pre-opening and development costs . . . . -- 365 Total costs and expenses . . . . . . . 2,199 263 OTHER INCOME (EXPENSE): Interest income. . . . . . . . . . . . . . . . . -- 72 Interest expense . . . . . . . . . . . . . . . . (144) (61) (144) 11 NET INCOME (LOSS) BEFORE MINORITY INTEREST . . . . (1,662) (120) MINORITY INTEREST. . . . . . . . . . . . . . . . . 316 -- NET LOSS . . . . .(1,346) (120) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. 2,466 2,021 NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.55) $ (.06)
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended September 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (3,429) $ 1,501 Adjustments to reconcile net income (loss) to net cash used in operating activities: Minority interest. . . . . . . . . . (747) -- Depreciation and amortization. . . . 572 33 Noncash compensation . . . . . . . . -- (3,251) Interest amortized on loan discount. 54 12 Changes in operating assets and liabilities: Other current assets. . . . . . . 376 (374) Accounts payable and accrued expenses . . . . . . . . . . . (21) (373) Accrued payroll and related liabilities. (38) 158 NET CASH USED IN OPERATING ACTIVITIES. . . . . . . (3,233) (2,294) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases for property and equipment . . . . . . (793) (2) (Increase) decrease in deposits and other assets . (435) (1,930) NET CASH USED IN INVESTING ACTIVITIES. . . . . . . (1,228) (1,932) CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributed by holders of minority interest. . . . . . 550 Proceeds from sale of preferred stock, net . . . . -- 3,867 Proceeds from (adjustment for previously issued) exercised warrants and stock options . . . . . . . . . . . . . . (4) 143 Proceeds from long-term debt . . . . . . . . . . 2,791 1,218 NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . 3,337 5,228 NET INCREASE (DECREASE) IN CASH. . . . . . . . . . (1,124) 1,002 CASH, beginning of period. . . . . . . . . . . . . 1,263 1,464 CASH, end of period. . . . . . . . . . . . . . . $ 139 $ 2,466
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended September 30, 2001 2000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest during the period $ 57 $ 10 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans receivable related to stock issued in connection with the exercise of stock options $ -- $ 145 Agreement to issue shares of the Company's common stock in settlement of liabilities to Bryanston: Long-term debt $ 1,407 Accounts payable and accrued expenses 42 Other liabilities 455 $ 1,904 Agreement to issue shares of the Company's common stock in settlement of accrued payroll $ 1,530 Agreement to issue shares of the Company's common stock in exchange for certain interests $ 9
See accompanying notes to consolidated financial statements ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands) NOTE 1. NATURE OF BUSINESS Alpha Hospitality Corporation (the "Company"), incorporated in Delaware on March 19, 1993, through Alpha Monticello, Inc. ("AMI"), a wholly owned subsidiary, has 50% ownership interest (see Note 7) in the parimutuel operations of Monticello Raceway in Monticello, New York. AMI has an approximate 57% interest in the casino related revenues derived from the management of any Native American casino developed at the Monticello Raceway property (see Note 7). A majority of the Company's 2001 revenues are generated by a majority owned subsidiary, Alpha Florida Entertainment, L.L.C. ("Alpha Florida LLC"). In November 2000, Alpha Florida LLC, launched its gaming day cruise vessel, the Ella Star Casino ("Ella Star"), operations out of Miami-Dade County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES Financial Statements - The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. All adjustments that are of a normal and recurring nature and, in the opinion of management, necessary for a fair presentation have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2000, included in the Company's annual report on Form10-K for the year ended December 31, 2000. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly- owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Cash. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on cash. Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives: Estimated Useful Assets Lives Boat and improvements 20 years Leasehold and improvements 10-20 years Gaming equipment 5-7 years Furniture, fixtures and equipment 5-7 years Investments. The Company's 19% interest in a limited partnership is being accounted for under the cost method of accounting. The Company's 5% investment in real property holdings on Monticello Raceway is being accounted for under the cost method of accounting. Pre-opening and Development Costs. The Company incurs costs in connection with start-up casino operations and joint ventures. The Company's policy is to expense pre-opening costs as incurred. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited) (in thousands) NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings (Loss) Per Common Share. Earnings (loss) per common share is based on the weighted average number of common shares outstanding. Casino Revenue. Casino revenue is the net win from gaming activities, which is the difference between gaming wagers less the amount paid out to patrons. Promotional Allowances. Promotional allowances primarily consists of food and beverage furnished gratuitously to customers. Revenues do not include the retail amount of food and beverage of $616 and $253, respectively, for the nine and three months ended September 30, 2001 provided gratuitously to customers. The cost of these items of $337 and $78, respectively, for the nine and three 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. Impairment of Long-Lived Assets. The Company periodically reviews the carrying value of its long-lived assets in relation to historical results, as well as management's best estimate of future trends, events and overall business climate. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would then estimate the future cash flows (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value. Reclassifications. Certain prior year amounts have been reclassified to conform to the 2001 presentation. New accounting pronouncements. In July 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards ("SFAS") Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for the impairment applying a fair-value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. The Company is in the process of determining the impact of these pronouncements on its consolidated financial position and results of operations. NOTE 3. PROPERTY AND EQUIPMENT Details of property and equipment at September 30, 2001 and December 31, 2000 were as follows (see Note 6) :
2001 2000 Boat and improvements . . . . . . . . $ 9,757 $ 9,034 Leasehold improvements. . . . . . . . 102 88 Gaming equipment. . . . . . . . . . . 2,265 2,224 Furniture, fixtures and equipment . . 1,975 1,970 14,099 13,316 Less accumulated depreciation and amortization. . 5,167 4,622 Less amounts included in assets of Casino Ventures 6,975 6,383 $ 1,957 $ 2,311
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited) (in thousands) NOTE 4. LONG-TERM DEBT Long-term debt at September 30, 2001 and December 31, 2000 was comprised of the following:
Interest Rate 2001 2000 Loan payable, due July 31, 2003 . . . . 4% $ 1,120 $ 1,066 Loan payable to a director of the Company, due in October 2002. . . . . . . 8% 1,276 804 Note payable to Bryanston Group, Inc. ("Bryanston"), an affiliate, with interest payable monthly and principal payments, commencing January 1, 2001, not to exceed $1,000 per annum, with any unpaid balance due at maturity in April 2005. Bryanston has agreed, subject to certain terms and conditions, to subordinate its rights to repayment of principal and to payment of cash dividends to the prior payment of amounts due to the holders of the preferred stock, series D. In June 2001, the Company agreed to satisfy this obligation, including accrued interest of $42 through the issuance of shares of the Company's common stock (see Notes 7 and 8) . . . . . 8% 1,407 Loan payable to Bryanston, due on demand. . . . . 8% 2,063 -- 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 Loan payable to minority member of Alpha Florida, L.L.C. Principal and interest payable prior to any distributions of earnings from Alpha Florida, L.L.C. Prime 250 Promissory note payable, due March 2001 . . . . . . 6% 34 29 5,393 3,956 Less current portion. . . . . 2,063 Less amounts included in liabilities of Casino Ventures . 2,209 1,483 $ 1,121 $ 2,473
ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Unaudited) (in thousands) NOTE 4. LONG-TERM DEBT (CONTINUED) Aggregate future required principal payments are approximately as follows: Twelve months ending September 30: 2002. . . . . . . . . . . . . . . . . $ 2,997 2003. . . . . . . . . . . . . . . . . 2,526 2004. . . . . . . . . . . . . . . . . -- 2005. . . . . . . . . . . . . . . . . -- 2006. . . . . . . . . . . . . . . . . -- $ 5,523 NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES At September 30, 2001 and December 31, 2000, accounts payable and accrued expenses were comprised of the following:
2001 2000 Property and equipment. . . . . $ 662 $ 1,110 Insurance . . . . . . . . . . . 150 167 Accrued professional fees . . . 307 280 Accrued interest. . . . . . . . 252 114 Other . . . . . . . . . . . . . 833 576 Less amounts included in liabilities of Casino Ventures (see Note 6). . . . . . . . (728) (918) $ 1,476 $ 1,329
NOTE 6. INVESTMENT IN CASINO VENTURES, L.L.C. On July 8, 1999, the Company contributed its inactive vessel, Jubilation, to Casino Ventures (see Notes 4 and 5). At the time of the contribution, the vessel (including gaming equipment, furniture and other items) had a net book value of $4,149. In exchange, the Company received $150 in cash, a promissory note of $1,350 and a membership interest in Casino Ventures. The promissory note accrues interest at an initial rate of 8.75% per annum, payable quarterly, with the principal balance due July 8, 2002. The initial interest rate of 8.75% is adjusted daily to prime plus one percent with a minimum rate of 8.75%. Through September 30, 2001, there have not been any payments of interest. Accordingly, the note is due on demand. The consolidated financial statements of the Company include the accounts of Casino Ventures until such time, if any, as the Company's membership interest decreases from its current amount of 93% to less than 50%. Accordingly, all transactions, including the $1,350 promissory note, have been eliminated in consolidation. A director of the Company is a member in Casino Ventures and serves as its General Manager. That director advanced funds to Casino Ventures in 1999, 2000 and 2001 that were used for site and vessel improvements. As of September 30, 2001, the loan payable to that director amounted to $1,276. The loan accrues interest at 8% and matures October 2002. During the nine months ended September 30, 2001, the Company capitalized $596 of costs related to the refurbishment of the vessel and improvement to its site in Tunica, Mississippi and incurred $88 of start-up costs. Additionally, during the year ended December 31, 1999, the vessel was used as collateral to obtain funding of $650 towards the aforementioned costs of Casino Ventures. Total interest expense on Casino Ventures debt for the nine months ended September 30, 2001 amounted to $113. Pursuant to an amendment agreement effective April 18, 2000, the total maximum borrowings allowed to be collateralized by the vessel is $1,000. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) NOTE 6. INVESTMENT IN CASINO VENTURES, L.L.C. (CONTINUED) At September 30, 2001and December 31, 2000, assets and liabilities of Casino Ventures consisted of the following:
2001 2000 Assets: Property and equipment $ 6,975 $ 6,383 Deposits 54 54 Other -- 11 $ 7,029 $ 6,448 Current liabilities: Long-term liability, current maturities 933 679 Accounts payable and accrued expenses 728 918 $ 1,661 $ 1,597 Long-term liabilities, Long-term debt, less current maturities $ 1,276 $ 804
NOTE 7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company, through its wholly owned subsidiary, AMI, was party to a General Memorandum of Understanding (the "Memorandum") with Catskill Development, LLC ("CDL" and, collectively with AMI, the "Parties") dated December 1, 1995, which among other things, provided for the establishment of Mohawk Management, LLC ("MML"), a New York limited liability company, for the purpose of entering into an agreement to manage a proposed casino on land to be owned by the St. Regis Mohawk Indian Tribe (the "Mohawk Tribe"). The Memorandum also sets forth the general terms for the funding and management obligations of CDL (25% owned by Bryanston, 75% owned by third parties) and AMI with regard to MML. In January 1996, MML was formed with each of CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML entered into a Gaming Facility Management Agreement with the Mohawk Tribe (the "Management Contract") for the management of a casino to be built on the current site of the Monticello Raceway in Monticello, New York (the "Monticello Casino"). Among other things, the Management Contract provided MML with the exclusive right to manage the Monticello Casino for seven (7) years from its opening and to receive certain fees for the provision of management and related services. By its terms, the Memorandum between CDL and AMI terminated on December 31, 1998, since all of the governmental approvals necessary for the construction and operation of the Monticello Casino were not obtained by MML. The Management Contract between MML and the Mohawk Tribe contains no such provision. Additionally, the Memorandum was silent as to the effect of such termination on the continued existence of MML, on the Parties' respective 50% membership interests therein or on the Management Contract. On December 28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to resolve certain disputes between the Parties. In July 2000, the Parties completed a final settlement agreement whereby AMI will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing from the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitled AMI to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe, while the settlement agreement covers all prospective federally recognized Native American Nations. Accordingly, Alpha Casino Management Inc. ("ACM"), a wholly owned subsidiary, and Monticello Casino Management, L.L.C. ("MCM"), similarly owned a s MML, were formed to facilitate such potential non-Mohawk Tribe arrangements. As part of and in conjunction with such settlement, AMI acquired five percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $455 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 230 acres of land. In June 2001, the Company agreed to satisfy this obligation through the issuance of shares of the Company's common stock (see Note 8) The $455 is included in other assets on the consolidated balance sheet as of September 30, 2001. Additionally, Bryanston transferred its 25% ownership in the ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) NOTE 7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED) Raceway's parimutuel operations to AMI. Under the previous agreement, AMI did not participate in any of these sources of revenue. In connection with the final settlement agreement, certain CDL members (Americas Tower Partners and Monticello Realty, LLC) were granted the right to receive $5,000, a "Senior Obligation" dated October 1999, as referenced in the final settlement agreement. Additionally, similar to the Memorandum, the final settlement agreement identified capital contributions made by all CDL members aggregating $10,000, plus accrued interest in excess of $7,000, which must be paid prior to other cash distributions, except the Senior Obligation, plus accrued interest in excess of $1,000, including the Company's revenue participation discussed in the preceding paragraphs. On April 6, 2000, in a letter to New York Governor George Pataki, the U.S. Department of the Interior and its Bureau of Indian Affairs (the "Department") forwarded its initial Two-Part Determination, which included the Department's findings that: 1) the Monticello Casino was in the best interests of the Mohawk Tribe; and 2) there was local support for the project. The Department has requested the Governor's concurrence in its findings. Such concurrence is an integral step in establishing the trust lands on which the proposed casino would be developed. On April 19, 2000, MML received a letter from the National Indian Gaming Commission asking for additional information as it was completing its review of the underlying management and development agreements. On June 5, 2000, MML notified the Department of the purported abandonment of the project by the Mohawk Tribe. On April 22, 2000, the Company was made aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment ("PPE"), which agreement (with two irrelevant exceptions) would purportedly give PPE the exclusive rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. The validity of the aforementioned purported agreement is not clear at this time. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed in United States District Court, Southern District of New York (the "Court") against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs' proposed casino in Monticello. On May 14, 2001, the Plaintiffs received notification from the Court that the Court had allowed the claim for interference with prospective business relations to proceed to trial. While dismissing other tortious interference claims with contracts, in July 2001, the Court revised a portion of its earlier ruling and concluded that the Land Purchase Agreement constituted a legally enforceable contract, allowing a claim for tortious interference with a contract to proceed. The case is now in the discovery phase and, at this point, a trial date has not been set by the Court. In August 2001, the Company reached a definitive agreement to acquire: i) an additional approximate 17% interest in casino related revenues derived from the management of any Native American casino facility development at Monticello Raceway; and ii) an additional 25% interest in Monticello Raceway's parimutuel operations. This transaction, which is subject to approval by the Board of Directors, shareholders and others, would be effectuated by the issuance of approximately 940 shares of the Company's common stock. Because the Company's interest in the Monticello project constitutes the Company's most significant interest and operations, and because the foregoing transaction effectively would increase the Company's interest in that project, the Company is of the view that the value of the common stock it would issue in that transaction reflects the value of the interests it would receive. Accordingly, rather perform a separate valuation of the interest it would acquire, the Company determined it appropriate to book the consideration it would receive at an amount equal to the par value of common stock it would issue, which is $9. Such amount is included in deposits and other assets on the September 30, 2001 consolidated balance sheet. Further, in connection with the transaction, the Company would enter employment agreements with principals of the seller providing for annual aggregate compensation of $500, subject to certain performance requirements, and options to purchase up to 556 shares of the Company's common stock at $22.50 per share. On October 31, 2001, the Governor of New York signed into law a gambling extension bill which, among other provisions, empowers the Governor to enter into up to three casino compacts with federally recognized tribes to develop class III gaming operations and allows several of the state's racetracks, including Monticello Raceway, to install video lottery terminals ("VLTs"). The Company anticipates that the ability to operate VLTs could have a positive impact on the operations at the Monticello Raceway. Included in deposits and other assets as of September 30, 2001 and December 31, 2000, the Company capitalized $2,612 and $2,047, respectively, towards the design, architecture and other costs of the development plans for the proposed ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) NOTE 7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED) Monticello Casino. The Company is obligated under an employment contract with its Chairman and Chief Executive Officer ("CEO").Under this agreement, the Company accrues deferred compensation of $250 per year. The agreement is automatically renewable for successive twelve-month periods, unless either party shall advise the other on ninety days written notice of his or its intention not to extend the term of the employment. In the event of termination of employment, the CEO will be retained to provide consulting services for two years at $175 per annum. At September 30, 2001, the CEO was owed $1,530 pursuant to such employment contract giving effect to his agreement to waive 2000 and 2001 salary. Further, on September 30, 2001, the CEO agreed to be paid only in common stock and rescind any previous conversion agreements. Hence, at September 30, 2001, the Company has reclassified accrued compensation of $1,530 to common stock payable. To comply with State requirements regarding the Company's 19% partnership interest in Greenville Casino Partners, L.P., the Company has received a finding of suitability from the Mississippi Gaming Commission. The Company's finding of suitability was renewed in October 2001 for a three-year period. The Company is a party to legal actions that have arisen in the normal course of business. In the opinion of the Company's management, the resolution of these other matters will not have a material or adverse effect on the consolidated financial position, results of operations or cash flows of the Company. NOTE 8. STOCKHOLDERS' EQUITY Activity The changes in stockholders' equity during the nine months ended September 30, 2001 consisted primarily of the net loss of $3,429, the conversion of .60 shares of the Series D Preferred Stock into 114 shares of the Company's common stock at an average exercise price of $5.80 per common share and the issuance of 317 shares of the Company's common stock in connection with dividends on cumulative Series B Preferred Stock (see below). Additionally, in June 2001, shareholder approval was received to amend the Company's Certificate of Incorporation, which provided for a 1-for-10 reverse split of the Company's common stock. Accordingly, common stock and per share data has been retroactively restated to give effect to the reverse stock split. On June 13, 2001, the Company satisfied 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. In August 2001, the Company agreed to issue 940 shares of its common stock in exchange for an increase in certain casino and other existing interests relative to Monticello Raceway (see Note 7). Additionally, as of September 30, 2001, the Company agreed to issue common stock of the Company in payment of deferred compensation payable to its CEO(see Note 7). Descriptions of Preferred Stock and Dividends The Company's Series B Preferred Stock has voting rights of 8 votes per preferred share (retroactively restated to .8 votes per preferred share to give effect to the 1-for-10 reverse split), is convertible to 8 shares of common stock (retroactively restated to .8 shares of common stock to give effect to the 1-for-10 reverse split) for each share of preferred stock and carries a dividend of $2.90 per share, payable quarterly, which increases to $3.77 per share if the cash dividend is not paid within 30 days of the end of each quarter. In the event the dividend is not paid at the end of the Company's fiscal year (December 31), the dividend will be payable in common stock. In April 2001, the Company issued 317 additional shares of the Company's common stock in lieu of the dividend owing for the year 2000 to the holders fo the Company's Series B Preferred Stock. As of November 12, 2001, dividends in arrears on the Series B Preferred Stock amounted to approximately $2,322. The Series C Preferred Stock has voting rights of 24 votes per preferred share (retroactively restated to 2.4 votes per preferred share to give effect to the 1-for-10 reverse split), is convertible into 24 shares of common stock (retroactively restated to 2.4 shares of common stock to give effect to the 1-for-10 reverse split) and carries a dividend of $5.65 per share. In addition, the terms of the preferred shares include a provision allowing the Company the option of calling the preferred shares based upon the occurrence of certain capital events that realize a profit in excess of $5,000. In the event the dividend is not paid ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In thousands, except for per share data) NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED) Descriptions of Preferred Stock and Dividends (continued) at the end of the Company's fiscal year (December 31), the dividend will be payable in common stock. As of November 12, 2001, dividends in arrears on the Series C Preferred Stock amounted to approximately 115 shares in the aggregate, of the Company's common stock for the years 1998, 1999 and 2000 and $573 for 2001. 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 common stock by February 8, 2005, there will be a mandatory redemption at that time, payable in shares of the Company's common stock at the same aforementioned conversion price. The dividends are payable in arrears on the earlier of the date of conversion of a share of Series D Preferred Stock or the date of redemption. At the Company's option, the dividends are payable in the form of cash or shares of the Company's common stock. The maximum aggregate total number of shares of the Company's common stock issuable relative to the conversions and payments of dividends is 330 shares. In the event such limitation prevents the conversion of any Series D Preferred Stock, the dividend rate will increase to 15% per annum to be payable in cash in arrears, semi-annually on September 30 and December 31. The Series D Preferred Stock has no voting rights prior to its conversion into common stock. NOTE 9. LIQUIDITY The Company has incurred an accumulated deficit and current net losses of $89,129 and 3,429, respectively, used $3,106 in operations during 2001 and has a working capital deficit (excluding Casino Ventures which is not expected to be paid by the Company during the next twelve months) of approximately $3,210 at September 30, 2001. Since the November 2000 launching of the Ella Star, the Company has been working to overcome the effects of unusually poor weather conditions in south Florida, a late season hurricane that just missed the Miami area and severe bridge construction related delays on the Haulover Bridge, the main artery to the casino's site. This, coupled with start-up activities and general learning curves, has negatively impacted the casino's operations. While the Company would anticipate improved operations in 2002, it is also considering the divestiture of the Ella Star investment. As a consequence of the general downturn of the travel and tourism industry, particularly following the events of September 11, 2001, and in view of the prior unsatisfactory historical operating results of the Ella Star, there can be no assurance that the financial performance of the Ella Star will improve. The Company has not been able to finance its current cash needs out of the revenues from its operating businesses; instead, the Company has been meeting its current cash needs through advances from Bryanston (approximately $611 during the quarter ended September 30, 2001). Bryanston is an affiliate of the Company of which the Chairman and CEO's spouse is a 50% stockholder. Bryanston is under no obligation to make these advances and there can be no assurance that Bryanston will make any future advances to the Company. In light of the Company's deteriorating financial condition and unprofitable Ella Star operations, the Company has been seeking other working capital alternatives, including the sale of its 19% limited partnership interest in GCP, which the Company believes, based on its discussions with an interested party, has increased in value significantly. Further, the Company has been aggressively pursuing investors and/or buyers relative to Casino Ventures to provide a cash infusion and effectively reduce or eliminate its membership interest. Finally, in connection with the August 2001 transaction (see Note 7), the Company entered into employment agreements with two individuals who will assist the Company in its ongoing efforts to raise additional debt or equity financing. Liquidity is dependent upon the Company's ability to attain profitable operations and raise capital by the preceding or other means. There can be no assurances that the Company's efforts will be successful. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the historical consolidated financial condition and results of the operations of the Company should be read in conjunction with the Consolidated Financial Statements and the Notes to such consolidated financial statements included elsewhere in this Form 10-Q. This Form 10-Q 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 was notified by Miami-Dade County (the "County") that it had received the final approval on a lease to dock and operate a day cruise vessel out of the County's Haulover Beach Park and Marina adjacent to Bal Harbour, Florida. The exclusive lease is for five years. The County may renew this exclusive agreement for two periods of five years each. For this exclusivity, the Company has agreed to pay the County a minimum guaranteed monthly base rent, a per- passenger fee and a percentage of retail merchandise sold in the facility. The lease commenced on November 26, 2000, the date of the vessel's inaugural cruise. On June 15, 2000, the Company entered into a Charter Agreement that required that $1,250,000, including the application of a previously issued $400,000 promissory note, be paid towards the completion of construction of the vessel and monthly payments over a three-year period commencing upon the completion. The monthly payments are $41,000 during the first year and $46,667 during years two and three, with an additional surcharge for each month of the three year period amounting to one dollar per each passenger during each previous month. At the completion of the three-year period, the Company has the option to purchase the vessel at a cost of $4,500,000, towards which all previous construction payments would be applied. In November 2000, the interior design and construction was completed on the vessel, the Ella Star, with the inaugural cruise taking place on November 26, 2000 The Ella Star has an inherent competitive advantage as it has the fastest route to the three-mile limit, putting its passengers in gaming action in approximately 20 minutes. The vessel's first two decks provide for 7,000 square feet of Las Vegas style gaming with 165 slot machines and 20 table games. The third deck features the Star Cafe with seating for 150 people. Included in property and equipment at September 30, 2001 is $1,972,000 (including $1,250,000 paid pursuant to the Charter Agreement) of payments related to the construction of the vessel and related improvements). On September 7, 2000, the Company entered into a three-year agreement for the rental of certain furniture and equipment to be used relative to the gaming day cruise vessel. Rental payments, which commenced in November 2000 and December 2000, are approximately $36,000 per month. In October 2000, Alpha Florida merged into Alpha Florida LLC. Also, in October 2000, the Company received $900,000 from an unrelated third party and an additional $71,000 of pre-opening expenses paid directly by that third party, in exchange for a 25% interest in Alpha Florida LLC, while retaining the remaining 75% interest. In May 2001, the Company received a loan of $250,000 from the same third party. In addition, the Company earns a monthly management fee amounting to 5% of gross revenues. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operation: The following table sets forth the statements of operations for Alpha Florida's Ella Star before intercompany charges, minority interest and pre-opening expenses for the nine and three months ended September 30, 2001 (dollar amounts in thousands):
Nine Months Ended Three Months Ended September 30, 2001 September 30, 2001 Revenues: Casino . . . . . . . . . . . . $ 2,657 $ 575 Food and beverage, retail and other 105 24 Total revenues . . . . . . . 2,762 599 Operating expenses: Casino . . . . . . . . . . . . 1,577 544 Food and beverage, retail and other 65 13 Selling, general and administrative 3,342 1,158 Depreciation and amortization 540 180 Total operating expenses . . 5,524 1,895 Loss before intercompany charges, interest, minority interest and pre-opening expenses $ (2,762) $ (1,296)
The Ella Star continued to have its revenues negatively impacted by the affects of unusually poor weather conditions in south Florida, a late season hurricane that just missed the Miami area and severe bridge construction related delays on the Haulover Bridge, the main artery to the casino's site. Because of the severe weather the Ella Star was forced to cancel several cruises and the attendance on those cruises that did sail in the face of poor weather or predictions of poor weather were negatively impacted. To partially ameliorate the negative impact of these conditions, the Company pulled the vessel out of the water for several days in January 2001 and installed bilge keel stabilizers at a cost to the operation in excess of $100,000. The retrofitting of the stabilizers improved passenger comfort during rough weather. Casino expenses, representing 59% and 95 % of casino revenues included $819 and $306 of payroll and related expenses, $337 and $78 of expenses related to food and beverage provided gratuitously to customers and other expenses of $421 and $160 for the nine and three months ended September 30, 2001, respectively. Selling, general and administrative expenses for the nine and three months ended September 30, 2001 include $1,045 and $367, respectively, of payroll and related expenses, $664 and $209, respectively, of advertising and marketing expenses, $1,020 and $359, respectively of dock, vessel, equipment and office rental expenses, $388 and $136, respectively, of insurance, utilities, fuel and other maintenance costs and the remaining $225 and $87, respectively, for professional fees, office expenses and other miscellaneous general and administrative expenses. Alpha Gulf: In 1998, the Company sold substantially all of the assets of Alpha Gulf and Greenville Hotel to GCP. In exchange for such assets, the Company received, among other consideration, a 19% limited partnership interest in GCP. However, shortly after the sale, the Company was advised by GCP that it had incurred significant operating losses resulting in substantial working capital and partners' deficiencies. In light of these developments, the Company adjusted the carrying value of its limited partnership interest in GCP to zero during the fourth quarter of 1998. The Company has been advised by GCP that its debt service has been modified during the quarter ended September 30, 2001, which GCP believes will allow for profitable operations in the future. However, there can be no assurance that the Company will ever realize any benefit from its 19% limited partnership interest. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Jubilation Lakeshore: On July 8, 1999, the Company contributed the idle gaming vessel to Casino Ventures in exchange for $150,000 cash, a promissory note of $1,350,000 plus a membership interest in Casino Ventures. Upon repayment of the promissory note and other funding to the venture, the Company's membership interest in Casino Ventures decreases from its current percentage of 93% to 15%. The consolidated financial statements of the Company will include the amounts of Casino Ventures until such time as the Company's membership interest decreases to less than 50%. See "Future Operations" for a discussion of Casino Ventures' operating plan for the vessel. The continuing costs (exclusive of Casino Ventures - see "Future Operations- Casino Ventures") incurred during both the nine months ended September 30, 2001 and 2000 for administration were $25,000. Interest expense for both the nine months ended September 30, 2001 and 2000 amounted to $51,000 and $84,000, respectively, which related to a note payable to Bryanston, which was satisfied through the issuance of the Company's common stock on June 13, 2001. Other: In connection with the sale of the hotel on March 2, 1998, the Company entered into a supervisory management agreement with GCP for a term of ten (10) years whereby the Company will be entitled to receive $100,000 per annum for management services. The Company recorded $42,000 of management fees during the three months ended Spetember 30, 2001, which represents amounts received during the period for past services. During the nine and three months ended September 30, 2001, the Company's share of operations from Monticello Raceway amounted to $119,000 and $85,000, respectively. (See Future Operations - Monticello). Future Operations General: Proposals or prospects for new casinos, other gaming activities or other opportunities may be presented to the Company, or the Company may otherwise become aware of such opportunities (any such new casino, other gaming activities or other opportunities being hereinafter sometimes referred to as "New Opportunities"). The Company will continue to investigate and evaluate New Opportunities and, subject to available resources, may choose to pursue and develop one or more New Opportunities if the same is deemed to be in the best interest of the Company and its stockholders. However, there can be no assurance that any New Opportunity will be presented to, or otherwise come to the attention of, the Company, that the Company will elect to pursue or develop any New Opportunity or that any New Opportunity that the Company may elect to pursue or develop will actually come to fruition or (even if brought to fruition) will be profitable. Prior to the opening of the Ella Star, the Company had been, since March 1998, effectively transformed to serve as a holding company, concentrating its efforts on the Native American casino facility development at the Monticello Raceway and as a vehicle to effect acquisitions, whether by merger, exchange of capital stock, acquisition of assets or other similar business combination (a "Business Combination") with an operating business (an "Acquired Business"). Excepting the Ella Star's operation, to the extent the Company's financial and other resources are not devoted to, or reserved for the development at Monticello or the development of any New Opportunity or other operations, the business objective of the Company will be to effect a Business Combination with an Acquired Business that the Company believes has significant growth potential. The Company intends to seek to utilize available cash, equity, debt or a combination thereof in effecting a Business Combination. While the Company may, under certain circumstances, explore possible Business Combinations with more than one prospective Acquired Business, in all likelihood, until other financing provides additional funds, or its stature matures, the Company may be able to effect only a single Business Combination in accordance with its business objective, although there can be no assurance that any such transaction will be effected. ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Monticello: The Company, through its wholly owned subsidiary, AMI, was party to a General Memorandum of Understanding (the "Memorandum") with Catskill Development, LLC ("CDL" and, collectively with AMI, the "Parties") dated December 1, 1995, which among other things, provided for the establishment of Mohawk Management, LLC ("MML"), a New York limited liability company, for the purpose of entering into an agreement to manage a proposed casino on land to be owned by the St Regis Mohawk Indian Tribe (the "Mohawk Tribe"). The Memorandum also sets forth the general terms for the funding and management obligations of CDL (25% owned by Bryanston Group, Inc. ("Bryanston")) and AMI with regard to MML. In January 1996, MML was formed with each of CDL and AMI owning a 50% membership interest in MML. On July 31, 1996, MML entered into a Gaming Facility Management Agreement with the Mohawk Tribe (the "Management Contract") for the management of a casino to be built on the current site of the Monticello Raceway in Monticello, New York (the "Monticello Casino"). Among other things, the Management Contract provided MML with the exclusive right to manage the Monticello Casino for seven (7) years from its opening and to receive certain fees for the provision of management and related services. By its terms, the Memorandum between CDL and AMI terminated on December 31, 1998, since all of the governmental approvals necessary for the construction and operation of the Monticello Casino were not obtained by MML. The Management Contract between MML and the Mohawk Tribe contains no such provision. Additionally, the Memorandum was silent as to the effect of such termination on the continued existence of MML on the Parties' respective 50% interests membership therein or on the Management Contract. On December 28, 1998, AMI filed for arbitration, as prescribed by the Memorandum, to resolve certain disputes between the Parties. In July 2000, the Parties completed a final settlement agreement whereby the Company's wholly-owned subsidiary will be entitled to receive 40% of any basic management fee income and 75% of any service fee income accruing from the operation of any Native American casino facility development at Monticello Raceway. The net result of the settlement entitles Alpha's subsidiary to receive approximately 47% of all management fee and service income derived from the underlying management contract. The original agreement contemplated an arrangement specific to the Mohawk Tribe while the settlement agreement covers all prospective federally recognized Native American Nations. Accordingly, Alpha Casino Management Inc. ("ACM"), a wholly owned subsidiary, and Monticello Casino Management, L.L.C. ("MCM"), similarly owned as MML, were formed to facilitate such potential non-Mohawk Tribe arrangements. As part of and in conjunction with such settlement, AMI acquired 5 percentage points of Bryanston's ownership interest in its real property holdings at the Monticello Raceway for $455,000 plus consideration if the asset is liquidated. That holding includes the Raceway's building and equipment and approximately 230 acres of land. In June 2001, the Company agreed to satisfy this obligation through the issuance of the Company's common stock. The $455,000 is included in other assets on the consolidated balance sheet as of September 30, 2001. Additionally, Bryanston transferred its 25% ownership in the Raceway's parimutuel operations to AMI. Under the previous agreement, AMI did not participate in any of these sources of revenue. In connection with the final settlement agreement, certain CDL members (Americas Tower Partners and Monticello Realty, LLC) were granted the right to receive $5,000,000, a "Senior Obligation" dated October 1999, as referenced in the final settlement agreement. Additionally, similar to the Memorandum, the final settlement agreement identified capital contributions made by all CDL members aggregating $10,000,000, plus accrued interest in excess of $7,000,000, which must be paid prior to other cash distributions, except the Senior Obligation, plus accrued interest in excess of $1,000,000, including the Company's revenue participation discussed in preceding paragraphs. Included in deposits and other assets as of September 30, 2001, the Company capitalized $2,491,000 towards the design, architecture and other costs of the development plans for the proposed Monticello Casino. On April 6, 2000, in a letter to New York Governor George Pataki, the U.S. Department of the Interior and its Bureau of Indian Affairs (the "Department") forwarded its initial Two-Part Determination, which included the Department's findings that: 1) the Monticello Casino was in the best interests of the Mohawk Tribe; and 2) that there was local support for the project. The Department has requested the Governor's concurrence in their findings. Such concurrence is an integral step in establishing the trust lands on which the proposed casino would be developed. On April 19, 2000, MML received a letter from the National Indian Gaming Commission asking for additional information as it was completing its review of the underlying management and development agreements. On June 5, 2000, MML notified the Department of the purported abandonment of the project by the Mohawk Tribe. On April 22, 2000, the Company was made aware of a purported letter agreement between the Mohawk Tribe and Park Place Entertainment ("PPE"), which agreement (with two irrelevant exceptions) would purportedly give PPE the exclusive ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Monticello (CONTINUED): rights to develop and manage any casino development the Mohawk Tribe may have in the State of New York. The validity of the aforementioned purported agreement is not clear at this time. On November 13, 2000, MML and CDL (collectively the "Plaintiffs") joined in a suit filed in the United States District Court, Southern District against PPE, alleging entitlement to substantial damages as a consequence of, among other things, PPE's purported interference in the Plaintiffs proposed casino in Monticello. On May 14, 2001, the Plaintiffs received notification from the Court that the Court had allowed the Claim for tortious interference with prospective business relations to proceed to trial. In July 2001, the Court reversed its earlier ruling and concluded that the Land Purchase Agreement between CDL and the Tribe constituted a legally enforceable contract thus allowing a claim for tortious interference with a contractual relationship to proceed along with the aforementioned claim. The case is now in the discovery phase. Subject to the obtaining of requisite replacement components and related approvals or the satisfactory resolution of the previously mentioned lawsuit, it is anticipated that MML will undertake the development and management of the proposed casino in Monticello, New York, and AMI would be responsible for the day-to-day operations of that casino. It is intended that the casino will be owned by a federally recognized tribe and will be located on land to be placed in trust for the benefit of that tribe. There can be no assurances that a replacement tribe will be substituted for the Mohawks and receive all requisite approvals or that the pending litigation will be satisfactorily resolved. However, if such replacement tribe and approvals are received or satisfactory resolution of the litigation is achieved, then it is the Company's intention to proceed with the development of this gaming activity. In August 2001, the Company reached a definitive agreement to acquire: (i) an additional approximate 17% interest in casino related revenues derived from the management of any Native American casino facility development at Monticello Raceway; and (ii) an additional 25% interest in Monticello Raceway's parimutuel operations. This transaction, which is subject to Board of Director, shareholders and other approvals, would be effectuated by the issuance of approximately 940,000 shares of the Company's common stock. Because the Company's interest in the Monticello project constitutes the Company's most significant interest and operations, and because the foregoing transaction effectively would increase the Company's interest in that project, the company is of the view that the value of the common stock it would issue in that transaction reflects the value of the interests it would receive. Accordingly, rather than perform a separate valuation of the interest it would acquire, the Company determined it appropriate to book the consideration it would receive at an amount equal to the par value of the common stock it would issue, which is $9. Such amount is included in deposits and other assets on the September 30, 2001 consolidated balance sheet. Further, in connection with the transaction, the Company would enter employment agreements with principals of the seller providing for annual aggregate compensation of $500,000, subject to certain performance requirements, and options to purchase up to approximately 556,000 shares of the Company's common stock at $22.50 per share. On October 31, 2001, the Governor of New York signed into law a gambling extension bill which, among other provisions, empowers the Governor to enter into up to three casino compacts with federally recognized tribes to develop Class III gaming operations, allows several of the state's racetracks, including Monticello Raceway, to install video lottery terminals ("VLTs"). The Company anticipates that the ability to operate VLTs could have a positive impact on the operations at the Monticello Raceway. Casino Ventures: On July 8, 1999, the Company, through its subsidiary, Jubilation Lakeshore, contributed its inactive gaming vessel, Bayou Caddy's Jubilation Casino ("Jubilation") to Casino Ventures in exchange for $150,000 in cash, a promissory note of $1,350,000 plus a membership interest in Casino Ventures. Matthew Walker ("Mr. Walker"), a 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 in 2000 and 2001, Casino Ventures has been loaned $1,276,000 from Mr. Walker, $197,000 from the Company and $34,000 from the holder of a $650,000 mortgage on the inactive ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Casino Ventures (CONTINUED): gaming vessel. An additional $550,000 and $350,000 was received by Casino Ventures in 2001and 2000, respectively for future equity contingent upon final approval of the casino by the Mississippi Gaming Commission. During the nine months ended September 30, 2001, the Company capitalized $596,000 of costs related to the relocation and refurbishing of the vessel and improvements to its redeployment site in Tunica. An additional $88,000 of start-up costs were incurred during the nine months ended September 30, 2001. The Company believes that Casino Ventures could commence operations in Tunica in 2002. 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, 2001 and 2000, not eliminated in consolidation, amounted to $113,000 and $39,000. This was substantially attributable to a $650,000 mortgage note payable secured by the vessel and the loans from Mr. Walker. Liquidity and Capital Resources For the nine months ended September 30, 2001, the Company had net cash used in operating activities of $3,106,000. The uses were the result of a net loss of $3,429,000, depreciation and amortization of $572,000, minority interest of $747,000, interest amortized on loan discount $54,000 and a net decrease in working capital of $226,000. The decrease in working capital consisted primarily of a net decrease in other current assets of $376,000, a decrease in accounts payable and other accrued expenses of $112,000 and a decrease in payroll and related liabilities of $38,000. Cash used in investing activities of $1,355,000 consisted of $793,000 of payments for property and equipment and a $562,000 increase in deposits and other assets. Cash provided by financing activities of $3,337,000 was substantially attributable to $2,791,000 of net proceeds from long-term debt and $550,000 of capital contributed by holders of minority interest. The Company has incurred an accumulated deficit and current net losses of $89,129,000 and 3,429,000, respectively, used $3,106,000 in operations during 2001 and has a working capital deficit (excluding Casino Ventures which is not expected to be paid by the Company during the next twelve months) of approximately $3,210,000 at September 30, 2001. Since the November 2000 launching of the Ella Star, the Company has been working to overcome the effects of unusually poor weather conditions in south Florida, a late season hurricane that just missed the Miami area and severe bridge construction related delays on the Haulover Bridge, the main artery to the casino's site. This, coupled with start-up activities and general learning curves, has negatively impacted the casino's operations. While the Company would anticipate improved operations in 2002, it is also considering the divestiture of the Ella Star investment. As a consequence of the general downturn of the travel and tourism industry, particularly following the events of September 11, 2001, and in view of the prior unsatisfactory historical operating results of the Ella Star, there can be no assurance that the financial performance of the Ella Star will improve. The Company has not been able to finance its current cash needs out of the revenues from its operating businesses; instead, the Company has been meeting its current cash needs through advances from Bryanston (approximately $611,000 during the quarter ended September 30, 2001). Bryanston is an affiliate of the Company of which the Chairman and CEO's spouse is a 50% stockholder. Bryanston is under no obligation to make these advances and there can be no assurance that Bryanston will make any future advances to the Company. In light of the Company's deteriorating financial condition and unprofitable Ella Star operations, the Company has been seeking other working capital alternatives, including the sale of its 19% limited partnership interest in GCP, which the Company believes, based on its discussions with an interested party, has increased in value significantly. Further, the Company has been aggressively pursuing investors and/or buyers relative to Casino Ventures to provide a cash infusion and effectively reduce or eliminate its membership interest. Finally, in connection with the August 2001 transaction (see Note 7), the Company ALPHA HOSPITALITY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Liquidity and Capital Resources (CONTINUED): entered into employment agreements with two individuals who will assist the Company in its ongoing efforts to raise additional debt or equity financing. Liquidity is dependent upon the Company's ability to attain profitable operations and raise capital by the preceding or other means. There can be no assurances that the Company's efforts will be successful. Further, the Company has been aggressively pursing investors and/or buyers relative to Casino Ventures to provide a cash infusion and effectively reduce or eliminate its membership interest. Finally, in connection with the August 2001 transaction , the Company entered into employment agreements with two individuals who will assist the Company in its ongoing efforts to raise additional debt or equity financing. Long-term liquidity is dependent upon the Company's ability to attain profitable operations and raise capital. There can be no assurances that the Company's efforts will be successful. Although the Company is subject to continuing litigation, the ultimate outcome of which cannot presently be determined, management believes any additional liabilities that may result from pending litigation in excess of insurance coverage will not be in an amount that will materially increase the liabilities of the Company as presented in the attached consolidated financial statements. 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 for the year ended December 31, 2000 on file with the Securities and Exchange Commission. There have been no material developments to any existing legal proceeding during the current quarterly period. 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 13, 2001 /s/ STANLEY S. TOLLMAN Stanley S. Tollman Chairman and CEO Dated: November 13, 2001 /s/ ROBERT STEENHUISEN Robert Steenhuisen Chief Accounting Officer