DUNES HOTELS & CASINOS INC, 10KSB, 1999-03-30

DUNES HOTELS & CASINOS INC
10KSB, 1999-03-30
REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-KSB
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .

Commission File No. 1-4385

DUNES HOTELS AND CASINOS INC.
(Exact name of registrant as specified in its charter)

NEW YORK 11-1687244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

4600 Northgate Boulevard, Suite 130, Sacramento, California 95834
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (916) 929 2295

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange
NONE on which registered
NONE

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.50 par value Series B, $7.50 Cumulative
(Title of class) Preferred Stock, $.50 par value
(Title of class)

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO

Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)

State issuer's revenues for its most recent fiscal year: $1,033,000

The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant (2,094,340 common shares) computed by
reference to the price at March 11, 1999 ($.2600 per share) was approximately
$544,528. No market value is assigned to the Series B preferred stock. See "Item
5. Market for Registrant's Common Equity and Related Matters".

The number of shares of common stock outstanding as of March 11, 1999 was
6,375,096.
Documents Incorporated by Reference Not Applicable

This document consists of -- pages with exhibits, -- pages without exhibits.

<PAGE>2

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Dunes Hotels and Casinos Inc. was incorporated in New York in 1956. In
this report the term "the Company" refers to Dunes Hotels and Casinos Inc.,
individually, or with its wholly-owned subsidiaries, Continental California
Corporation (Continental), M & R Corporation (MRC) and MRC's subsidiary M & R
Investment Company, Inc. (MRI) and MRI's subsidiaries SHF Acquisition
Corporation (SHF) and Southlake Acquisition Corporation (Southlake).

The Company, through its subsidiaries, operates in two principal
business segments: real estate (development and sale of residential lots and
rental of agricultural land), and agriculture (drying and storing grain). See
Note 13 of Notes to Consolidated Financial Statements for information relating
to industry segments and class of services.

The Company's real estate segment develops and sells completed
residential lots primarily to builders of custom homes and to the general public
located in and around the greater Sacramento, California area.

The agricultural segment dries harvested grain over a two-month period
(approximately September 15 to November 15) and stores, for a fee, the dried
grain until it is removed by the owner. The Company dries and stores grain
principally for one customer under a five-year contract which commenced in 1998.
This contract accounts for approximately 98% of the grain drying and storage
revenue. If the Company were to lose this customer, it would have a material
adverse effect on the Company's agricultural segment. In September 1997, the
Company completed construction of a new grain drying facility adjacent to its
grain storage facility. See "Item 1. Business - Agricultural Segment - Grain
Storage and Drying Facilities."

REAL ESTATE SEGMENT:

THE FAIRWAYS

The Company, through SHF, developed approximately 50 acres of real
property as a residential planned unit development known as "The Fairways" in
Rancho Murieta, California. Rancho Murieta is a 3,500- acre master planned unit
development located approximately 25 miles from Sacramento, California. Rancho
Murieta consists primarily of single family homes, town houses, commercial
property and two 18-hole championship golf courses, including country club
facilities. The Fairways, located within the boundaries of one of the golf
courses at Rancho Murieta, was subdivided into 110 single family estate lots. As
of March 11, 1999, 45 lots remain unsold.

In connection with its development of The Fairways, SHF was required to
construct certain improvements that benefited not only The Fairways, but other
properties that lay outside of the boundaries of The Fairways (the Benefited
Properties). The net cost of the improvements to the Benefited Properties was
$1,140,900 and SHF will be reimbursed for these costs as the Benefited
Properties are developed. SHF's right to reimbursement will expire in September
2115. The Company is unable to predict what amount, if any, will be received as
reimbursement. The rights to reimbursement are personal to SHF and do not run

<PAGE>3

with The Fairway's property unless assigned by SHF.

In 1995, the Company, along with Continental, MRI and SHF entered into
a Settlement Agreement with the Resolution Trust Corporation ("RTC") in
connection with an obligation due to San Antonio Savings Association (SASA
Obligation"). As part of the Settlement Agreement with the RTC, the Company
agreed to pay the RTC $2,710,000 in the form of a promissory note (the "RTC
Promissory Note"). The RTC Promissory Note bears interest at an annual rate of
1% over prime rate, adjustable on a semi-annual basis. The RTC Promissory Note
requires monthly payments of interest only and is due December 6, 2000. Further,
as part of the Settlement Agreement with the RTC, all of the unsold lots in The
Fairways are encumbered by a deed of trust in favor of the RTC. The deed of
trust requires a $40,000 payment for the release of each encumbered lot. The RTC
Promissory Note was subsequently sold by the RTC to Beal Bank in 1996.

In October 1996, the Company and Murieta Investors, LLC, (MI) signed a
Purchase and Option Agreement which provides that MI will purchase from the
Company 6 lots at The Fairways at $40,000 per lot plus payment of the park fees
applicable to the lots purchased. In addition, the Company may receive
contingent consideration equal to 20% of the gross sales price of each
residential dwelling sold less $40,000 (a "Success Payment").

The agreement also provided for MI to have an option to acquire 36
additional lots at various prices. Due to delays in obtaining plans and permits
MI did not exercise any of its options. In 1998 the Purchase and Option
Agreement was amended whereby the Company granted to MI new options to acquire
34 lots. The options are exercisable starting December 1, 1998 (6 lots) and
every six months thereafter (4 lots each). If two consecutive options are not
exercised then the remaining options are terminated. The sales price under the
option is $50,000 per lot plus reimbursement of park fees paid to Rancho Murieta
Association and 20% of the lesser of (i) gross sale price or (ii) the basic
sales price as defined in the purchase and option agreement dated October 7,
1996, less $50,000. To date, MI did not exercise the first option due December
1, 1998.

SAM HAMBURG FARM

MRI owns approximately 150 acres of agricultural property called Sam
Hamburg Farm (Hamburg Farm) in Fresno and Merced Counties, California. MRI's 150
acres are operated by SHF. Of the 150 acres, 40 acres contain the airstrip and
the shop areas which are the focus of continuing attempts at chemical clean-up.
The remaining 110 acres are leased to various tenants at an annual aggregate
rental of approximately $20,000.

The Company has been advised that the farm contains approximately
5,000 cubic yards of contaminated earth. The Company, through its chemical and
toxic clean-up consultant, has been working with the California State
Environmental Protection Agency, in seeking alternate means to the disposal in
toxic dump sites of chemical and toxics-laden soil.

Because of the ongoing testing, the State has not imposed a disposal
date upon the Company. Cost of disposal is estimated at $100 per cubic yard or
approximately $500,000. However, if on-site remediation can be achieved, it is
estimated that the cost will be between $90,000 and $115,000. The Company is
unable to predict when the ongoing testing will be completed or what the outcome
of these tests will be. Accordingly, the estimates could materially change as
the testing and remediation work continues, which could be as early as 1999.

<PAGE>4

SOLANO COUNTY OPTION

The Company has an option (the Solano County Option) to acquire
approximately 1,690 acres of farm land located in Solano County, California. The
Company acquired the Solano County Option as part of a settlement agreement
between Baby Grand Corp. (BGC), an Anderson Entity, a financial institution and
MRI. The purchase price of the Solano County Option was $1,043,902. The Solano
County Option provides that the Company can purchase the 1,690 acres at a price
of $3,000,000 (the Option Purchase Price). The Company will receive a credit of
$1,000,000 against the Option Purchase Price. The option expires on May 1, 2003.

In December 1998, the Company entered into an agreement with the option
grantor to sell its rights under the option agreement for $533,333. The
agreement provides for a 120 day escrow and the reacquisition price is to be
paid $500,000 in cash at closing and a $33,333 note. Closing occurred on March
2, 1999 and the Company has received its consideration.

AGRICULTURAL SEGMENT:

GRAIN STORAGE AND DRYING FACILITIES

Since 1990 SHF owns a grain storage facility (the "Storage Facility")
located in Yolo County, California. The Storage Facility generally stores, for a
fee, grains owned principally by Adam's Grain Company.
The Storage Facility can store approximately 34,000 tons of grain.

In 1997 the Company entered into a financing lease agreement for its
drying facility which is adjacent to the Storage Facility. The lease is for five
years commencing March 1998, the monthly rental is $25,122 and the Company can
buy the drying facility for $1 at the end of the lease. The lease is
collateralized by the drying facility, a deed of trust on certain parcels of
property including the parcel on which the Storage Facility is located and the
guarantees of MRI and the Company. Before the Guarantors are liable for any
deficiency, the leasing company must first proceed against the drying facility
and the additional collateral.

OTHER ACTIVITIES:

CERTAIN LOANS

From time to time the Company has entered into certain transactions and
has made loans to various Anderson Entities, Anderson Related Entities,
Directors and Executive Officers of the Company and other unrelated third
parties. All loans to related parties were approved by the Company's Audit
Committee. See Item 3. Legal Proceedings and Item 12. Certain Relationships and
Related Transactions.

<PAGE>5

COMPETITION

REAL ESTATE SEGMENT:

The real estate investment and development business is highly
competitive. The Company competes for real estate investments with investors of
all types, including domestic and foreign corporations, financial institutions,
other real estate investment companies and individuals, many of which have
substantially greater resources than the Company. In addition, the Company's
properties are subject to local competitors from the surrounding areas. The
Company does not consider its real estate business to be seasonal in nature.

With respect to the residential real estate, the Company competes with
numerous other developers and residential properties in the greater Sacramento
area of California, ranging from regional and national firms to local companies,
many of which have substantially greater resources than the Company. In the
greater Sacramento area, the Company's residential lots compete on the basis of,
among other things, location, price and quality of amenities, such as the golf
course and country club facilities at Rancho Murieta.

With respect to the Company's agricultural real estate, the Company
competes for tenants with other regional or local agricultural properties in the
area of California where the Company's property is located. Leasing property to
prospective tenants is generally determined on the basis of, among other things,
lease rates and quality of top soil. The Company's leases of agricultural
property are generally for a short-term period of one year or less.

AGRICULTURAL SEGMENT:

With respect to the Company's grain drying and storage operations, the
Company competes with other grain drying and storage companies in Northern
California. The grain drying operation is seasonal and runs from approximately
September 15 to November 15.The storage facility, depending on the types of
grain being stored, operates on a year around basis. The drying and storage
operations are impacted by the number of acres grown, the yield per acre,
weather conditions and government programs. Because the Company dries and stores
grain for principally one customer, the loss of that customer could have a
material adverse effect on the grain drying and storage operation.

SALES AND MARKETING

The Company employs a sales consultant for the sale of its residential
lots at the Fairways, although sales by independent real estate brokers are also
encouraged. The residential lots are marketed primarily by means of media
advertising, customer referrals and realtor contacts. Selling prices are set
based on the local market conditions and competitive factors. The agricultural
properties are marketed to farmers in the surrounding area where the
agricultural property is located. The grain drying and storage operation is
marketed to principally one customer.

REGULATION

The Company must comply with various federal, state and local zoning,
building, pollution, environmental, health, and advertising ordinances, rules
and regulations, including regulations relating to specific building materials

<PAGE>6

to be used, building design, minimum elevations of properties and emissions from
the grain drying and storage facilities.

EMPLOYEES

At March 11, 1999, the Company had 6 employees. None of the Company's
employees are covered by collective bargaining agreements. The Company believes
its employee relations to be satisfactory.

ITEM 2. DESCRIPTION OF PROPERTY

REAL ESTATE SEGMENT:

The Fairways

The Fairways is comprised of approximately 50 acres of land which has
been developed into 110 single family estate lots. It is located in Rancho
Murieta, California, adjacent to Highway 16, approximately 25 miles southeast of
Sacramento. The land is encumbered by bonds in the approximate amount of
$140,000, which is the pro rata share of a bonded indebtedness incurred that
enabled the Rancho Murieta Community Services District to acquire the water and
sewer facilities that serve the community of Rancho Murieta, which includes the
Fairways. The bonded indebtedness will be assumed, pro rata, by the individual
lot buyers. As part of the settlement of the RTC Obligation, the Company signed
a note in favor of the RTC in the original principal amount of $2,710,000. The
note is collateralized by, among other things, a deed of trust on the lots at
The Fairways. The deed of trust requires a $40,000 payment for the release of
each of the encumbered lots. See "Item 1. Business -- Real Estate Segment -- The
Fairways."

Sam Hamburg Farm

Sam Hamburg Farm consists of approximately 150 acres remaining from an
original 4,600 acres of agricultural land. The land is located in the most
southwesterly corner of Merced County, California and the most northwesterly
corner of Fresno County, California, approximately two miles east of Interstate
Highway 5. It is approximately ten miles south of the city of Los Banos,
California. The Company leases the remaining land to various tenants, whose
current crops include cotton, small grains, and certain types of melons. The
terms of the leases are usually one crop year on a cash rent basis. See "Item 1.
Business - Real Estate Segment - Sam Hamburg Farm".

AGRICULTURAL SEGMENT:

Grain Storage and Drying Facility

The storage and drying facilities are located in Yolo County,
California, approximately 15 miles west of the city of Sacramento. The storage
facility can store approximately 34,000 tons of grain. The drying facility can
dry approximately 165,000 pounds of grain in a 24 hour period. The drying
facility dries enough grain to fill approximately one-half of the storage
facility. See "Item 1. Business -- Agricultural Segment -- Grain Storage and
Drying Facilities."

<PAGE>7

EXECUTIVE OFFICES:

The Company's executive office is located in an office building in
Sacramento, California. The executive offices are 1,353 square feet and are
leased under terms of a lease agreement expiring June 30, 2001. The Company
believes that the executive office is suitable for its needs.

ITEM 3. LEGAL PROCEEDINGS

Federal Deposit Insurance Corporation, et al. v. John B. Anderson et al.,
United States District Court, District of Nevada, Case No. CV-S-95-00679-PMP
(LRL), instituted on July 14, 1995. John B. Anderson (Anderson), Edith Anderson
(Anderson's wife), Cedar Development Co. (Cedar), J.A Inc (JA), J.B.A.
Investments Inc, (JBA and, collectively with Anderson, his wife, Cedar, and JA,
the Anderson Parties) are involved in litigation (the Anderson Litigation) with
the Federal Deposit Insurance Corporation (the FDIC). This matter is more fully
described in the Company's Form 10-K for the year ended December 31, 1997, see
"Item 3. Legal Proceedings - Federal Deposit Insurance Corporation, et al. v.
John B. Anderson, et al."

In July 1997 the Nevada District Court approved "a plan of disposition
of collateral". A Special Master was appointed to implement the plan, which
includes among other things, the FDIC Pledged Shares and the common stock of BGC
which owns the BGC Pledged Shares. The Special Master was to accept bids until
November 13, 1997 and make his recommendation to the court. To date, the Special
Master has not reported his recommendations to the court and the Company has not
been advised of any FDIC sale of security interests it holds in the FDIC Pledged
Shares.

The Company submitted a bid for the 3,000,000 FDIC Pledged Shares.
Under certain circumstances, the sale of the FDIC Pledged Shares and the BGC
Pledged Shares within a three year period may result in a change of ownership of
more than fifty percent of the Company which may result in a material reduction
of the amount of net operating loss carry forward (NOL). (Note 12).

Until December 11, 1997, Anderson was the President and Chairman of the
Board of the Company and Chairman of the Board of various subsidiaries of the
Company. Prior to the events described herein, Anderson, through his ownership
of Cedar, the parent of Baby Grand Corp. (BGC) and JBA, owned approximately
4,280,756 shares or 67.2% of the Company's outstanding common stock (the Common
Stock). Of those shares (i) 3,000,000 shares (the FDIC Pledged Shares) have been
pledged as collateral in favor of entities of which the FDIC is a successor
and/or assign, and (ii) 1,280,756 shares (the BGC Pledged Shares) had been
pledged as collateral in favor of a subsidiary of the Company. Since 1998, the
BGC Pledged Shares have been under the jurisdiction of the US Bankruptcy Court
in Las Vegas, since BGC filed a petition under Chapter 7.

On or about December 16, 1997, the Nevada District Court issued an
order in the Anderson Litigation declaring that the FDIC has the right to act by
written consent with respect to Cedar, BGC, JBA and JA. Because of the Nevada
District Court's order, the FDIC has the power to exercise voting rights with
respect to the FDIC Pledged Shares, which represent 47.1% of the outstanding
Common Stock. Because the FDIC is able to exercise voting rights with respect to
the FDIC Pledged Shares, the FDIC could exercise substantial influence with
respect to the election of the entire Board of Directors of the Company and all
matters submitted to stockholders. The FDIC is able to significantly influence
the direction and future operations of the Company, including decisions
regarding future financing (which could involve the issuance of additional
Common Stock or other securities) and decisions regarding the day-to-day

<PAGE>8

operations of the Company's real estate and agricultural operations. If it is
ultimately determined that the FDIC has authority to exercise voting rights with
respect to the BGC Pledged Shares, then the FDIC would have the power to vote
67.2% of the outstanding Common Stock of the Company. In such event, the FDIC
would be able to control, rather than only significantly influence, the election
of the entire Board of Directors of the Company and all other matters submitted
to stockholders.

In response to the FDIC's demand to hold a special meeting of the
stockholders, the Company indicated that it is willing to discuss the procedures
and effects of a stockholder meeting with the FDIC, but pending further
information from the FDIC, the Company was deferring the formal setting of the
meeting date and record date for voting purposes. The FDIC has not yet responded
to the Company as to such further information.

On March 12, 1998, the Nevada District Court approved the FDIC's
request for a 120 day extension under it's Plan of Liquidation, as to any
disposition of the FDIC pledged shares. To date the Company has not been advised
that the FDIC has liquidated the collateral nor reported to the court.

Regardless of what action, if any, the FDIC should determine to take
with respect to the Company, if there is a change of more than 50% of the
ownership of the outstanding Common Stock, there may be a change of ownership of
the Company for purposes of the Internal Revenue Code of 1986, as amended (the
Code). At December 31, 1998, the Company has a net operating loss carry forward
(NOL) of approximately $52,542,000. The Board of Directors believes that this
NOL represents a valuable asset to the Company which may or may not be used in
future years. It is unclear whether or not the events described herein have
resulted in a change of ownership under the Code. If the FDIC or a third-party
purchaser obtains the power to vote the BGC Pledged Shares in addition to the
FDIC Pledged Shares, there would be a change in ownership under the Code. It is
possible that the Internal Revenue Service will take the position that the
events within a three-year period, taken together with the events described
above, have already resulted in a change in ownership under the Code. If there
is a change of ownership under the Code, the value of the Company's NOL would be
materially adversely reduced or eliminated. There can be no assurance that a
change of ownership will not occur or has not already occurred.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise. No matter has been submitted to a vote of security
holders since December 19, 1984.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The principal United States market in which the Company's common stock
is traded is the over-the-counter market. There is no established public trading
market for the Company's Series B preferred stock. Neither the Company's common
stock nor the Company's preferred stock is listed for trading on an exchange.

<PAGE>9

The following table sets forth for the periods indicated the range of
the high and low bid quotations for the Company's common stock as quoted on the
OTC Bulletin Board. The reported bid quotations reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.

1998 HIGH LOW
---- ---- ---
1st Quarter .44 .25
2nd Quarter .37 .28
3rd Quarter .32 .15
4th Quarter .19 .14

1997 HIGH LOW
---- ---- ---
1st Quarter .19 .16
2nd Quarter .25 .16
3rd Quarter .34 .25
4th Quarter .50 .25

At December 31, 1998, the Company's transfer agent reported that there
were approximately 1,810 holders of record of the Company's common stock, and
approximately 754 holders of record of the Company's Series B $7.50 cumulative,
voting and non-convertible Preferred Stock with a liquidating value of $125 per
share.

Dividends on the Company's common stock have not been paid since the
second quarter of 1979. Dividends on the Company's Series B preferred stock have
not been paid since the first quarter of 1982. The Company is in arrears on such
dividends in the amount of approximately $1,245,000 as of December 31, 1998. The
Company has no present intention to pay dividends on either its common or
preferred shares.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION

The Consolidated Financial Statements and Notes thereto are an integral
part of this report, including this Item 6, and are incorporated herein by this
reference and should be read in conjunction herewith.

Certain information included herein contains statements that are
forward-looking, such as anticipated liquidity requirements for the coming
fiscal year, anticipated sources of liquidity for the coming fiscal year, the
impact of anticipated asset sales, and potential changes in control of the
Company. Such forward-looking information involves important risks and
uncertainties that could significantly affect the Company's financial condition
and future results of operations, and, accordingly, such future financial
condition and results of operations may differ from those expressed in any
forward-looking statements made herein. These risks and uncertainties include,
but are not limited to, those risks relating to actual costs necessary to
clean-up certain real property chemical contamination, real estate market
conditions and general economic conditions, the abilities of certain third
parties to obtain financing and otherwise perform under real estate purchase
agreements, and the outcome of certain litigation and other risks. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, and, such statements speak only as of the date made.

<PAGE>10

YEAR 2000 ISSUE

The Company has addressed the possible exposures related to the impact
on its computer systems of the Year 2000. Key financial information and
operational systems have been assessed. It has been determined that accounting
software and computer controlled systems at the grain drying facility built in
1997 are Year 2000 compliant.

OVERVIEW

REAL ESTATE

FAIRWAYS

Pursuant to a 1998 amendment to the Purchase and Option Agreement between the
Company and Murieta Investors, LLC (MI) the Company has granted to MI an option
to purchase 34 of the remaining 45 lots at the Fairways. The lots covered by the
option are subject to prior sale by the Company. The options are exercisable
starting December 1, 1998 (6 lots) and every six months thereafter ( 4 lots
each). In addition, if 2 consecutive options are not exercised then the
remaining options are terminated. MI did not exercise the December 1, 1998
option. The sales price under the option is the greater of $50,000 per lot or
20% of the gross sales price of residential dwelling sold.

In December 1996 the Company sold 6 lots to MI for the greater of $40,000 per
lot or 20% of the gross sales price of the residential dwelling. To date MI has
constructed 4 dwelling units (1 is in escrow) and has not started any
construction on the remaining 2 lots.

SOLANO COUNTY OPTION

In December 1998, the Company entered into an agreement to sell the option.
Escrow closed in March 1999.

OTHER

In July 1997 the Company sold the remaining 57 residential lots in North Las
Vegas, Nevada and the White Ranch located in the Tulare County, California.

AGRICULTURAL

The Company operates a grain drying and storage facility. The drying facility is
financed by a 5 year lease which commenced in March 1998. At the end of the
lease the Company will obtain title to the drying facility.

PRINCIPAL SHAREHOLDER

Until December 11, 1997, Anderson was the President and Chairman of the
Board of the Company and Chairman of the Board of various subsidiaries of the
Company. Anderson, through his ownership of Cedar, the parent of BGC and JBA,
owns approximately 4,280,756 shares or 67.2% of the Company's common stock. Of
those shares (i) 3,000,000 shares (the FDIC Pledged Shares) have been pledged as

<PAGE>11

collateral in favor of entities of which the FDIC is a successor and/or assign,
and (ii) 1,280,756 shares (the BGC Pledged Shares) had been pledged as
collateral in favor of a subsidiary of the Company. Refer to Item 3. Legal
Proceedings - Federal Deposit Insurance Corporation et al. v. John B. Anderson
et al. Re: (i) the rights of the FDIC to vote the FDIC Pledged Shares and the
possible right of the FDIC to vote the BGC Pledged Shares; (ii) a possible
change in control of the Company and (iii) a demand made by the FDIC to have the
Company hold a shareholder meeting.

The Company has no present intentions to pay dividends on either its
common or preferred stock.

OPERATING RESULTS

Net loss for the year ended December 31, 1998 increased by approximately
$352,000 when compared with the year ended December 31,1997. This was due to a
number of factors including:

(1) A decrease in profit from the sale of real estate primarily due to
the sale of the White Ranch and the sale of the 57 residential lots in North Las
Vegas, Nevada and
(2) A decrease in rental income-agricultural properties due to the sale
of the White Ranch. (3) A decrease in drying and storage revenues.
(4) An increase in bad debt expense relating to the rescinding of the
note sale agreement with the John J. Anderson Family Trust.

1998 vs. 1997

Real estate

The major decrease in real estate revenues and profits in 1998 was due
to the 1997 sale of the White Ranch and the 57 residential lots in North Las
Vegas, Nevada. Sales at The Fairways continue to be slow.

Net rental income from agricultural properties decreased in 1998 when
compared with 1997 due primarily to the sale of the White Ranch.

Agricultural

Grain drying and storage profits in 1998 decreased by approximately
$330,000 when compared with 1997. The decrease is primarily due to a decrease in
drying revenue. An abnormally wet spring due to El Nino during 1998 delayed or
cancelled planting the rice crop which reduced the availability of rice to be
dried at the Company's facility. Because there was no rice for the Company to
dry, the Company agreed to dry white taco corn for which the Company receives
less per pound revenues than rice. Drying revenue in 1998 was $77,100 compared
to $277,300 in 1997.

General

Selling, administrative and general expenses in total decreased
approximately $290,000. This was due primarily to the following decreases in
salaried and related cost of $143,000 due to the decrease in personnel; in legal
fees $56,000 due to the decrease in litigation during 1998, during 1997 the
Company was involved in substantial litigation relating to litigation between
John B. Anderson and the FDIC; in officers travel of $57,000; in officers and

<PAGE>12

directors liability insurance of $20,000; and in office expense of $12,000 due
to the relocation to Sacramento, CA.

Interest income decreased because of principal collections on various
notes receivable. Interest expense decreased because of principal payments
through the sale of the lots at The Fairways made to Beal Bank, the purchaser of
the RTC Settlement Note. The decrease in interest expense was partially offset
by interest expense applicable to the drying facility financing.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 1998, cash, cash equivalents and
marketable securities decreased by $1,024,000 from $4,972,000 at December 31,
1997 to $3,948,000 at December 31, 1998. The most significant uses of cash in
1998 consisted of operation ($578,000), payments on long-term debt ($397,000),
loans made to others ($145,000), payments on short-term debt ($101,000), and
cash paid for other investments. The most significant sources of cash in 1998
were the collection of loans made to others ($224,000) and proceeds from
short-term debt,

The Company believes that its primary requirements for liquidity in the
coming fiscal year will be to fund ongoing expenses at The Fairways, which
include, among other things, association dues, water and sewer fees and property
taxes; to fund the required payments due on the note to Beal Bank; to fund the
required payments due on the grain dryer financing; to fund costs that may be
incurred relating to the toxic clean-up at Sam Hamburg Farm; to fund any tax
payments that may be due to the California Franchise Tax Board; and to fund
general and administrative expenses. In addition the Company may be required to
fund certain costs relating to a possible stockholder meeting.

The Company believes that sources of required liquidity will be cash
generated from the grain drying and storage facilities, anticipated lot sales at
The Fairways, collection of notes receivable resulting from sales at The
Fairways, Success Payments related to the venture with MI. Based on known
commitments, the Company believes that the sources of cash described and the
cash available at December 31, 1998, will be adequate to fund known liquidity
requirements. However, if the sources of required liquidity and the cash
available at December 31, 1998 prove to be insufficient to cover the Company's
primary liquidity requirements, it will be necessary to sell some of the
Company's non-income producing assets.

ITEM 7. FINANCIAL STATEMENTS

The Consolidated Financial Statements of Dunes Hotels and Casinos Inc. are
located at pages F-1 to F-22 attached to the end of this annual report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

<PAGE>13

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The By-laws of the Company provide that the number of directors
constituting the entire board shall be twelve. Directors are elected at each
annual meeting of shareholders to hold office until the next annual meeting and
until a successor has been elected and qualified. The Company has not held an
annual meeting of stockholders since December 19, 1984. However, see "Item 3.
Legal Proceedings - Federal Deposit Insurance Corporation et al. v. John B.
Anderson et al." regarding a possible stockholders meeting. Of the nine
directors elected at the December 19, 1984 annual meeting of shareholders, three
have resigned, and only two of such vacancies thereby created have been filled;
however, one such appointee died. As a result, the number of directors currently
serving is seven.

Pursuant to a Securities and Exchange Commission consent decree, the
Company has been required to have an Audit Committee of the Board of Directors
(Audit Committee) since 1978, a majority of which must be independent directors.

Identified herein are all directors and executive officers of the
Company. The information set forth as to each Director and Executive Officer has
been furnished by such person.

John B. Anderson, 56, is and has been since May 1984, a director of the
Company and until December 11, 1997, served as the Company's chairman of the
board and president. On March 10, 1992, BGC (an Anderson Entity) filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Nevada. On November 10, 1992,
the United States Bankruptcy Court confirmed and approved BGC's plan of
reorganization which became effective December 1, 1992. On December 20, 1994,
the Chapter 11 case was closed. On April 6, 1992, Maxim Development Co. (an
Anderson Entity) filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Eastern District
of California, which bankruptcy was subsequently dismissed on March 12, 1993.

Brent L. Bowen, 70, is and has been a director, officer and member of the
audit committee of the Company; and a director and officer of certain of the
Company's subsidiaries since December 1984. Mr. Bowen was employed by Anderson
Farms (an Anderson Entity) from 1981 to 1995 as a business and financial
analyst. Mr. Bowen became an employee of MRI in 1995. Mr. Bowen has experience
in the hotel/casino, farming, real estate, home-building, rice mill, commodities
and banking industries. Mr. Bowen retired from the Company in 1998.

Andrew Marincovich, 77, is and has been since August 1978, a
director and member of the Audit Committee of the Company. He is, and has been
since July 1983, Chairman of the Audit Committee. He is President and Executive
Officer of Marincovich & Company, a certified public accounting firm in Rancho
Palos Verdes, California. He is a Certified Public Accountant, licensed to
practice in California.

Donald J. O'Leary, 68, was elected to the Company's Board of Directors
and appointed to the Company's Audit Committee on May 19, 1994. Mr. O'Leary is
an attorney and is a member of the California, Virginia and District of Columbia

<PAGE>14

Bars. He is currently in private practice in California. Prior to entering
private practice, Mr. O'Leary was a trial attorney for the U.S. Department of
Justice and resident counsel for several large real estate companies.

Edward Pasquale, 55, is and has been a director and officer of the
Company since December 1984; and was a director and officer of certain of the
Company's subsidiaries from December 1984 until September 1988. On January 27,
1998, he was elected president and a director of certain of the Company's
subsidiaries. On December 11, 1997, Mr. Pasquale was elected president of the
Company. Mr. Pasquale has been a member of the Company's audit committee since
May 19, 1994. He is presently, and has been since September 1983, self-employed
as a financial consultant, with emphasis in litigation support services,
bankruptcy proceedings, and corporate reorganization. He is a Certified Public
Accountant, licensed to practice in the States of California and Nevada.

Wayne O. Pearson, 68, is and has been since August 1978, a director and
member of the Audit Committee of the Company. From March 1975 to May 1993, he
was a marketing analyst for R&R Advertising Agency, Las Vegas, Nevada; and since
January 1970, sole proprietor, Wayne Pearson Consulting, Las Vegas, Nevada, a
business and public opinion research company.

Erik J. Tallstrom, 52, is and has been a director of the Company since
December 1984. Prior to 1985, he was self-employed as a certified public
accountant, and was a financial consultant to Anderson. From November 1985 to
December, 1996 he was a business partner with Anderson in several real estate
developments, including Rancho Murieta in California. Currently, Mr. Tallstrom
acts as a consultant to various real estate companies and is a part owner of a
tile manufacturing company.

There is no family relationship between any directors or executive
officers of the Company. No director holds a directorship in any other company
with a class of securities registered pursuant to Section 12 of the Exchange Act
or subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended.

Compliance with Section 16(a) of the Exchange Act. Based solely upon a
review of the Commission's Forms 3 and 4 received by the Company during the last
fiscal year and upon written representations solicited by the Company, no
Officer, Director, beneficial owner of more than 10% of any class of the
Company's equity securities or any other person subject to Section 16 of the
Exchange Act failed to file on a timely basis as disclosed in the above forms,
reports required by Section 16(a) of the Exchange Act during the year ended
December 31, 1998.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the annual compensation paid to Edward
Pasquale, the Company's President. No other executive officer of the Company
received compensation in excess of $100,000 for the year ended December 31,
1998.

<PAGE>15

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<S> <C> <C> <C> <C> <C>

(a) (b) (c) (d) (e) (i)
Other annual All other
Name and prin- compensation compensation
cipal position Year Salary($) Bonus($) ($) ($)
- ------------------ ---- --------- -------- ---------------- ----------------

Edward Pasquale, 1998 -- -- -- $36,862 (1)
President

</TABLE>

(1) All other compensation to Edward Pasquale consists of the
following for 1998:

Annual Directors fees $ 15,000
Audit Committee fees 12,000
Consulting fees 9,862
------------
$36,862

Compensation of Directors

The Company pays each director an annual fee of $15,000 payable
monthly. Directors fees due Mr. Anderson are retained by the Company and applied
against amounts due the Company from entities owned or controlled by Mr.
Anderson. The assignment of Mr. Anderson's directors fees will remain in effect
until changed by the Board of Directors. In addition to their regular directors
fees and audit committee fees, board members and audit committee members are
paid up to $150 per hour for special projects considered to be outside the scope
of their duties as board and audit committee members. In addition, they receive
a travel allowance of $300 for each meeting attended.

Messrs. Marincovich, Pearson, Bowen, Pasquale and O'Leary are all
members of the Company's Audit Committee. Audit Committee members receive
compensation of $1,000 per month plus a travel allowance of $300 for each
meeting attended. For services rendered as Audit Committee members and
consultants during the fiscal year 1998, Messrs. Marincovich, Pearson, O'Leary,
Bowen and Pasquale were paid $13,200, $12,000, $13,350, $12,000, and $21,862
respectively.

The Company does not have a plan, pursuant to which cash or non-cash
compensation is paid or distributed, or is proposed to be paid or distributed in
the future. The Company does not have any pension or other benefit plans.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table shown below (1) contains certain information with respect to
any person (including any "group" as that term is used in Section 13(d)(3) of
the Exchange Act), who is known to the Company to be beneficial owner (as that
term is defined in rules and regulations of the Commission under the federal
securities laws) of more than 5% of the Company's common stock. No person is
known to the Company to be the beneficial owner of more than 5% of the Company's
Series B preferred stock.

<PAGE>16

Name and Address of Amount and Nature of Percent of Common
Beneficial Owner Beneficial Ownership (1) Stock Outstanding
- ------------------------------- ------------------------- -------------------

John B. Anderson(2) 4,280,756 67.2%
P.O. Box 1410
Davis, CA 95617

Federal Deposit Insurance 4,280,756 67.2%
Corporation(2)
550-17th N.W.
Washington, D.C.
</TABLE>

The table shown below (1) contains certain information with respect to
the Company's common stock beneficially owned (as that term is defined in rules
and regulations of the Commission under the federal securities laws) by all
directors, and directors and executive officers of the Company as a group. No
director or executive officer is known to the Company to be the beneficial owner
of any of the Company's Series B preferred stock.

Name of Beneficial Amount and Nature of Percent of Common
Owner Beneficial Ownership(1) Stock Outstanding

John B. Anderson(2) 4,280,756 67.2%

Brent L. Bowen(3) 2,000 *

Andrew P. Marincovich(3) 200 *

All Directors and Officers
as a Group (3 Persons) 4,282,956 67.2%
</TABLE>

* Less than one percent

(1) In furnishing this information, the Company is relying upon the
contents of statements filed with the Commission pursuant to Section
13(d) and Section 13(g) of the Exchange Act.

(2) Anderson, through various entities owned or controlled by him,
claims beneficial ownership of, and shared voting and shared investment
power with respect to the reported shares (the Anderson Shares). These
shares of common stock are subject to litigation. See Item 3. Legal
Proceedings.

Of the Anderson Shares, approximately 3,000,000 shares are
pledged in favor of the FDIC. On February 17, 1993, the Company
received a copy of Securities and Exchange Commission Schedule 13D
dated February 12, 1993 filed with the Commission on behalf of Eureka
Bank (Eureka). Eureka's Schedule 13D reports that Eureka possesses
"sole voting power" and "sole dispositive power" with respect to
3,000,000 shares of the Company's common stock. The Eureka Schedule 13D
also reports that Eureka may be deemed to have acquired beneficial
ownership of 4,367,643 shares of the Company's common stock which
amounts to 68.5% of the class represented by said shares. In July 1993,
Eureka representatives advised the Nevada Gaming Control Board that the

<PAGE>17

FDIC had assumed management and supervision of efforts to collect Mr.
Anderson's obligation under a debtor-creditor agreement dated November
30, 1988, by and between John B. Anderson, Edith Anderson and Eureka
Federal Savings and Loan Association. On July 14, 1995, the FDIC filed
an action in the United States District Court for the District of
Nevada against Anderson, Edith Anderson, CDC, J.A. Inc. and J.B.A.
Investments, Inc. The Company is not a party to the action. See "Item.3
- Legal Proceedings" for a detailed discussion of the Anderson Parties
obligation to the FDIC and the litigation relating thereto.

Of the Anderson Shares, 1,280,756 shares are pledged in favor
of the Company to secure indebtedness to the Company. The balance of
the Anderson Shares are pledged in favor of other creditors of
Anderson.

The transfer agent's records maintained for the Company show
that Anderson or entities owned or controlled by him own 4,260,912
shares. The difference between what the transfer agent's records show
and the information provided to the Company by Anderson is 19,844
shares. The difference consists of (i) 106,731 shares purchased by BGC
and (ii) 86,887 shares owned by CBC given in payment of legal fees owed
by Mr. Anderson. None of these transactions have been changed on the
transfer agent's records.

(3) Messrs. Marincovich and Bowen claim beneficial ownership of, and
sole investment and sole voting powers with respect to the reported
shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Anderson and Anderson Entities own approximately 67.2% of the Company's
common stock. Refer to the Company's report on Form 8-K dated February 12, 1993
regarding Securities and Exchange Commission Schedule 13D filed on behalf of
Eureka wherein Eureka claims "sole voting" and "sole dispositive power" with
respect to 3,000,000 shares of the Company's common stock and beneficial
ownership of 4,367,643 shares of the Company's common stock. In July 1993, the
FDIC succeeded to the position of Eureka with respect to the Debtor-Creditor
Agreement.

In November 1997, the Company entered into a Loan Purchase Agreement
with John B. Anderson, as Trustee for the John J. Anderson Family Trust. The
Loan Purchase Agreement provided for the sale of a note (the BGC Note) issued by
Baby Grand Corp. payable to MRI. The BGC Note, the Loan Purchase Agreement and
the recession of the Agreement are described in detail in the Company's Form
10-KSB for the year ended December 31, 1998 in Note 3 of Notes to Consolidated
Financial Statements. See also Item 3, Legal Proceedings.

<PAGE>18

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

The following documents are filed as part of this report

a. Financial Statements
PAGE

Independent Auditors' Report F-1

Dunes Hotels and Casinos Inc. and Subsidiaries
Consolidated Financial Statements:

Balance Sheet as December 31, 1998 F-2

Statements of Operations, two years ended
December 31, 1998 F-4

Statements of shareholders' equity, two years ended
December 31, 1998 F-6

Statements of cash flows, two years ended December 31, 1998 F-7

Notes to Consolidated Financial Statements, two years ended
December 31, 1998 F-9

b. Exhibits

1.00 Restated Certificate of Incorporation of Dunes Hotels
and Casinos Inc. dated June 17, 1982, is incorporated
herein by reference to Dunes Hotels and Casinos Inc.
Annual Report on Form 10-K (file no. 1-4385) for the
year ended December 31, 1994, Part IV, Item 14(a)(3),
Exhibit 3.01.

2.00 Certificate of Amendment of Restated Certificate of
Incorporation of Dunes Hotels and Casinos Inc. dated
December 19, 1984, is incorporated herein by reference
to Dunes Hotels and Casinos Inc. Annual Report on Form
10-K (file no. 1-4385) for the year ended December 31,
1994, Part IV, Item 14(a)(3), Exhibit 3.02.

3.00 Revised By-laws of Dunes Hotels and Casinos Inc. dated
December 1984, is incorporated herein by reference to
Dunes Hotels and Casinos Inc. Annual Report on Form
10-K (file no. 1-4385) for the year ended December 31,
1994, Part IV, Item 14(a)(3), Exhibit 3.03.

4.01 Specimen Certificate for the Common Stock of Dunes
Hotels and Casinos Inc., is incorporated herein by
reference to Dunes Hotels and Casinos Inc. Annual
Report on Form 10-K (file no. 1-4385) for the year
ended December 31, 1994, Part IV, Item 14(a)(3),
Exhibit 4.01.

<PAGE>19

4.02 Specimen Certificate for the Preferred Stock of Dunes
Hotels and Casinos Inc., is incorporated herein by
reference to Dunes Hotels and Casinos Inc. Annual
Report on Form 10-K (file no. 1-4385) for the year
ended December 31, 1994, Part IV, Item 14(a)(3),
Exhibit 4.02.

10.04 Settlement Agreement dated June 28, 1988, by and
between San Antonio Savings Association and Dunes
Hotels and Casinos Inc.; First Amendment to Settlement
Agreement dated December 5, 1989, by and between San
Antonio Savings Association, F.A. (assignee of San
Antonio Savings Association) and Dunes Hotels and
Casinos Inc., is incorporated herein by reference to
Dunes Hotels and Casinos Inc. Annual Report on Form
10-K (file no. 1-4385) for the year ended December 31,
1994, Part IV, Item 14(a)(3), Exhibit 10.04. Settlement
Release and Loan Modification Agreement dated October
24, 1995, by and among the Resolution Trust
Corporation, Dunes Hotels and Casinos Inc., Continental
California Corporation, M & R Investment Company, Inc.
and SHF Acquisition Corporation, is incorporated herein
by reference to Dunes Hotels and Casinos Inc. Quarterly
Report on Form 10-Q for the nine months ended September
30, 1995, Item 6, Exhibit 10.01.

10.05 Promissory Note dated November 2, 1992, in the
principal amount of $2,650,000 made by Baby Grand Corp.
and M&R Investment Company, Inc.; Amended and Restated
Pledge Agreement dated November 2, 1992, by and between
Baby Grand Corp. and M&R Investment Company, Inc.; and
Release of Assignment of Leases, Rents and Revenues
dated November 2, 1992, by M&R Investment Company,
Inc., are incorporated herein by reference to Dunes
Hotels and Casinos Inc. Annual report on Form 10-K
(file no. 1-43855) for the year ended December 31,
1992, Part IV, Item 14(a)(3), Exhibit 10.05. Second
Settlement and Forbearance Agreement dated February 5,
1995, by and among Baby Grand Corp., M&R Investment
Company, Inc. and Bank One, Arizona, NA.; and Purchase
Agreement (including Option Agreement) dated February
9, 1995, by and between Baby Grand Corp. and M&R
Investment Company, Inc. Current Report on Form 8-K
(file no. 1-4385) dated February 9, 1995, Item 7,
Exhibit Nos.
10.01 and 10.02.

10.24 Reimbursement Agreement dated September 20, 1995, by
and between Rancho Murieta Community Services District
and SHF Acquisition Corporation regarding the amount of
the reimbursement due SHF for excess work done at The
Fairways at Rancho Murieta that will benefit other
properties within the boundaries of Rancho Murieta is
incorporated herein by reference to Dunes Hotels and
Casinos Inc. Annual Report on Form 10-K (file no.
1-4385) for the year ended December 31, 1995, Part IV,
Item 14(a)(3), Exhibit 10.24.

10.36 Real Estate Option Agreement dated September 27, 1996,
wherein M&R Investment Company, Inc. granted an Option
to MARCOR PARTNERSHIP, a general partnership, an Option
to acquire M&R Investment Company, Inc.'s 66.667%
interest in 2.16 acres of industrial property in Las
Vegas, Nevada; Memorandum Of Option for the purpose of
recordation is incorporated by reference to Dunes
Hotels and Casinos Inc. Annual Report on Form 10-K
(file no 1-4385) for the year ended December 31, 1996,
Part IV, Item 14 (a) (3), Exhibit 10.36.

<PAGE>20

10.37 Purchase Agreement dated February 27, 1997 by and
between Dana C. Hair ("Buyer") and Southlake
Acquisition Corporation, a Nevada Corporation, and Jim
Joseph, as Trustee of The Joseph Revocable Trust, each
as to an undivided 2 interest wherein Buyer agrees to
buy the property, more commonly known as The White
Ranch for $6,000,000 is incorporated by reference to
Dunes Hotels and Casinos Inc. Annual Report on Form
10-K (file no. 1-4385) for the year ended December 31,
1996, Part IV, Item 14 (a) (3), Exhibit 10.37.

10.38 Agreement For The Purchase and Sale of Real Property
dated February 21,1997, wherein SHF Acquisition
Corporation agrees to sell to Celebrate, LLC, and/or
assignee, Arroyo Grande Unit 3 consisting of 4 lots is
incorporated by reference to Dunes Hotels and Casinos
Inc. Annual Report on Form 10-K (file no. 1-4385) for
the year ended December 31, 1996, Part IV, Item 14 (a)
(3), Exhibit 10.38.

10.39 Agreement For The Purchase and Sale of Real Property
dated February 21,1997, wherein SHF Acquisition
Corporation agrees to sell to Celebrate, LLC, and/or
assignee, Arroyo Grande Unit 2A and 2B is incorporated
herein by reference to Dunes Hotels and Casinos Inc.
Annual Report on Form 10-K (file no. 1-4385) for the
year ended December 31, 1996, Part IV, Item 14 (a) (3),
Exhibit 10.39.

10.40 Purchase and Option Agreement by and between SHF
Acquisition Corporation and Murieta Investors, LLC,
dated October 7, 1996. This Agreement is incorporated
herein by reference to Dunes Hotels and Casinos Inc.
Annual Report on Form 10-K (file no. 1-4385) for the
year ended December 31, 1996, Part IV, Item 14 (a) (3),
Exhibit 10.40.

10.41 Construction Contract dated March 24, 1997, between SHF
Acquisition Corporation and Tolson Construction Co. for
the construction of a new rice dryer is incorporated
herein by reference to Dunes Hotels and Casinos Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, Part II, Item 6, Exhibit 10.01

10.42 Master Equipment Lease dated April 3, 1997, between
ICON Financial Corp. and SHF Acquisition Corporation is
incorporated herein by reference to Dunes Hotels and
Casinos Inc. Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, Part II, Item 6, Exhibit
10.02.

10.49 Loan Purchase Agreement dated November 19, 1997,
between M&R Investment Company, Inc. and John B.
Anderson, as Trustee of the John J. Anderson Family
Trust is incorporated herein by reference to Dunes
Hotels and Casinos Inc. Current Report on Form 8-K,
dated December 16, 1997, Item 5. Other Events.

<PAGE>21

10.50 Agreement to provide storage and drying dated May 28,
1998 between Adams Grain Co. and SHF Acquisition
Corporation.

10.51 Amendment to Purchase and Option Agreement by and
between SHF Acquisition Corporation and Murieta
Investors, LLC.

10.52 Agreement to purchase certain real property located in
Solano County, California (the Option Property) between
Los Rios Farms, Inc. and M&R Investment Company, Inc.
Dated December 8, 1998.

21.01 Subsidiaries of Registrant.

27.01 Financial Data Schedule

(b) Reports on Form 8-K

None

<PAGE>22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DUNES HOTELS AND CASINOS INC. DUNES HOTELS AND CASINOS INC.

By /s/Edward Pasquale By /s/Marvin P. Johnson
------------------------------ ------------------------
Edward Pasquale Marvin P. Johnson
President Principal Financial and
(Principal Executive Officer) Accounting Officer

Dated March 24, 1999
----------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Signature Title Date
- ------------------------- ---------------- ------------------

/s/EDWARD PASQUALE President
- -------------------------
Edward Pasquale

- -------------------------
John B. Anderson Director March , 1999

/s/ BRENT L. BOWEN
- -------------------------
Brent L. Bowen Director March 24, 1999

/s/ ANDREW P. MARINCOVICH
- -------------------------
Andrew P. Marincovich Director March 24, 1999

/s/ DONALD J. O'LEARY
- -------------------------
Donald J. O'Leary Director March 24, 1999

/s/ EDWARD PASQUALE
- ------------------------
Edward Pasquale Director March 24, 1999

/s/ WAYNE O. PEARSON
- -----------------------
Wayne O. Pearson Director March 24, 1999

/s/ ERIK J. TALLSTROM
- ----------------------
Erik J. Tallstrom Director March 24, 1999
</TABLE>

<PAGE>F-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Dunes Hotels and Casinos Inc.
Sacramento, California

We have audited the accompanying consolidated balance sheet of Dunes Hotels and
Casinos Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dunes
Hotels and Casinos Inc. and Subsidiaries as of December 31, 1998, and the
consolidated results of their operations and cash flows for each of the two
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.

As discussed in Note 3a(1), there is a substantial possibility that a change of
control of the Company has occurred or may occur in the near future. The effect
of such a change on the Company's future operations or other activities cannot
be assessed at this time.

The Company has engaged in significant business activities and transactions with
related parties, including real estate investments and lending, which have
resulted in losses.

/s/ Piercy, Bowler, Taylor & Kern

Las Vegas, Nevada

January 29, 1999, except for Note 7 as to which the date is March 2, 1999.

<PAGE>F-2

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1998
(Dollars in thousands)

ASSETS

Cash and cash equivalents $ 3,120

Marketable securities 828

Receivables
Trade 9
Related party, less allowance 37
Real estate sales 369

Inventory of real estate held for sale 3,950

Prepaid expenses 115

Property and equipment, less accumulated depreciation
and amortization of $598 3,228

Real estate investment 544

Other assets 3
---------------

$ 12,203
================

<PAGE>F-3

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (CONTINUED)

DECEMBER 31, 1998
(Dollars in thousands)

LIABILITIES AND SHAREHOLDERS EQUITY

Accounts payable $ 25

Accrued expenses 185

Due to former minority interest 320

Income taxes 307

Short-term debt 49

Long-term debt and capital lease obligations 1,875

Accrued preferred stock dividends in arrears 1,245
-----------------

4,006
-----------------

Shareholders' equity
Preferred stock - authorized 10,750,000
shares ($.50 par); issued 10,512
shares Series B $7.50 cumulative preferred stock,
outstanding 9,610 shares, aggregate liquidation
value $2,446, including dividends in arrears 5

Common stock - authorized 25,000,000 shares
($.50 par); issued 7,799,780
shares, outstanding 6,375,096
shares 3,900

Capital in excess of par 25,881

Deficit (19,589)
-----------------
10,197
Treasury stock, at cost; Preferred - Series B,
902 shares Common 1,424,684 shares (2,000)
------------------

Total shareholders' equity 8,197
------------------

$ 12,203
==================

<PAGE>F-4

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands, except per share)

1998 1997
------------------- -------------------
Revenues
Sales of real estate $ 571 $ 7,146
Rental income, agricultural properties 57 529
Drying and storage revenues 370 806
Miscellaneous income (expense), net 35 (83)
------------------- -------------------
1,033 8,398
------------------- -------------------

Cost and expenses
Cost of real estate sold 552 6,658
Cost and expenses of rental income 4 97
Cost of drying and storage revenues 413 519
Selling, administrative and general
Corporate 763 1,053
Real estate operations 193 218
Bad debts (recoveries), net 151 (94)
Depreciation 129 83
Provision for loss on real estate investment 100 400
------------------- -------------------
2,305 8,934
------------------- -------------------

Loss before other credits (charges), income taxes and
minority interest (1,272) (536)
------------------- -------------------

Other credits (charges):
Interest and dividend income 260 323
Interest expense (184) (201)
Loss on marketable securities, net (20) (4)
------------------- -------------------
56 118
------------------- -------------------
</TABLE>

<PAGE>F-5

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands, except per share)

1998 1997
------------------- -------------------

Loss before income taxes and minority interest (1,216) (418)

Income taxes 11 53
------------------- -------------------

Loss before minority interest (1,227) (471)

Minority interest in income of subsidiary, White Ranch 404
------------------- -------------------

Net loss $ (1,227) $ (875)
=================== ===================

Weighted average number of shares outstanding 6,375,096 6,375,096
=================== ===================

Loss per common share $ (0.19) $ (0.14)
=================== ===================

</TABLE>

<PAGE>F-6

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1998 AND 1997

(Dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Preferred stock Common stock
issued (1) issued Capital Preferred Common Total
----------------- ------------ in treasury stock treasury stock share-
Par Par excess -------------- ----------------- holders'
Shares value Shares value of par Deficit Shares Cost Shares Cost equity
------ ----- ------- ------ ------ -------- ------ ----- ---------- ------- --------
Balance,
January 1, 1997 10,512 $5 7,799,780 $3,900 $25,881 ($17,343) 902 ($70) 1,424,684 ($1,930) $10,443

Accrued
dividends, preferred (72) (72)
Net loss (875) (875)
------ ----- ---------- -------- ------- ---------- ------ ----- ---------- ------- --------

Balance,
December 31, 1997 10,512 5 7,799,780 3,900 25,881 (18,290) 902 ($70) 1,424,684 (1,930) 9,496

Accrued
dividends, preferred (72) (72)
Net loss (1,227) (1,227)
------ ----- ---------- -------- ------- ---------- ------ ----- ---------- -------- ----------

Balance,
December 31, 1998 10,512 $5 7,799,780 $3,900 $25,881 ($19,589) 902 ($70) 1,424,684 ($1,930) $8,197
======= ==== ========== ======= ========= ========= ====== ====== ========== ======== ==========

</TABLE>

(1) Series B, $7.50 dividend, voting and non-convertible (liquidation
value, $125 per share)

See notes to consolidated financial statements.

<PAGE>F-7

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands)

1998 1997
--------------- ----------------
Cash flows from operating activities:
Net loss $ (1,227) $ (875)
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Depreciation 129 83
Loss on marketable securities 20 4
Provision for losses on receivables 76 240
(Gain) loss on disposition of assets (8) 58
Provision for loss on real estate investment 100 400
Allocation of income to minority interest 404
(Increase) decrease in operating assets:
Trade receivables (6) 130
Inventory, real estate held for sale 409 6,560
Inventory, other 38
Prepaid expenses 7 (6)
Other 121 (113)
Increase (decrease) in operating liabilities:
Accounts payable 3 (74)
Accrued expenses (24) (39)
Deferred credits and other (178) 108
Income taxes 60
--------------- ----------------
Net cash provided by (used in) operating activities (578) 6,978
--------------- ----------------

Cash flows from investing activities:
Investment in marketable securities (250) (150)
Proceeds from sale of marketable securities 75
Real estate loans (145) (189)
Payments received on receivables 224 760
Proceeds from disposition of assets 13 111
Purchase of property and equipment (110) (1,826)
Proceeds from investments 5
Payments made to minority interest (2,981)
--------------- ----------------
Net cash used in investing activities (193) (4,270)
--------------- ----------------
</TABLE>

<PAGE>F-8

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands)

1998 1997
--------------- ----------------
Cash flows from financing activities:
Proceeds from short-term debt $ 90 $ 110
Payments on short-term debt (101) (119)
Proceeds from long-term debt 1,150
Payments on long-term debt (397) (833)
--------------- ----------------
Net cash provided by (used in) financing activities (408) 308
--------------- ----------------

Increase (decrease) in cash and cash equivalents (1,179) 3,016

Cash and cash equivalents, beginning of year 4,299 1,283
--------------- ----------------

Cash and cash equivalents, end of year $ 3,120 $ 4,299
=============== ================

Supplemental disclosures of cash flow information:
Cash paid during the year for:

Income taxes $ 11
===============
Interest $ 204 $ 185
=============== ================

Supplemental schedules of non-cash investing and
financing activities:
Dividends accrued but unpaid $ 72 $ 72
=============== ================

</TABLE>

<PAGE>F-9

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1998 AND 1997

1. Summary of significant accounting policies:

Consolidation:

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Continental California
Corporation (Continental), M & R Corporation (MRC) and MRC's
subsidiary, M & R Investment Company, Inc. (MRI) and MRI's subsidiaries
SHF Acquisition Corporation (SHF) and Southlake Acquisition Corporation
(Southlake), after elimination of all material intercompany balances
and transactions.

Description of business:

The Company operates in two principal business segments: real estate
(development and sale of residential lots and rental of agricultural
land) and agricultural (grain drying and storage).

The Company's real estate segment sells completed residential lots
primarily to builders of custom homes and to the general public in and
around the greater Sacramento, California, area. The agricultural
properties are leased to farmers in the area where the agricultural
properties are located. Accordingly, the Company's operations in this
segment could be affected by material adverse changes in economic
conditions in the area.

The agricultural segment dries and stores harvested grain over a two-month
period (approximately September 15 to November 15). In 1998, the
Company dried and stored white taco corn for one customer under a
five-year agreement. If the Company's five-year contract were to be
cancelled, it would have a material adverse effect on the Company's
drying and storage operation. In 1997, the Company dried and stored
rice principally for another customer.

Property and equipment and depreciation and amortization:

Property and equipment are stated at cost. Depreciation and amortization
are provided by the straight-line method over the estimated useful
lives of the assets.

Loss per share:

Lossper common share has been computed using the weighted average number
of shares outstanding during the year: 6,375,096 and 6,375,096 for the
years ended December 31, 1998 and 1997, respectively. Dividends on
nonconvertible preferred stock - Series B have been deducted from
income or added to the loss applicable to common shares.

<PAGE>F-10

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

Cash equivalents:

The Company considers all highly liquid cash investments purchased with an
original maturity of three months or less to be cash equivalents.

Marketable securities:

The Company's investments in marketable securities are accounted for as
trading securities. Accordingly, gains or losses related to the
Company's investments in marketable securities, which have not been
material, are included in operations.

Environmental expenditures:

Expenditures that relate to current operations are expensed or capitalized
as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to future
revenues are expensed. Liabilities are recorded when remedial efforts
are probable and the costs can be reasonably estimated.

Inventory of real estate held for development and sale:

Realestate held for development and sale is stated at the lower of cost or
net realizable value. Costs include primarily acquisition costs and
improvements costs. Costs are allocated to individual properties using
the method appropriate in the circumstances. For purposes of the
statement of cash flows, sales and purchases of real estate held for
development and sale are classified as operating activities, because
the real estate is, in substance, inventory.

Use of estimates:

Timely preparation of financial statements in accordance with generally
accepted accounting principles requires management estimates, some of
which may require revision in future periods. (See Note 11(c) ).

Capitalized interest:

Forthe year ended December 31, 1997, the Company capitalized
approximately $15,000 of interest in connection with the construction
of the rice drying facility (the Drying Facility).The capitalization
rate that was used was 12% which is the rate applicable to the debt
related to the construction of the Drying Facility.

<PAGE>F-11

2. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value and disclosures for financial instruments.

Cash, cash equivalents and marketable securities: The carrying amount
approximates fair value of cash, cash equivalents and marketable
securities. For marketable securities, fair values are estimated based
on quoted market prices as of December 31, 1998.

Notes receivable: These notes are collateralized by the real property sold.
Management believes the fair value of real estate notes receivable
approximates their carrying value based on their outstanding balances
(net of allowances), their respective interest rates and the estimated
fair value, based on comparable sales in the area, of the real
property.

In the event these notes were not collected, and the Company were
unable to recover or sell the collateral property the maximum losses
sustained would be equal to the aggregate value of the notes.

Realestate investment: The fair value of the investment in the Solano
County Option, is based on the sales price the Company will receive
when the sale of the option closes escrow. (See Note 7).

Long-term debt and capital lease obligation: The fair value of long-term
debt is not subject to reasonable estimation because the debt arose
principally as a result of the settlement of a dispute. The fair value
of the capital lease obligation is based on current rates at which the
Company could borrow funds.

The carrying amounts and fair values of the Company's significant financial
instruments at December 31, 1998, is as follows (Dollars in thousands):

Carrying Fair
Amount Value
-------- -------
Cash, cash equivalents and marketable securities $3,948 $3,948
Notes receivable, real estate sales 369 369
Real estate investment 544 544
Long-term debt and capital lease obligation (1,875) (1,000)

3. Related party transactions:

a. John B. Anderson (Anderson), the Company's controlling
stockholder and former Chairman of the Board of Directors of the
Company, and entities owned or controlled by him (Anderson
Entities) own approximately 67.2% of the Company's common stock as
of January 29, 1999. See Note 11(b) regarding litigation between
Anderson and the Federal Deposit Insurance Corporation (the FDIC)
and a possible change in ownership of the Company. Each entity
related or controlled by Anderson will hereinafter be identified
as an Anderson Entity.

<PAGE>F-12

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

(1) In November 1997, the Company entered into a Loan Purchase
Agreement with Anderson, as Trustee of the John J. Anderson Family
Trust (Trust). At such date, Anderson was President and Chairman
of the Board of the Company, and through his ownership of Cedar
Development Co., was the sole shareholder and President of Baby
Grand Corp. (BGC). The Loan Purchase Agreement provided for the
sale of a note issued by BGC (BGC Note) payable to MRI for
$320,000. The BGC Note was in the original principal amount of
$2,650,000 with interest at 9% per annum and was collateralized by
1,280,756 shares of the Company's outstanding common stock. The
BGC Note was carried on the Company's books at approximately
$100,000 and the Company reported a gain of approximately $162,500
in 1997.

The Loan Purchase Agreement was unanimously approved by the Audit
Committee of the Company's Board of Directors and seven of the
Directors of the Company. Anderson did not participate in the
Board's deliberation or vote with respect to the Loan Purchase
Agreement and provided written representation to the Board that
(i) he was aware of his fiduciary obligation to the Company, and
(ii) he was not aware of any transaction pending or in prospect
which would enhance the value of the BGC Note above the sale price
to the Trust. The Loan Purchase Agreement was approved in order to
prevent a change of ownership for purposes of the Internal Revenue
Code of 1986, as amended. Such a change would result in a
significant reduction, or the complete loss of the Company's net
operating loss carryforward, which as of December 31, 1997,
approximated $51,375,000.

On December 2, 1997, subsequent to completing the Loan Purchase
Agreement, it came to the Company's attention that BGC had
transferred to the Trust, in other satisfaction of the BGC Note,
assets having an estimated value, determined by BGC, ranging from
approximately $1,192,443 to approximately $1,612,632.

On December 8, 1997, the Company demanded that Anderson confirm to
the Company that the transfer of the assets from BGC to the Trust
did in fact occur. In addition, the Company demanded that all
assets received by the Trust from BGC, less the amount paid to MRI
for the purchase of the BGC Note, be turned over to the Company.

On December 15, 1997, Larry L. Bertsch, the special liquidating
master (the Special Master) previously appointed by the United
States District Court, District of Nevada (the Nevada District
Court), to sell the assets that serve as collateral for the
obligation due the FDIC by the Anderson Parties, filed with that
court an emergency motion seeking among other things a rescission
of the transaction.

On March 31, 1998, the Nevada District Court ordered that the Loan
Purchase Agreement be rescinded and all parties return any of the
assets transferred. As a result, the Company has recorded a loss
of approximately $162,500 in 1998.

(2) For the year ended December 31, 1997, $45,400 was paid on behalf
of Anderson for certain of Anderson's expenses, in lieu of salary,
which payments were considered compensation to Anderson as
President of the Company and were approved by the Company's Audit
Committee. No payments have been made to Anderson during 1998.

<PAGE>F-13

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

(3) In August 1997, the Company entered into a oral agreement with an Anderson
related entity to lease the West Sacramento Drying Facility for the purpose
of drying short-grain rice during the 1997 rice drying season. Rental for
the West Sacramento Drying Facility was $20,000 plus 50% of the rice drying
and storage profit after deduction for the $20,000 rent payment. The rent
payment was made by transferring to the Anderson related entity a piece of
equipment, valued at $20,000, that was previously used in the Steadfast
Cattle operation.

4. Inventory of real estate held for development and sale (Dollars in
thousands):

The Fairways (a) $ 3,764
Sam Hamburg Farm (b) 146
Other 40
------------
$ 3,950

(a) The Company, through SHF, developed 50 acres of residential land
located at Rancho Murieta, California as a residential planned unit
development known as "The Fairways". Rancho Murieta is a 3,500- acre
master planned unit development located approximately 25 miles from
Sacramento, California. The land is encumbered by bonds in the
approximate amount of $140,000, see page 6. Rancho Murieta consists
primarily of single family homes, town houses, commercial property and
two 18-hole championship golf courses, including country club
facilities. The Fairways, located within the boundaries of one of the
golf courses located at Rancho Murieta, was subdivided into 110
single-family estate lots. As of January 29, 1999, 45 lots remain
unsold.

In connection with its development of The Fairways, SHF was required to
construct certain improvements that benefited not only The Fairways,
but other properties that lay outside of the boundaries of The Fairways
(the Benefited Properties). The net cost of the improvements to the
Benefited Properties was $1,140,900. SHF will be reimbursed for these
costs as the Benefited Properties are developed. SHF's right to
reimbursement will expire in September 2115 and the Company is unable
to predict what amount, if any, will be received as reimbursement. The
rights to reimbursement are personal to SHF and do not run with The
Fairway's property unless assigned by SHF.

As part of the Settlement Agreement with the Resolution Trust
Corporation (the RTC), all of the unsold lots in The Fairways are
encumbered by a deed of trust in favor of the RTC. The deed of trust
requires a $40,000 payment for the release of each of the encumbered
lots. (See Note 8).

In July 1996, the Company signed a Purchase and Option Agreement
(Agreement) with Murieta Investors, LLC (MI). The Agreement provides
that MI will purchase from the Company 6 lots at The Fairways at
$40,000 per lot and MI will have an option to acquire additional lots.
In addition, the Company may receive contingent consideration equal to
20% of the gross sales price of each residential dwelling sold less
$40,000 (the Success Payments).

<PAGE>F-14

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

In 1998, the Agreement was amended to provide for options on 34 lots at
a purchase price of $50,000 plus the 20% Success Payments. The options
are exercisable starting December 1, 1998 (6 lots) and every six months
thereafter (4 lots each). In addition, if 2 consecutive options are not
exercised, then the remaining options are terminated. To date, MI did
not exercise the first option due December 1, 1998.

(b) Sam Hamburg Farm consists of approximately 150 acres of agricultural
property. Of the 150 acres, 40 acres contain the air strip and shop
areas which are the focus of continuing attempts at chemical clean-up.
See Note 11 (c) for a detailed discussion concerning the removal of the
toxic waste. The remaining 110 acres are leased to various tenants at
an annual aggregate rental of approximately $20,000.

(c) On July 15, 1997, the Company closed the sale of the White Ranch. Net
proceeds from the sale were approximately $5,965,000 of which
approximately $2,982,500 was paid to the Company. The balance of the
proceeds were paid to the other 50% owner of the White Ranch. (See Note
10).

On July 3, 1997, the Company closed the sale of the 57 residential lots
located in North Las Vegas, Nevada. Net proceeds to the Company were
approximately $645,600 which included a reimbursement of approximately
$72,600 for water fees previously paid. Out of the net proceeds, the
Company paid approximately $318,000 to Beal Bank, the purchaser of the
SASA Obligation.

5. Property and equipment and accumulated depreciation and amortization (Dollars
in thousands):

Land and land improvements $ 159
Building and improvements 3,591
Machinery and equipment 76
--------
3,826
Less accumulated depreciation
and amortization ( 598)
---------
$ 3,228

In September 1997, the Company commenced the operation of its new drying
facility which cost $1,806,250.

<PAGE>F-15

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

6. Long-term notes receivable (Dollars in thousands):
Related Party
BGC, including interest 1936
Less allowance 1899
37
Real estate
Various real estate notes, collateralized by deeds of trust
with interest ranging from 8% to 10% (a) 369
--------
$ 406
========
(a) Approximately $63,000 of the various real estate notes are subject to a
collateral assignment in favor of the RTC. (See Note 8).

7. Real estate investment (Dollars in thousands):

Real estate investment consists of:
Solano County Option, at cost $ 1,044
Less allowance (500)
--------
$ 544
=========

The Company has an option (the Solano County Option) to acquire
approximately 1,690 acres of farm land located in Solano County,
California. The Company acquired the Solano County Option as part of a
settlement agreement between BGC, an Anderson Entity, a financial
institution and MRI. The purchase price of the Solano County Option was
$1,043,902. The Solano County Option provides that the Company would
purchase the 1,690 acres at a price of $3,000,000. The Company would
receive a credit of $1,000,000 against the Option Purchase Price. The
option expires on May 1, 2003. The owner of the property under option
had informed the Company that it is current on all payments that are
required on the first mortgage lien.

In December 1998, the Company entered into an agreement with the
grantor of the option to sell back its rights under the option agreement for
$533,333. The agreement provides for a 120 day escrow, and the reacquisition
price is to be paid $500,000 in cash at closing and a $33,333 note. Closing
occurred on March 2, 1999 and the Company received its
consideration.

8. Long-term debt and capital lease obligations:

Long-term debt and capital lease obligations at December 31, 1998, consists of
the following (Dollars in thousands):

RTC Settlement Note (a) $ 856
Capital lease obligation (b) 1,000
Other (c) 19
----------
$ 1,875
==========

<PAGE>F-16

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

Five year maturities of long-term debt are as follows:

(Dollars in thousands)
----------------------
Long term Capital
debt Lease Obligation Total
------------ ----------------- --------

1999 $ 3 $ 182 $ 185
2000 858 221 1,079
2001 3 247 250
2002 3 276 279
2003 3 74 77
Thereafter 5 5
-------- ------- -------
$ 875 $ 1,000 $ 1,875
======== ======== =======

(a) The RTC Settlement Note is dated December 6, 1995, and is due December
6, 2000. The note bears interest at the rate of 1% over the prime rate
as published in the Wall Street Journal. The rate is adjusted
semi-annually (the Interest Adjustment Date), provided, however, that
under no circumstances shall the rate be less than 8% or more than 12%
per annum. Payment terms are interest only, payable monthly. Monthly
payments are adjusted semi-annually on the Interest Adjustment Date.
The entire remaining principal amount and all accrued and unpaid
interest is due and payable in full on December 6, 2000. The RTC
Settlement Note was sold to Beal Bank in 1996.

The note is collateralized by the following:

A deed of trust with an assignment of rents (Rancho Murieta Deed
of Trust) with SHF. The Rancho Murieta Deed of Trust encumbers
approximately 45 finished residential lots at December 31, 1998
located at The Fairways. SHF is entitled to the release of a lot
upon the payment of $40,000 to Beal Bank for each lot released.
Beal Bank will apply such payments to the outstanding principal
due on the note.

A collateral assignment of purchase money promissory notes (
Notes) secured by deeds of trust with SHF as pledgor and Beal Bank
as pledgee. As of December 31, 1998, Notes with a face amount of
$63,000 have been pledged to Beal Bank. Principal collections on
the Notes will be remitted to Beal Bank for application to the
outstanding principal due on the note.

(b) The Company has a financing lease agreement for its drying
facility for five years commencing March 1998. The monthly rental
is $25,122, and the Company can buy the drying facility for $1 at
the end of the lease. The lease is collateralized by the drying
facility, a deed on trust on certain parcels of property,
including the parcel on which the storage facility is located and
the guarantees of MRI and the Company. Before the guarantors are
liable for any deficiency, the leasing company must first proceed
against the drying facility and the additional collateral.

<PAGE>F-17

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

9. Preferred Stock:

The Company is authorized to issue 10,750,000 shares of $0.50 par
value preferred shares. The Company gave authority to its Board of
Directors to issue such preferred shares in one or more series,
and to fix the number of shares in each series, and all
designations, relative rights preferences and limitations of the
shares issued in each series. As of December 31, 1998, the Board
of Directors has not exercised the authority granted, and no such
preferred shares have been issued except for the 10,512 shares of
Series B, $7.50 cumulative preferred of which 902 shares are held
as treasury stock. Dividends on the Company's Series B preferred
stock have not been paid since the first quarter of 1982. The
Company is in arrears on such dividends as of December 31, 1998,
in the amount of approximately $1,245,000.

10. Due to former minority interest:

The due to former minority interest consists of the other 50% owner's
share of the accumulated profits from the operations of the
subsidiary, White Ranch, which was sold in 1997.

11. Contingencies:

(a) As of December 31, 1998, there were no material legal proceedings
pending against the Company. See Note 3(a) and item (b) below
regarding legal proceedings not involving the Company that may
have a material adverse effect on the Company.

(b) Anderson, Edith Anderson (Anderson's wife), Cedar Development Co.
(Cedar), J.A. Inc., and J.B.A. Investments, Inc. (JBA and
collectively with Anderson, his wife, Cedar, and J.A. Inc. the
Anderson Parties) are involved in litigation (the Anderson
Litigation) with the FDIC. Until December 11, 1997, Anderson was
the President and Chairman of the Board of the Company
and Chairman of the Board of various subsidiaries of the Company.
Prior to the events described herein, Anderson, through his
ownership of Cedar, the parent of BGC and JBA, owned approximately
4,280,756 shares or 67.2% of the Company's outstanding common stock
(the Common Stock). Of those shares (i) 3,000,000 shares (the FDIC
Pledged Shares) have been pledged as collateral in favor of
entities of which the FDIC is a successor and/or assign, and
(ii) 1,280,756 shares (the BGC Pledged Shares) have been
pledged as collateral in favor of a subsidiary of the Company.

In July 1997 the Nevada District Court approved "a plan of
disposition of collateral". A Special Master was appointed to
implement the plan, which includes among other things, the FDIC
Pledged Shares and the common stock of BGC which owns the BGC
Pledged Shares. The Special Master was to accept bids until
November 13, 1997 and make his recommendation to the court. To
date the Special Master has not reported his

<PAGE>F-18

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

recommendations to the Court and the Company has not been advised
of any FDIC sale of security interests it holds in the FDIC
Pledged shares.

The Company submitted a bid for the 3,000,000 FDIC Pledged Shares.
Under certain circumstances, the sale of the FDIC Pledged Shares
and the BGC Pledged Shares within a three year period may result
in a change in ownership of more than fifty percent of the Company
which may result in a material reduction of the amount of net
operating loss carry forward (NOL). (Note 12).

On or about December 16, 1997, the Nevada District Court issued an
order declaring that the FDIC has the right to act by written
consent with respect to Cedar, BGC, JBA and JA. Because of the
Nevada District Court's order, the FDIC has the power to exercise
voting rights with respect to the FDIC Pledged Shares, which
represent 47.1% of the outstanding common stock. Because the FDIC
is able to exercise voting rights with respect to the FDIC Pledged
Shares, the FDIC is able to exercise substantial influence with
respect to the election of the entire Board of Directors of the
Company and all matters submitted to stockholders. The FDIC is
able to significantly influence the direction and future
operations of the Company, including decisions regarding future
financings (which could involve the issuance of additional Common
Stock or other securities) and decisions regarding the day-to-day
operations of the Company's real estate and agricultural
operations. If it is ultimately determined that the FDIC has the
authority to exercise voting rights with respect to the BGC
Pledged Shares, then the FDIC would have the power to vote 67.2%
of the outstanding Common Stock of the Company. In such event, the
FDIC would be able to control, rather than only significantly
influence, the election of the entire Board of Directors of the
Company and all matters submitted to stockholders.

In response to the FDIC's January 15, 1998, demand to hold a
special meeting of shareholders, the Company indicated that it is
willing to discuss the procedures and effects of a stockholder
meeting with the FDIC, but pending more information from the FDIC
the Company is deferring the formal setting of a meeting date and
record date for voting purposes. To date, the FDIC has not yet
responded to the Company as to such further information.

(c) SHF was advised in 1991 of possible contamination at Sam Hamburg
Farm of approximately 5,000 cubic yards of contaminated earth. The
Company, through its chemical and toxic clean-up consultant, has
been working with the California State Environmental Protection
Agency, in seeking alternate means to the disposal in toxic dump
sites of chemical and toxics-laden soil.

Because of the ongoing testing, the State has not imposed a
disposal date upon the Company. Cost of disposal is estimated at
$100 per cubic yard or approximately $500,000. However, if on-site
remediation can be achieved, it is estimated that the cost will be
between $90,000 and $115,000. The Company is unable to predict
when the ongoing testing will be complete or what the outcome of
these tests will be. Accordingly, the estimates could materially
change as the testing and emediation work continues, which
could be as early as 1999.

<PAGE>F19
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

(d) The Company has received a notice from the State of California Franchise
Tax Board (FTB) wherein the FTB alleges that one of the Company's
subsidiaries owes California franchise tax of approximately $316,000, plus
approximately $350,000 in penalties and interest resulting from the
foreclosure sale of certain real property owned by the subsidiary. The
Company appealed this matter to the California State Board of Equalization
(SBE) which ruled in favor or the Company on one point and ruled in favor
of the FTB on another. Both sides appealed and the SBE has agreed to rehear
the case in 1999. Provision has been made in the financial statements for
management's minimum estimate of the costs of this matter, including
penalties and interest accrued.

12. Taxes:

The Company and its subsidiaries file a consolidated federal income tax
return. Deferred tax assets (liabilities) are comprised of the
following at December 31, 1998
(Dollars in thousands);
<TABLE>
<S> <C>
Investment allowances $170
Real estate allowances 480
Loss carryforwards 17,858
Other 2
Gross deferred tax assets 18,510
Deferred tax asset valuation allowance (18,508)
2
Marketable securities valuation allowance (2)
Gross deferred tax liabilities (2)
Net deferred tax assets $ 0
============

A reconciliation of the changes in deferred tax assets valuation
allowance is as follows: (Dollars in thousands);

Valuation allowance for idle equipment (11)
Valuation allowance for unrealized loss on marketable securities 7
Current year loss carryforwards 551
(Decrease) in valuation allowance for loan receivables. (2)
Valuation allowance for other investments 34
----------- -
Change in deferred tax asset valuation allowance 579
Deferred tax assets valuation allowance, beginning of year 17,929
---------
Deferred tax assets valuation allowance, end of year $ 18,508
=========
</TABLE>

<PAGE>F-20

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

A reconciliation of the federal statutory tax rate to the effective tax rate for
1998 and 1997, is as follows:

Percentage of pre-tax income
1998 1997
----- ------
Federal statutory rate (34.00%) (34.00%)
Debt discharges and other (1.08%) (84.69%)
Non-deductible items:
Valuation adjustments 34.65% 121.46%
Other .43% (2.77%)
-------- --------
0.00% 0.00%
======== =========

The Company has the following net operating loss carryovers available for income
tax reporting purposes:
Year of expiration (Dollars in thousands)
------------------ -----------------------
2000 2,386
2001 9,890
2003 20,156
2004 1,889
2005 1,891
2006 3,542
2007 803
2008 2,408
2009 595
2010 3,298
2011 1,791
2012 2,726
2018 1,167

As more fully described in Note 3a (1) a change in ownership of the
Company may have or could take place. If such a change in
ownership were to take place, it would materially reduce the
amount of net operating losses that the Company could use to
offset future taxable income in any given year. This annual
limitation, to the extent not used in any given taxable year, may
be carried forward and added to the limitation of subsequent
years.

<PAGE>F-21

DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1998 AND 1997

13. Segment information:

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information", without any material
effect.

As discussed in Note 1, the Company operates in two principal
business segments: real estate investments (development and sale
of residential lots and rental of agricultural land), and
agricultural (drying and storing grain).

Following is a summary of segment information for 1998 and 1997:
<TABLE>
<S> <C> <C>

1998 1997
---- ----
Net revenues from unaffiliated customers:
Real estate:
Sale of real estate $ 571 $ 7,146
Land rent 57 529
Grain drying and storage revenue 370 806
--------- ---------
$ 998 $ 8,481
======= =======

Income (loss) from operations:

Real estate $ (122) $ 626
Grain drying and storage (165) 211
------------- ---------
(287) 837
Corporate operating expense (1,020) (1,290)
Other income (expense) 91 35
Income taxes (11) (53)
Minority interest (404)
------------- ---------------
Net loss, as reported in the
accompanying consolidated statements of operations ($1,227) ($ 875)
======= ======

1998
Identifiable assets
Real estate $ 3,950
Grain drying and storage 3,203
General corporate assets 5,050
---------
Total assets, as reported in the accompanying
consolidated balance sheet $ 12,203
=========
</TABLE>

ADAMS GRAIN CO.
P. O. Box 799
Arbuckle, CA 95712

May 28, 1998

Walt Ramazzini
S.H.F. Acquisition Corp.
4600 North Gate Blvd, Suite #13
Sacramento, CA 95834

Dear Walt:
The following terms and conditions will govern the storage agreement between
Adams Grain Co. Inc. (AGCo) and S.H.F. Acquisition Corp. (SHF):

1) SHF agrees to provide storage and drying at their facility located at
46735 County Road 32B, Davis, California. The facility consists of two buildings
sized to each store 300,000 cwt. of wheat, corn, or safflower. Adams will be the
sole tenant at the facility during this storage agreement. The contract period
will be from June 1998 through May 31, 2002. This contract will be reviewed each
May with an option to extend the contract an additional year if agreed by both
SHF and AGCo.

2) Adams will fill each building to capacity (as determined by SHF) at
least once per year (June through May). AGCo will pay SHF as follows: A) Wheat -
$0.10/cwt. receiving (as harvested- May through July), $0.075/cwt. (each for
September and October), and $0.10/cwt. shipping (when loaded out). AGCo is
responsible for an additional $0.05/cwt. charge on unused storage capacity if
the building is filled at harvest, emptied before September, and then partially
filled with another commodity. B) Corn - $0.175/cwt. receiving (on dried weight,
as harvested-September through December) and $0.175/cwt. shipping (when loaded
out). C) Safflower - $0.175/cwt. receiving, and $0.175/cwt. shipping.

3) SHF will dry any corn that is 15.6% or higher moisture (per AGCo grade)
to 14.5%. SHF shall store the corn at moistures between 14.0% and 15.5%. AGCo
will pay SHF the following for drying (on received weight):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>

Moist % $/cwt Moist % $/cwt Moist % $/cwt
15.6-15.9 0.30 20.0-20.9 0.45 25.0-25.9 0.70
16.0-16.9 0.325 21.0-21.9 0.50 26.0-26.9 0.75
17.0-17.9 0.35 22.0-23.9 0.55 27.0-27.9 0.80
18.0-18.9 0.375 23.0-23.9 0.60 28.0-28.9 0.85
19.0-19.9 0.40 24.0-24.9 0.65 29.0-29.9 0.90
</TABLE>

<PAGE>

4) SHF will bill AGCo on the last day of each month for all drying,
receiving, and shipping charges incurred that month. AGCo will reconcile the
bill and pay within 20 days.

5) SHF's receiving hours will coincide with AGCo's 102 facility harvest
receiving hours until facility is filled. Otherwise, SHF's receiving/shipping
hours will be 7AM to 3PM, Monday through Friday, excepting holidays.

6) AGCo will deliver no more than 40 trucks of grain per day unless other
arrangements are made with SHF. AGCo will grade all trucks prior to delivery and
provide SHF with the grade for drying purposes. SHF will not dump any grain
without an AGCo grade. SHF will provide AGCo with a composite sample of dried
corn daily. This sample will be taken at the end of conveyance (where the grain
enters the bin).

7) SHF is responsible for maintaining quality of stored grain. SHF is
liable for shrink on any corn less than 13.0% moisture. SHF will retain a probed
sample of grain from every truck shipped from their facility for AGCo. Wheat and
corn needing fumigation will be done at AGCo's recommendation and expense. SHF
will convert tunnels from screens to perforated metal at SHF's expense, as
required, for wheat storage.

8) AGCo may inspect their grain stocks at any time during the storage
period. AGCo will absorb 1 percent loss or gain on grain stored. SHF agrees that
any loss or gain greater than 1 percent will be for their account. SHF will
provide daily scale weights and monthly inventory statements to AGCo.

9) In the event that SHF sells the facility to a third party during the
term of this agreement, AGCo will fulfill the obligations for the current
harvest year and reserves the right to retain or void the remaining years of the
agreement.

Please sign below for confirmation of the agreement. Thank you.

Sincerely,

/s/ Mike Adams

Mike Adams
Adams Grain Co. Inc.

/s/ Walt Ramazzini

Walt Ramazzini
S.H.F. Acquisition Corp.

AMENDMENT TO PURCHASE AND OPTION AGREEMENT
by and between
SHF ACQUISITION CORPORATION
and
MURIETA INVESTORS, LLC
dated October 7, 1996

SHF Acquisition Corporation, a Nevada Corporation (Seller) and Murieta
Investors, LLC, a California Limited Liability Company (Buyer) desire to amend
that certain Purchase and Option agreement dated October 7, 1996, as follows:

1. Seller will grant to Buyer an Option to purchase up to 34 lots, if
said number of lots are available during the Option Period (the Option Lots),
located in the subdivision commonly referred to as Unit 6, or the Fairways, of
Rancho Murieta, County of Sacramento, State of California. Seller will also
grant to Buyer a First Right of Refusal for the sale of Multiple (three or more)
Lots to a single Third Party Purchaser. Said First Right of Refusal shall be
issued to Buyer upon the Seller's receipt of a bonafide offer to purchase three
(3) or more lots from the Sellers remaining unsold lots in Unit 6. Buyer shall
have five (5) business days, from the date of Sellers notification of a bonafide
offer to purchase Multiple Lots, to submit to Seller an executed purchase
agreement on the same terms and conditions as set forth in the Third Party
Purchase offer of purchase. In the event that Buyer fails to submit such
executed purchase offer to Seller within five (5) business days, then all Buyer
rights associated with the First Right of Refusal for the identified lots shall
be waived and thereafter have no force or effect, except that in the event,
should the Third Party Purchaser seek to modify the purchase price or Seller
financing of the purchase on terms more favorable to the Third Party Purchaser
than contained in the original purchase agreement, then Buyer shall be so
notified and the five (5) day First Right of Refusal reinstated for those lots
contained in the purchase agreement. A Third Party Purchaser shall be a person
or entity, with no affiliation to Seller.

2. Buyer shall have the right to exercise the Option in multiple phases
and in such increments as Buyer desires, until Buyer has purchased all of the
Option Lots. Notwithstanding the foregoing, Buyer will purchase a minimum of six
(6) of the Option Lots on the first Option Exercise Date and a minimum of four
(4) of the Option Lots on each Option Exercise Date thereafter.

3. The first Option Exercise Date shall be December 1, 1998 (the Initial
Option Date). Additional Option Dates will be every six months following the
Initial Option Date. If any Options are not exercised subsequent to the Initial
Option Date, then the number of remaining Option Lots shall be reduced by the
number of Option Lots not exercised. In the event, that Buyer fails to exercise
two (2) consecutive Options to purchase, then all remaining Options and First
Right of Refusal rights shall be terminated by operation of this amendment and
without notice.

<PAGE>

4. The Option Lots to be purchased will be identified by Buyer and
approved by Seller prior to each Option Exercise Date with no more than one half
(1/2) of the Option Lots being located on the fairway of the golf course next to
the Sellers property.

5. The purchase price of the Option Lots will be $50,000.00 per lot
purchased plus reimbursement to Seller of Park Fees paid to Rancho Murieta
Association and 20% of the lesser of (i) the Gross Sales Price or (ii) the Basic
Sales Price, as both are defined in the Purchase and Option Agreement dated
October 7, 1996, less $50,000.00.

6. If Buyer has not completed a single family residence on any of the
Option Lots purchased within nine months of the purchase date, then Buyer will
at Sellers option and upon Sellers inspection of the construction status, either
(1) pay to Seller the balance of the lot purchase price as defined by the
Sellers Lot Price List as of the date of this amendment, or (2) extend the
completion date. Should Seller elect (1) above, Buyer will have thirty (30) days
to tender to Seller the balance of the purchase price. Seller will discount the
purchase price Buyer based on the following schedule:

Single lot 0%
Two lots 3%
Three lots 5%
Four or more 7.5%

Time is of the essence, however, should Buyers construction time be extended by
acts of nature or other acts beyond their control, i.e. governmental
intervention, the nine month time frame will be adjusted accordingly at Sellers
discretion.

It is understood by both Buyer and Seller that all other terms of the
Purchase and Option Agreement, dated October 7, 1996 shall remain in full force
and effect.

SHF ACQUISITION CORPORATION

by Edward Pasquale /s/ E. Pasquale, President

MURIETA INVESTORS, LLC

by Jeff Herbst

AGREEMENT

This Agreement is made and entered into as of the ___ day of
___________, 1998, by and between LOS RIOS FARMS, INC., a California corporation
("Los Rios"), and M & R INVESTMENT COMPANY, INC., a Nevada corporation ("M &
R").

RECITALS

WHEREAS, Los Rios granted an option to purchase certain real property
located in Solano County, California (the "Option Property"), to Baby Grand
Corp., a Nevada corporation ("Baby Grand"), pursuant to an Option Agreement
dated April 30, 1993 (the "Option Agreement"), in consideration for the sum of
One Million Dollars ($1,000,000.00) (the "Option"); and

WHEREAS, a Memorandum Option was recorded August 10, 1993, in the
Official Records of Solano County, California as Instrument No. 1993 - 00072641;
and

WHEREAS, Baby Grand sold, assigned and conveyed to M & R, with the
consent of Los Rios, all of its right, title and interest in and to the Option
Agreement, including but not limited to its right, title and interest in and to
the Option Property, pursuant to a Purchase Agreement dated as of February 9,
1995; and

WHEREAS, a Memorandum of Purchase and Assignment of Option was recorded
March 20, 1995 in such Official Records as Instrument No. 1995-00016318, and a
Quitclaim Deed from Baby Grand to M & R was recorded March 20, 1995 as
Instrument No. 1995 - 00016319; and

WHEREAS, the Option has not been exercised, and Los Rios still holds
good and marketable title to the Option Property; and

WHEREAS, Los Rios now desires to buy the Option back from M & R, thus
effecting a termination of the Option; and

WHEREAS, M & R is willing to sell and assign the Option to Los Rios, on
the terms and conditions, and based upon the representations and covenants, set
forth in this Agreement.

NOW, THEREFORE, for and in consideration of the covenants contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereby agree as follows:

1. Sale and Buy-Back of the Option. Subject to the terms and conditions
set forth in this Agreement, M & R shall sell, assign and convey to Los Rios,
all of its right, title and interest in, to

<PAGE>

and under the Option Agreement, including but not limited to any right, title or
interest it may have in the Option Property (the "Option Rights"), and Los Rios
shall purchase, assume and acquire the Option Rights.

2. Termination of the Option. The Option and the Option Rights shall
automatically terminate without any further action or documentation upon
completion of all acts necessary to be performed at and conditions precedent to
the Closing (as defined below), and Los Rios shall thereafter own the Option
Property free and clear of the Option.

3. Consideration. The consideration for M & R's sale, assignment and
conveyance of the Option Rights shall be (i) Los Rios' covenant with respect to
sale of the Option Property specified at Section 8. B. below, and (ii) the sum
of Five Hundred Thirty-Three Thousand, Three Hundred Thirty-Three Dollars and
33/100 Cents ($533,333.33) (the "Consideration"), payable as follows:

A. At the Closing (as defined below), Los Rios shall pay to M & R
the sum of Five Hundred Thousand Dollars ($500,000.00) in cash (the "Cash
Consideration"); and

B. At the Closing (as defined below), Los Rios shall deliver to M
& R a Promissory Note, payable to M & R, in the amount of Thirty-Three Thousand,
Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($33,333.33), plus
interest at the rate of Eight Percent (8%) per annum (the "Note"). The Note
shall be in form of and include the terms and conditions set forth the
promissory note attached hereto as Exhibit A.

4. Closing. The Closing shall, unless extended by written agreement of
the parties, occur on or before one hundred twenty (120) days from the execution
of this Agreement (the "Closing"), at such place and time as shall be agreed to
by the parties.

5. Escrow; Title Insurance Policy. Upon full execution of this
Agreement, Los Rios may open an escrow with Placer Title Co. having an address
of Davis, California (the "Escrow Agent") to complete the transaction
contemplated by this Agreement. If Los Rios elects to open the escrow, M & R
will cooperate with Los Rios in the preparation and submission of mutually
acceptable escrow instructions and other documents as may be requested by Escrow
Agent, but Los Rios shall pay any and all escrow fees. In addition, Los Rios
shall take any and all action necessary to obtain a policy of title insurance,
as described in Section 6(B)(5) of this Agreement, and shall pay any and all
fees and costs associated therewith.

6. Conditions Precedent.

A. M & R's obligation to sell and convey the Option Rights to Los
Rios shall be expressly conditioned upon the following conditions precedent to
Closing:

<PAGE>

(1) Los Rios' payment of the Cash Consideration at Closing;

(2) Los Rios' delivery of the Note at Closing;

(3) Los Rios' compliance with all of the terms and provisions of this
Agreement which must be complied with at or prior to Closing;

(4) Los Rios' delivery to M & R, at or before the Closing, of evidence of
capacity and other authority and such other documents reasonably requested by M
& R; and

(5) Issuance by Placer Title Company, at the Closing, of a CLTA owners'
policy of title insurance to Los Rios, in the amount of $533,000, insuring that
title to the Option Property is free and clear of the Option.

B. Los Rios' obligation to pay the Consideration to M & R is expressly
conditioned on the following conditions precedent to the Closing

(1) M & R's delivery to Los Rios, at Closing, of an
Assignment of Option Rights, in the form attached hereto as
Exhibit B; and

(2) M & R's delivery of a Quitclaim Deed in the form
attached hereto as Exhibit C;

(3) M & R's delivery to Los Rios, at or before the
Closing, of evidence of capacity and other authority and such
other documents reasonably requested by Los Rios; and

(4) M & R's compliance with all of the terms and
conditions of this Agreement which must be complied with prior to
the Closing.

7. Los Rios' Representations and Warranties. Los Rios hereby represents
and warrants to M & R as follows, which representations and warranties shall be
deemed made as of the date of this Agreement and as of the Closing, and the
effectiveness of such representations and warranties as of the Closing shall
survive the Closing:

A. Los Rios is a corporation organized and in good standing under the laws
of the State of California.

B. The person executing this Agreement for and on behalf of Los Rios has
been duly authorized and empowered by Los Rios to execute this Agreement on its
behalf and upon such execution the terms and provisions of this Agreement shall
be valid and binding obligations of Los Rios.

<PAGE>

C. Los Rios is not now offering the Option Property for sale or
negotiating a sale of the Option Property, and has no plans to do so.

8. Los Rios' Covenants.

A. As of and after the Closing, Los Rios shall indemnify, defend,
and hold harmless M & R, its assigns and transferees, and each of their
respective representatives, employees, trustees, officers, directors and agents
(collectively, the "Indemnified Parties"), from and against any and all claims,
judgments, damages, penalties, fines, costs, expenses, liabilities or losses
(including, without limitation, sums paid in settlement of claims, attorneys'
fees, consultant fees and expert fees) which M & R or any other Indemnified
Party may incur or suffer as a result of (i) any misrepresentation made herein
by Los Rios or any of its members, officers, directors, employees or agents,
(ii) any breach of any provision set forth herein by Los Rios or any of its
members, officers, directors, employees or agents, or (iii) M & R's sale of, or
Los Rios' buy-back of the Option.

B. Los Rios expressly acknowledges that M & R paid $1,000,000 for
the Option, and that M & R has only agreed to accept the Consideration based on
representations made by Los Rios' principal(s) that Los Rios could not pay more
than $533,333.33 for the Option, and that Los Rios had no plans to and would not
sell the Option Property to a third person after the Closing. Therefore, Los
Rios expressly covenants and agrees that neither it, nor any of its successors
or assigns, shall, prior to the Closing and for a period of nine months after
the Closing, offer the Option Property for sale, negotiate with anyone with
respect to the sale of the Option Property, enter into any contract for sale of
the Option Property, sell or convey the Option Property, or grant an option in
the Option Property.

C. At and after the Closing, Los Rios shall execute any and all
other documents which the parties determine are reasonably necessary to
consummate the transactions contemplated by this Agreement.

9. M & R's Representations and Warranties. M & R hereby represents and
warrants to Los Rios as follows, which representations and warranties shall be
deemed made by M & R as of the date of this Agreement and as of the Closing, and
such representations and warranties shall survive the Closing:

A. M & R is a corporation formed and in good standing under
the laws of the State of Nevada;

B. The person executing this Agreement on behalf of M & R is
authorized to execute this Agreement and upon such execution the terms and
provisions of this Agreement shall be valid and binding obligations of M & R.

<PAGE>

C. M & R is now, and immediately prior to close of escrow will
be, the owner of the Option and the Option Rights.

D. M & R has not sold, transferred, assigned, pledged,
encumbered, or hypothecated its interest in the Option Property, and has no
plans to do so except as stated herein.

10. M & R's Covenants.

A. As of and after the Closing, M & R shall indemnify, defend and
hold harmless Los Rios and its officers, directors, employees and agents from
and against any and all claims, judgments, damages, penalties, fines, costs,
expenses, liabilities, or losses (including, without limitation, sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees) which
Los Rios or any of its officers, directors, employees or agents may incur or
suffer as a result of (i) any misrepresentation made herein by M & R or any of
its officers, directors, employees or agents, or (ii) any breach of any
provision set forth herein by M & R or any of its officers, directors, employees
or agents.

B. At and after the Closing, M & R shall execute any and all
documents which the parties determine are reasonably necessary to consummate the
transactions contemplated by this Agreement.

11. Default. If Los Rios defaults in its performance of or under this
Agreement or the Note, M & R shall have all rights and remedies available to it
under California law or in equity.

12. Notices. Any and all notices or other communications required or
permitted by this Agreement or by law to be served on or given to either party
by the other party or by Escrow Agent shall be in writing and shall be deemed
duly served and given when personally delivered to the party to whom such notice
or communication is directed, or in lieu of personal service when deposited in
the United States mail, first-class postage prepaid, or by overnight courier,
addressed as follows:

If to Los Rios: Los Rios Farms, Inc.
P. O. Box 1395
Davis, CA 95617
Attn: Gregory Schmid, President
Fax No. (530) 757-1754

If to M & R: M & R Investment Company, Inc.
c/o Edward Pasquale, President
4600 Northgate Blvd., Ste. 130
Sacramento, CA 95834
Fax No. (916) 929-2178

<PAGE>

Each party may change its address for the purposes of this Paragraph 12 by
giving written notice of the change to the other party in the manner provided
for in this paragraph.

13. Attorneys' Fees. Each party shall bear its own attorneys' fees and
costs incurred in connection with the negotiating and drafting of this
Agreement. If any litigation or arbitration action is commenced by one of the
parties against the other concerning this Agreement, or the rights and duties of
either in relation thereto, the party prevailing in such litigation or
arbitration shall be entitled, in addition to such other relief as may be
granted, to a reasonable sum as and for attorneys' fees and expenses incurred in
connection with such litigation or arbitration, which amount shall be determined
by the court in such litigation or arbitrator in such arbitration, or in a
separate action brought for that purpose.

14. Governing Law. This Agreement shall be construed under and in
accordance with the laws of the State of California, without regard to choice of
law principles.

15. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors, and permitted assigns.

16. Severability. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal and
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.

17. Entire Agreement; Modification. This Agreement, the Assignment of
Option Rights, the Note, and the Quitclaim Deed constitute the sole and only
agreement of the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the within subject
matter and cannot be modified, amended or any way changed except by their
written consent.

18. Assignment; Nomination of Another Party for Title. Neither party
shall have the right to assign its rights and obligations.

19. Counterparts; Fax Transmission. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and all of which, taken
together, shall constitute one and the same instrument. This Agreement may be
executed and delivered by exchange of facsimile copies, and the facsimile copies
will constitute originally signed copies of this Agreement until such time as
applicable pages bearing non-facsimile signatures are obtained from the relevant
party or parties.

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.

"Los Rios"

LOS RIOS FARMS, INC.,
a California corporation

By:
Gregory Schmid, President
"M & R"

M & R INVESTMENT COMPANY, INC.,
a Nevada corporation

By:
Edward Pasquale, President

SUBSIDIARIES OF THE REGISTRANT

M & R CORPORATION ("MRC"), Delaware

M & R Investment Company, Inc. ("MRI"), Nevada
wholly owned by MRC

SHF Acquisition Corporation, Nevada
wholly owned by MRI

Southlake Acquisition Corporation, Nevada
wholly owned by MRI

CONTINENTAL CALIFORNIA CORPORATION, Delaware
wholly owned by Registrant

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statements of income (loss) on pages
F-2 through F-5 of the Company's annual report on Form 10-KSB and is qualified
in it's entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,120
<SECURITIES> 828
<RECEIVABLES> 2,314
<ALLOWANCES> 1,899
<INVENTORY> 0
<CURRENT-ASSETS> 5,022
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0
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