UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-KSB/A
As filed on April 4, 2000
(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, 1999 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.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-1687244
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4600 Northgate Boulevard, Suite 130, Sacramento, California 95834
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(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:
Name of each exchange
Title of each class on which registered
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NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Series B, $7.50 Cumulative
Common Stock, $.50 par value Preferred Stock, $.50 par value
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(Title of class) (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: $2,394,000
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant (1,240,918 common shares) computed by
reference to the price at March 17, 2000 ($.875 per share) was approximately
$1,085,803. 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 17, 2000 was
5,094,340.
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 at The Fairways 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 stores grain principally for
one customer under a contract which expires in May 2002. This contract accounts
for approximately 50% of the storage capacity and 98% of the storage revenue.
During the year ended December 31, 1999, the Company did not have any contracts
for drying grain but is seeking such contracts in 2000. If the Company were to
lose its storage customer, fail to obtain drying contracts or the crop yield is
low, it would have a material adverse effect on the Company's agricultural
segment.
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 24, 2000, 34 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 expects to be reimbursed for these costs if the Benefited
Properties are developed. SHF's right to reimbursement will expire in September
2015. The Company is unable to predict what amount, if any, will be received as
<PAGE>3
reimbursement. The rights to reimbursement are personal to SHF and do not run
with The Fairway's property unless assigned by SHF.
Until 1999, all of the unsold lots in The Fairways were encumbered by
a deed of trust in favor of Beal Bank which required a $40,000 payment for the
release of each encumbered lot. In November 1999, the note was paid in full and
the lien of the deed of trust was released.
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. If two consecutive options are not exercised
then the remaining options are terminated. MI did not exercise the December 1,
1998 option and the June 1, 1999 option. During June 1999, the Company notified
MI that the remaining options were terminated.
SAM HAMBURG FARM
MRI owns approximately 150 acres of agricultural property called Sam
Hamburg Farm (Hamburg Farm) in Merced County, 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 one tenant at an annual aggregate rental of
approximately $24,000. The current lease commences January 2000 for a period of
two years.
The Company has been advised that the 40 acres 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 the chemical and toxic-laden soil.
Because of 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 the cost will be up to $170,000. 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.
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.
<PAGE>4
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 Executives 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.
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 period of 2 years.
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
<PAGE>5
operations are impacted by the number of acres grown, the yield per acre,
weather conditions and government programs. Because the Company 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 but the Company is attempting to obtain
additional customers.
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
to be used, building design, minimum elevations of properties and emissions from
the grain drying and storage facilities.
EMPLOYEES
At March 24, 2000, the Company had 4 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 of which 34 remain unsold as
of March 24, 2000. 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 $99,000, 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.
Sam Hamburg Farm
Sam Hamburg Farm consists of approximately 150 acres remaining from an
original 4,600 acres of agricultural land. The remaining land is located in the
most southwesterly corner of Merced 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 110 acres to one tenant,
<PAGE>6
who grows annual crops. The terms of the leases are usually two crop years 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."
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), a director of the Company, 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."
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 asserts, 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 then 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 General
Financial Services, Inc. (GFS) since June 1999 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.
In June 1999, the FDIC sold a portion of its loan, together with the
underlying security and a part of the judgement against Anderson Parties to GFS.
Included in the sale was the pledged FDIC shares.
GFS attempted to exercise its rights under the judgement and
demanded that the Company transfer ownership of the FDIC Pledged Shares to
itself but Mr. Anderson objected, claiming that there was no change in ownership
of the shares. The Company in turn filed on July 6, 1999, a Complaint in
Interpleader in Superior Court of California. The jurisdiction of the action was
removed and transferred on September 20, 1999 to the United States District
<PAGE>7
Court for the District of Nevada as DUNES HOTELS AND CASINOS INC. v. J.B.A.
INVESTMENTS, INC. et al. Case No. CV-S-99-1470-PMP (RJJ).
On January 5, 2000, The Nevada District Court ordered that the Company
hold a shareholders' meeting on or before April 14, 2000 and that GFS was
entitled to vote the FDIC Pledged Shares at that meeting. In addition to its
interest in the FDIC Pledged Shares, GFS has reported that it owns 853,422
shares of the Company's common stock acquired in the open market during 1999 and
January 2000, or approximately a total of 60% of the then outstanding stock.
Since 1998, the BGC Pledged Shares have been under the jurisdiction of
the US Bankruptcy Court in Las Vegas, NV, since BGC filed a petition under
Chapter 7. On February 22, 2000, the Company was granted its motion in
Bankruptcy Court to allow it to foreclose on the BGC Pledged Shares. On March 3,
2000, the Company foreclosed on the BGC Pledged Shares and placed them in the
treasury. GFS is now able to vote 75.6% of the outstanding stock (GFS Shares).
See "Item 14. Subsequent Events, Notes To Consolidated Financial Statements."
Because GFS is able to exercise voting rights with respect to the GFS
Shares, GFS could exercise substantial influence with respect to the election of
the entire Board of Directors of the Company and all matters submitted to
stockholders. Therefore, GFS 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 operations of the Company's
real estate and agricultural operations. If it is determined that GFS owns the
FDIC Pledged Shares, it would then own 75.6% of the Company and GFS would have
ownership, rather than only significantly control the election of the entire
Board of Directors of the Company and all other matters submitted to
stockholders.
If there has been an ownership change for purposes of Section 382 of
the Internal Revenue Code of 1986, as amended (the Code), then there is a
limitation on the amount of income that can be offset by NOL carryovers. In
general, an ownership change occurs when a major shareholder of a loss
corporation increases their ownership by more than 50 percentage points, which
is tested over a three-year period. Regardless of what action, if any, GFS
should determine to take with respect to the Company, if the District Court of
Nevada finds in favor of GFS with respect to the transfer of the pledged shares,
an ownership change of more than 50 percentage points will have occurred at the
date the shares were actually acquired by GFS. At December 31, 1999, the Company
has a net operating loss carry forward (NOL) of approximately $53,246,000. The
Board of Directors believes this NOL represents a valuable asset to the Company
which may or may not be utilized in future years. When GFS purchased a portion
of the FDIC loan in June 1999, there could be a deemed change in ownership under
the Code if it is determined that this action is inconsistent with a typical
lending transaction. It is possible that the Internal Revenue Service could 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. In various court pleadings, GFS has asserted that it owns the FDIC
Pledged Shares. Mr. Anderson disagrees with this assertion and the decision in
the interpleader action will determine ownership.
On January 28, 2000, the Company entered into a non-binding letter of
intent with USI Corp whereby the Company would acquire not less than 3,000
shares of Series B Preferred Stock of the Company valued at $275 per share,
<PAGE>8
based upon the liquidation value and accrued but unpaid dividends on such Series
B Preferred Stock, in exchange for shares of the Company's Common Stock valued
at $.70 per share. The entering into the transaction was subject to a number of
conditions, including entering into a definitive stock purchase agreement, an
independent third party appraiser confirming the value of the Series B Preferred
Stock and Common Stock and the overall transaction, and determination by the
United States District Court, District of Nevada (No. CV-5-99-1470-PMP (RJJ)),
that the proposed stock purchase agreement was not subject to the Court's order
of January 6, 2000. Although the Company and USI had entered into subsequent
discussions regarding the acquisition of additional Common Stock, no definitive
agreement has been entered into.
On March 23, 2000, GFS and GFS Acquisition served the Company with an
emergency motion for temporary restraining order and amendment of preliminary
injunction in the United States District Court for the District of Nevada (Case
No. CV-S-99-1470-PMP-(RJJ)) seeking the Company from (1) issuing new shares of
common or preferred stock; (2) continuing or completing a purported transaction
with USI; (3) doing anything that will hinder or effect GFS' majority voting
control of the Company; and (4) changing the status quo concerning ownership of
the Company as of January 6, 2000, except as to transactions previously approved
by GFS. The litigation relates to a purported transaction with USI Corp. The
hearing for the emergency motion has been scheduled for March 28, 2000, and the
Company has not yet responded to the motion.
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. The Company's symbol for its common
stock is "DUNE". 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.
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.
1999 HIGH LOW
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1st Quarter .25 .19
2nd Quarter .83 .21
3rd Quarter .89 .50
4th Quarter .78 .68
<PAGE>9
1998 HIGH LOW
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1st Quarter .44 .25
2nd Quarter .37 .28
3rd Quarter .32 .15
4th Quarter .19 .14
At December 31, 1999, the Company's transfer agent reported that there
were approximately 1,805 holders of record of the Company's common stock, and
approximately 757 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 $1,317,000 as of December 31, 1999. The
Company has no present intention to pay dividends on either its common or
preferred shares in the near future.
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.
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. As of March 24, 2000, all systems are
functioning properly.
<PAGE>10
OVERVIEW
REAL ESTATE
FAIRWAYS
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). During 1999, the four residential
dwellings were sold by MI and the Company received Success Payments in the
amount of $174,980. Construction has not started on the two remaining lots.
The agreement also provided for MI to have options to acquire 36 additional lots
at various prices. 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. MI did not exercise
the December 1, 1998 option and the June 1, 1999 option. During June 1999, the
Company notified MI that the remaining options were terminated.
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.
OPERATING RESULTS
Net loss for the year ended December 31, 1999 decreased by approximately
$1,136,000 when compared with the year ended December 31,1998. This was due to a
number of factors including:
(1) A increase in profit from the sale of real estate primarily due to the
sale of the 2.16 acres of industrial property in Las Vegas, Nevada.
(2) A decrease in bad debt expense.
(3) A decrease in interest expense.
1999 vs. 1998
Real estate
The major increase in real estate revenues and profits in 1999 was due
to the sale of the 2.16 acres of industrial property in Las Vegas, Nevada for
$846,800 and the sale of the Solano Option for $533,000. Sales at The Fairways
were 6 lots in 1999 compared to 6 lots in 1998 and continue to be slow.
Agricultural
Grain drying and storage losses in 1999 increased by approximately
$80,000 when compared with 1998. For the year ended December 31, 1999 drying and
storage revenue was $168,000 compared to $370,000 for the prior year. This
<PAGE>11
decrease is primarily due to a decrease in drying and storage revenue of
$200,000. The 1999 revenue decrease consisted of $75,000 less drying revenue and
$120,000 less rice overage revenue compared to 1998. It was anticipated that the
facility would dry rice during the 1999 season, however, due to the lower yields
of rice acreage grown, there was no rice available to dry. The rice overage
revenue in 1998 resulted from the sale of rice overage from the 1997 crop.
General
Selling, administrative and general expenses in total decreased
approximately $78,000. The major contributors to the decrease were salaried and
related costs of $122,000 due to the decrease in personnel; office expenses of
$7,000; Director Fees of $8,000; and officers and directors liability insurance
of $16,000. These decreases were offset by increases in legal fees of $85,000
primarily related to litigation concerning the Interpleader and other GFS
related matters.
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, which was paid
in full in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, cash, cash equivalents and
marketable securities decreased by $347,000 from $3,948,000 at December 31, 1998
to $3,601,000 at December 31, 1999. The most significant sources of cash in 1999
were cash of $655,000 provided by operations, the collection of loans of
$109,000 made to others, the proceeds of $500,000 from disposition of assets.
The most significant uses of cash in 1999, consisted of payments of $320,000
made to former minority interest, payments of $1,060,000 on long-term debt and
payments of $49,000 on 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 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 will
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. Based on known commitments, the Company believes that the sources of
cash described and the cash available at December 31, 1999, will be adequate to
fund known liquidity requirements in 2000. However, if the sources of required
liquidity and the cash available at December 31, 1999 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.
<PAGE>12
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Dunes Hotels and Casinos
Inc. are located at pages F-1 to F-20 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 seven. 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.
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, 57, 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. On
June 4, 1998, BGC filed a petition for relief under Chapter 7 of the Bankruptcy
Code in the United States Bankruptcy Court for the District of Nevada where it
is pending.
Brent L. Bowen, 71, 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 was an employee of MRI from 1995 to 1998. Mr. Bowen has
experience in the hotel/casino, farming, real estate, home-building, rice mill,
commodities and banking industries.
Andrew Marincovich, 78, 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, 69, 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
Bars. He is currently in private practice in California. Prior to entering
<PAGE>14
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, 56, 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, 69, 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, 53, 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 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, 1999.
<PAGE>15
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to Edward
Pasquale, the Company's President since December 1997. No other executive
officer of the Company received compensation in excess of $100,000 for the 3
years ended December 31, 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<S> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (i)
Other annual All other
Name and prin- compensation compensation
cipal position Year Salary($) Bonus($) ($) ($) (1)
- ------------------ ---- --------- -------- ---------------- ---------------
Edward Pasquale, 1999 -- -- -- $62,568
President
Edward Pasquale,
President 1998 -- -- -- $36,862
Edward Pasquale,
President 1997 -- -- -- $ 2,250 (2)
</TABLE>
(1) All other compensation to Edward Pasquale consists of the following:
Dec
1997 1998 1999
------ -------- -------
Directors fees $1,250 $15,000 $15,000
Audit Committee fees 1,000 12,000 12,000
Consulting fees - 9,862 35,568
------ ------- -------
$2,250 $36,862 $62,568
====== ======= =======
(2) Mr. Pasquale was elected as President in December 1997. Amount represents
one-twelfth of the all other compensation paid in 1997.
Compensation of Directors
The Company pays each director an annual fee of $15,000 payable
monthly. Directors fees due to 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 fee 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 fee of $300 for each meeting
attended. For services rendered as Audit Committee members and consultants
<PAGE>16
during the fiscal year 1999, Messrs. Marincovich, Pearson, O'Leary, Bowen and
Pasquale were paid $15,750, $12,900, $16,050, $12,600, and $47,568 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 contains certain information as of March 17, 2000
with respect to (1) 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 (2) each director and executive officer and (3) 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 security
laws) by all directors, and executive officers of the Company as a group.
<TABLE>
<S> <C> <C>
Name and Address of Amount and Nature of Percent of Common
Beneficial Owner (1) Beneficial Ownership (1) Stock Outstanding
- --------------------------------- ------------------------- -----------------
John B. Anderson(2) 3,000,000 58.9%
P.O. Box 1410
Davis, CA 95617
GFS Acquisition Company, Inc.(2) 3,853,422 75.6%
8441 E. 32nd Street N
Wichita, KS 67226
Brent L. Bowen(3) 2,000 *
15361 Pear Valley Lane
Auburn, CA 95603
Andrew P. Marincovich(3) 200 *
28924 S. Western Ave., Ste 206
Rancho Palos Verdes, CA 90275
All Directors and Officers
as a Group (7 Persons) 3,002,200 58.9%
</TABLE>
* Less than one percent
<PAGE>17
(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 GFS as successor to the FDIC. In its Schedule 13D dated January 13, 2000
GFS reports that it possesses "Shared Voting Power" and "Shared Dispositive
Power" with respect to 3,853,422 shares of the Company's common stock which
includes the Anderson Shares.
The Anderson Shares are the subject of litigation between Anderson, the
FDIC and GFS pending in the United States District Court for the District
of Nevada. The Anderson Shares are also the subject of the interpleader
action filed by the Company and now pending in the United States District
Court for the District of Nevada. See Item 3. Legal Proceedings for a
detailed discussion of the pending litigation.
(3) Messrs. Marincovich and Bowen claim beneficial ownership of, and sole
investment and sole voting powers with respect to the reported shares.
The following table sets forth, as of March 17, 2000, the number and percentage
of shares of the Company's Series B preferred stock which are beneficially
owned, directly or indirectly, by each shareholder who owns more than 5% of the
outstanding shares. No director or officer has any beneficial ownership in the
Series B preferred stock. Unless otherwise indicated, the person listed has sole
voting and investment power over the preferred stock beneficially owned.
Name and Address of Amount and Nature of Percent of Series B
Beneficial Owner Beneficial Ownership Stock Outstanding
- --------------------- --------------------- -------------------
USI Corp 1,811 18.84%
1040 Lawrence Court
Wichita, KS 67206
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 17, 2000, Anderson and Anderson Entities beneficially own
approximately 58.9% 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 (DCA). In June 1999 GFS acquired a
portion of the DCA including all of the collateral from the FDIC.
<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
Dunes Hotels and Casinos Inc. and Subsidiaries Consolidated Financial
Statements:
PAGE
- ------
F-1 Independent Auditors' Report
F-2 Balance Sheet as December 31, 1999
F-4 Statements of Operations, two years ended December 31, 1999
F-6 Statements of shareholders' equity, two years ended December 31, 1999
F-7 Statements of cash flows, two years ended December 31, 1999
F-9 Notes to Consolidated Financial Statements, two years ended December 31,
1999
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 February 3,
2000.
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.
10.05 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.
10.40 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.Amendment to Purchase and Option Agreement by and between SHF
Acquisition Corporation and Murieta Investors, LLC is incorporated
herein by reference to Dunes Hotels and Casinos Inc. Annual Report on
Form 10-KSB (file no. 1-4385) for the year ended December 31, 1998,
Part IV, Item 13 (b), Exhibit 10.51.
10.41 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.
<PAGE>20
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 is
incorporated herein by reference to Dunes Hotels and Casinos Inc.
Annual Report on Form 10-KSB (file no. 1- 4385) for the year ended
December 31, 1998, Part IV, Item 13 (b), Exhibit 10.52.
10.53 Agreement to provide storage and drying between Adams Grain Co. and
SHF Acquisition Corporations, dated May 7, 1999 (Originally filed with
Company's Form 10-KSB for the year ended December 31, 1999 filed
with the Commission on March 27, 2000).
10.54 Form of Indemnity Agreement with Directors (Originally filed with
Company's Form 10-KSB for the year ended December 31, 1999 filed
with the Commission on March 27, 2000).
10.55 Letter of Intent(Originally filed with Company's Form 10-KSB for the
year ended December 31, 1999 filed with the Commission on
March 27, 2000).
21.01 Subsidiaries of Registrant (Originally filed with Company's
Form 10-KSB for the year ended December 31, 1999 filed
with the Commission on March 27, 2000).
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the
report to be signed on its behalf by the undersigned, thereunto duly authorized.
DUNES HOTELS AND CASINOS INC.
By /s/ EDWARD PASQUALE
---------------
Edward Pasquale
President
(Principal Executive
Officer)
Dated April 4, 2000
<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, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1999. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dunes Hotels and
Casinos Inc. and Subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
In connection with matters discussed in Notes 11(a) and 14, there has been a
change in voting control of the Company's stock. The effect of such a change on
the Company's future operations or other activities cannot be assessed at this
time.
/s/ Piercy, Bowler, Taylor & Kern
Las Vegas, Nevada
January 28, 2000, except for Note 14
as to which the date is March 23, 2000
<PAGE>F-2
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Dollars in thousands)
ASSETS
<TABLE>
<S> <C>
Cash and cash equivalents $ 3,323
Marketable securities 278
Receivables
Trade 3
Related party, less allowance 37
Real estate sales 363
Inventory of real estate held for sale 3,460
Prepaid expenses 111
Property and equipment, less accumulated depreciation
and amortization of $730 3,118
Other assets 3
---------------
$ 10,696
===============
</TABLE>
<PAGE>F-3
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1999
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<S> <C>
Accounts payable $ 52
Accrued expenses 171
Income taxes 307
Long-term debt and capital lease obligations 815
Accrued preferred stock dividends in arrears 1,317
--------------
2,662
--------------
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 $2,517, including dividends in arrears 5
Common stock - authorized 25,000,000 shares ($.50 par);
issued 7,799,780 shares, outstanding 6,375,096 3,900
shares
Capital in excess of par 25,881
Deficit (19,752)
--------------
10,034
Treasury stock, at cost; Preferred - Series B, 902 shares
Common 1,424,684 shares (2,000)
--------------
8,034
--------------
$ 10,696
==============
</TABLE>
<PAGE>F-4
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except per share)
<TABLE>
<S> <C> <C>
1999 1998
---------------- -----------------
Revenues
Sales of real estate $ 2,108 $ 571
Rental income, agricultural properties 51 57
Drying and storage revenues 168 370
Miscellaneous income (expense), net 67 35
---------------- -----------------
2,394 1,033
---------------- -----------------
Cost and expenses
Cost of real estate sold 1,120 552
Cost and expenses of rental income 4 4
Cost of drying and storage revenues 292 413
Selling, administrative and general
Corporate 685 763
Real estate operations 225 193
Bad debts 151
Depreciation 132 129
Provision for loss on real estate investment 100
---------------- -----------------
2,458 2,305
---------------- -----------------
Loss before other credits (charges) and income taxes (64) (1,272)
---------------- -----------------
Other credits (charges):
Interest and dividend income 248 260
Interest expense (178) (184)
Loss on marketable securities, net (90) (20)
---------------- -----------------
(20) 56
---------------- -----------------
</TABLE>
<PAGE>F-5
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except per share)
<TABLE>
<S> <C> <C>
1999 1998
-------------- --------------
Loss before income taxes (84) (1,216)
Income taxes 7 11
-------------- --------------
Net loss $ (91) $ (1,227)
============== ==============
Weighted average number of shares outstanding 6,375,096 6,375,096
============== ==============
Loss per common share $ (0.01) $ (0.19)
============== ==============
</TABLE>
See notes to consolidated financial statements
<PAGE>F-6
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred stock Common stock Preferred Common
issued (1) issued Capital treasury stock treasury stock Total
------------------ ------------------ in -------------- ---------------- share-
Par Par excess holders'
Shares value Shares value of par Deficit Shares Cost Shares Cost equity
-------- ------- --------- ------ -------- --------- ------- ----- --------- ------- ----------
Balance, January 1, 1998 10,512 $5 7,799,780 $3,900 $25,881 ($18,290) 902 ($70) 1,424,684 ($1,930) $9,496
Accrued dividends,
preferred stock (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
Accrued dividends,
preferred stock (72) (72)
Net loss (91) (91)
-------- ------- --------- ------ -------- --------- ------- ----- --------- ------- ----------
Balance, December 31, 1999 10,512 $5 7,799,780 $3,900 $25,881 ($19,752) 902 ($70) 1,424,684 ($1,930) $8,034
======== ======== ========== ======= ========= ========= ======= ===== ========= ======= ==========
</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, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<S> <C> <C>
1999 1998
-------------- ------------
Cash flows from operating activities:
Net loss $ (91) $ (1,227)
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Depreciation 132 129
Loss on marketable securities 90 20
Provision for losses on receivables 76
(Gain) loss on disposition of assets 11 (8)
Provision for loss on real estate investment 100
(Increase) decrease in operating assets:
Trade receivables 6 (6)
Inventory, real estate held for sale 490 409
Prepaid expenses 4 7
Other 121
Increase (decrease) in operating liabilities:
Accounts payable 27 3
Accrued expenses (14) (24)
Deferred credits and other (178)
Former minority interest (320)
-------------- ------------
Net cash provided by (used in) operating activities 335 (578)
-------------- ------------
Cash flows from investing activities:
Investment in marketable securities (250)
Proceeds from sale of marketable securities 460 75
Real estate loans (70) (145)
Payments received on receivables 109 224
Proceeds from disposition of assets 500 13
Purchase of property and equipment (22) (110)
-------------- ------------
Net cash provided by (used in) investing activities 977 (193)
-------------- ------------
</TABLE>
<PAGE>F-8
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<S> <C> <C>
1999 1998
------------------- -------------------
Cash flows from financing activities:
Proceeds from short-term debt $ $ 90
Payments on short-term debt (49) (101)
Payments on long-term debt (1,060) (397)
------------------- -------------------
Net cash used in financing activities (1,109) (408)
------------------- -------------------
Increase (decrease) in cash and cash equivalents 203 (1,179)
Cash and cash equivalents, beginning of year 3,120 4,299
------------------- -------------------
Cash and cash equivalents, end of year $ 3,323 $ 3,120
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 7 11
=================== ===================
Interest $ 189 $ 204
=================== ===================
Supplemental schedules of non-cash investing and
financing activities:
Dividends accrued but unpaid $ 72 $ 72
=================== ===================
</TABLE>
See notes to consolidated financial statements
<PAGE>F-9
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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) and stores, for a fee,
the dried grain until it is removed by the owner. The Company stores grain
principally for one customer under a contract which expires in May 2002.
This contract accounts for approximately 50% of the storage capacity and
98% of the storage revenue. The Company does not have any contracts for
drying grain but is seeking such contracts in 2000. If the Company were to
lose its storage customer, fail to obtain drying contracts or crop yields
are low, it would have a material adverse affect on the Company's
agricultural segment.
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:
Loss percommon 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, 1999 and 1998, respectively. Dividends on
nonconvertible preferred stock - Series B have been deducted from income or
added to the loss applicable to common shares. (See Note 14).
<PAGE>F-10
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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(b) & (c)).
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, 1999.
<PAGE>F-11
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 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.
Long-term debt and capital lease obligation: The fair value of the capital
lease obligation is based on current rates at which the Company could
borrow funds.
The fair values of the Company's significant financial instruments at
December 31, 1999 approximate their carrying amounts.
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 through
ownership of Cedar Development Co., was the sole shareholder and
President of Baby Grand Corp. (BGC) and they assert that entities
owned or controlled by him (Anderson Entities) owned approximately
67.2% of the Company's common stock as of January 29, 2000. See Note
11(a) regarding litigation between Anderson and the Federal Deposit
Insurance Corporation (the FDIC) and Note 14 regarding subsequent
events. Each entity related or controlled by Anderson will hereinafter
be identified as an Anderson Entity. As discussed, Anderson's
ownership in the Anderson Entities is currently subject to Litigation.
In June 1999 the FDIC sold a portion of its loan, together with the
underlying security and a part of the judgement against Anderson
Parties to General Financial Services, Inc. (GFS).
(1) In November 1997, the Company entered into a Loan Purchase Agreement
with Anderson, as Trustee of the John J. Anderson Family Trust
(Trust). The Loan Purchase Agreement provided for the sale of a note
issued by BGC (BGC Note) payable to MRI for $320,000 and the Company
reported a gain of approximately $162,500 in 1997. 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 recorded a loss of approximately $162,500 in 1998.
<PAGE>F-12
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
4. Inventory of real estate held for development and sale (Dollars in
thousands):
The Fairways (a) $ 3,274
Sam Hamburg Farm (b) 146
Other 40
----------
$ 3,460
==========
(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 $99,000. 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, 2000, 38 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 expects
to be reimbursed for these costs as the Benefited Properties are
developed. SHF's right to reimbursement will expire in September 2015
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.
In 1996, the Company sold 6 lots to Murieta Investors, LLC (MI) for
$40,000 per lot. In addition the Company is entitled to a success
payment based on the gross sales price of the residential dwelling
(Success Payment). To date MI has constructed 4 dwelling units and has
not started any construction on the remaining 2 lots. During 1999, all
4 dwellings were sold and the Company received net Success Payments in
the amount of $174,980.
(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 (b) for a detailed discussion concerning the removal of
the toxic waste. The remaining 110 acres are leased to one tenant at
an annual aggregate rental of approximately $24,000.
<PAGE>F-13
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 98
---------
3,848
Less accumulated depreciation
and amortization (730)
---------
$ 3,118
=========
6. Long-term notes receivable (Dollars in thousands):
Related Party
BGC, including interest $ 1,936
Less allowance 1,899
---------
37
Real estate
Various real estate notes, collateralized
by deeds of trust with interest ranging
from 8% to 10% 363
---------
$ 400
=========
7. Real estate investment:
The Company had 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 provided 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.
In March 1999, the Company sold its rights under the option to the
grantor of the option for $500,000 in cash and a $33,333 note.
8. Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations at December 31, 1999,
consists of the following (Dollars in thousands):
Capital lease obligation (a) $ 802
Other (b) 13
---------
$ 815
=========
<PAGE>F-14
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Maturities of long-term debt are as follows:
(Dollars in thousands)
-----------------------
Capital
Long term debt Lease Obligation Total
-------------- ----------------- ------
2000 $ 3 $223 $226
2001 3 250 253
2002 3 279 282
2003 4 50 54
-------------- ----------------- ------
$13 $802 $815
============== ================= ======
(a) The Company has a financing lease agreement for its drying facility
for five years commencing March 1998 with a monthly rental of $25,121.
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.
(b) Other long-term debt consists of an unsecured note payable in annual
installments of $5,000, including interest.
9. Preferred Stock:
The Company is authorized to issue 10,750,000 share 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, 1999, 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, 1999, in the amount of approximately $1,317,000.
10. Due to former minority interest:
The due to former minority interest consists of a 50% co-owner's share
of the accumulated profits from the operations of the White Ranch,
which was sold in 1997. In December 1999, the minority interest was
paid.
<PAGE>F-15
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
11. Contingencies:
(a) 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 asserts, 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 General Financial
Services, Inc. (GFS) since June 1999 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.
In June 1999, the FDIC sold a portion of its loan, together with the
underlying security and a part of the judgement against Anderson
parties to GFS. Included in the sale was the pledged FDIC shares.
GFS attempted to exercise its rights under the judgement and demanded
that the Company transfer ownership of the FDIC Pledged Shares to
itself but Mr. Anderson objected, claiming that there was no change in
ownership of the shares. The Company in turn filed on July 6, 1999, a
Complaint in Interpleader in Superior Court of California. The
jurisdiction of the action was removed and transferred on September
20, 1999, to the United Stated District Court for the District of
Nevada.
At December 31, 1999, the Company has a net operating loss carry
forward (NOL) of approximately $53,246,000. The Board of Directors
believes that this NOL represents a valuable asset to the Company
which may or may not be utilized in future years.
See Note 14 for a discussion of subsequent developments with regard to
these matters.
(b) SHF was advised in 1991 of the possible contamination of 40 acres at
Sam Hamburg Farm of approximately 5,000 cubic yards of soil. 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 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 the cost will be up to $170,000. 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 remediation work continues.
<PAGE>F-16
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
(c) The Company had received an assessment from the State of California
Franchise Tax Board (FTB) wherein the FTB stated that one of the
Company's subsidiaries owed 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 of the Company
and in October 1999 the FTB withdrew it's assessment.
The Company has been notified that the FTB is examining its 1995 tax
return. The FTB is questioning the Company's reporting of
approximately $7,700,000 of income as being exempt from the 9.3%
California tax. The Company disagrees with the FTB and plans to oppose
any assessment of additional taxes or interest. Therefore, no
provision for additional taxes or interest has been made.
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, 1999 (Dollars in thousands):
<TABLE>
<S> <C>
Marketable securities valuation allowance $ 26
Real estate allowances 480
Loss carryforwards 18,078
Other 2
----------
Gross deferred tax assets 18,586
Deferred tax asset valuation allowance (18,586)
----------
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 unrealized loss on marketable
securities $ 28
Current year loss carryforwards 220
Valuation allowance for other investments (170)
--------- -
Change in deferred tax asset valuation allowance 78
Deferred tax assets valuation allowance, beginning of year 18,508
----------
Deferred tax assets valuation allowance, end of year $ 18,586
==========
</TABLE>
<PAGE>F-17
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
A reconciliation of the federal statutory tax rate to the effective tax rate for
1999 and 1998, is as follows:
Percentage of pre-tax income
1999 1998
---------- ---------
Federal statutory rate (34.00%) (34.00%)
Debt discharges and other (1.08%)
Non-deductible items:
Valuation adjustments 33.94% 34.65%
Other .06% .43%
---------- ---------
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 2,767
2018 1,241
2019 589
As more fully described in Note 3(a), 11(a) and 14, 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 income that could be offset by net operating losses each
year; and if there is no continuity of business after an ownership
change, the net operating losses could be eliminated. Net operating
losses, to the extent not used in any given taxable year, may be
carried forward and added to the limitation of subsequent years.
<PAGE>F-18
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
13. Segment information:
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 1999 and 1998:
<TABLE>
<S> <C> <C>
1999 1998
-------- ----------
Net revenues from unaffiliated customers:
Real estate:
Sale of real estate $ 2,108 $ 571
Land rent 51 57
Grain drying and storage revenue 168 370
-------- ----------
$ 2,327 $ 998
======== ==========
Income (loss) from operations:
Real estate $ 840 $ (122)
Grain drying and storage (250) (165)
-------- ----------
590 (287)
Corporate operating expense (721) (1,020)
Other income 47 91
Income taxes (7) (11)
-------- ----------
Net loss, as reported in the
accompanying consolidated statements of operations ($91) ($1,227)
======== ==========
1999
--------
Identifiable assets
Real estate $ 3,921
Grain drying and storage 3,159
General corporate assets 3,616
--------
Total assets, as reported in the accompanying
consolidated balance sheet $ 10,696
=========
</TABLE>
<PAGE>F-19
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
14. Subsequent events:
On January 5, 2000, The Nevada District Court ordered that the Company hold
a shareholders'meeting on or before April 14, 2000, and that GFS was
entitled to vote the FDIC Pledged Shares at that meeting. In addition to
its interest in the FDIC Pledged Shares, GFS has reported that it owns
853,422 shares of the Company's common stock acquired in the open market
during 1999 and January 2000, or approximately a total of 60% of the
outstanding stock.
Since 1998, the BGC Pledged Shares have been under the jurisdiction of the
US Bankruptcy Court in Las Vegas, NV, since BGC filed a petition under
Chapter 7. On February 22, 2000, the Company was granted its motion in
Bankruptcy Court to allow it to foreclose on the BGC Pledged Shares. On
March 3, 2000, the Company foreclosed on the BGC Pledged Shares and placed
them in the treasury. GFS is now able to vote 75.6% of the outstanding
stock (GFS Shares).
Because GFS is able to exercise voting rights with respect to the GFS
Shares, GFS could exercise substantial influence with respect to the
election of the entire Board of Directors of the Company and all matters
submitted to stockholders. Therefore, GFS is able to significantly control
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
operations of the Company's real estate and agricultural operations. If it
is determined that GFS owns the FDIC Pledged Shares, it would then own
75.6% of the Company and GFS would have ownership, rather than only
significantly control, the election of the entire Board of Directors of the
Company and all other matters submitted to stockholders.
If there has been an ownership change for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended (the Code), then there is a
limitation on the amount of income that can be offset by NOL carryovers. In
general, an ownership change occurs when a majority shareholder of a loss
corporation increases their ownership by more than 50 percentage points,
which is tested over a three-year period. Regardless of what action, if
any, GFS should determine to take with respect to the Company, if the
District Court of Nevada finds in favor of GFS with respect to the transfer
of the pledged shares, an ownership change of more than 50 percentage
points will have occurred at the date the shares were actually acquired by
GFS. When GFS purchased a portion of the FDIC loan in June 1999, there
could be deemed a change of ownership under the Code if it is determined
that this action is inconsistent with a typical lending transaction. It is
possible that the Internal Revenue Service could 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 already
occurred. In various court pleadings, GFS has asserted that it owns the
<PAGE>F-20
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
FDIC Pledged Shares. Mr. Anderson disagrees with this assertion and the
decision in the interpleader action will determine ownership.
On January 28, 2000, the Company entered into a non-binding letter of
intent with USI whereby the Company would acquire not less than 3,000
shares of Series B Preferred Stock of the Company valued at $275 per share,
based upon the liquidation value and accrued but unpaid dividends on such
Series B Preferred Stock, in exchange for shares of the Company's Common
Stock valued at $.70 per share. The entering into the transaction was
subject to a number of conditions, including entering into a definitive
stock purchase agreement, an independent third party appraiser confirming
the value of the Series B Preferred Stock and Common Stock and the overall
transaction, and determination by the United States District Court,
District of Nevada (No. CV-5-99-1470-PMP (RJJ)), that the proposed stock
purchase agreement was not subject to the Court's order of January 6, 2000.
Although the Company and USI had entered into subsequent discussions
regarding the acquisition of additional Common Stock, no definitive
agreement has been entered into.
On March 23, 2000, GFS and GFS Acquisition served the Company with an
emergency motion for temporary restraining order and amendment of
preliminary injunction in the United States District Court for the District
of Nevada (Case No. CV-S-99-1470-PMP-(RJJ) seeking the Company from (1)
issuing new shares of common or preferred stock; (2) continuing or
completing a purported transaction with USI; (3) doing anything that will
hinder or effect GFS' majority voting control of the Company; and (4)
changing the status quo concerning ownership of the Company as of January
6, 2000, except as to transactions previously approved by GFS. The
litigation relates to a purported transaction with USI Corp. The hearing
for the emergency motion has been scheduled for March 28, 2000, and the
Company has not yet responded to the motion.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,323
<SECURITIES> 278
<RECEIVABLES> 2,302
<ALLOWANCES> 1,899
<INVENTORY> 0
<CURRENT-ASSETS> 4,115
<PP&E> 3,848
<DEPRECIATION> 730
<TOTAL-ASSETS> 10,696
<CURRENT-LIABILITIES> 530
<BONDS> 0
0
5
<COMMON> 3,900
<OTHER-SE> 4,129
<TOTAL-LIABILITY-AND-EQUITY> 10,696
<SALES> 2,108
<TOTAL-REVENUES> 2,394
<CGS> 1,416
<TOTAL-COSTS> 1,416
<OTHER-EXPENSES> 1,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (178)
<INCOME-PRETAX> (84)
<INCOME-TAX> (7)
<INCOME-CONTINUING> (91)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (91)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
