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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM:
COMMISSION FILE NUMBER: 0-14050
THE SANDS REGENT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 88-0201135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
345 NORTH ARLINGTON AVENUE
RENO, NEVADA 89501
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 348-2200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.05 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 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
The aggregate market value of the Registrant's $.05 par value Common
Stock held by non-affiliates of the Registrant on September 23, 1997 was
$5,320,149. The aggregate market value is computed with reference to the average
price per share on such date.
Registrant's Common Stock outstanding at September 23, 1997 was
4,498,722 shares.
Portions of Registrant's 1997 Annual Report to the Shareholders are
incorporated into Part II as set forth herein. Portions of Registrant's
definitive Proxy Statement for its November 3, 1997 Annual Meeting of
Shareholders are incorporated into Part III as set forth herein.
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PART I
ITEM 1. BUSINESS
GENERAL
THE COMPANY
The Company, through a wholly-owned subsidiary, Zante, Inc. ("Zante"),
owns and operates the Sands Regency hotel/casino in downtown Reno, Nevada. The
Company, through three wholly-owned subsidiaries, Patrician, Inc. ("Patrician"),
Gulfside Casino, Inc. ("GCI") and Artemis, Inc., ("Artemis"), owns Gulfside
Casino Partnership (the "Partnership"), which owns the Copa Casino, a dockside
gaming vessel located in Gulfport, Mississippi. GCI, Patrician and Artemis own
60%, 39% and 1%, respectively, of the Partnership. Gaming operations for the
Copa Casino commenced in September 1993.
Reno, Nevada. The Sands Regency hotel/casino has approximately 27,000
square feet of gaming space and 938 hotel rooms, including 32 suites of various
sizes. The complex also includes three restaurants, a Donut House, a "Pizza
Hut", and an "Arby's" restaurant, a "Baskin-Robbins" and an "Orange Julius"
operated by third parties. The facilities also include three cocktail lounges, a
gift shop, a beauty/barber shop and a liquor store, each operated by third
parties, a video arcade, a health club, a swimming pool and over 10,000 square
feet of convention and meeting space which can seat up to 650 people. The
Company maintains six parking areas on its main hotel/casino property and
adjacent to it, including two parking garages, with a total combined capacity
for approximately 1,000 vehicles. Although the Company offers, on a very limited
basis, complimentary hotel accommodations to select customers, no group
arrangements known as "junkets" are conducted.
The average room occupancy for fiscal 1997 was 84.4% compared to 82.9%
for 1996. The hotel's average room rate for the current fiscal year was
approximately $29.00 as compared to $32.00 in the prior fiscal year.
As of September 16, 1997, the casino offered 20 table games, including
13 blackjack tables, 1 caribbean stud table, 1 craps table, and 2 roulette
tables, 2 let it ride tables and 1 three-card poker table; 2 keno games and
approximately 684 slot machines. In connection with the supervision of its
gaming activities, the Company's policies include stringent controls,
cross-checks and recording of all receipts and disbursements.
The Company's Reno, Nevada operations are conducted 24 hours a day,
every day of the year. The primary source of revenues and income to the Company
is its gaming activities, although the hotel, bars, shops, restaurants and other
services are an important adjunct to the gaming activities. The Company's
operating and marketing philosophy emphasizes high volume business, offering
large, attractive hotel rooms at reasonable prices to travel group wholesalers,
primarily from Western Canada, the Pacific Northwest and Northern California.
Gaming accounted for approximately 54% of the Company's revenues in fiscal 1997
and approximately 73% of the gaming revenues were generated by slot machines.
The Company generally does not extend credit to its gaming customers.
As a result of adverse market conditions in 1996 and the uncertainty of
future market growth, the Company has cancelled its major expansion plans and
allowed its local governmental approvals to expire. In the near term, the
Company will concentrate its resources on renovating and improving existing Reno
facilities and services. Future expansion plans will be considered based upon
future market conditions and the need to add hotel rooms and other major
facilities.
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Gulfport, Mississippi. In December 1992, the Company, through
Patrician, entered into a partnership agreement with GCI to develop and operate
a dockside gaming facility in Gulfport, Mississippi. Located approximately 75
miles from New Orleans, Louisiana and 70 miles from Mobile, Alabama, the
facility, known as the "Copa Casino," is a permanently moored 500-foot cruise
ship. Gaming operations commenced in mid- September 1993.
On February 25, 1994, the Company acquired all of the outstanding stock
of GCI as well as certain advances to the Partnership previously due to an
affiliate of GCI. GCI's principal asset is its general partnership interest in
the Partnership. In April 1995, Artemis was formed as a wholly-owned subsidiary
of The Sands Regent and acquired a 1% ownership interest in the Partnership from
Patrician. The Company, through Patrician, GCI and Artemis, owns 100% of the
Partnership.
Mississippi, which legalized casino gaming in September 1991, allows
for 24-hour gaming on riverboats or other floating vessels located on or
adjacent to approved navigable waterways. Such floating facilities need not
cruise into the waterways and, as such, become permanently moored as dockside
gaming facilities. Gulfport is a deep-water port located on U.S. Highway 90 on
the Mississippi gulf coast. A population of approximately 2.5 million resides
within a 100-mile radius, including New Orleans and Mobile. Interstate Highway
10, which is the main thoroughfare between Mobile and New Orleans, lies
approximately 10 miles to the north of the port area. The Gulfport-Biloxi
metropolitan area has over 7,000 hotel and motel rooms located in the immediate
Gulfport-Biloxi area.
The Copa Casino consists of approximately 24,000 square feet of casino
space located on two decks. As of September 16, 1997, the Copa offered
approximately 735 slot machines and 26 table games, including craps, roulette,
blackjack, caribbean stud, let it ride, big six and three-card poker. In
addition, the facility also includes 4 cocktail lounges/bars, a deli-style
restaurant, a buffet restaurant, a gift shop and various ancillary services and
facilities. The deck below the two casino decks contains a surveillance area, a
vault, count rooms and security and various operations and administrative
offices. An additional three decks on the ship are available for future
expansion of gaming and dining facilities.
The Copa Casino is permanently moored dockside at a location known as
the "Horseshoe Site." Such site, which is leased from the Mississippi Department
of Economic and Community Development and the Mississippi State Port Authority,
is between the East and West Piers of the Mississippi State Port in Gulfport,
Mississippi. This location, which includes 8.3 acres of land based facilities,
will accommodate surface parking for approximately 840 vehicles. The leased
facilities also include a docking structure which accommodates the Copa Casino
ship and will allow for mooring of additional vessels. The docking structure
also includes a roadway and pedestrian walk which provides access to the Copa
Casino entrance.
As in Nevada, the Mississippi operations are conducted 24 hours a day
every day of the year. Present operations provide for the offering of
complimentary food and beverage on a limited basis. Group arrangements, known as
"junkets," are not conducted.
MARKETING
Reno, Nevada. The central component of the Company's marketing
philosophy is to utilize travel wholesalers to attract group and air wholesale
business to the hotel/casino. This philosophy is based on offering attractive,
well-furnished, large hotel accommodations and quality food and beverages at
prices slightly lower than those of most major hotel/casinos in Reno. Management
believes this strategy has historically enabled the Company to maintain high
levels of hotel occupancy.
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Significant group and air wholesale market areas continue to be Western
Canada, the Pacific Northwest and Northern California. The Company continues to
expand its marketing areas by adding additional air wholesalers and has been
successful in obtaining wholesale business in Central and Eastern Canada, the
Midwest, Southwest and Southern California.
In addition to the group and air wholesale business, the Company
aggressively packages and markets convention and military reunion business which
require 300 rooms or less. Other travel package arrangements are also being
promoted which are geared toward individual travelers. The Company undertakes,
from time to time, direct advertising in select Western cities in order to
promote and increase the individual traveler business.
The Company uses a flexible approach to pricing its rooms which is
designed to maintain high occupancy levels. Hotel rooms are offered at discount
prices to travel wholesalers, as much as six months in advance of arrival, for
block sales of rooms used in travel packages. This is particularly important to
the Company because of the impact of hotel occupancy on the level of gaming
activity. The Company is particularly dependent upon group business from
November through February because of the seasonal decline in other sources of
business. During these months, a substantial amount of the Sands Regency's hotel
capacity is normally prebooked 30 to 180 days in advance on a cancelable basis.
During the summer months, the Company relies on direct advertising of its room
rates to attract individual customers.
The Sands Regency is the lead hotel/casino in the Reno area for several
major travel wholesalers who serve major cities in the West, Midwest and
Southwest United States and in Western and Central Canada. Group and air
wholesale business accounted for approximately 62% of the hotel's occupancy in
fiscal 1997 compared to 59% in fiscal 1996.
Most advertising for the Sands Regency is done by travel wholesalers in
their markets. The Company also advertises directly in its major United States
markets through printed publications, especially during periods of the year when
group business operates at reduced levels.
Gulfport, Mississippi. The Company has positioned the Copa Casino as a
casino for local residents. Emphasis has been placed on providing a casual and
friendly atmosphere. To maintain this marketing position, the Company's goal is
to provide its products and services at values favored by the Company's guests.
The Company also uses numerous, in-house promotional programs to attract local
residents and other customers. These Company-sponsored promotional and special
event programs include gaming and slot tournaments, football season promotions,
give-a-way programs and seasonal promotions.
The Company has implemented a variety of outside advertising campaigns
in order to attract "drive-up" gaming customers. This includes billboards within
a 100-mile radius of Gulfport and newspaper, radio and television advertising in
the local market and in the New Orleans area on a selective basis. In addition,
the Company has implemented drive-up promotions and programs to generate more
frequent customer visits and to identify valued customers. Direct mail programs,
which have resulted in positive customer responses, will continue to be
undertaken to encourage more frequent visits by customers.
In fiscal 1997, the Company acquired a computerized slot player
tracking and marketing system which has improved the Company's ability to offer
different and more diverse promotions. The system also provides player tracking
information so as to allow the Company to reward gaming customers with
complimentary and other promotional goods and services.
The Company has also pursued marketing efforts toward developing group
business, primarily bus charters and, beginning in fiscal 1997, hotel
promotional programs to entice visits from hotel/motel guests staying in the
many non-casino hotel/motel rooms in the local area. The Company has been
successful in attracting bus charters from various areas within a 500-mile
radius including Atlanta, Georgia and Florida.
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The Company will continue to utilize various marketing strategies with
a goal of increasing the frequency of casino visits by its customers which
includes implementing programs to identify and retain selected valued customers
and the establishment of promotional programs which cater to senior citizens.
The Company has employed sales representatives to market to tour operators,
travel agents, social groups, corporations and associations.
COMPETITION
Reno, Nevada. The Company competes in the greater Reno area with
approximately sixteen major casinos and hotel/casinos, some of which are larger
than the Sands Regency. In addition, there are numerous other smaller casinos in
the greater Reno area. The Company competes for its customers based upon gaming
activities, room rates, room size and quality of rooms, food, beverages and
location. Competitors of the Company have received governmental approval to
construct an additional 2,580 hotel rooms, none of which are presently under
construction. Such governmental approval does not provide assurance that all of
these rooms will be built. If construction is completed on all hotel rooms
presently under construction or approved for construction, the hotel room
capacity in the greater Reno area will increase by approximately an additional
16%. In the event all approved hotel rooms are built, and depending on the time
frames during which they are completed, management of the Company believes that
this added capacity may have an adverse effect on operations of the Company.
The Company's Reno operations compete, to a lesser extent, with gaming
operations in other parts of the state of Nevada, such as Laughlin, Las Vegas
and Lake Tahoe. California currently sponsors a state lottery and allows other
non-casino style gaming, including parimutuel wagering, card parlors, bingo and
off-track betting. There is also casino style gaming on various Native American
lands in California. The Company believes that such non-casino style gaming does
not have a significant impact on the Company's operations. The Company believes,
however, that Native American gaming in California does have somewhat of an
impact on the Company's gaming operation and that the general legalization of
casino-style gaming in California could have a material impact on the Company's
operations.
Gulfport, Mississippi. The Company's operations on the Gulf Coast of
Mississippi are in competition with numerous gaming operations currently
established or to be established on vessels or barges moored on the Gulf Coast
of Mississippi, and on boats or barges cruising or moored on the Mississippi
River. Currently there are ten dockside gaming facilities, excluding the
Company, operating along the Gulf Coast of Mississippi, including one in Bay
Saint Louis, one in Gulfport and eight in Biloxi. There are also two gaming
facilities presently planned along the Gulf Coast which are licensed and under
construction.
Along the Mississippi River, there are presently twenty Mississippi
dockside casino facilities; one in Natchez, four in Vicksburg, three in
Greenville, one near Lula and eleven in Tunica. There is one additional proposed
casino operation to be located along the Mississippi River in Vicksburg which
has been granted a gaming license and other proposed casinos which are presently
involved in litigation regarding proposed locations. There is also one casino
currently in operation on an Indian reservation near Philadelphia, Mississippi.
In addition to the above, there are also numerous other proposed
Mississippi casino operations along the Mississippi River and the Gulf Coast.
Requiring both site approval and gaming licenses, such proposed operations are
at various stages in the developmental process without assurances that
development and operation will occur.
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In addition to direct competition which the Company faces in the
Mississippi market, the Company faces competition from riverboats and a possibly
reopened land-based casino in the State of Louisiana, which is an important
market area for the Company's Gulfport casino. Current Louisiana legislation
permits unlimited stakes gaming and a total of fifteen riverboat licenses and
one land-based license have been authorized statewide. At present, there are
fourteen riverboats in operation. Besides these State of Louisiana gaming
operations, it is also anticipated that gaming may be implemented on Indian
reservations near Gulfport and New Orleans.
In the event that all, or a significant number, of these proposed
facilities are licensed, built and operated, management of the Company believes
that this added capacity may have an adverse effect on its Gulfport casino
operation. Management believes that the principal competitive factors will
include ease of access, availability of parking, attractiveness of casino
vessels and surrounding property, proximity to other gaming facilities, and
quality of food and entertainment offered.
General. To a significantly lesser extent, the Company competes with
gaming facilities in New Jersey, Colorado, South Dakota, Illinois, Iowa and
other parts of the world. The Company also competes with various gaming
operations on Native American land, including those located in California,
Arizona, Oregon, Washington, Connecticut, Michigan, Minnesota and Wisconsin.
Indian casino gaming has become a growing sector of the gaming industry as a
result of the Indian Gaming Regulatory Act of 1988, which generally permits
unrestricted gaming on Indian land in any state that allows similar forms of
gaming, whether or not restricted. Other states may legalize various forms of
gaming that may compete with the Company. In any jurisdiction where the Company
may commence operations, it will face competition for desirable sites and
qualified personnel.
EMPLOYEES
At June 30, 1997, the Company employed 933 people at the Sands Regency
in Reno, Nevada, including 89 salaried employees and 844 hourly employees. The
Copa Casino employed 486 people, including 60 salaried employees and 426 hourly
employees. None of the Company's employees is represented by a union. The
Company has not experienced any work stoppages or other significant labor
problems and management considers its labor relations to be good.
REGULATION AND LICENSING-GAMING
Nevada. The ownership and operation of casino gaming facilities in
Nevada are subject to (i) The Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act"); and (ii) various local
regulation. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board") and the City of Reno,
(together, the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through
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taxation and licensing fees. Change in such laws, regulations and procedures
could have an adverse effect on the Company's gaming operations.
Zante operates the Sands Regency hotel/casino and is required to be
licensed by the Nevada Gaming Authorities. The gaming license requires a
periodic payment of fees and taxes and is not transferable. The Company is
registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and as such, it is required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information which the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of profits from Zante without
first obtaining licenses and approvals from the Nevada Gaming Authorities. The
Company and Zante have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Zante in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee. Officers, directors and certain key
employees of Zante must file applications with the Nevada Gaming Authorities and
may be required to be licensed or found suitable by the Nevada Gaming
Authorities. Officers, directors and key employees of the Company who are
actively and directly involved in gaming activities of Zante may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or Zante, the companies involved would have to
sever all relationships with such person. In addition, the Nevada Commission may
require the Company or Zante to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.
The Company and Zante are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by Zante must be
reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Zante, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Zante, the Company, and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the direction
of the Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate the Company's gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of the Company's gaming properties) could be
forfeited to the State of Nevada. Limitation, conditioning or suspension of any
gaming license or the appointment of a supervisor could (and revocation of any
gaming license would) materially adversely affect the Company's gaming
operations.
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Any beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails the written
notice requiring such filing. Under certain circumstances, an "institutional
investor," as defined in the Nevada Act, which acquires more than 10%, but not
more than 15%, of the Company's voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of the directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or operations of the
Company, or any of its gaming affiliates, or any other action which the Nevada
Commission finds to be inconsistent with holding the Company's voting securities
for investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability
or a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or Zante,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals, if without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
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The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. The
Company's stock certificates do bear such a legend.
The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who has become involved in a gaming venture outside of
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Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
Mississippi. The ownership and operation of a gaming business in
Mississippi is subject to extensive laws and regulations, including the
Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the
"Mississippi Regulations") promulgated thereunder by the Mississippi Gaming
Commission (the "Mississippi Commission") and the Mississippi State Tax
Commission Regulations for Gaming Establishments ("Mississippi Tax Regulations")
promulgated by the Mississippi State Tax Commission ("Mississippi Tax
Commission"). The Mississippi Commission and Mississippi Tax Commission
(together the "Mississippi Gaming Authorities") are empowered to oversee and
enforce the Mississippi Act. Gaming in Mississippi can be legally conducted only
on floating vessels of a certain minimum size in navigable waters of the
Mississippi River or in waters of the State of Mississippi (so called dockside
gambling) which lie adjacent and to the south (principally in the Gulf of
Mexico) of the counties of Hancock, Harrison and Jackson, and only in counties
in Mississippi in which the registered voters have not voted to prohibit such
activities. The voters in Jackson County, the southeastern most county of
Mississippi, have voted to prohibit gaming in that county. However, gaming could
be approved in Jackson County in any subsequently held referendum.
The underlying policy of the Mississippi Act is to ensure that gaming
operations in Mississippi are conducted (i) honestly and competitively, (ii)
free of criminal and corruptive influences, and (iii) in a manner which protects
the rights of the creditors of gaming operations. The laws, regulations and
supervisory procedures of the Mississippi Act seek to (i) establish and maintain
response accounting practices and procedures; (ii) maintain effective control
over the financial practices of licensees, including establishing minimum
procedures for internal fiscal affairs and safeguarding assets and revenues,
providing reliable record keeping, and making periodic reports to the
Mississippi Gaming Authorities; and (iii) provide a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations
and procedures could have an adverse effect on the Company.
The Mississippi Act requires that a person (including any corporation
or other entity) must be licensed to conduct gaming activities in Mississippi. A
license will be issued only for a specified location which has been approved as
a gaming site by the Mississippi Commission prior to issuing such license.
Gaming licenses are issued for an initial two year period and are renewable
every two years thereafter. The Mississippi Act also requires that each officer
or director of a gaming licensee, or other person who exercises a material
degree of control over the licensee, either directly or indirectly, must be
found suitable by the Mississippi Commission. The Mississippi Commission will
not issue a license or make a finding of suitability unless it is satisfied,
only after an extensive investigation paid for by the applicant, that the
persons associated with the gaming licensee or applicant for a license are of
good character, honesty and integrity, with no relevant or material criminal
record. In addition, the Mississippi Commission will not issue a license unless
it is satisfied that the licensee is adequately financed or has a reasonable
plan to finance its proposed operations from acceptable sources, and that
persons associated with the applicant have sufficient business probity,
competence and experience to engage in the proposed gaming enterprise. Other
parties, including the Partnership's or the
9
<PAGE> 11
Company's lenders, holders of evidences of indebtedness, underwriters and
employees, may be required to be licensed, and such applications for licensing,
if any, may be denied for any cause deemed reasonable by the Mississippi
Commission. The Mississippi Commission may refuse to issue a work permit to a
gaming employee (i) if the employee has committed larceny, embezzlement or any
crime of moral turpitude, or knowingly violated the Mississippi Act or
Mississippi Regulations, or (ii) for any other reasonable cause.
The Partnership holds the gaming license to the Copa Casino gaming
facility in Gulfport, Mississippi. Patrician, GCI and Artemis, all wholly-owned
subsidiaries of the Company, have been approved as partners of the Partnership.
The license is not transferrable.
In October 1994, the Mississippi Gaming Commission adopted a regulation
requiring, as a condition of licensure or license renewal, that a gaming
establishment's site development plan include certain infrastructure facilities
in close proximity to the casino complex which will amount to at least 25% of
the cost of the casino facility. Parking facilities, roads, sewage and water
systems or facilities normally provided by governmental entities do not meet the
infrastructure requirement. The Mississippi Gaming Commission found the Copa
Casino to be in compliance with this regulation as a result of its construction
of a general purpose pier facility and other improvements that inure to the
benefit of the Mississippi State Port Authority.
The Mississippi Commission has the power to deny, limit, condition,
revoke and suspend any license, finding of suitability or registration, or fine
any person, as it deems reasonable and in the public interest, subject to an
opportunity for a hearing. The Mississippi Commission may fine any licensee or
persons who was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations, which is the subject of an
initial complaint, and up to $250,000 for each such violation which is the
subject of any subsequent complaint. The Mississippi Act provides for judicial
review of any final decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but the filing of such petition does not necessarily
stay any action taken by the Mississippi Commission pending a decision by the
Circuit Court.
The Partnership must submit detailed financial and operating reports to
the Mississippi Gaming Authorities. Substantially all loans, leases, sales of
securities and other financing transactions entered into by the Partnership must
be reported to, and, in some cases, approved by, the Mississippi Gaming
Authorities.
Under the Mississippi Regulations, a gaming license may not be held by
a publicly traded company, although an affiliate corporation, such as the
Company, may be publicly held so long as the Company receives the approval of
the Mississippi Commission. The Company has received such approval of the
Mississippi Commission. In addition, approval of any public offering of the
securities of the Company must be obtained from the Mississippi Commission if
any part of the proceeds from that offering are intended to be used to
construct, acquire or finance the operation of gaming facilities in Mississippi
or to retire or extend obligations incurred for any such purpose.
Under the Mississippi Regulations, a person is prohibited from
acquiring control of the Company without prior approval of the Mississippi
Commission. The Company is also prohibited from consummating a plan of
recapitalization proposed by management in opposition to an attempted
acquisition of control of the Company and which involves the issuance of a
significant dividend to Common Stockholders, where such dividend is financed by
borrowing from financial institutions or the issuance of debt securities. In
addition, the Company is prohibited from repurchasing any of its voting
securities under circumstances (subject to certain exemptions) where the
repurchase involves more than one percent of the Company's outstanding Common
Stock at a price in excess of 110% of the then market value of the Company's
Common Stock from a person who owns and has for less than one year owned more
than three percent of the Company's outstanding Common Stock, unless the
repurchase has been approved by a majority of the Company's
10
<PAGE> 12
shareholders voting on the issue (excluding the person from whom the repurchase
is being made) or the offer is made to all other shareholders for the Company.
Any person who, directly or indirectly, or in associations with others,
acquires beneficial ownership of more than five percent of the Common Stock of
the Company must notify the Mississippi Commission of this acquisition and may
be required to be found suitable by the Mississippi Commission. Any person who
becomes a beneficial owner of more than 10% of the Company's Common Stock must
apply for a finding of suitability by the Mississippi Commission. Furthermore,
regardless of the amount of securities purchased, any person who acquires any
beneficial ownership in the Common Stock of the Company may be required to be
found suitable if the Mississippi Commission has reason to believe that the
acquisition and ownership would be inconsistent with the declared policy of
Mississippi. Any person who is required to be found suitable must apply for a
finding of suitability from the Mississippi Commission within 30 days after
being requested to do so, and must deposit with the State Tax Commission a sum
of money which is adequate to pay the anticipated investigatory costs associated
with such finding. Any person who is found not to be suitable by the Mississippi
Commission shall not be permitted to have any direct or indirect ownership in
the Company's Common Stock. Any person who is required to apply for a finding of
suitability and fails to do so, or who fails to dispose of his or her interest
in the Company's Common Stock if found unsuitable, is guilty of a misdemeanor.
If a finding of suitability with respect to any person is not applied for where
required, or if it is denied or revoked by the Mississippi Commission, the
Company is not permitted to pay such person for services rendered, or to employ
or enter into any contract with such person.
The Mississippi legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting securities and other
corporate defense tactics that affect corporate gaming licensees in Mississippi,
and corporations whose stock is publicly traded that are affiliated with those
operations, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environmental for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof (commonly referred to as
"greenmail") and before a corporate acquisition opposed by management can be
consummated. Mississippi's gaming regulations also requires prior approval by
the Mississippi Commission if the Company were to adopt a plan of
recapitalization proposed by the Company's Board of Directors in opposition to a
tender offer made directly to its stockholders for the purposes of acquiring
control of the Company.
Neither the Partnership, the Company nor any controlled affiliate may
engage in gaming activities in Mississippi and outside of Mississippi without
approval of the Mississippi Commission. The Mississippi Commission may require,
among other things, that there be adequate governmental regulation of gaming in
the out-of-state location and that there is a means of the Mississippi
Commission to have access to information concerning the out-of-state gaming
operations and persons associated with them.
REGULATION AND LICENSING - ALCOHOLIC BEVERAGES
Nevada. The sale of alcoholic beverages by the Company is subject to
supervision, control and regulation by the City of Reno, which issues licenses
deemed to be nontransferable, revocable privileges, and which has full power to
limit, condition, suspend or revoke such licenses. The Company is presently
licensed to sell alcoholic beverages. Any adverse regulatory act with respect to
this license could have an adverse effect upon the operations of the Company.
11
<PAGE> 13
Mississippi. The sale of alcoholic beverages by the Copa Casino is
subject to regulation by the Mississippi State Tax Commission, which issues
licenses which are both revocable and non-transferable, and which has full power
to limit, condition, suspend or revoke any such license. The Partnership is
currently licensed to sell alcoholic beverages as an "On-Premises Retailer." Any
adverse regulatory act with respect to this license could have an adverse effect
upon the operation of the Partnership. The sale of light wine and beer by Copa
Casino is also subject to regulation by the Mississippi State Tax Commission,
which issues licenses which are both revocable and non-transferable, and which
has the full power to limit, condition, suspend or revoke any such license.
However, the enforcement of laws regulating the acquisition, use, sale and
distribution of light wine and beer is left to local law enforcement agencies.
The Partnership is currently licensed to sell light wine and beer as a
"Retailer" under a beer permit and privilege license. Any adverse regulatory act
with respect to this license could have an adverse effect upon the operation of
the Partnership.
12
<PAGE> 14
ITEM 2. PROPERTIES
Reno, Nevada. The Company operates the casino and hotel towers at the
Sands Regency on a Company-owned 6.3 acre site in downtown Reno. The
hotel/casino site also includes the original three-story motor lodge and
four-story hotel tower and other buildings and facilities. Garage and surface
parking is provided at the hotel/casino site and also on a 2.7 acre site located
adjacent to the hotel/casino site. In addition, the Company's personnel office
and certain storage facilities are located one-half block from the hotel/casino
site on a Company-owned .5 acre lot. Management considers the Company's facility
to be in good condition and well-maintained.
In addition to the main hotel/casino facility, the Company owns a
smaller property in Reno consisting of an area of approximately .2 acres.
The Company's Reno hotel/casino property is subject to aggregate
encumbrances of approximately $11.0 million as of June 30, 1997.
Gulfport, Mississippi. The Copa Casino gaming facilities are located on
two decks of a 500 foot cruise ship owned by Gulfside Casino Partnership. These
two decks also include four cocktail lounges/bars, a deli-style restaurant, a
buffet restaurant operated by a third party and a gift shop. The deck below the
two casino decks contains a surveillance area, a vault, count rooms, security
and various operations and administrative offices. An additional three decks on
the ship are available for future expansion of gaming and dining facilities. The
engines for such cruise ship are disabled. All gaming activities are conducted
while moored dockside.
The Copa Casino is permanently moored dockside at a location known as
the "Horseshoe Site." Such site, which is leased from the Mississippi Department
of Economic and Community Development and the Mississippi State Port Authority,
is between the East and West Piers of the Mississippi State Port in Gulfport,
Mississippi. This location, which includes 8.3 acres of land-based facilities,
will accommodate surface parking for approximately 840 vehicles. The leased
facilities also include a docking structure which accommodates the Copa Casino
ship and will allow for mooring of additional vessels. The docking structure
also includes a four-lane roadway and a pedestrian walk which provides access to
the Copa Casino entrance.
The initial term of the lease, as amended, is seven years and ends in
October 1999. The lease provides for three renewal periods of five years each
and one renewal period of ten years if the Partnership, within the first ten
years of the lease agreement, constructs, on the leased premises or within the
city limits of Gulfport, a hotel with a minimum of 350 units. If any of such
renewal options are exercised, the lease term will be extended under the same
terms and provisions of the lease agreement except that the rental amounts will
be adjusted and revised annually, in years six through thirty-two, in accordance
with changes in the Consumer Price Index.
The lease provides for an annual rental of $500,000 (the "Minimum
Rental") plus five percent (5%) of the gross annual gaming revenues over
$25,000,000 (the "Percentage Rental"). In addition to the Minimum Rental and
Percentage Rental set forth above, the Partnership is also required to pay,
monthly, 3% of the gross monthly revenues on all activities other than gaming
(the "Additional Percentage Rent"). The Minimum Rental is to be paid in advance,
in equal monthly installments of $41,667 on the first day of every month during
the lease year. For each month, the Percentage Rental and the Additional
Percentage Rental must be calculated and the amounts due, if any, are to be paid
on or before the 10th day of the following month.
In July 1996, Copa Casino was notified by the Mississippi Department of
Economic and Community Development and the Mississippi State Port Authority that
its lease will be cancelled and terminated at the end of the initial lease term
in October 1999 because the Copa Casino's leased site is needed by the
Mississippi State Port Authority to accommodate a purported expansion of Port
facilities. Such notice of termination, among other items, is presently the
subject of litigation between the Copa Casino and the Mississippi
13
<PAGE> 15
Department of Economic and Community Development and the Mississippi State Port
Authority as further described in Item 3. Legal Proceedings. If the Copa Casino
is required to vacate its existing site and no suitable replacement sites can be
found, the Company's results of operations could be materially adversely
affected.
ITEM 3. LEGAL PROCEEDINGS
GCI MATTER
In December 1994, a lawsuit was filed by Terry W. Green and Joel R.
Carter, Sr. ("Green and Carter") in the Chancery Court of Harrison County,
Mississippi, First Judicial District against GCI because of GCI's failure to
make payments on promissory note obligations of GCI to Green and Carter. These
note obligations, in the aggregate amount of $6 million, plus interest, are
secured by a pledge of GCI's partnership interest in GCP. Although these
promissory notes and the accrued interest thereon are obligations of GCI, they
are reflected as current liabilities in the Company's Consolidated Balance
Sheets at June 30, 1997 and 1996 upon consolidation.
In addition to demanding payment of the $6 million plus interest, for
which a partial summary judgment was entered, the lawsuit by Green and Carter
also demanded the appointment of a receiver to take possession of and sell GCI's
ownership interest in GCP and sought attorneys fees which were subsequently
awarded in January 1997 in the amount of $54,000. In May 1995, GCP and Patrician
were joined as necessary parties to the lawsuit.
In August 1995, a Charging Order was entered which required GCP to
respond to inquiries by Green and Carter for the purpose, among other things, of
determining what distributions, if any, have been paid by the partnership to its
partners. Moreover, a court order was granted whereby any amounts due or to
become due GCI by GCP are to be paid to Green and Carter, pro-rata, until the
summary judgment against GCI is satisfied.
In July 1996, following a court hearing, the Chancery Court rendered a
judgment that the reallocation of GCI's interest in the partnership may be
appropriate as to the GCP partners but had no effect on the lien position of
Green and Carter. This ruling related to the reduction in GCI's ownership
interest in GCP from an original 60% interest to a .006% interest as a result of
an amendment to the partnership agreement and a partner capital call. The
amendment to the GCP partnership agreement was entered in April 1994 whereby the
profit and loss allocation percentages were amended from 40% to 80% for
Patrician and from 60% to 20% for GCI. Such amendment was entered into to cure a
monetary partnership breach by GCI which occurred prior to the Company's
acquisition of GCI and to properly reflect the relative financial risks of
Patrician and GCI. The partner capital call occurred in January 1996 and was for
the purpose of improving the partnership capital structure. Patrician and
Artemis complied with the capital call; however, GCI failed to comply. As a
result, and in accordance with the partnership agreement, GCI's interest in GCP
was reduced from 20% to .006%. In May 1997, the Partnership Agreement was again
amended to restore the original 60% interest as to GCI. Such was done to resolve
the Chancery Court ruling dilemma.
In the above July 1996 court ruling, Green and Carter were also given
until November 1996 to exhaust their legal remedies in collecting against the
judgment. Failing collection or other resolution by November 1996, the Court
would consider additional measures including, but not limited to, the
appointment of a receiver.
In January 1997, the Chancery Court issued an amendment judgment which
reaffirmed the prior judgments and reserved ruling on the necessity to appoint a
receiver. The ruling also charged GCP, under Mississippi law, with the
obligation to pay the GCI judgment amounts to Green and Carter and to pay Green
and Carter 60% of all monies not designated for normal operational expenses on a
monthly basis, commencing February 1, 1997, until the judgments due Green and
Carter were satisfied. GCP was also required to provide a monthly accounting of
income and operating expenses to Green and Carter.
14
<PAGE> 16
To date, the required monthly reports have been made which report that
no monies are available for distribution by GCP and that no monies have been
distributed by GCP. Such reports continue to be made irrespective of the fact
that GCI had filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code.
GCI, GCP and Patrician, as joined parties to such lawsuit, have filed
an appeal with the Mississippi Supreme Court because it is the Company's belief
that the Chancery Court's rulings are incorrect and not supported by the facts
or the law. A hearing has not yet been scheduled on such appeal.
On January 31, 1997, GCI filed for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court of
the Southern District of Mississippi, Southern Division. A Plan of
Reorganization was filed with the related Disclosure Statement expected to be
filed in late September 1997. Actions have not yet been taken to dispose of the
bankruptcy case.
Green and Carter have filed a motion in the United States Bankruptcy
Court for relief from the automatic stay provisions under Section 3 of the
Bankruptcy Code which prohibits payments on pre-petition obligations. Such
motion contends that the automatic stay provisions should not apply because the
obligations are payable by GCP and not the bankrupt entity GCI. It is the
Company's belief that the automatic stay provisions under the United States
Bankruptcy Code, which are applicable to the creditors of GCI, appropriately
apply to Green and Carter and that GCP is prohibited from making any payment or
distribution to these individuals who are creditors of GCI.
GCP and GCI have filed briefs in opposition to the motion for relief
from the automatic stay properly stating that the debtor to Green and Carter is
GCI and not GCP. Further, that the Chancery Court judgment created, or
clarified, an obligation of GCP to make payments to Green and Carter only to the
extent that GCP may otherwise have a requirement to make payments to GCI.
Notwithstanding this, GCI and GCP further contend that any payments that may be
required to be made by GCP to GCI should appropriately be paid into the bankrupt
estate of GCI and should not be distributed to pre-petition, or other, creditors
of GCI. A hearing on such motion is presently scheduled for October 1, 1997. In
the event the motion for relief from the automatic stay is granted, Green and
Carter may continue legal action in the Chancery Court which was consistent with
a May 28, 1997 Chancery Court ruling and which could include the appointment of
a receiver.
GCI's only tangible asset is its partnership interest in GCP. GCI has
filed for Chapter 11 Bankruptcy protection and is also not otherwise in the
financial position to make any payments with respect to the note obligations due
Green and Carter. It is the Company's belief that GCI's Plan of Reorganization,
which contemplates making certain payments to Green and Carter from new equity
funding to GCI, represents a reasonable, equitable and final resolution and
settlement to the GCI litigation and bankruptcy issues. However, confirmation
and acceptance of the filed Plan of Reorganization is not assured. As such, the
ultimate resolution of this matter is not presently subject to reasonable
estimation and could include a dispossession of a 60% right to receive
partnership profits and surplus.
In February 1997, Carter and Green also each filed separate lawsuits in
U. S. District Court for the Southern District of Mississippi, Biloxi Division,
against The Sands Regent and certain officers and directors of The Sands Regent
and GCI. Such lawsuits allege breach of various common law duties and
contractual interference by the defendants and seek compensatory and punitive
damages. Such actions are in the preliminary discovery stages. Management, and
the individual defendants, believe these actions to be without merit and will
vigorously defend them.
15
<PAGE> 17
PORT MATTER
In July 1996, the Mississippi Department of Economic and Community
Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the
"Port") filed a declaratory judgment action against GCP in the Chancery Court of
Harrison County, Mississippi, First Judicial District. Such lawsuit seeks Court
interpretation of certain provisions of the lease between MDECD and the Port and
GCP including whether the Port may terminate the lease on a date certain,
whether the Port must approve the substitution of another gaming vessel for the
present gaming vessel and whether the Port must approve the construction of a
hotel on the lease premises. In addition to the lawsuit, MDECD and the Port also
notified GCP that its lease will be cancelled and terminated at the end of the
initial lease term in October 1999 because GCP's current leased site is needed
by the Port to accommodate a purported expansion of Port facilities.
In July 1997, the MDECD and the Port filed a second amended complaint,
in addition to the original declaratory relief action, seeking damages and to
immediately terminate the lease related to certain dredging activities conducted
on GCP's leased premises by contractors engaged by GCP.
In response to the initial MDECD and Port action and the second amended
complaint, GCP filed counterclaims against the MDECD and Port claiming various
tort and contract breaches including wrongful failure to approve the
substitution of a gaming barge for the present gaming ship, wrongful failure to
allow GCP to construct a hotel on the leased premises, breach of covenant of
good faith and fair dealing, misrepresentation, breach of covenant of quiet
enjoyment and wrongfully allowing activities at the Port to cause the
accumulation of sand and silt under and adjacent to the GCP gaming vessel. GCP's
lawsuit seeks an award for compensatory damages in an amount not less than $200
million and a declaratory judgment quieting the lease term and allowing the
development of the leased premises.
The lawsuit is presently set for trial on October 6, 1997 with respect
to the liability issues and both parties have been engaged in active discovery
matters, including depositions and exchange of documents, for most of calendar
1997. In the event GCP is successful on any or all of its claims and
counterclaims, a separate trial on damages will be held which is currently
scheduled during the first week of December 1997.
Management believes that the outcome of this lawsuit is not presently
predictable or subject to reasonable estimation.
OTHER
The Company is also a party to various other legal actions, proceedings
and pending claims arising in the normal course of its business. Management does
not expect the outcome of these claims or suits to have a material adverse
effect on the Company's financial position or results of future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in
the fourth quarter of fiscal 1997.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company is traded in the NASDAQ National Market
System under the symbol "SNDS" and the following table sets forth the range of
high and low closing sales prices as reported by NASDAQ.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30, HIGH LOW DIVIDEND
- ---------------------------- ---- --- --------
<S> <C> <C> <C>
1996
First Quarter.......................................... $6.25 $ 4.50 $.05
Second Quarter......................................... 6.25 4.50 $.05
Third Quarter.......................................... 5.50 3.62 $.05
Fourth Quarter......................................... 5.75 3.50 -
1997
First Quarter.......................................... $5.13 $3.13 -
Second Quarter......................................... 3.75 2.63 -
Third Quarter.......................................... 3.13 2.50 -
Fourth Quarter......................................... 3.50 1.63 -
</TABLE>
-----------
In fiscal 1996, the Board of Directors of the Company suspended the
payment of cash dividends. The declaration and payment of dividends in the
future, if any, will be determined by the Board of Directors in light of the
conditions then existing, including the Company's earnings, financial condition,
capital requirements and other factors.
As of September 22, 1997, the Company had 158 shareholders of record
and in excess of 400 beneficial shareholders.
ITEM 6. SELECTED FINANCIAL DATA
There is hereby incorporated by reference the information appearing
under the caption "The Sands Regent - Selected Financial Data" in the Company's
1997 Annual Report, filed as Exhibit 13 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
There is hereby incorporated by reference the information appearing
under the caption "The Sands Regent - Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1997 Annual
Report, filed as Exhibit 13 to this Form 10-K.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
There is hereby incorporated by reference the Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements in the
Company's 1997 Annual Report, filed as Exhibit 13 to this Form 10-K. Reference
is made to the Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in Item 14(a)(1) hereof.
With the exception of the aforementioned information and the
information in Items 6 and 7, the Company's 1997 Annual Report is not deemed
filed as part of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information appearing
under the caption "Directors and Executive Officers" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on November 3,
1997, filed or to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing
under the caption "Compensation of Executive Officers" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
November 3, 1997, filed or to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing
under the captions "Principal Shareholders" and "Directors and Executive
Officers" in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on November 3, 1997, filed or to be filed with the
Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing
under the caption "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on November 3, 1997, filed or to be filed with the Securities and
Exchange Commission.
19
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
Included in Part II of this Report:
Independent Auditors' Report
Consolidated Balance Sheets -- June 30, 1997 and 1996
Consolidated Statements of Operations -- Years Ended June 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity -- Years Ended
June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years Ended June 30,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES.
Included in Part IV of this Report:
As of and for the Years Ended June 30, 1997, 1996 and 1995:
Independent Auditors' Report on Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto.
20
<PAGE> 22
(A)(3) EXHIBITS
3(a)(i) Restated Articles of Incorporation of the Company
(Exhibit 3(a) to the Company's Registration Statement
(Registration No. 2-93453) on Form S-1).*
3(a)(ii) Certificate of Amendment to the Restated Articles of
Incorporation of the Company, dated November 2, 1987
(Exhibit 4(a) to the Company's Form 10-Q for the
quarter ended December 31, 1987).*
3(b)(i) Amended and Restated Bylaws of the Company, as amended
April 29, 1985, and currently in effect (Exhibit 3(b)
to the Company's Form 10-K for the fiscal year ended
June 30, 1985).*
3(b)(ii) Resolution of Amendment to the Bylaws of the Company,
dated November 2, 1987 (Exhibit 4(b) to the Company's
Form 10-Q for the quarter ended December 31, 1987).*
3(b)(iii) Certificate of Amendment of the Amended and Restated
Code of Bylaws, as Amended, of The Sands Regent, dated
January 10, 1996 (Exhibit 3(b)(iii) to the Company's
Form 10-K for the fiscal year ended June 30, 1996).*
4(a) Amended Trust Agreement, dated February 22, 1987, among
Antonia Cladianos II as trustor and beneficiary and
Pete Cladianos, Jr. as trustee (Exhibit 4(a) to the
Company's Form 10-K for the fiscal year ended June 30,
1987).*
4(b) Amended Trust Agreement, dated February 19, 1987, among
Pete Cladianos III as trustor and beneficiary and Pete
Cladianos, Jr. as trustee (Exhibit 4(b) to the
Company's Form 10-K for the fiscal year ended June 30,
1987).*
10(a) Amended and Restated Stock Option Plan for Executive
and Key Employees of the Sands Regent and Forms of
Stock Option Agreements (Exhibit 4(a) to the Company's
Registration Statement (Registration No. 33-59574) on
Form S-8).*
10(b) Deferred Compensation Plan for Directors of the Company
(Exhibit 10(e) to the Company's Registration Statement
(Registration No. 2-93453) on Form S-1).*
10(c) Form of Indemnity Agreement for Directors and Officers
of the Company (Exhibit 10(f) to the Company's Form
10-K for the fiscal year ended June 30, 1988).*
10(d) Loan Agreement, dated March 31, 1993, by and between
First Interstate Bank of Nevada, National Association,
First Interstate Bank of California, The Daiwa Bank,
Limited and Zante, Inc. and the related Term and
Revolving Credit Promissory Note; Guarantee of Loan by
the Sands Regent; Deed of Trust, Fixture Filing and
Security Agreement with Assignment of Rents (Exhibit
10(b) to the Company's Form 10-Q for the Quarter ended
March 31, 1993).*
10(e) First Amendment to Loan Agreement, dated June 27, 1994,
by and between First Interstate Bank of Nevada,
National Association, The Daiwa Bank Limited and Zante,
Inc., Borrower, and The Sands Regent, Guarantor
(Exhibit 10(e) to the Company's Form 10-K for the
fiscal year ended June 30, 1994).*
10(f) Second Amendment to Loan Agreement and Term and
Revolving Credit Promissory Note, dated October 15,
1996, by and between Wells Fargo Bank, National
Association, The Sumitomo Bank Limited and Zante, Inc.,
Borrower, and The Sands Regent, Guarantor.**
21
<PAGE> 23
10(g) International Swap Dealers Association, Inc. Master
Agreement for interest rate swap, dated March 23,1994,
by and between First Interstate Bank of Nevada N.A. and
Zante, Inc., and the related Guarantee by The Sands
Regent and Letter Agreement of Confirmation (Exhibit
10(f) to the Company's Form 10-K for the fiscal year
ended June 30, 1994).*
10(h) General Partnership Agreement, effective as of December
31, 1992, between Gulfside Casino, Inc. and Patrician,
Inc. (a wholly-owned subsidiary of the Sands Regent)
(Exhibit 10(a) to the Company's Form 10-Q for the
Quarter ended March 31, 1993).*
10(i) First Amendment to Gulfside Casino, a Mississippi
General Partnership, General Partnership Agreement,
dated April 15, 1994, between Gulfside Casino, Inc. and
Patrician, Inc. (both wholly owned subsidiaries of The
Sands Regent) (Exhibit 10(a) to the Company's Form 10-Q
for the Quarter ended March 31, 1994).*
10(j) Second Amendment to Gulfside Casino, a Mississippi
General Partnership, General Partnership Agreement,
dated December 9, 1994, between Gulfside Casino, Inc.
and Patrician, Inc., (both wholly-owned subsidiaries of
The Sands Regent)(Exhibit 10(a) to the Company's Form
10-Q for the Quarter ended December 31, 1994).*
10(k) Unanimous Consent to Action in Lieu of Special Call
Meeting of the Board for Gulfside Casino Partnership,
amending, among other items, the Gulfside Casino
General Partnership Agreement, dated May 30, 1997, by
and between Patrician, Inc., Gulfside Casino, Inc. and
Artemis, Inc.**
10(l) Agreement for the Purchase of Stock of the Gulfside
Casino, Inc. and certain Assets of McDonald Limited,
dated February 25,1994 (Exhibit 2(a) to the Company's
Form 8-K/A for event reporting date of February 14,
1994).*
10(m) Gulfside Casino, Inc. Settlement Agreement, dated
August 20, 1993, by and between Gulfside Casino, Inc.,
a Mississippi Corporation, and Joel R. Carter, Sr. and
Terry Green (Exhibit 10(j) to the Company's Form 10-K
for the year ended June 30,1994).*
10(n) Settlement Agreement dated November 2, 1984, by and
between Hughes Properties, Inc., and Zante, Inc.
(Exhibit 10(u) to the Company's Registration Statement
(Registration No. 2-93453) on Form S-1).*
10(o) Franchise Agreement dated October 9, 1986 and as
amended on October 9, 1986, by and between Roma
Corporation and Zante, Inc. (Exhibit 10(r) to the
Company's Form 10-K for the fiscal year ended June 30,
1987).*
10(p) Agreement, dated as of January 2, 1995, between David
R. Wood and The Sands Regent (Exhibit 10(n) to the
Company's Form 10-K for the fiscal year ended June 30,
1995).*
10(q) Lease Agreement by and between the Mississippi
Department of Economic and Community Development and
the Mississippi State Port Authority at Gulfport and
Gulfside Casino, Inc., dated August 20, 1992 (Exhibit
10(o) to the Company's Form 10-K for the fiscal year
ended June 30, 1996).*
22
<PAGE> 24
10(r) Amendment to Lease and Approval of Stock Purchase by
and between the Mississippi Department of Economic and
Community Development and the Mississippi State Port
Authority at Gulfport and Gulfside Casino, Inc., dated
October 28, 1992 (Exhibit 10(p) to the Company's Form
10-K for the fiscal yer ended June 30, 1996).*
10(s) Second Lease Amendment by and between the Mississippi
Department of Economic and Community Development and
the Mississippi State Port Authority at Gulfport and
Gulfside Casino, Inc., Lessee, and Gulfside Casino
Partnership, Substitute Lessee, dated May 12, 1993
(Exhibit 10(q) to the Company's Form 10-K for the
fiscal year ended June 30, 1996).*
10(t) Third Lease Amendment by and between the Mississippi
Department of Economic and Community Development and
the Mississippi State Port Authority at Gulfport and
Gulfside Casino Partnership, dated June 21, 1994
(Exhibit 10(r) to the Company's Form 10-K for the
fiscal year ended June 30, 1996).*
13 1997 Annual Report to Shareholders.**
21 Subsidiaries: Zante, Inc., Patrician, Inc., and
Artemis, Inc., Nevada Corporations, and Gulfside
Casino, Inc., a Mississippi corporation, are wholly
owned by the Company. Patrician, Inc., Gulfside Casino,
Inc.,and Artemis, Inc., are the sole partners in
Gulfside Casino Partnership, a Mississippi general
partnership.
23 Independent Auditors' Consent to the incorporation by
reference into specified registration statement on Form
S-8 of their reports contained in or incorporated by
reference into this report.**
27 Financial Data Schedule.
-------------------------------
* Incorporated by reference
** Filed herewith
(B) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the last
quarter of fiscal 1997.
(C) INDEX TO EXHIBITS.
(D) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules required by Regulation S-X are excluded from
the 1997 Annual Report to the Shareholders by Rule 14a-3(b)(1). See
Schedule II to the Financial Statements appearing under Item 14(a)(2)
hereof.
23
<PAGE> 25
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.
THE SANDS REGENT
Date: September 25, 1997 By: PETE CLADIANOS, JR.
-------------------
Pete Cladianos, Jr., President
and Chief Executive Officer
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 dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
PETE CLADIANOS, JR. President (Chief September 25, 1997
- ------------------- Executive Officer)
Pete Cladianos, Jr. and Director
KATHERENE LATHAM Chairman of the September 25, 1997
- ------------------- Board of Directors
Katherene Latham
JON N. BENGTSON Executive Vice President, September 25, 1997
- ------------------- Chief Operating Officer and
Jon N. Bengtson Director
DAVID R. WOOD Executive Vice President, September 25, 1997
- ------------------- Treasurer, Chief Financial and
David R. Wood Accounting Officer and Director
PETE CLADIANOS III Executive Vice President, September 25, 1997
- ------------------- Secretary and Director
Pete Cladianos III
JOSEPH G. FANELLI Director September 25, 1997
- -------------------
Joseph G. Fanelli
WELDON C. UPTON Director September 25, 1997
- -------------------
Weldon C. Upton
</TABLE>
24
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Shareholders of The Sands Regent:
We have audited the consolidated financial statements of The Sands Regent and
subsidiaries as of June 30, 1997 and 1996, and for each of the three years in
the period ended June 30, 1997, and have issued our report thereon dated August
8, 1997. Such consolidated financial statements and report are included in your
1997 Annual Report to Shareholders and are incorporated herein by reference. Our
audits also included the consolidated financial statement schedule of The Sands
Regent and subsidiaries, listed in Item 14. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Reno, Nevada
August 8, 1997
25
<PAGE> 27
The Sands Regent
Schedule II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions(1) End of Year
----------- ---------- ----------- ------------- -----------
Allowance for Doubtful Accounts Receivable:
<S> <C> <C> <C> <C>
Year ended June 30, 1997 . . . . . . . . $ 107 $ 103 $ ( 91) $ 119
Year ended June 30, 1996 . . . . . . . . 147 136 (176) 107
Year ended June 30, 1995 . . . . . . . . 111 92 (56) 147
</TABLE>
- ---------------
(1) Write-offs of uncollectible accounts receivable, net of recoveries
26
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------ --------
<S> <C> <C>
10(f) Second Amendment to Loan Agreement and Term and Revolving Credit
Promissory Note, dated October 15, 1996, by and between Wells
Fargo Bank, National Association, The Sumitomo Bank Limited and
Zante, Inc., Borrower, and The Sands Regent, Guarantor . . . . . . . . . . . . . . . . . .
10(k) Unanimous Consent to Action in Lieu of Special Call Meeting of the
Board for Gulfside Casino Partnership, amending, among other items,
the Gulfside Casino General Partnership Agreement, dated May 30, 1997,
by and between Patrician, Inc., Gulfside Casino, Inc. and Artemis, Inc . . . . . . . . . .
13 1997 Annual Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Independent Auditors' Consent to the incorporation by reference
into specified registration statement on Form S-8 of their
reports contained in or incorporated by reference into
this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 1
EXHIBIT 10(f)
SECOND AMENDMENT TO LOAN AGREEMENT AND TERM AND
REVOLVING CREDIT PROMISSORY NOTE
THIS SECOND AMENDMENT TO LOAN AGREEMENT AND TERM AND REVOLVING CREDIT
PROMISSORY NOTE ("Second Amended Agreement") is entered into as of the 15th day
of October, 1996, by and among ZANTE, INC., a Nevada corporation ("Borrower"),
THE SANDS REGENT, a Nevada corporation ("Sands Regent") and WELLS FARGO BANK,
National Association and THE SUMITOMO BANK, LIMITED (collectively the "Lenders")
and WELLS FARGO BANK, National Association, as administrative and collateral
agent for the Lenders (herein, in such capacity, called the "Agent Bank" and,
together with the Lenders, collectively referred to as the "Banks").
R_E_C_I_T_A_L_S:
WHEREAS:
A. On or about March 31, 1993, First Interstate Bank of Nevada,
National Association ("FINV"), First Interstate Bank of California ("FICAL") and
The Daiwa Bank, Limited (hereinafter "Daiwa" and together with FINV and FICAL
collectively referred to as the "Closing Lenders") entered into a Loan Agreement
(hereinafter referred to as the "Original Loan Agreement") with Borrower under
the terms of which, among other things, the Closing Lenders agreed to loan to
Borrower a principal sum not to exceed Twenty-Three Million Six Hundred Nine
Thousand Five Hundred Sixteen Dollars ($23,609,516.00) as evidenced by a Term
and Revolving Credit Promissory Note of even date therewith (as amended, the
"Original Note").
B. On or about January 26, 1994, FINV acquired all interest of FICAL in
and to the Loan pursuant to that certain Assignment and Assumption Agreement for
Participation Interest in Loan of even date therewith.
C. On or about June 27, 1994, FINV and Daiwa entered into a First
Amendment to Loan Agreement with Borrower (the "First Amendment to Loan
Agreement", and together with the Original Loan Agreement, the "Existing Loan
Agreement"), under the terms of which, among other things, the financial
covenants set forth by Section 5.14 of the Original Loan Agreement were
modified.
<PAGE> 2
D. The Sumitomo Bank, Ltd. acquired the interest of Daiwa by Assignment
and Assumption Agreement for Participation in Loan dated as of February 2, 1996.
Wells Fargo Bank, National Association, is the successor by merger to First
Interstate Bank of Nevada, National Association.
E. Borrower and Lenders desire to amend the Existing Loan Agreement and
Original Note for the purpose of: (i) waiving certain financial covenant
non-compliance for the Fiscal Quarters more particularly hereinafter described,
(ii) amending certain financial covenants effective as of the Fiscal Quarter
ending September 30, 1996, (iii) requiring principal prepayment as hereinafter
described and amending the Scheduled Maximum Principal Amount schedule attached
as Exhibit A to the Note, and (iv) prohibiting Distributions by Borrower to
Sands Regent.
F. Banks have agreed to the amendments and modifications to the
Existing Loan Agreement and Note set forth in Recital Paragraph E hereinabove on
the terms and conditions more particularly hereinafter described.
G. In this Second Amended Agreement all capitalized words and terms not
otherwise defined or redefined herein shall have the respective meanings and be
construed herein as provided in Section 1.01 of the Existing Loan Agreement and
any reference to a provision of the Existing Loan Agreement shall be deemed to
incorporate that provision as a part hereof in the same manner and with the same
effect as if the same were fully set forth herein.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable considerations, the parties hereto do agree to amend the Existing Loan
Agreement and Original Note by substituting the amended terms and provisions as
hereinafter set forth, which amended terms shall be deemed effective as of the
Second Amendment Effective Date, unless otherwise specifically provided, as
follows:
1. Additional/Amended Definitions. Section 1.01 of the Existing Loan
Agreement entitled "Definitions" shall be amended by the following additions and
modifications to the definitions set forth hereinbelow which shall supersede and
restate, where previously defined, the applicable definition as originally set
forth in the Existing Loan Agreement:
"Capital Expenditures" shall mean, for any period, without duplication,
the aggregate of all expenditures
- 2 -
<PAGE> 3
(whether paid in cash or accrued as liabilities during that period and including
capitalized lease liabilities) by the Borrower during such period that, in
conformity with GAAP, are required to be included in or reflected by the
property, plant or equipment or similar fixed or capital asset accounts
reflected in the consolidated balance sheet of the Borrower (including equipment
which is purchased simultaneously with the trade-in of existing equipment owned
by Borrower to the extent of (a) the gross amount of such purchase price less
(b) the cash proceeds or trade-in credit of the equipment being traded in at
such time), but excluding capital expenditures made in connection with the
replacement or restoration of assets, to the extent reimbursed or refinanced
from insurance proceeds paid on account of the loss of or damage to the assets
being replaced or restored, or from awards of compensation arising from the
taking by condemnation of or the exercise of the power of eminent domain with
respect to such assets being replaced or restored.
"Closing Lenders" shall have the meaning ascribed to such term in
Recital Paragraph A of the Second Amended Agreement.
"Distributions" shall mean and collectively refer to any and all cash
dividends, loans, management fees, payments, advances, stock redemptions or
repurchases or other distributions, fees or compensation of any kind or
character whatsoever made by Borrower to Sands Regent.
"Existing Loan Agreement" shall have the meaning ascribed to such term
in Recital Paragraph C of the Second Amended Agreement.
"First Amendment to Loan Agreement" shall have the meaning ascribed to
such term in Recital Paragraph C of the Second Amended Agreement.
"Loan Agreement" shall mean the Existing Loan Agreement as amended by
the Second Amended Agreement, as such instrument may hereafter be amended,
modified, renewed or restated.
"Note" shall mean the Original Note as amended by the Second Amended
Agreement as such instrument may hereafter be amended, modified, renewed or
restated.
- 3 -
<PAGE> 4
"Original Loan Agreement" shall have the meaning ascribed to such term
in Recital Paragraph A of the Second Amended Agreement.
"Original Note" shall have the meaning ascribed to such term in Recital
Paragraph A of the Second Amended Agreement.
"Scheduled Maximum Principal Amount" shall mean the maximum principal
amount which may be outstanding and unpaid as of any date of determination as
set forth on the schedule setting forth the dates and Scheduled Maximum
Principal Amount which may be outstanding and unpaid on the Note as of and
subsequent to the Second Amendment Effective Date, a copy of which schedule of
Scheduled Maximum Principal Amount is marked "Exhibit A", affixed to the Second
Amended Agreement and by this reference incorporated herein and made a part
hereof, which schedule of Scheduled Maximum Principal Amount shall, as of the
Second Amendment Effective Date, fully restate and supersede the schedule of
Scheduled Maximum Principal Amount attached as Exhibit A to the Original Note.
"Second Amended Agreement" shall mean the Second Amendment to Loan
Agreement and Term and Revolving Credit Promissory Note dated as of October 15,
1996, executed by and among Borrower, Sands Regent and Banks.
"Second Amendment Effective Date" shall mean September 30, 1996,
subject to the satisfaction of each of the Conditions Precedent set forth in
Paragraph 9 of the Second Amended Agreement.
"Second Amendment Execution Date" shall mean the date as of which the
Second Amended Agreement has been executed by Borrower, Sands Regent and each of
the Banks.
2. Compliance Waiver and Amendment of Fixed Charge Coverage Ratio.
Effective as of June 30, 1996, Borrower's compliance with the Fixed Charge
Coverage Ratio as set forth in Section 5.14(b) of the Original Loan Agreement,
as restated by Section 5.14(c) of the First Amendment to Loan Agreement, is
hereby waived for the Fiscal Quarter ended June 30, 1996. Furthermore, as of the
Second Amendment Effective Date, Section 5.14(b) of the Original Loan Agreement,
as restated by Section 5.14(c) of the First Amendment to Loan Agreement, shall
be and is hereby fully amended and restated in its entirety as follows:
- 4 -
<PAGE> 5
"Section 5.14(c). Commencing as of the Second Amendment Effective Date,
Borrower shall maintain a minimum Fixed Charge Coverage Ratio as of the end of
each Fiscal Quarter, calculated on a cumulative basis with respect to each such
Fiscal Quarter and the most recently ended three (3) preceding Fiscal Quarters
on a rolling four (4) Fiscal Quarter basis, in accordance with the following
schedule:
<TABLE>
<CAPTION>
FIXED CHARGE
FISCAL QUARTER END COVERAGE RATIO
===============================================================================
<S> <C>
As of the Fiscal Quarters
ending on September 30, 1996
and December 31, 1996 0.65 to 1.00
As of the Fiscal Quarter
ending on March 31, 1997 0.75 to 1.00
As of the Fiscal Quarter
ending on June 30, 1997 1.00 to 1.00
As of the Fiscal Quarter
ending on September 30, 1997
and as of the end of each
Fiscal Quarter through the
Maturity Date 1.50 to 1.00"
</TABLE>
3. Compliance Waiver of Adjusted Fixed Charged Coverage Ratio.
Effective as of June 30, 1996, Banks hereby waive compliance with the provisions
of the Adjusted Fixed Charge Coverage Ratio set forth in Section 5.14(d) of the
First Amendment to Loan Agreement for the Fiscal Quarter ending on June 30, 1996
through the Fiscal Quarter ending June 30, 1997. Borrower acknowledges and
agrees that Banks are entitled to require strict compliance with Section 5.14(d)
as set forth in the First Amendment to Loan Agreement as of the Fiscal Quarter
ending September 30, 1997 as well as each Fiscal Quarter thereafter occurring
through the Maturity Date.
4. Waiver and Amendment of Maximum Capital Expenditure Requirement.
Effective as of June 30,1996, the limitation imposed on Capital Expenditures as
set forth in Section 5.14(a) of the Original Loan Agreement, as restated by
Section 5.14(a) of the First Amendment to Loan Agreement, shall be and is hereby
waived for the Fiscal Year ended June 30, 1996. Furthermore, Section 5.14(a) as
set forth in the Original Loan Agreement, as restated by Section 5.14(a) of the
- 5 -
<PAGE> 6
First Amendment to Loan Agreement, shall be and is hereby further amended and
restated in its entirety as follows:
"Section 5.14(a). Notwithstanding the provisions contained in
Section 5.03, the Borrower shall not, without the prior written consent
of Lenders, make Capital Expenditures or acquire additional fixed
assets or equipment or enter into capital leases in an aggregate amount
during any applicable Fiscal Year, which exceeds: (i) Three Million
Four Hundred Thousand Dollars ($3,400,000.00) for the Fiscal Year
ending June 30, 1997, or (ii) five percent (5%) of its gross revenues
for its then most recently completed prior Fiscal Year for each Fiscal
Year ending on and after June 30, 1998 through the Maturity Date."
5. Restatement of Dividend Restriction and Substitution of Distribution
Prohibition. Section 5.14(e) of the Original Loan Agreement, as restated by
Section 5.14(g) of the First Amendment to Loan Agreement, shall be and is hereby
amended, restated and superseded in its entirety as follows for the period
commencing on the Second Amendment Effective Date through June 30, 1997:
"Section 5.14(g). Borrower shall not make or advance
Distributions of any kind or character whatsoever to Sands Regent
without the prior written consent of Lenders."
Subsequent to June 30, 1997, Section 5.14(g) shall read and provide as
set forth in the First Amendment to Loan Agreement.
6. Modification of Scheduled Maximum Principal Amounts. As of the
Second Amendment Effective Date, the Scheduled Maximum Principal Amount schedule
attached as Exhibit A to the Original Note shall be restated and superseded in
its entirety by the Scheduled Maximum Principal Amount schedule marked "Exhibit
A", affixed to the Second Amended Agreement and by this reference incorporated
herein and made a part hereof.
7. Consent of and Guaranty Affirmation by Sands Regent. Sands Regent
joins in execution of this Second
- 6 -
<PAGE> 7
Amended Agreement for the purpose of: (i) evidencing its consent and agreement
to the terms and conditions set forth herein, (ii) acknowledging that all
references in the Sands Regent Guaranty to the "Loan Agreement" and "Note" shall
include the Existing Loan Agreement and Original Note as amended hereby and
(iii) ratifying, confirming and reaffirming the Sands Regent Guaranty in all
respects as being fully applicable to and unconditionally guaranteeing the
prompt and full payment and performance of the Loan Agreement and the Note.
8. Amendment Fee. On or before the Second Amendment Effective Date,
Borrower shall pay to Agent Bank for the benefit of Lenders a non-refundable fee
(the "Second Amendment Fee") in the amount of Fifty-Four Thousand Eight Hundred
Seventy-Five Dollars ($54,875.00) to be promptly distributed by Agent Bank to
Lenders in proportion to their respective Participation Interests in the Loan.
9. Conditions Precedent to Second Amendment Effective Date. The
occurrence of the Second Amendment Effective Date is subject to Agent Bank
having received the following documents, in each case in a form and substance
reasonably satisfactory to Lenders:
a. Execution and delivery by each of the Borrower, Sands Regent and
Banks of four (4) counterpart originals of the Second Amended Agreement.
b. Delivery to Agent Bank of a copy of a corporate resolution for
each of the Borrower and Sands Regent authorizing the execution and delivery of
this Second Amended Agreement and each document, agreement and instrument to be
executed and delivered by Borrower and/or Sands Regent in connection herewith.
c. Payment by Borrower and receipt by Agent Bank of the Second
Amendment Fee on or before the Second Amendment Execution Date;
d. Payment by Borrower and receipt by Agent Bank of a principal
reduction payment in the amount of Four Million Five Hundred Seventy-Eight
Thousand Dollars ($4,578,000.00) or such other amount as may be necessary to
reduce the outstanding unpaid principal of the Loan to be no greater than Ten
Million Nine Hundred Seventy-Five Thousand Dollars ($10,975,000.00) as of the
Second Amendment Execution Date.
- 7 -
<PAGE> 8
e. Reimbursement to Agent Bank by Borrower for all reasonable fees
and out-of-pocket expenses incurred by Agent Bank in connection with the Second
Amended Loan Agreement, including, but not limited to, reasonable attorneys'
fees of Henderson & Nelson, and all other like expenses remaining unpaid as of
the Second Amendment Execution Date; and
f. Such other documents, instruments or conditions as may reasonably
be required by Lenders.
10. Representations and Warranties. To induce Banks to enter into this
Second Amended Agreement, Borrower hereby: (i) ratifies and reaffirms the
representations and warranties set forth in Article IV of the Existing Loan
Agreement; (ii) warrants and represents that each such representation and
warranty shall be true and correct as of the Second Amendment Execution Date,
other than representations and warranties which expressly speak as of a
different date which shall be true and correct as of such date; and (iii)
represents and warrants that, as of the Second Amendment Execution Date, after
giving effect to the waivers and amendments set forth in the Second Amended
Agreement, no Event of Default or event with which the giving of notice or
passage of time would constitute an Event of Default has occurred and remains
continuing.
11. No Other Changes. That all of the other terms and provisions of the
Existing Loan Agreement and Original Note shall remain unchanged and in full
force and effect except as specifically modified herein.
12. Entire Agreement. The Existing Loan Agreement and Original Note as
modified by this Second Amended Agreement together with the other Loan Documents
constitute the entire agreement between the parties and supersedes all prior
agreements whether written or oral with respect to the subject matter hereof,
including, but not limited to, any term sheets furnished by Banks to Borrower
and/or Sands Regent and any negotiations, discussions or commitments for the
lending or advance of any funds or monies other than as specifically set forth
in the Existing Loan Agreement and Original Note, as amended by the Second
Amended Agreement. Neither the Existing Loan Agreement or the Original Note, as
modified hereby, nor any provision therein, or herein, may be changed, waived,
discharged or terminated, except by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or termination is
sought.
- 8 -
<PAGE> 9
13. Counterpart. This Second Amended Agreement may be executed in any
number of separate counterparts with the same effect as if the signatures hereto
and hereby were upon the same instrument. All such counterparts shall together
constitute but one and the same document.
14. Additional/Replacement Exhibits Attached. The following replacement
Schedules and Exhibits are attached hereto and incorporated herein and made a
part of the Loan Agreement as follows:
Exhibit A - Scheduled Maximum Principal
Amount schedule
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed the foregoing
Second Amended Agreement as of the day and year first above written.
LENDERS: BORROWER:
WELLS FARGO BANK, National Association, ZANTE, INC.,
successor by merger to FIRST INTERSTATE a Nevada corporation
BANK OF NEVADA, National Association,
Agent Bank and Lender By /s/ DAVID R. WOOD
---------------------
David R. Wood,
Treasurer
By /s/ ROB MEDEIROS
--------------------------
Rob Medeiros, SANDS REGENT,
Vice President a Nevada corporation
THE SUMITOMO BANK, LIMITED,
Lender By /s/ DAVID R. WOOD
---------------------
David R. Wood,
Treasurer
By /s/ DAVID M. LAWRENCE
-------------------------
Name David M. Lawrence
-----------------------
Title Vice President &
Manager
----------------------
By /s/ BRADFORD E. CHAMBERS
-------------------------
Name Bradford E. Chambers
-----------------------
Title Vice President
----------------------
- 10 -
<PAGE> 11
SCHEDULED MAXIMUM PRINCIPAL AMOUNT
----------------------------------
<TABLE>
<CAPTION>
=============================================================================
SCHEDULED
MAXIMUM
AMOUNT OF PRINCIPAL
DATE OF DETERMINATION REDUCTION AMOUNT
=============================================================================
<S> <C> <C>
04-01-96 to Second Amendment -0- $15,553,000
Effective Date
- -----------------------------------------------------------------------------
Second Amendment Effective $4,578,000 $10,975,000
Date to 09-30-97
- -----------------------------------------------------------------------------
10-01-97 to 03-31-98 $1,793,000 $ 9,182,0000
- -----------------------------------------------------------------------------
04-01-98 to 09-30-98 $1,884,000 $ 7,298,000
- -----------------------------------------------------------------------------
10-01-98 to 03-31-99 $1,980,000 $ 5,318,000
- -----------------------------------------------------------------------------
04-10-99 to 09-30-99 $2,081,000 $ 3,237,000
- -----------------------------------------------------------------------------
10-01-99 to date immediately $2,188,000 $ 1,049,000
preceding Maturity Date
- -----------------------------------------------------------------------------
Maturity Date $1,049,000 -0-
(All
outstanding
sums fully
due)
=============================================================================
</TABLE>
EXHIBIT "A"
TO SECOND AMENDED AGREEMENT AND TO
TERM AND REVOLVING CREDIT PROMISSORY NOTE
<PAGE> 1
EXHIBIT 10(k)
UNANIMOUS CONSENT TO ACTION IN LIEU
-----------------------------------
OF SPECIAL CALL MEETING OF THE
------------------------------
BOARD FOR GULFSIDE CASINO PARTNERSHIP
-------------------------------------
WHEREAS, GULFSIDE CASINO, INC., a Mississippi Corporation, ("GULFSIDE")
and PATRICIAN, INC., a Nevada Corporation, ("PATRICIAN") entered into that
certain General Partnership Agreement effective December 31, 1992, wherein
GULFSIDE was originally vested with a 60% interest and PATRICIAN was vested
with a 40% interest; and,
WHEREAS, the First Amendment to the Partnership Agreement was entered
into by and between GULFSIDE and PATRICIAN on April 15, 1994, and made
effective on January 1, 1993, in order to accurately reflect the financial risk
of each partner and to cure various breaches by GULFSIDE CASINO, INC. and which
First Amendment caused the profits and losses of the Partnership between
GULFSIDE and PATRICIAN to be reallocated as follows: 80% interest in PATRICIAN
and 20% interest in GULFSIDE; and,
WHEREAS, the Second Amendment to the Partnership Agreement was entered
into by and between GULFSIDE and PATRICIAN on December 9, 1994 and contained,
among other things, provisions related to additional contributions to capital;
and,
WHEREAS, PATRICIAN was designated in accordance with Article IX of the
Partnership Agreement as the construction manager and as the operations
manager; and,
WHEREAS, PATRICIAN transferred a portion of an interest equivalent to
one percent (1%) in the partnership to ARTEMIS, INC., a Nevada Corporation
(herein "ARTEMIS") in order to ensure the
1
<PAGE> 2
continuity of the Partnership in the event of dissolution of one of its
partners; and,
WHEREAS, the Chancery Court of Harrison County, Mississippi, First
Judicial District, entered its Amended Judgment dated January 13, 1997, in the
matter styled "Terry W. Green and Joel R. Carter, Sr. v. Gulfside Casino,
Inc., Gulfside Casino Partnership, Mississippi Partnership and Patrician,
Inc.", Cause No. 106,741; and,
WHEREAS, GULFSIDE CASINO, INC. filed a Voluntary Petition pursuant to
Title 11 of the United States Bankruptcy Code on January 31, 1997, in the
United States Bankruptcy Court for the Southern District of Mississippi,
Southern Division, Case No. 97-07499; and,
WHEREAS, the Chancery Court of Harrison County, Mississippi, First
Judicial District entered its Judgment dated May 29, 1997, in Cause No.
106,741; and,
WHEREAS, the Defendants in the above referenced Chancery Court
proceeding have taken an appeal to the Mississippi Supreme Court and dispute
certain findings of fact and conclusions of law set forth in the Amended
Judgment dated January 13, 1997, and intend to do likewise relative to the
Judgment dated May 29, 1997, in order to protect their respective rights and
interests in the Partnership; and,
WHEREAS, notwithstanding the perfection of the appeal to the
Mississippi Supreme Court, the Partnership and its partners, in an effort to
comply with the spirit and intent of the Amended Judgment
2
<PAGE> 3
of the Chancery Court dated January 13, 1997, and the subsequent Judgment dated
May 29, 1997, and without waiving any rights under the appeals or otherwise,
find that a reallocation of the ownership interest in the Partnership will
facilitate a resolution of the time consuming, costly and disruptive litigation
pending in Chancery Court proceeding Cause No. 106,741, by and through the
Chapter 11 Reorganization of GULFSIDE CASINO, INC. in the United States
Bankruptcy Court; and,
WHEREAS, GULFSIDE CASINO PARTNERSHIP, by and through its partners,
finds that a reallocation of the interest originally vested in GULFSIDE CASINO,
INC. should eliminate the substantive issues between the parties to the
litigation pending before the Chancery Court of Harrison County, Mississippi,
First Judicial District, in Cause No. 106,741;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises and covenants contained herein, GULFSIDE, PATRICIAN and ARTEMIS
hereby agree as follows:
1. PERCENTAGE INTEREST. The Partnership Agreement shall be amended
to provide for the reallocation of profits and losses in the Partnership to
restore the 60% interest originally vested in GULFSIDE CASINO, INC. which
reallocation will result in the following ownership: 60% to GULFSIDE, 39% to
PATRICIAN and 1% to ARTEMIS, effective May 30, 1997.
2. CAPITAL CALL. The Capital Call Notice dated January 24, 1996,
and subsequent Capital Call pursuant to Article VI of the General Partnership
Agreement is hereby reversed and rescinded.
3
<PAGE> 4
3. CONTINUING EFFECT. Except as set forth to the contrary herein,
all other terms and conditions of the Partnership Agreement, as amended, remain
in full force and effect.
4. RESERVATION OF RIGHTS. The Partnership and its partners hereby
reserve any and all rights, claims, demands, charges, defenses, affirmative
defenses and assignments of error on appeal, in law and in equity, which have
been raised or may be raised in any litigation, including the litigation
pending before the Chancery Court of Harrison County, Mississippi, First
Judicial District, in Cause No. 106,741, in the Chapter 11 Bankruptcy
proceeding for GULFSIDE CASINO, INC. in United States Bankruptcy Court for the
Southern District of Mississippi, Southern Division, Case No. 97-07499, and/or
in any other proceeding which has been or may be filed or alleged by the
Plaintiffs arising out of or in any way related to the disputes between the
Plaintiffs and the Partnership or any of its partners in the above referenced
proceedings.
5. WAIVER OF NOTICE. The undersigned partners do hereby consent
and agree to the actions and matters set forth hereinabove and do hereby waive
any and all requirements of notice relative to such actions as allowed under
Article VIII of the Partnership Agreement.
6. EFFECTIVE DATE. This Unanimous Consent to Action is effective
immediately upon the date of last execution by the parties hereto.
4
<PAGE> 5
WITNESS THE SIGNATURES OF THE PARTNERS on the date set forth below:
PATRICIAN, INC., GULFSIDE CASINO, INC.,
a Nevada Corporation, General Partner
Managing Partner
BY: /s/ PETE CLADIANOS, JR. BY: /s/ PETE CLADIANOS, JR.
-------------------------------- -----------------------------
PETE CLADIANOS, JR. PETE CLADIANOS, JR.
DATE: 5-30-97 DATE: 5-30-97
----------- -----------
BY: /s/ JON N. BENGTSON BY: /s/ JON N. BENGTSON
-------------------------------- -----------------------------
JON N. BENGTSON JON N. BENGTSON
DATE: May 30, 1997 DATE: May 30, 1997
---------------- ----------------
BY: /s/ DAVID R. WOOD BY: /s/ DAVID R. WOOD
-------------------------------- -----------------------------
DAVID R. WOOD DAVID R. WOOD
DATE: May 30, 1997 DATE: May 30, 1997
---------------- ----------------
ARTEMIS, INC.
BY: /s/ PETE CLADIANOS, JR.
--------------------------------
PETE CLADIANOS, JR.
DATE: 5-30-97
-----------
BY: /s/ JON N. BENGTSON
--------------------------------
JON N. BENGTSON
DATE: May 30, 1997
----------------
BY: /s/ DAVID R. WOOD
--------------------------------
DAVID R. WOOD
DATE: May 30, 1997
----------------
5
<PAGE> 1
EXHIBIT 13
[THE SANDS REGENT LOGO]
[THE SANDS REGENCY LOGO] [COPA CASINO LOGO]
1997 ANNUAL REPORT
<PAGE> 2
THE SANDS REGENT
- --------------------------------------------------------------------------------
The Company owns and operates The Sands Regency Hotel/Casino in downtown
Reno, Nevada and, through three wholly-owned subsidiaries, owns Gulfside Casino
Partnership which owns and operates the Copa Casino in Gulfport, Mississippi.
RENO, NEVADA PROPERTIES AND OPERATIONS
The Sands Regency Hotel/Casino, located in Reno, Nevada, has approximately
27,000 square feet of gaming space which offers 20 table games, two keno games
and 684 slot machines. The complex has 938 hotel rooms, including 32 suites of
various sizes, and also includes three restaurants, a Donut House, a "Pizza
Hut", and an "Arbys" restaurant, a "Baskin-Robbins" and an "Orange Julius"
operated by third parties. The facilities also include three cocktail lounges.
The Company's facilities also include a gift shop, a video arcade, a
beauty/barber shop and a liquor store, each operated by third parties, a health
club, a swimming pool and over 10,000 square feet of convention and meeting
space which can seat up to 650 people. The Company maintains six parking areas
on its main hotel/casino property and adjacent to it, including two parking
garages, with a total combined capacity for approximately 1,000 vehicles.
The Company's property holdings also include a .5 acre lot, located
one-half block from the hotel/casino site, used for the Company's personnel
office and for storage and a smaller property located in Reno of approximately
.2 acres.
The Company's Reno hotel/casino operations are conducted 24 hours a day
every day of the year. Although the Company offers, on a very limited basis,
complimentary hotel accommodations to select customers, no group arrangements
known as "junkets" are conducted.
GULFPORT, MISSISSIPPI PROPERTIES AND OPERATIONS
The Copa Casino, which is owned and operated by Gulfside Casino Partnership
("GCP"), commenced operations in September 1993. The three partners in Gulfside
Casino Partnership, Patrician, Inc. ("Patrician"), Gulfside Casino, Inc. ("GCI")
and Artemis, Inc. ("Artemis") are all wholly owned by the Company.
The Copa Casino is located aboard a 500-foot cruise ship owned by the
partnership. In Mississippi, all gaming facilities must be constructed on
floating facilities on or juxtapositional to approved navigable waterways. Such
facilities need not cruise into the waterways and, as such, become permanently
moored as dockside gaming facilities. The Copa Casino is also permanently
moored.
The Copa Casino consists of approximately 24,000 square feet of gaming area
located on two decks. The Copa offers 735 slot machines and 26 table games,
including craps, roulette, blackjack, caribbean stud, three card poker and big
six. In addition, the facility also includes four cocktail lounges/bars, a
deli-style restaurant, a buffet restaurant and various ancillary services and
facilities.
The Copa Casino is permanently moored dockside at a location known as the
"Horseshoe Site." Such location, which is leased to the partnership by the
Mississippi Department of Economic and Community Development and the Mississippi
State Port Authority, is between the East and West Piers of the Mississippi
State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of
land based facilities, will accommodate surface parking for approximately 840
vehicles. The leased facilities also include a docking structure which
accommodates the Copa Casino ship. The docking structure also includes a roadway
and pedestrian walk which provides access to the Copa Casino entrance.
As in Nevada, the Mississippi operations are conducted 24 hours a day every
day of the year. Present operations provide for the offering of complimentary
food and beverage on a limited basis. Group arrangements, known as "junkets" are
not conducted.
<PAGE> 3
TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
In Reno, as anticipated, our revenues declined during the three quarters
ended March 31, 1997 and improved in the fourth quarter. Such decrease in
revenues and profitability at the Sands Regency continues to be due to increased
competition from Las Vegas Mega-resorts, Indian casinos in the Pacific Northwest
and Reno area market dilution as a result of the 25% increase in hotel rooms in
the last 24 months. We were also negatively impacted by floods and other unusual
weather conditions in Reno and our major market areas in the third quarter.
In the fourth quarter, revenues and profitability at the Sands Regency
improved over last year. These improvements were due to the Women's
International Bowling Congress, a city-wide event held in Reno from February to
July 1997, and aggressive marketing efforts undertaken by the Company.
During the year, we undertook and completed a renovation of our main casino
area improving and updating the ambiance. We also installed a state-of-the-art
player marketing-tracking system which has been operating since approximately
December 1996. With these improvements and additions, coupled with the
renovation of a significant number of our hotel rooms in the last several years,
we believe that our Reno facility is an up-to-date and well maintained property.
Looking ahead for the Sands Regency, we believe the Reno market will
continue to grow and absorb the increased hotel and casino capacity added over
the last several years. In February 1998, the Men's American Bowling Congress
will start and we anticipate it will make a positive contribution to us and the
Reno area as a whole. We will continue our aggressive marketing efforts directed
toward both group and air wholesale business and small convention business. We
are also looking at new marketing approaches and promotional programs, some of
which have been successful at the Copa Casino, to increase our business and
profitability.
In Mississippi, operating profit and net income were down, compared to last
year, despite an increase in revenues. Such declines were due, in part, to a
loss on the write-off of property and equipment items, extraordinary dredging
costs and increased legal costs. The loss on disposal of property and equipment
includes the write-off of the undepreciated cost of a slot monitoring/accounting
system, which was replaced in 1997, and the write-off of certain capitalized
costs for projects no longer deemed viable.
The dredging costs were a result of dredging under and around our gaming
ship necessitated, primarily, by unusual and rapid siltation. This rapid
siltation appears to have been caused by other vessels in the Port and is the
responsibility of, and part of our lawsuit with, the Port. The increase in legal
costs are significantly attributable to the lawsuit with the Port and the
Mississippi Department of Community and Economic Development.
With respect to this lawsuit, the trial date of October 6, 1997 is rapidly
approaching and preparation for it has been time consuming and costly. Although
we are somewhat optimistic about our situation and position, we can not predict
the outcome which will likely have an important impact on the future of the Copa
Casino.
In addition to the above lawsuit, legal action with the two former
shareholders of Gulfside Casino, Inc., a partner in the Copa Casino, is ongoing.
An unfavorable ruling in Chancery Court in Harrison County Mississippi, entered
in January 1997, has been appealed to the Mississippi Supreme Court on the
grounds that the judgment was incorrect and not based on the facts or the law.
In addition, Gulfside Casino, Inc., the creditor to the two former shareholders,
has filed for protection under Chapter 11 of the United States Bankruptcy Code.
We believe that Bankruptcy Court is the proper forum to resolve the dispute with
these individuals although they are attempting to circumvent such jurisdiction
by requesting that the Bankruptcy Court allow them to continue to pursue their
action in Chancery Court.
2
<PAGE> 4
- --------------------------------------------------------------------------------
The most recent obstacle for the Copa Casino is our entrance off highway
90. Highway 90 is being widened, by utilizing the Port's frontage road, to
accommodate increased traffic. This includes the demolition of our entrance
which was accessible off the frontage road. Although delayed by the Port, a new
signalized intersection will be provided to serve as our new entrance which
should significantly enhance access to our facility. We expect completion by
December 1997 and until then, access to our facilities will continue to be
difficult.
In spite of these difficulties, the Copa continues to make the best of the
situation. We have implemented numerous innovative marketing programs and
promotions which have been successful in attracting visitors. We also have many
loyal customers who are diligently trudging through the construction.
As always, we are thankful for, and appreciate our many loyal employees in
both Reno and Gulfport. We are also very appreciative of our guests, many of
whom come to see us again and again, and year-after-year.
Respectfully,
[SIG]
Pete Cladianos, Jr.
President and Chief Executive Officer
Reno, Nevada
September 25, 1997
3
<PAGE> 5
THE SANDS REGENT
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
For the years ended June 30,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- -------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues(1) $57,521 $59,858 $ 60,497 $51,446 $43,877
Income (loss) from operations (114) 4,675 (11,748)(2) 8,178 8,608
Net income (loss) (762) 2,042 (11,428)(2) 7,730 5,481
Net income (loss) per share $ (.17) $ .45 $ (2.54)(2) $ 1.76 $ 1.27
Cash dividends per share -- $ .15 $ .20 $ .20 $ .20
OPERATING DATA:
Casino square footage(3) 51,000 51,000 51,000 51,000 27,000
Number of slot machines(3) 1,409 1,407 1,459 1,483 783
Number of hotel rooms(3) 938 938 938 938 938
Average hotel occupancy rate 84.4% 82.9% 87.1% 89.7% 89.0%
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments(3) $ 7,894 $11,557 $ 12,214 $ 9,804 $ 3,274
Total assets(3) 61,053 64,311 66,253 82,268 56,559
Long-term debt(3) 4,658 14,816 17,808 27,559 13,676
Total stockholders' equity(3) 32,454 33,216 31,849 44,138 35,423
</TABLE>
- ---------------
(1) Revenues are net of complimentaries.
(2) Includes a write-off attributable to an impairment in long-lived assets of
GCP and GCI. The negative impact of such write-off on income (loss) from
operations, net income (loss) and net income (loss) per share was
approximately $17.5 million, $13.9 million and $3.08, respectively.
(3) Information presented as of the end of the period.
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF 1997 TO 1996
For the year ended June 30, 1997, revenues decreased to $57.5 million
compared to $59.9 million for the year ended June 30, 1996 and income from
operations decreased from $4.7 million to a loss from operations of $114,000.
For the same comparable periods, net income decreased from $2 million, or $.45
per share, in fiscal 1996, to a net loss of $762,000, or a $.17 loss per share,
in fiscal 1997. The decrease in revenues is composed of an increase in revenues
from the Copa Casino of approximately $900,000 which was offset by a decrease in
revenues from the Sands Regency of approximately $3.3 million. The decrease in
income from operations is composed of a decrease from the Copa Casino of
approximately $1.0 million and a decrease from the Sands Regency of $3.8
million. The decrease in Copa Casino income from operations is due to increased
costs and expenses whereas the decrease in income from operations from the Sands
Regency is due primarily to a decrease in revenue.
The decreases in net income and net income per share, are also attributable
to both the Sands Regency and the Copa Casino operations. The Copa Casino
contributed approximately $741,000 to the consolidated net income in fiscal 1997
compared to $1.3 million in fiscal 1996. For the same comparable periods, the
Sands Regency incurred a net loss of approximately $1.5 million in fiscal 1997
compared to net income in fiscal 1996 of $705,000.
Such declines in revenues, income from operations, net income (loss) and
net income (loss) per share at the Sands Regency are primarily due to increased
competition from new and expanded Reno area hotel/casinos and from new Las Vegas
mega-resorts. Unusually poor weather conditions in Northern Nevada, Northern
California and the Pacific Northwest, during the third quarter of fiscal 1997,
also contributed to the decline in Sands Regency revenues. The increase in Copa
Casino revenues is due to an increase in customer counts while the decrease in
profitability is due to increased costs and expenses.
The decrease in lodging revenue of $671,000, in the year ended June 30,
1997 compared to the prior year, is due to a decrease in the average daily room
rate at the Sands Regency. The average daily rate decreased from $32 in fiscal
1996 to approximately $29 in fiscal 1997. For the same periods hotel occupancy
increased from 82.9% for the year ended June 30, 1996 to 84.4% in the year ended
June 30, 1997.
The decrease in gaming revenue of $606,000 is a result of a decrease in
gaming revenue from the Sands Regency of approximately $1.7 million which was
offset by an increase in gaming revenue from the Copa Casino of $1.1 million.
The decrease in gaming revenue in Reno consists of a decrease in Sands Regency
casino gaming revenue of $2.2 million which was offset by increased gaming
revenue from the Company's slot route operation of $477,000. The decrease in
Sands Regency gaming revenue primarily consists of a decrease in slot revenue
and is due to a decline in gaming revenue per occupied room. Gaming revenue per
occupied room decreased from $71 in the year ended June 30, 1996 to
approximately $64 in the year ended June 30, 1997. The increase in slot route
revenue is due to the Company's acquisition of a slot route business in June
1996 which operates slot machines at various non-casino businesses (convenience
stores and cocktail lounges) in the Reno area.
The slight increase in food and beverage revenue of $28,000, in fiscal 1997
compared to fiscal 1996, consists of an increase from the Copa Casino of
approximately $101,000 and a decrease from the Sands Regency of $73,000. The
increase at the Copa Casino is in beverage revenue and the decrease at the Sands
Regency is in restaurant revenue as a result of a slight decrease per occupied
room.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
- --------------------------------------------------------------------------------
The decrease in other revenue of $990,000 includes a decrease from the Copa
Casino of approximately $371,000 and a decrease from the Sands Regency of
$619,000. The decrease at the Copa Casino is due to the write-off of the
undepreciated cost of a slot monitoring/accounting system which was replaced in
fiscal 1997 and the write-off of certain capitalized costs for projects no
longer deemed viable. The decrease at the Sands Regency is due to the
nonrecurrence of a prior year gain on the sale of a small motel owned and
operated by the Sands Regency.
The increase in complimentary lodging, food and beverage, deducted from
revenue, of $98,000 consists of an increase from the Sands Regency of $203,000
which was offset by a decrease from the Copa Casino of $105,000. The increase at
the Sands Regency is composed of an increase in complimentary hotel
accomodations of approximately $74,000 and an increase in complimentary food and
beverages of $129,000. The increase in complimentary lodging is partially a
result of changes in the Company's lodging programs and packages offered to
attract and retain guests.
The increase in gaming costs and expense of $1.3 million in the year ended
June 30, 1997, compared to the year ended June 30, 1996, is comprised of
increases from the Copa Casino of $698,000 and from the Sands Regency of
$614,000. The increase in Copa Casino costs and expenses is primarily
attributable to the increase in associated gaming revenue. The increase in Sands
Regency gaming costs and expenses includes increases in the cost of
complimentary goods and services provided of $297,000, costs and expenses
associated with the new slot route operation of $425,000 and costs of
approximately $338,000 associated with the preferred players club which was
implemented in December 1996. These increases at the Sands Regency have been
offset by a decrease in gaming taxes and licenses of $192,000 and a decrease in
various other costs and expenses of approximately $254,000. The decrease in
taxes and licenses is due to the decrease in associated gaming revenue.
The decrease in lodging costs and expenses of $240,000 includes an increase
in the allocation of costs and expenses to gaming relative to the provision of
complimentary lodging of $65,000 and a decrease in various other lodging costs
and expenses.
The slight increase in food and beverage costs and expenses of $68,000, in
fiscal 1997 compared to fiscal 1996, consists of a decrease from the Sands
Regency of approximately $222,000 and an increase from the Copa Casino of
$290,000. The increase from the Copa Casino is due to a decrease in the
allocation of costs and expenses to gaming relative to the provision of
complimentary food and beverage of $80,000 and an increase in the cost of
beverages provided. The decrease from the Sands Regency consists primarily of an
increase in the allocation of costs and expenses to gaming relative to the
provision of complimentary food and beverage.
The increase in maintenance and utilities costs and expenses of $195,000
includes an increase from the Copa Casino of $145,000 and an increase from the
Sands Regency of approximately $50,000. The increase from the Copa Casino is due
to maintenance dredging performed under and around the ship totaling
approximately $316,000 through June 30, 1997 which costs were greater than the
prior year hurricane preparedness costs and expenses associated with Hurricane
Opal. The increase from the Sands Regency primarily consists of painting costs
of $162,000 which was offset by a decrease in other costs of approximately
$112,000. The increase in painting costs is due to the painting of the exterior
of the Company's Reno facilities and the interior of the five story parking
structure.
6
<PAGE> 8
- --------------------------------------------------------------------------------
The increase in general and administrative costs and expenses of $934,000
consists principally of an increase from the Copa Casino of $628,000 and an
increase from the Sands Regency of $299,000. The increase from the Copa Casino
is attributable to increases in legal costs of $570,000 and in wages and
benefits of $238,000 which were offset by a decrease in advertising and
promotional costs of approximately $176,000. The increase in legal costs is
significantly related to the disputes and legal actions with the State Port of
Mississippi at Gulfport as further discussed in Notes 9 and 10 to the Company's
Consolidated Financial Statements.
The increase in general and administrative costs and expenses for the Sands
Regency consists primarily of an increase in advertising and promotional costs
of approximately $389,000 reduced by a decrease in property taxes of $185,000.
The increase in depreciation and amortization expense of $170,000 is
primarily attributable to the Sands Regency and is due to additional
depreciation taken on assets placed in service in fiscal 1997 and 1996. During
such years, significant property and equipment additions and replacements were
undertaken.
The increase in interest and other income of approximately $188,000 is
primarily attributable to the Sands Regency. In fiscal 1997, the Sands Regency
recognized a gain of $374,000 on the sale of a non-casino property in Reno which
was offset by a reduction in interest income. Interest income decreased as a
result of a reduction in excess cash held in investments.
The decrease in interest and other expense of $468,000, in fiscal 1997
compared to fiscal 1996, is primarily due to a principal reduction in an
interest bearing long-term debt obligation of the Sands Regency in October 1996.
As further indicated in the Company's Notes to the Consolidated Financial
Statements, the effective income tax rate differs from the statutory rate, in
the current fiscal year, as a result of one-time differences including tax-free
interest income and deductible tax credits.
As is true for other hotel/casinos in the Reno area, demand for the
Company's facilities declines in the winter. Operating margins and, to a lesser
extent, revenues are lower during the second and third fiscal quarters due to
lower room rates and a lower level of gaming play per occupied room. The Sands
Regency has not historically been affected as severely as many other
hotel/casinos in the Reno area because the Company attracts high levels of group
business during that period. This group business and the Company's flexible
pricing strategy have historically enabled the Company to maintain relatively
high levels of hotel occupancy. Management anticipates that the trend of
experiencing lower operating margins in the second and third quarters of each
fiscal year will continue.
It appears that such seasonal trends are also applicable to the Copa
Casino. However, because of the limited amount of time that the Copa has been in
operation, the relatively limited amount of time that gaming has existed on the
Mississippi gulfcoast and the rapid expansion of gaming in Mississippi and
nearby Louisiana, the nature and extent of seasonal fluctuations, if any, are
subject to change.
COMPARISON OF 1996 TO 1995
For the year ended June 30, 1996, revenues decreased to $59.9 million
compared to $60.5 million for fiscal 1995 and income from operations increased
to $4.7 million as compared to a loss from operations of approximately $11.7
million in fiscal 1995. For the same comparable periods, net income increased
from a net loss of $11.4 million, or a $2.54 loss per share, in fiscal 1995 to
net income of $2 million, or $.45 per share, in
7
<PAGE> 9
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
- --------------------------------------------------------------------------------
fiscal 1996. The decrease in revenues was composed of an increase in revenues
from the Copa Casino which was offset by a decrease in revenues from the Sands
Regency. The increases in income from operations, net income and net income per
share were a result of the prior year recognition of an impairment in value of
long-lived assets of the Copa Casino and GCI of $17.5 million which did not
occur in fiscal 1996. In addition, income from operations, net income and net
income per share had been positively affected from improved operating results
from the Copa Casino and negatively impacted from declining operating results at
the Sands Regency in fiscal 1996 compared to fiscal 1995. Management believed
that the decline in Reno revenue and profits is due to increased competition
from new and expanded Reno area hotel/casinos and from the Las Vegas
mega-resorts.
The decrease in lodging revenue of $673,000, in the year ended June 30,
1996 compared to the prior year, was due to a decrease in Sands Regency hotel
occupancy at a lower average daily room rate. In fiscal 1995, hotel occupancy
was 87.1% at an average daily room rate of approximately $33. In fiscal 1996,
hotel occupancy was 82.9% at an average daily room rate of $32.
The increase in gaming revenue of $318,000 was comprised of an increase in
gaming revenue from the Copa Casino of approximately $2.7 million which was
offset by a decrease in gaming revenue at the Sands Regency of approximately
$2.4 million. The decrease in gaming revenue in Reno, which was primarily slot
revenue, was due to the decrease in hotel occupancy and a decrease in gaming
revenue per occupied room. Gaming revenue per occupied room decreased from $75
in year ended June 30, 1995 to approximately $71 in the year ended June 30,
1996.
The decrease in food and beverage revenue of $313,000 included a decrease
in food revenue at the Sands Regency of approximately $369,000 and the
elimination of Copa Casino buffet revenue of approximately $266,000. During
approximately the first four months of fiscal 1995, the Copa Casino was involved
in the operation of a buffet style restaurant located on its facilities.
Thereafter, such buffet style restaurant was operated by a third party. The
decrease in Sands Regency food revenue was primarily due to the decrease in
hotel occupancy. These decreases were partially offset by improved Copa Casino
food and beverage revenues as a result of an overall increase in business
volumes.
The increase in other revenue of $326,000 was principally comprised of a
gain on the sale of a small motel previously owned and operated by the Sands
Regency of $506,000 and a decrease in retail liquor store sales of approximately
$267,000. In August 1994, the retail liquor store business, which was operated
by the Company in Reno, was sold to a third party. Such third party operated the
retail liquor store in Company owned facilities for rent and other consideration
paid to the Company. The increase in complimentary lodging, food and beverage,
deducted from revenue, of $298,000 was primarily due to an increase in
complimentary lodging in Reno, as a result of changes in the Company's lodging
programs and packages offered to attract and retain guests.
The increase in gaming costs and expenses of $295,000 was comprised of, for
the Copa Casino, an increase in gaming taxes and licenses of $259,000, a
decrease in estimated health benefit costs of $163,000 and a decrease in the
cost of complimentary goods and services provided to Copa Casino guests of
$124,000. The net remaining increase was attributable to the Sands Regency and
includes an increase in the cost of complimentary goods and services in the
amount of $185,000, due to increased complimentary services provided to Sands
Regency guests, and general increases in salaries, wages and benefits and other
costs.
The decrease in food and beverage costs and expenses of $225,000, in fiscal
1996 compared to fiscal 1995, consisted primarily of the elimination of costs
and expenses associated with the buffet style restaurant at the
8
<PAGE> 10
- --------------------------------------------------------------------------------
Copa Casino. The decrease in other costs and expenses of $295,000 was primarily
due to the elimination of costs and expenses associated with the sale of the
retail liquor store business in August 1994 which was previously operated by the
Sands Regency.
The increase in maintenance and utilities costs and expenses of $381,000 in
the year ended June 30, 1996, compared to the year ended June 30, 1995, was
principally due to hurricane preparedness costs and expenses for the Copa
Casino, both in general and for Hurricane Opal. The increase in general and
administrative costs and expenses of $1.1 million consisted primarily of
increased advertising, promotional and customer solicitation costs for the Copa
Casino of approximately $790,000 and increased legal costs of approximately
$190,000 related, in part, to the Copa Casino's leased site development conflict
with the Mississippi State Port Authority.
The prior year recognition of an impairment of long-lived assets of $17.5
million, which did not occur in fiscal 1996, consisted of a write-down of Copa
Casino property and equipment of $10.7 million and the write-off of goodwill,
which originated when GCI was purchased in February 1994, of approximately $6.8
million. The impairment was based upon political and market conditions and an
analysis, at June 30, 1995, of projected undiscounted future cash flows.
The decrease in depreciation and amortization expense of $784,000 included
the elimination of goodwill amortization of $366,000 as a result of the
write-off of Gulfside Casino, Inc. goodwill in June 1995 when the Company
recognized an impairment in long-lived assets associated with the Copa Casino.
Likewise, due to the recognition of such impairment, the decrease in
depreciation and amortization expense also included a decrease in Copa Casino
depreciation expense of approximately $585,000.
The decrease in interest expense, in fiscal 1996 compared to fiscal 1995,
was primarily a result of a reduction in interest-bearing debt owed by the
Company.
As further indicated in the Company's Notes to the Consolidated Financial
Statements, the decrease in the statutory rate to arrive at the effective income
tax rate, in the year ended June 30, 1996, was primarily a result of the tax
effect of tax-free interest income earned by the Company and the utilization of
general business credits. The increase in the effective income tax rate from the
statutory rate in fiscal 1995 was primarily the result of the write-off of
goodwill in connection with the recognition of an impairment in long-lived
assets in fiscal 1995.
CAPITAL RESOURCES AND LIQUIDITY
The Company's working capital declined from a deficit of $2.4 million at
June 30, 1996 to a deficit of $12.6 million at June 30, 1997. Such decline is
primarily due to an early repayment of principal on the Company's bank debt of
$1.3 million, the reclassification of $7.3 million of bank debt at June 30, 1997
from non-current to current and the purchase of property and equipment, for
cash, of approximately $3.1 million. The early repayment of bank debt was a
result of an agreement between the Company and Wells Fargo Bank and Sumitomo
Bank, Ltd. amending certain financial covenants of the long-term debt loan
agreement in October 1996. Such amendment resulted in the Company's compliance
with the financial covenants at June 30, 1996 and September 30, 1996 and it was
anticipated that the Company would also be in compliance thereafter. As part of
the consideration for such amendment, the Company made a prepayment of $1.3
million which would otherwise have been due on the loan maturity date of March
31, 2000.
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
- --------------------------------------------------------------------------------
Subsequent to such October 1996 amendment to the bank loan agreement, the
Company has been, and is, in noncompliance with certain of the required
financial covenants related to operating results due to net losses from the
Sands Regency. As a result, the bank has declared an Event of Default in
accordance with the terms of the loan agreement which entitles the bank to a
default interest rate of prime plus three percent and allows the bank to
accelerate the loan principal balance. Although the bank has not accelerated the
loan principal balance, the Company has included the entire balance as a current
liability of which approximately $7.3 million would have otherwise been
reflected as non-current.
The Company is currently in discussions with the bank regarding
restructuring the loan agreement. In the event such discussions are unsuccessful
and the bank accelerates the loan balance, the Company is not in a financial
position to pay-off the loan obligation. Further, the Company's ability to make
the future scheduled semi-annual principal payments is subject to significant
improvements in the Company's operating results which is presently not
anticipated. Management believes that its efforts to enter into a restructured
loan agreement, with monthly principal and interest payments due over a longer
period than the current remaining loan term of approximately three years, will
be successful. However, there are no assurances that such will be the result.
In addition to the non-compliance with certain financial covenants,
majority shareholders of the Company have entered into an agreement to sell all
of their common stock in the Company, aggregating approximately 46 percent, to a
third party. Such transaction is subject to certain regulatory approvals and the
approval of the bank. Without bank approval, such transaction would violate
certain additional bank loan covenants.
At June 30, 1997, cash, cash equivalents and short-term investments
decreased to $7.9 million compared to $11.6 million at June 30, 1996. Cash and
cash equivalents provided from operating activities for the years ended June 30,
1997, 1996 and 1995 was $3.3 million, $5.1 million and $7.3 million,
respectively. Although the Company's operations and capital expenditures are
financed primarily from funds generated from operations and borrowings, cash of
approximately $475,000 and $735,000 was generated in fiscal 1997 and 1996,
respectively, from the sale of non-hotel/casino properties located in Reno,
Nevada. In fiscal 1997, cash was also generated through the issuance of
long-term debt of $498,000 and in fiscal 1996, cash was generated from the net
disposal of short-term investments of $1.7 million. In fiscal 1995, cash of $1.7
million was used for the net acquisition of short-term investments. The
Company's short-term investments, which generally mature in one year or less,
represent temporarily invested cash funds which are generally readily
convertible to cash.
Uses of cash included the Company's payment of dividends in the amounts of
$675,000 and $899,000 in fiscal years 1996 and 1995, respectively, and payments
of long-term debt of $4.9 million, $3.1 million and $703,000 in fiscal 1997,
1996 and 1995. Cash was also utilized for the acquisition of property and
equipment in the amounts of $3.1 million, $2.6 million and $2.7 million in the
years ended June 30, 1997, 1996 and 1995, respectively. The property and
equipment acquisition amounts, for the years indicated, represent primarily
furniture, fixtures and equipment replacements and additions. Cash payments of
$98,000 in fiscal 1996 and $756,000 in fiscal 1995 were made to satisfy accounts
payable for the preceeding years purchases of property and equipment items.
At June 30, 1997, the Company estimates that all of its cash funds are
necessary for operational purposes. The Company generally invests its excess
cash in securities which are readily marketable and that are not subject to
significant market value fluctuations.
10
<PAGE> 12
- --------------------------------------------------------------------------------
Future expansion plans for the Reno and Gulfport facilities will be
considered based upon future market conditions, available financial resources
and the need to add hotel rooms and other major facilities. Expansion at the
Gulfport facility has also been denied by the Mississippi State Port Authority
at Gulfport and the Mississippi Department of Economic and Community Development
which disapproval is part of on-going litigation as further discussed below and
in Note 10 to the Company's Notes to Consolidated Financial Statements.
A judgement has been entered against Gulfside Casino, Inc. ("GCI"), as
further discussed in Note 10 to the Company's Notes to Consolidated Financial
Statements, requiring certain payments by Gulfside Casino Partnership ("GCP") to
two former shareholders of Gulfside Casino, Inc. Such payments are to be applied
against promissory notes payable and related accrued interest, aggregating
approximately $7.1 million at June 30, 1997 until such amounts are paid in full.
At present, the circumstances requiring such payments, including excess monies
not designated for Gulfside Casino Partnership operational purposes, have not
been met. Further, as a result of the GCI filing for protection under Chapter 11
of the United States Bankruptcy Code, management believes that the automatic
stay provisions under the Bankruptcy Code restricts payments to GCI creditors,
including payment to the two former shareholders.
The two former GCI shareholders have filed a motion in Bankruptcy Court for
relief from the automatic stay provisions of the Bankruptcy Code which prohibits
payments on pre-petition obligations. Such motion, which is scheduled to be
heard on October 1, 1997, contends that the automatic stay provisions should not
apply because the obligations are payable by GCP and not the bankrupt entity
GCI. It is the Company's belief that the automatic stay provisions under the
United States Bankruptcy Code, which are applicable to the creditors of GCI,
appropriately apply to these two former GCI shareholders and that GCP is
prohibited from making any payment or distribution to these individuals who are
creditors of GCI.
Notwithstanding the above, GCI and GCP further contend that any payments
that may be required to be made by GCP to GCI should appropriately be paid into
the bankrupt estate of GCI and should not be distributed to pre-petition, or
other, creditors of GCI. In the event the motion for relief from the automatic
stay is granted, the two former GCI shareholders may continue legal action in
the Chancery Court which could include the appointment of a receiver.
In July 1996, GCP received notice from the Mississippi Department of
Economic and Community Development and the Mississippi State Port Authority (the
"Port") that GCP's lease for the present Copa Casino site would not be extended
beyond its initial term of October 1999 because GCP's site was needed by the
Port. Such notice of termination and the Port's refusal to allow the Company to
undertake an expansion of its Gulfport facility, including building a hotel,
among other items, are the subject of a lawsuit between the parties.
The lawsuit is presently set for trial on October 6, 1997 with respect to
the liability issues. In the event GCP is successful on any or all of its claims
and counterclaims, a separate trial on damages will be held which is currently
scheduled during the first week of December 1997. If GCP is unsuccessful and is
required to vacate the current leased site in October 1999, the Company's
results of operations could be materially adversely affected and the Company's
investment in the Mississippi gaming operation may not be recovered. At June 30,
1997, the book value of the Company's net investment in and advances to
(including accrued interest) the Mississippi gaming operation was approximately
$2.6 million.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
- --------------------------------------------------------------------------------
Inflation has had only a slight impact on the Company's operating results.
Cost and expense increases have generally been passed on to the customers
through moderate price increases, higher table limits and upgraded slot machine
denominations.
Cautionary statement for purposes of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events. Such statements
are identified by the words "anticipates", "believes", "expects", "intends",
"future", or words of similar import. Various important factors that could cause
actual results to differ materially from those in the forward-looking statements
include, without limitation, the following: increased competition in existing
markets or the opening of new gaming jurisdictions; a decline in the public
acceptance of gaming; the limitation, conditioning or suspension of any of the
Company's gaming licenses; adverse outcomes in any of the Company's various
material legal proceedings in Mississippi; increases in or new taxes imposed on
gaming revenues or gaming devices; a finding of unsuitability by regulatory
authorities with respect to the Company's officers, directors or key employees;
loss or retirement of key executives; significant increases in fuel or
transportation prices; adverse economic conditions in the Company's key markets;
severe and unusual weather in the Company's key markets and adverse results of
significant litigation matters.
12
<PAGE> 14
THE SANDS REGENT
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Gaming $42,837,923 $ 43,443,535 $ 43,125,137
Lodging 8,461,714 9,132,778 9,805,719
Food and beverage 7,910,110 7,882,377 8,195,340
Other 1,186,327 2,175,831 1,850,111
----------- ------------ -----------
60,396,074 62,634,521 62,976,307
Less complimentary lodging, food and beverage
included above 2,874,795 2,776,918 2,479,087
----------- ------------ -----------
57,521,279 59,857,603 60,497,220
----------- ------------ -----------
OPERATING COSTS AND EXPENSES:
Gaming 22,106,717 20,794,534 20,499,506
Lodging 4,918,433 5,158,603 5,193,683
Food and beverage 6,566,859 6,499,231 6,724,601
Other 678,566 665,220 960,201
Maintenance and utilities 5,658,004 5,462,777 5,073,517
General and administrative 13,901,048 12,967,352 11,878,463
Impairment of long-lived assets -- -- 17,496,282
Depreciation and amortization 3,805,522 3,635,219 4,418,769
----------- ------------ -----------
57,635,149 55,182,936 72,245,022
----------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS (113,870) 4,674,667 (11,747,802)
----------- ------------ -----------
OTHER INCOME (DEDUCTIONS):
Interest and other income 779,508 591,126 549,978
Interest expense (1,926,378) (2,394,743) (2,562,889)
----------- ------------ -----------
(1,146,870) (1,803,617) (2,012,911)
----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,260,740) 2,871,050 (13,760,713)
INCOME TAX (PROVISION) BENEFIT 498,928 (828,688) 2,332,892
----------- ------------ -----------
NET INCOME (LOSS) $ (761,812) $ 2,042,362 $(11,427,821)
=========== ============ ===========
NET INCOME (LOSS) PER SHARE $ (.17) $ 0.45 $ (2.54)
=========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,498,722 4,498,722 4,497,588
=========== ============ ===========
</TABLE>
- ---------------
See notes to consolidated financial statements.
13
<PAGE> 15
THE SANDS REGENT
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,643,681 $11,356,980
Short-term investments 250,000 200,000
Accounts receivable, less allowance for
possible losses of $119,000 and $107,000 418,018 400,018
Inventories 640,023 789,199
Federal income tax refund receivable 1,062,657 141,369
Prepaid expenses and other assets 1,297,392 979,555
----------- -----------
Total current assets 11,311,771 13,867,121
PROPERTY AND EQUIPMENT:
Land 8,092,923 8,094,823
Buildings, ship and improvements 45,753,424 45,376,570
Equipment, furniture and fixtures 24,775,831 21,762,273
Construction in progress 171,955 231,264
----------- -----------
78,794,133 75,464,930
Less accumulated depreciation and amortization 31,059,712 28,051,014
----------- -----------
47,734,421 47,413,916
OTHER ASSETS:
Deferred federal income tax asset 422,434 899,908
Note receivable 1,237,156 1,244,263
Other 347,079 885,705
----------- -----------
2,006,669 3,029,876
----------- -----------
$61,052,861 $64,310,913
=========== ===========
</TABLE>
- ---------------
See notes to consolidated financial statements.
14
<PAGE> 16
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,712,531 $ 2,281,286
Accrued salaries, wages and benefits 1,815,841 1,686,932
Other accrued expenses 1,691,557 1,376,101
Deferred federal income tax liability 239,683 126,469
Current maturities of long-term debt 17,480,492 10,789,021
------------ ------------
Total current liabilities 23,940,104 16,259,809
LONG-TERM DEBT 4,658,474 14,816,286
OTHER -- 18,723
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.05 par value, 20,000,000 shares
authorized, 6,898,722 shares issued 344,936 344,936
Additional paid-in capital 13,073,803 13,073,803
Retained earnings 41,390,379 42,152,191
------------ ------------
54,809,118 55,570,930
Treasury stock, at cost; 2,400,000 shares (22,354,835) (22,354,835)
------------ ------------
Total stockholders' equity 32,454,283 33,216,095
------------ ------------
$ 61,052,861 $ 64,310,913
============ ============
</TABLE>
15
<PAGE> 17
THE SANDS REGENT
CONSOLIDATED STATEMENTS
OF CASH FLOWS
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (761,812) $ 2,042,362 $(11,427,821)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,805,522 3,635,219 4,418,769
Impairment of long-lived assets -- -- 17,496,282
(Gain) loss on disposal of property and
equipment 15,341 (482,978) 78,322
Amortization of imputed interest expense -- -- 17,100
(Increase) decrease in accounts and notes
receivable (18,000) 77,334 (147,281)
(Increase) decrease in inventories 149,176 (70,147) 397,516
(Increase) decrease in prepaid expenses and
other current assets (317,837) (33,181) 189,362
(Increase) decrease in other assets 128,420 (494,904) 31,273
Increase (decrease) in accounts payable 207,268 332,286 (612,013)
Increase (decrease) in accrued salaries, wages
and benefits 128,909 (200,032) 218,733
Increase in other accrued expenses 315,456 59,218 604,404
Change in federal income taxes
payable/receivable (921,288) (525,579) 563,165
Change in deferred federal income taxes 590,688 768,693 (4,442,575)
Decrease in other liability (18,723) (37,428) (37,428)
------------ ----------- ------------
Net cash provided by operating activities 3,303,120 5,070,863 7,347,808
------------ ----------- ------------
INVESTING ACTIVITIES:
Purchase of short-term investments (50,000) (583,257) (3,251,250)
Sale and maturity of short-term investments -- 2,240,760 1,528,747
Payments received on note receivable 7,107 6,635 7,547
Additions to property and equipment (3,105,448) (2,588,447) (2,657,280)
Proceeds from sale of property, equipment and
other assets 501,490 735,320 32,756
------------ ----------- ------------
Net cash used in investing activities (2,646,851) (188,989) (4,339,480)
------------ ----------- ------------
</TABLE>
- ---------------
See notes to consolidated financial statements.
16
<PAGE> 18
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Payment of accounts payable for prior year
purchases of property and equipment -- (97,893) (756,487)
Issuance of long-term debt 497,940 -- --
Payments on long-term debt (4,867,508) (3,108,343) (702,796)
Issuance of common stock -- -- 37,500
Payment of dividends on common stock -- (674,808) (899,444)
------------ ----------- ------------
Net cash used in financing activities (4,369,568) (3,881,044) (2,321,227)
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,713,299) 1,000,830 687,101
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,356,980 10,356,150 9,669,049
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,643,681 $11,356,980 $ 10,356,150
============ =========== ============
Supplemental cash flow information:
Property and equipment acquired by accounts
payable $ 223,977 $ -- $ 59,489
============ =========== ============
Property and equipment acquired by long-term debt $ 903,227 $ -- $ --
============ =========== ============
Property and equipment acquired by conversion of
other assets $ 400,000 $ -- $ --
============ =========== ============
Accounts payable converted to long-term debt $ -- $ -- $ 118,726
============ =========== ============
Interest paid, net of amount capitalized $ 1,594,085 $ 2,022,546 $ 2,254,248
============ =========== ============
Federal income taxes paid $ -- $ 1,075,000 $ 1,550,000
============ =========== ============
</TABLE>
17
<PAGE> 19
THE SANDS REGENT
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
---------------------- Paid-in Retained -------------------------
Shares Amount Capital Earnings Shares Amount Total
---------- --------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 1, 1994 6,892,722 $ 344,636 $ 13,036,603 $ 53,111,902 2,400,000 $(22,354,835) $ 44,138,306
Net loss -- -- -- (11,427,821) -- -- (11,427,821)
Shares issued on exercise
of stock options 6,000 300 37,200 -- -- -- 37,500
Cash dividends ($.20 per
share) -- -- -- (899,444) -- -- (899,444)
--------- -------- ------------ ------------ --------- ------------- ------------
BALANCES, JUNE 30, 1995 6,898,722 344,936 13,073,803 40,784,637 2,400,000 (22,354,835) 31,848,541
Net income -- -- -- 2,042,362 -- -- 2,042,362
Cash dividends ($.15 per
share) -- -- -- (674,808) -- -- (674,808)
--------- -------- ------------ ------------ --------- ------------- ------------
BALANCES, JUNE 30, 1996 6,898,722 344,936 13,073,803 42,152,191 2,400,000 (22,354,835) 33,216,095
Net loss -- -- -- (761,812) -- -- (761,812)
--------- -------- ------------ ------------ --------- ------------- ------------
BALANCES, JUNE 30, 1997 6,898,722 $ 344,936 $ 13,073,803 $ 41,390,379 2,400,000 $(22,354,835) $ 32,454,283
========= ======== ============ ============ ========= ============= ============
</TABLE>
- ---------------
See notes to consolidated financial statements.
18
<PAGE> 20
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Sands
Regent and its wholly-owned subsidiaries Zante, Inc. ("Zante"), Patrician, Inc.
("Patrician"), Artemis, Inc. ("Artemis") and Gulfside Casino, Inc. ("GCI"), and
Gulfside Casino Partnership ("GCP") (together the "Company"). Patrician, GCI and
Artemis are the sole partners in GCP.
All significant intercompany balances and transactions have been eliminated
in consolidation.
(B) NATURE OF OPERATIONS
The Company owns and operates The Sands Regency Hotel/Casino in Reno,
Nevada and the Copa Casino in Gulfport, Mississippi. The Copa Casino, which is
owned by GCP, was licensed and commenced operations in September 1993. The
Company's operations are conducted in the hotel-casino industry and include
gaming activities, hotel, restaurant and other related support facilities.
Because of the integrated nature of these operations, the Company is considered
to be engaged in one industry segment.
Casino operations are subject to extensive regulation in the States of
Nevada and Mississippi by the respective state Gaming Authorities. Management
believes that the Company's procedures for supervising casino operations and
recording casino and other revenues comply in all material respects with the
applicable regulations.
(C) OPERATING REVENUES
In accordance with industry practice, the Company recognizes as casino
revenue the net win from gaming activities, which is the difference between
gaming wins and losses.
Lodging, food and beverage furnished without charge to customers are
included in gross revenues at a value which approximates retail and then
deducted as complimentary services to arrive at net revenues. The cost of such
complimentary services is charged to gaming operating costs and expenses.
The estimated costs of providing the complimentary services are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Hotel $ 445,572 $ 380,869 $ 215,661
Food and beverage 2,221,535 2,073,504 2,185,106
Other 51,843 39,112 32,896
---------- ---------- ----------
$2,718,950 $2,493,485 $2,433,663
========== ========== ==========
</TABLE>
Other operating revenue is comprised of hotel/casino ancillary services and
includes any gain or loss on the sale of property and equipment previously used
in the Company's operations and a retail liquor store owned and operated by the
Company through August 1994 at which time the business was sold to a third
party. Related costs and expenses are included in other operating costs and
expenses.
19
<PAGE> 21
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
(D) CASH AND CASH EQUIVALENTS
Cash equivalents include all short-term investments with an original
maturity of three months or less. Such investments, carried at cost which
approximates market, are readily marketable with no significant investment in
any individual issuer.
(E) SHORT-TERM INVESTMENTS
The Company accounts for its short-term investments in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
115 -- "Accounting for Certain Investments in Debt and Equity Securities". This
statement requires that unrealized gains and losses on securities defined as
"available-for-sale" be excluded from income and be reported in a separate
component of stockholders' equity. Securities that the Company has the ability
and positive intent to hold to maturity are classified as "held-to-maturity" and
are reported at the lower of aggregate cost or market. As of June 30, 1997, the
Company's short-term investments were not subject to the provisions of SFAS No.
115.
(F) INVENTORIES
Inventories consist primarily of food, beverage and operating supplies and
are stated at the lower of cost (determined on an average cost basis) or market.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of impairment write-downs to
estimated net realizable values. Depreciation and amortization is computed
primarily by the straight line method over the estimated useful lives of the
assets. These lives range between 5 to 35 years for buildings, ship and
improvements and 5 to 20 years for equipment, furniture and fixtures. Assets
sold or otherwise disposed of are removed from the property accounts and the
resulting gains or losses are included in income.
(H) GOODWILL
In fiscal 1995, goodwill, which represented the excess of cost over net
assets of the acquisition of GCI in February 1994, was written-off to reflect
the net realizable value of long-lived assets on a basis consistent with the
provisions of recently issued accounting standards as more fully described
below. Prior to such write-down, goodwill was being amortized on a straight-line
basis over a period of 20 years.
(I) IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121 -- "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of " was issued by the Financial Accounting Standards Board in March 1995. The
Company adopted the provisions of SFAS No. 121 during the fourth quarter of the
year ended June 30, 1995 which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The Company reviews the
carrying values of its long-lived and identifiable intangible assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable.
20
<PAGE> 22
- --------------------------------------------------------------------------------
(J) INCOME TAXES
Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109 -- "Accounting for
Income Taxes". In accordance with SFAS No. 109, the asset and liability method
of accounting for income taxes is utilized whereby deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with reporting and disclosure requirements of the Statement
of Financial Accounting Standards ("SFAS") No. 107 -- "Disclosures about Fair
Values of Financial Instruments", the Company calculates the fair value of
financial instruments and includes this additional information in the Company's
Notes to Consolidated Financial Statements when the fair value is different than
the book value of those financial instruments. When fair value is equal to book
value, no additional disclosure is made. Fair value is determined using quoted
market prices whenever available. When quoted market prices are not available,
the Company uses alternative valuation techniques such as calculating the
present value of estimated future cash flows utilizing discount rates
commensurate with the risks involved.
(L) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and short-term investments. The Company maintains cash in bank accounts with
balances, at times, in excess of Federally insured limits. The Company has not
experienced any losses in such accounts.
(M) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by using the weighted average
number of shares and common stock equivalents outstanding for the period.
(N) RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB")
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128 entitled "Earnings Per Share". This statement
establishes standards for computing and presenting earnings per share and is
effective for financial statements issued for periods ending after December 15,
1997. Earlier application of this statement is not permitted and, upon adoption,
requires restatement, as applicable, of all prior period earnings per share data
presented. Management does not believe this new SFAS will have a material effect
on the presentation or computation of earnings per share.
On June 30, 1997, the FASB issued SFAS No. 130 entitled "Reporting
Comprehensive Income". This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Such
21
<PAGE> 23
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
pronouncement is effective for financial statements issued for years beginning
after December 15, 1997. Management does not believe this new SFAS will have a
material impact on the financial statements of the Company.
On June 30, 1997, the FASB issued SFAS No. 131 entitled "Disclosures About
Segments of an Enterprise and Related Information". This statement redefines how
operating segments are determined and requires qualitative disclosure of certain
financial and descriptive information about a company's operating segments and
is effective for fiscal years beginning after December 15, 1997. Management
believes that the segment information required to be disclosed under SFAS 131
will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each of its
reportable operating segments. The Company has not completed an analysis of
which operating segment information may be reported.
(O) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(P) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
NOTE 2 -- SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposit which are carried
at cost, which approximates market.
NOTE 3 -- NOTE RECEIVABLE
The note receivable is due in monthly principal and interest payments
calculated over 30 years using an annual interest rate of prime plus 2% (10.5%
at June 30, 1997). Subject to a minimum interest rate of 8%, the interest rate
shall be adjusted semi-annually. The unpaid balance is payable in full in March
1999. The note is secured by a first deed of trust on motel real property in
Reno, Nevada and is a joint and several obligation of, and guaranteed by, the
makers.
NOTE 4 -- OPERATION OF GULFSIDE CASINO PARTNERSHIP
On a stand alone basis, GCP dba Copa Casino incurred a net loss of $281,000
in the year ended June 30, 1997 and generated net income of $326,000 in the year
ended June 30, 1996. As of June 30, 1997, GCP's total liabilities exceeded its
total assets by $16.2 million. Such excess of total liabilities over total
assets results from advances by the Company to GCP, aggregating $26 million
including accrued interest, which are reflected as liabilities of GCP.
22
<PAGE> 24
- --------------------------------------------------------------------------------
Management of GCP was notified in July 1996 that its lease with the
Mississippi State Port Authority will be cancelled and terminated at the end of
the primary lease term in October 1999. Further, GCP's requests to substitute a
barge for its present gaming vessel and to construct land based facilities,
including a hotel, have been refused by the Mississippi State Port Authority.
Management of GCP believes that in order to be ultimately successful, it must
have a stable, long-term lease arrangement and be allowed to develop its
leasehold site to provide adequate gaming, lodging and entertainment facilities.
As discussed in Notes 9 and 10, such issues, among others, are the subject of a
lawsuit between the GCP and the Mississippi State Port Authority.
NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS
The Company made a determination during the year ended June 30, 1995 that
the carrying amount of certain long-lived assets of GCI and GCP may not be
recoverable based upon analysis of projected undiscounted future cash flows of
the GCI and GCP calculated in accordance with the provisions of SFAS No.
121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ". The resultant, calculated impairment of long-lived
assets necessitated a write-down of $17.5 million as follows: 1) $6.8 million of
Goodwill which represented the excess of cost over net assets of the acquisition
of GCI in February 1994; 2) $5.3 million for the GCP ship which contains the
Copa Casino operation; 3) $3.7 million for the GCP leasehold improvements at the
Copa Casino operating site; and 4) $1.7 million for Copa Casino gaming
equipment, primarily slot machines. The estimated net realizable values of these
long-lived assets at June 30, 1995 were determined by calculating the present
value of estimated expected future GCI and GCP cash flows using a discount rate
commensurate with the risks involved.
23
<PAGE> 25
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Bank term and revolving line of credit loan; interest originally
at prime or LIBOR plus an amount in excess of such amounts,
respectively, of up to 2% and 3.65%, depending on defined
performance levels of the Sands Regency (a rate of 8.4% utilized
at June 30, 1997 which was increased effective July 1, 1997 as
indicated below); collateralized by a first deed of trust on the
real property and equipment used in the Reno, Nevada
hotel/casino operation; interest payable monthly; principal due
semi-annually in such amounts so as to reduce the advanced and
unpaid principal balance to the maximum scheduled unpaid balance
due as of specified dates; payable in full in 2000; presently in
default of certain financial covenants as further described
below $10,975,000 $15,553,000
Capital lease obligation; imputed interest at 8.6%; payable in
monthly principal and interest payments in the amount of $26,794
over 60 months at which time a one dollar purchase option is
exercisable; assets under the capital lease, with an original
cost of $1,303,000 and accumulated depreciation of approximately
$41,000 at June 30, 1997, are included in property and equipment
and are being depreciated over their estimated useful lives 1,259,600 --
Contract payable to International Game Technology ("IGT") by GCP;
principal and interest payments of $55,000, including interest
at 10% per annum, due monthly commencing September 1, 1996
through August 1, 1999 at which time the remaining unpaid
principal balance of $3.2 million is due in full; secured by
certain gaming equipment 3,831,186 4,052,307
Notes payable by GCI to former minority stockholders of GCI as
issued pursuant to a settlement agreement in August 1993;
interest at 6% per annum and unpaid since May 1994; secured by
GCI's ownership interest in GCP which is 60% at June 30, 1997;
principal payments past due since 1994; in accordance with a
Chancery Court judgement, as further described in Note 10, the
entire principal balance, is due in full and is included in
current maturities at June 30, 1997 and 1996 6,000,000 6,000,000
Other 73,180 --
----------- -----------
22,138,966 25,605,307
Less current maturities 17,480,492 10,789,021
----------- -----------
Long-term portion $ 4,658,474 $14,816,286
=========== ===========
</TABLE>
The bank loan is covered under a loan agreement which requires the Company
to comply with certain financial covenants, restricts future encumbrances and
requires certain existing major shareholders of the Company to continue to hold
a significant ownership interest in the Company and to be involved in the
management of the Company. The financial covenants include restrictions on
investment activities and the sale or disposition of a significant portion of
the Company's assets and also limit annual capital expenditures. The financial
covenants additionally require the maintenance of certain financial ratios and
restrict the payment of dividends if an event of default has occurred. The loan
agreement also requires that no
24
<PAGE> 26
- --------------------------------------------------------------------------------
shareholder, other than the existing major shareholders, may own 20% or more of
the issued and outstanding voting stock of the Company.
The Company is presently in non-compliance with certain of the required
financial covenants related to operating results. As a result, the bank has
declared an Event of Default, in accordance with the terms of the loan
agreement, which entitles the bank to a default interest rate of prime plus
three percent and allows the bank to accelerate the loan principal balance.
Although the bank has not accelerated the loan principal balance, the Company
has included the entire balance as currently payable.
Effective July 1, 1997, interest due on the loan is at prime plus three
percent with prime plus .75 percent payable monthly and the remaining interest
to be accrued until payment is requested by the bank.
In addition to the non-compliance with certain financial covenants,
majority shareholders of the Company have entered into an agreement to sell all
of their common stock in the Company, aggregating approximately 46 percent, to a
third party. Such transaction is subject to certain regulatory approvals and the
approval of the bank. Without bank approval, such transaction would violate
certain additional bank loan covenants.
The Company is currently in discussions with the bank regarding
restructuring the loan agreement. In the event such discussions are unsuccessful
and the bank accelerates the loan balance, the Company is not in a financial
position to pay-off the loan obligation. Further, the Company's ability to make
the future scheduled semi-annual principal payments is subject to significant
improvements in the Company's operating results which is presently not
anticipated. Management believes that its efforts to enter into a restructured
loan agreement, with monthly principal and interest payments due over a longer
period than the current remaining loan term of approximately three years, will
be successful.
Long-term debt at June 30, 1997 is payable as follows:
<TABLE>
<CAPTION>
Year ending
June 30, Amount
----------- ------
<S> <C>
1998 $17,480,492
1999 583,284
2000 3,533,114
2001 284,666
2002 257,410
$22,138,966
</TABLE>
The Company entered into an interest rate swap agreement, effective April
1, 1994, to fix the variable interest rate due on the bank term and revolving
line of credit loan. Under such agreement, the Company pays the bank interest at
a fixed rate of 6.25% per annum on the notional amount and the bank pays the
Company interest at a variable rate (currently 5.94%) based on the London
Interbank Offer Rate ("LIBOR") on the notional amount. The notional amount of
the swap coincides with the maximum amount of amortized borrowings that may be
made under the bank term and revolving line of credit loan (currently $11
million). The notional amount may be reduced by the Company, in whole or in
part, upon notice by the Company to the bank and a fair market settlement of
such reduction between the parties. The fair value of the interest rate swap
agreement is a liability of approximately $7,000 at June 30, 1997 which was
based on estimated termination values. The interest rate swap is subject to
market risk as interest rates fluctuate.
25
<PAGE> 27
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
Of the total interest expense of $1,926,000, $2,395,000 and $2,563,000 in
1997, 1996 and 1995, respectively, $97,000, none and none has been capitalized
into construction costs.
NOTE 7 -- STOCK OPTION AND STOCK INCENTIVE PLANS
The Company's amended and restated stock option plan provides for the
granting of incentive stock options as well as non-qualified stock options to
executives and key employees. The plan presently permits for the grant of
options covering a maximum of 500,000 shares of the Company's common stock. The
Company has reserved shares to cover these requirements. The plan will continue
until the year 2002, unless terminated earlier. Under the plan, the per share
exercise price of an option cannot be less than 100% of the fair market value of
the shares at date of grant or 110% of the fair market value in the case of
incentive stock options granted to stockholders owning more than 10% of the
outstanding common shares. The options generally vest 20% each year after grant.
The following table summarizes activity of the Company's stock option plan
which includes only incentive stock option grants:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
---------- --------------
Options Outstanding
-------------------
<S> <C> <C>
Outstanding, July 1, 1994 150,000 $ 8.29
Options cancelled (36,000) (10.50)
Options exercised (6,000) (6.25)
------- -------
Outstanding, June 30, 1995 108,000 7.67
Options granted 250,000 3.58
Options cancelled (24,000) (6.25)
Options exercised -- --
------- -------
Outstanding, June 30, 1996 334,000 4.71
------- -------
Outstanding, June 30, 1997 334,000 $ 4.71
======= =======
Options Exercisable
-------------------
At June 30, 1995 72,000 $ 6.25
======= =======
At June 30, 1996 60,000 $ 6.25
======= =======
At June 30, 1997 122,000 $ 5.78
======= =======
</TABLE>
Of the 250,000 options granted in the year ended June 30, 1996, 190,000
options were issued for an exercise price equal to fair market value and 60,000
options were issued at an exercise price equal to 110% of fair market value or
$3.85 per share. At June 30, 1997, options to purchase 11,864 shares were
available for grant under the stock option plan.
26
<PAGE> 28
- --------------------------------------------------------------------------------
The following table sets forth certain information with respect to stock
option grants outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------- Options Exercisable
Weighted ------------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.50 to $ 3.85 250,000 8.8 years $ 3.58 50,000 $ 3.58
6.25 to 6.25 60,000 3.2 6.25 60,000 6.25
12.63 to 12.63 24,000 5.6 12.63 12,000 12.63
------- --------- ------ ------- ------
$ 3.50 to $12.63 334,000 7.6 years $ 4.71 122,000 $ 5.78
======= ========= ====== ======= ======
</TABLE>
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 -- "Accounting for Awards of
Stock-Based Compensation" which was issued by the Financial Accounting Standards
Board in October 1995 and is effective for years beginning after December 15,
1995. This statement establishes financial accounting and reporting standards
for stock-based employee compensation plans and for transactions where equity
securities are issued for goods and services. It defines a fair value based
method of accounting for an employee stock option, or similar equity instrument,
and encourages such method of accounting for all employee stock compensation
plans.
As provided by SFAS No. 123, the Company has elected to continue to follow
the provisions of APB Opinion No. 25 -- "Accounting for Stock Issued to
Employees" which measures compensation costs for employee stock compensation
plans using the intrinsic value based method of accounting. Accordingly, no
compensation cost has been recognized.
The following table indicates the Company's net income and net income per
share assuming that compensation costs for the Company's stock option plan
grants were determined using the fair value based method prescribed by SFAS 123.
The table also discloses the weighted average assumptions used in estimating the
fair value of each option grant on the date of the grant, using the
Black-Scholes option pricing model, and the estimated weighted average fair
value of the options granted. The model assumes no expected future dividend
payments on the Company's common stock for the options granted:
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
Net income (loss):
As reported $(761,812) $2,042,362
Pro forma (888,768) 2,017,065
Net income (loss) per share:
As reported $ (0.17) $ 0.45
Pro forma (0.20) 0.45
Weighted average assumptions:
Expected stock price volatility -- 80%
Risk-free interest rate -- 6.1%
Expected option lives -- 3.6 years
Estimated fair value of options granted -- $ 2.03
</TABLE>
27
<PAGE> 29
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
Because the accounting method prescribed by SFAS 123 has not been applied
to options granted prior to July 1, 1995, the compensation costs reflected in
the above pro forma amounts may not be representative of that to be expected in
future years.
The Company's Board of Directors approved an amendment to the Company's
stock option plan increasing the number of shares that may be granted from
500,000 shares to 800,000 shares and extending the period during which options
may be granted from 2002 to 2007. Such amendment is subject to shareholder
approval which is scheduled at the November 1997 annual meeting of shareholders.
NOTE 8 -- FEDERAL INCOME TAXES
The Company's income tax (provision) benefit consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Current $1,089,608 $ (59,995) $(2,109,683)
Deferred (590,680) (768,693) 4,442,575
---------- --------- -----------
$ 498,928 $ (828,688) $ 2,332,892
========== ========= ===========
</TABLE>
The Company's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- -----
<S> <C> <C> <C>
Federal statutory tax rate (35.0)% 35.0% (35.0)
Surtax exemption 1.0 (1.0) 1.0
Write-off of goodwill -- -- 17.8
Tax effect of tax-free interest income (3.0) (2.5) (0.4)
General business credits (2.3) (2.3) (0.5)
Other (0.3) (0.3) 0.1
----- ---- -----
(39.6)% 28.9% (17.0)
===== ==== =====
</TABLE>
The components of the Company's net deferred federal income tax asset are
as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
License acquisition costs $ 1,558,015 $ 1,697,021
Pre-opening costs 301,330 559,614
Alternative minimum tax credit 980,725 523,386
Accrued expenses 160,681 160,276
Other 45,636 52,671
----------- -----------
3,046,387 2,992,968
----------- -----------
Deferred tax liabilities:
Property and equipment (2,404,650) (1,876,410)
Prepaid expenses (441,113) (333,049)
Other (17,873) (10,070)
----------- -----------
(2,863,636) (2,219,529)
----------- -----------
Net deferred federal income tax asset $ 182,751 $ 773,439
=========== ===========
</TABLE>
The Company has a March 31 tax year-end.
28
<PAGE> 30
- --------------------------------------------------------------------------------
NOTE 9 -- LEASE COMMITMENTS
GCP leases its dockside facilities from the Mississippi Department of
Economic and Community Development ("MDECD") and the Mississippi State Port
Authority in Gulfport, Mississippi (the "Port"). The lease provides for an
initial lease term of seven years commencing in October 1992. The lease also
provides for three extension options of five years each and a final extension
option of ten years. The final ten year extension option may only be exercised
if the GCP constructs, within the city limits of Gulfport, Mississippi, a
minimum of 350 hotel/motel rooms during the first ten years of the lease
agreement.
The lease provides for a monthly base rent of $41,667 plus 5% of gross
annual gaming revenue in excess of $25 million. Additionally, the lease requires
monthly payments equal to 3% of non-gaming revenue. Beginning in October 1997,
the base rent shall be adjusted, annually, in accordance with changes in the
consumer price index.
In July 1996, GCP was notified by MDECD and the Port that its lease will be
cancelled and terminated at the end of the initial lease term in October 1999
because the Company's current leased site is needed by the Port to accommodate a
purported expansion of Port facilities. Such notice of termination, among other
items, is presently the subject of litigation between the Company and MDECD and
the Port as further described in Note 10.
Total rental expense charged to operations was $523,000, $538,000 and
$534,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Future minimum payments under the remaining noncancellable term of
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending
June 30, Amount
----------- ----------
<S> <C>
1998 $ 500,000
1999 500,000
2000 125,001
----------
$1,125,001
==========
</TABLE>
NOTE 10 -- CONTINGENCIES
GCI matter
In December 1994, a lawsuit was filed in Mississippi Chancery Court against
GCI because of GCI's failure to make payments on promissory note obligations of
GCI to two of its former shareholders. These note obligations, in the aggregate
amount of $6 million, plus interest of $1.1 million at June 30, 1997, are
secured by a pledge of GCI's partnership interest in GCP and are reflected, upon
consolidation, as current liabilities in the Company's Consolidated Balance
Sheets at June 30, 1997 and 1996. These promissory notes were owed by GCI when
The Sands Regent purchased GCI in February 1994 and have not been assumed or
guaranteed by The Sands Regent.
In addition to demanding payment of the $6 million plus interest, for which
a partial summary judgment was entered, the lawsuit also demanded the
appointment of a receiver to take possession of and sell GCI's ownership
interest in GCP and sought attorneys fees which were subsequently awarded in
January 1997 in the amount of $54,000. In May 1995, GCP and Patrician were
joined as necessary parties to the lawsuit.
29
<PAGE> 31
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
In August 1995, a Charging Order was entered which required GCP to respond
to inquiries by the two former GCI shareholders for the purpose, among other
things, of determining what distributions, if any, have been paid by the
partnership to its partners. Moreover, a court order was granted whereby any
amounts due or to become due GCI from GCP are to be paid to the two former
shareholders, pro-rata, until the their judgments against GCI are satisfied.
Under such Charging Order, no amounts were due or distributed to GCI or the two
former shareholders.
In July 1996, following a court hearing, the Chancery Court rendered a
judgement that the reallocation of GCI's interest in the partnership may be
appropriate as to the GCP partners but had no effect on the lien position of the
two former GCI shareholders. This ruling related to the reduction in GCI's
ownership interest in GCP from an original 60% interest to a .006% interest as a
result of an amendment to the partnership agreement and a partner capital call.
The amendment to the GCP partnership agreement was entered in April 1994 whereby
the profit and loss allocation percentages were amended from 40% to 80% for
Patrician and from 60% to 20% for GCI. Such amendment was entered into to cure a
monetary partnership breach by GCI which occurred prior to the Company's
acquisition of GCI and to properly reflect the relative financial risks of
Patrician and GCI. The partner capital call occurred in January 1996 and was for
the purpose of improving the partnership capital structure. Patrician and
Artemis complied with the capital call; however, GCI failed to comply. As a
result, and in accordance with the partnership agreement, GCI's interest in GCP
was reduced from 20% to .006%.
In the July 1996 ruling, the two former shareholders were also given until
November 1996 to exhaust their legal remedies in collecting against the
judgement. Failing collection or other resolution by November 1996, the Court
would consider additional measures including, but not limited to, the
appointment of a receiver.
The effect of the July 1996 judgement was that the two former shareholders
of GCI are secured by GCI's pre-amendment, pre-capital call 60% ownership
interest in GCP. The fact that the partnership amendments which provided or
allowed for the change in partner ownership interests were found to be valid in
a June 1996 arbitration award between Patrician and GCI was ruled as
inconsequential relative to the two former shareholders. GCI subsequently filed
a motion for reconsideration of the judgement with the Chancery Court, which was
unsuccessful.
In January 1997, the Chancery Court issued an amended judgement which
reaffirmed the prior judgements and reserved ruling on the necessity to appoint
a receiver. The ruling also charged GCP, under Mississippi law, with the
obligation to pay the GCI judgement amounts to the two former shareholders and
to pay the two former shareholders 60% of all monies not designated for normal
operational expenses on a monthly basis, commencing February 1, 1997, until the
judgements due the two former shareholders were satisfied. GCP was also required
to provide a monthly accounting of income and operating expenses to the two
former shareholders.
To date, the required monthly reports have been made which report that no
monies are available for distribution by GCP and that no monies have been
distributed by GCP. Such reports continue to be made irrespective of the fact
that GCI has filed for bankruptcy protection under chapter 11 of the United
States Bankruptcy Code.
30
<PAGE> 32
- --------------------------------------------------------------------------------
GCI, GCP and Patrician, as joined parties to such lawsuit, have filed an
appeal with the Mississippi Supreme Court because it is the Company's belief
that the Chancery Court's rulings are incorrect and not supported by the facts
or the law. A hearing has not yet been scheduled on such appeal.
On January 31, 1997, GCI filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. A Plan of Reorganization was filed with
the related Disclosure Statement expected to be filed in late September 1997.
Actions have not yet been taken to dispose of the bankruptcy case.
On May 30, 1997, the GCP Partnership Agreement was amended to restore GCI's
ownership interest in GCP to the original 60% which included reversing the
January 1996 capital call. Such reallocation was undertaken in order to resolve
the GCI ownership/security dilemma created in the Chancery Court judgments and
to facilitate a resolution of the Chancery Court proceeding by and through the
Chapter 11 reorganization of GCI in the United States Bankruptcy Court.
The two former GCI shareholders have filed a motion in the United States
Bankruptcy Court for relief from the automatic stay provisions under Section 3
of the Bankruptcy Code which prohibits payments on pre-petition obligations.
Such motion contends that the automatic stay provisions should not apply because
the obligations are payable by GCP and not the bankrupt entity GCI. It is the
Company's belief that the automatic stay provisions under the United States
Bankruptcy Code, which are applicable to the creditors of GCI, appropriately
apply to these two former GCI shareholders and that GCP is prohibited from
making any payment or distribution to these individuals who are creditors of
GCI.
GCP and GCI have filed briefs in opposition to the motion for relief from
the automatic stay properly stating that the debtor to these two former GCI
shareholders is GCI and not GCP. Further, that the Chancery Court judgement
created, or clarified, an obligation of GCP to make payments to the two former
shareholders only to the extent that GCP may otherwise have a requirement to
make payments to GCI. Notwithstanding this, GCI and GCP further contend that any
payments that may be required to be made by GCP to GCI should appropriately be
paid into the bankrupt estate of GCI and should not be distributed to
pre-petition, or other, creditors of GCI. A hearing on such motion is presently
scheduled for October 1, 1997. In the event the motion for relief from the
automatic stay is granted, the two former GCI shareholders may continue legal
action in the Chancery Court which was consistent with a May 28, 1997 Chancery
Court ruling and which could include the appointment of a receiver.
GCI's only tangible asset is its partnership interest in GCP. GCI has filed
for Chapter 11 Bankruptcy protection and is also not otherwise in the financial
position to make any payments with respect to the note obligations due the two
former GCI shareholders. It is the Company's belief that GCI's Plan of
Reorganization, which contemplates making certain payments to these two former
shareholders from new equity funding to GCI, represents a reasonable, equitable
and final resolution and settlement to the GCI litigation and bankruptcy issues.
However, confirmation and acceptance of the filed Plan of Reorganization is not
assured. As such, the ultimate resolution of this matter is not presently
subject to reasonable estimation and could include a dispossession of a 60%
right to receive partnership profits and surplus.
In February 1997, the above two former shareholders of GCI each filed
separate lawsuits in U. S. District Court for the Southern District of
Mississippi, Biloxi Division, against The Sands Regent and certain officers and
directors of The Sands Regent and GCI. Such lawsuits allege breach of various
common law duties and contractual interference by the defendants and seek
compensatory and punitive damages. Such actions are in
31
<PAGE> 33
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
- --------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, 1995
the preliminary discovery stages. Management, and the individual defendants,
believe these legal actions to be without merit and will vigorously defend them.
Port matter
In July 1996, the Mississippi Department of Economic and Community
Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the
"Port") filed a declaratory judgement action against the Copa Casino in a
Mississippi Chancery Court. Such lawsuit seeks Chancery Court interpretation of
certain provisions of the lease between MDECD and the Port and the Copa Casino
including whether the Port may terminate the lease on a date certain, whether
the Port must approve the substitution of another gaming vessel for the present
gaming vessel and whether the Port must approve the construction of a hotel on
the leased premises. In addition to the lawsuit, MDECD and the Port also
notified the Copa Casino that its lease will be canceled and terminated at the
end of the initial lease term in October 1999 because the Copa Casino's current
leased site is needed by the Port to accommodate a purported expansion of Port
facilities.
In July 1997, the MDECD and the Port filed a second amended complaint, in
addition to the original declaratory relief action, seeking damages and to
immediately terminate the lease related to certain dredging activities conducted
on the Copa Casino leased premises by contractors engaged by the Copa Casino.
In response to the initial MDECD and Port action and the second amended
complaint, the Copa Casino filed counterclaims against the MDECD and Port
claiming various tort and contract breaches including wrongful failure to
approve the substitution of a barge for the present Copa ship, wrongful failure
to allow Copa Casino to construct a hotel on the leased premises, breach of
covenant of good faith and fair dealing, misrepresentation, breach of covenant
of quiet enjoyment and wrongfully allowing activities at the Port to cause the
accumulation of sand and silt under and adjacent to the Copa vessel. The Copa
Casino's lawsuit seeks an award for compensatory damages in an amount not less
than $200 million and a declaratory judgement quieting the lease term and
allowing the development of the leased premise.
The lawsuit is presently set for trial on October 6, 1997 with respect to
the liability issues and both parties have been engaged in active discovery
matters, including depositions and exchange of documents for most of calendar
1997. In the event the Copa Casino is successful on any or all of its claims and
counterclaims, a separate trial on damages will be held which is currently
scheduled during the first week of December 1997.
Management believes that the outcome of this lawsuit is not presently
predictable or subject to reasonable estimation. At June 30, 1997, the book
value of the Company's net investment in and advances to (including accrued
interest) the Mississippi gaming operation was approximately $2.6 million.
Other
The Company is party to other legal actions, proceedings and pending claims
arising in the normal conduct of business. Management believes that the final
outcomes of these matters will not have a material adverse effect upon the
Company's financial position or results of operations.
32
<PAGE> 34
- --------------------------------------------------------------------------------
NOTE 11 -- CONDENSED QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Operating revenues $15,600,664 $13,536,196 $13,183,107 $15,201,312
Income (loss) from operations 837,879 (1,322,500) (227,621) 598,372
Net income (loss) 303,908 (808,794) (371,069) 114,143
Net income (loss) per share $0.07 $(0.18) $(0.08) $0.02
1996
Operating revenues $16,054,749 $14,037,918 $15,299,849 $14,465,087
Income from operations 2,217,331 336,522 1,247,123 873,691
Net income (loss) 1,188,329 (3,841) 543,797 314,077
Net income (loss) per share $0.26 -- $0.12 $0.07
</TABLE>
33
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and
Shareholders of The Sands Regent:
We have audited the accompanying consolidated balance sheets of The Sands
Regent and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of The Sands Regent and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Reno, Nevada
August 8, 1997
34
<PAGE> 36
- --------------------------------------------------------------------------------
CORPORATE OFFICERS
Pete Cladianos, Jr.
President and Chief Executive Officer
Katherene Latham
Chairman of the Board
Jon N. Bengtson
Executive Vice President and
Chief Operating Officer
David R. Wood
Executive Vice President,
Treasurer and Chief Financial Officer
Pete Cladianos III
Executive Vice President and Secretary
BOARD OF DIRECTORS
Katherene Latham
Chairman of the Board
Pete Cladianos, Jr.
President and Chief Executive Officer
Jon N. Bengtson(1)
Executive Vice President and
Chief Operating Officer
David R. Wood(1)
Executive Vice President,
Treasurer and Chief Financial Officer
Pete Cladianos III
Executive Vice President and Secretary
Joseph G. Fanelli
Weldon C. Upton
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
Reno, Nevada
SECURITIES COUNSEL
Latham & Watkins
Costa Mesa, California
TRANSFER AGENT & REGISTRAR
Chase Mellon Shareholder Services, LLC
Ridgefield Park, New Jersey
- ------------
(1) Standing for re-election to the Board of Directors at the November 3, 1997
Annual Meeting.
FORM 10-K REPORT
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K is available to shareholders without charge by writing
to The Sands Regent, Attention: David R. Wood, 345 North Arlington Avenue, Reno,
Nevada 89501.
35
<PAGE> 37
[THE SANDS REGENT LOGO]
345 N. ARLINGTON AVENUE - RENO, NV 89501 - (702) 348-2200
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
The Sands Regent:
We consent to the incorporation by reference in Registration Statement No.
33-59574 of The Sands Regent on Form S-8 of our reports dated August 8, 1997,
appearing and incorporated by reference in the Annual Report on Form 10-K of The
Sands Regent for the year ended June 30, 1997.
Deloitte & Touche LLP
Reno, Nevada
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,643,681
<SECURITIES> 250,000
<RECEIVABLES> 537,018
<ALLOWANCES> 119,000
<INVENTORY> 640,023
<CURRENT-ASSETS> 11,311,771
<PP&E> 78,794,133
<DEPRECIATION> 31,059,712
<TOTAL-ASSETS> 61,052,861
<CURRENT-LIABILITIES> 23,940,104
<BONDS> 4,658,474
0
0
<COMMON> 344,936
<OTHER-SE> 32,109,347
<TOTAL-LIABILITY-AND-EQUITY> 61,052,861
<SALES> 7,910,110
<TOTAL-REVENUES> 57,635,149
<CGS> 6,566,859
<TOTAL-COSTS> 34,270,575
<OTHER-EXPENSES> 23,364,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,926,378
<INCOME-PRETAX> (1,260,740)
<INCOME-TAX> (498,928)
<INCOME-CONTINUING> (761,812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (761,812)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
