-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VtLbtq14YLDyYPKWabYlQu8b0Nj1pF29YW7X+EjU0C9Q7NgtBktio2vDIGvffKl/ WK0coANEfNtZdJqa/PFmzw== 0000892569-95-000527.txt : 19951002 0000892569-95-000527.hdr.sgml : 19951002 ACCESSION NUMBER: 0000892569-95-000527 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANDS REGENT CENTRAL INDEX KEY: 0000753899 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880201135 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14050 FILM NUMBER: 95576649 BUSINESS ADDRESS: STREET 1: 345 N ARLINGTON AVE CITY: RENO STATE: NV ZIP: 89501 BUSINESS PHONE: 7023482200 MAIL ADDRESS: STREET 1: 345 N ARLINGTON AVE CITY: RENO STATE: NV ZIP: 89501 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------- (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, 1995 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) ---------------- 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 ---------------- 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 25, 1995 was $ 12,160,340. The aggregate market value is computed with reference to the average price per share on such date. Registrant's Common Stock outstanding at September 25, 1995 was 4,498,722 shares. Portions of Registrant's 1995 Annual Report to the Shareholders are incorporated into Part II as set forth herein. Portions of Registrant's definitive Proxy Statement for its November 6, 1995 Annual Meeting of Shareholders are incorporated into Part III as set forth herein. ================================================================================ 2 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 20%, 79% and 1%, respectively, of the Partnership. Gaming operations for the Copa Casino commenced in September 1993. Patrician and GCI have equal voting control over all activities and all matters presented to the Partnership Board are subject to unanimous approval. Patrician is the day-to-day operations manager for which there is no management fee or other specific compensation. 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 "Winchell's Donut House", a "Pizza Hut", an "Arby's" restaurant operated by a third party, a "Baskin-Robbins" and an "Orange Julius" operated by a third party, four 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 1995 was 87.1% compared to 89.7% for 1994. The hotel's average room rate for the current fiscal year was approximately $33.00 as compared to $32.00 in the prior fiscal year. As of September 26, 1995, the casino offered 18 table games, including 14 blackjack tables, 1 caribbean stud table, 1 craps table, and 2 roulette tables, two keno games and approximately 783 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 56% of the Company's revenues in fiscal 1995 and approximately 77% of the gaming revenues were generated by slot machines. The Company generally does not extend credit to its gaming customers. The Company has local government approval for a major expansion program at its Reno facility. As presently approved, the construction is to be completed in phases through approximately the year 2000. Construction of the next phase, which must commence by February 1996, would include an expansion of approximately 5,500 square feet of casino, commercial and restaurant/convention space. All phases of the expansion program are presently planned to be built on properties owned by the Company. 1 3 The subsequent phases, as presently approved, would include adding in excess of 300 additional hotel rooms, approximately 25,000 square feet of gaming space, 19,000 square feet of convention, meeting and commercial space, a 34-lane bowling alley, restaurants and other public areas. Also included is the construction of a parking structure sufficient to accommodate approximately 700 vehicles which will meet the hotel/casino's increased capacity. The total estimated cost of all of the phases of the expansion project, if completed, is $40 million. Potential sources of financing include bank or other debt, available cash and funds generated from operations, public equity securities, or a combination of these sources. The Company does not expect to begin construction on any phase without arranging all or substantially all of the financing of such phase. It is anticipated that the first phase, which is estimated to cost $1.5 million, will be financed by available cash and funds generated from operations. Major construction projects, such as the proposed addition to the hotel/casino, entail significant risks. These include the risk of cost overruns, insufficient financing, labor disputes, material shortages and other potential problems. In addition to these risks, completion will be subject to compliance with local governmental requirements. 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 6,000 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 26, 1995, the Copa offered 679 slot machines and 29 table games, including craps, roulette, blackjack, caribbean stud, let it ride and poker. In addition, the facility also includes 4 cocktail lounges/bars, a deli-style restaurant, a buffet restaurant operated by a third party, 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. 2 4 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 enabled the Company to maintain high levels of hotel occupancy. 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 is aggressively packaging and marketing 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 61% of the hotel's occupancy in fiscal 1995 compared to 63% in fiscal 1994. 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. 3 5 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, slot and poker tournaments, football season promotions and give-a-way programs. The Company has implemented a variety of outside advertising campaigns in order to attract "drive-up" gaming customers. This includes billboard and newspaper advertising in numerous cities within a 100-mile radius and local radio and television advertising. 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 have also been recently undertaken which have resulted in positive customer responses. The Company has also pursued marketing efforts toward developing group business, primarily bus charters. Through these efforts, the Company has attracted bus charters from various areas within a 500-mile radius including Atlanta, Georgia and Florida. The Company will continue to utilize various marketing strategies to increase 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. Unlike some of its competitors, the Company does not provide cabaret or showroom entertainment for its customers and hotel guests. Management believes that the lack of entertainment is not material to the Company's business. A new hotel/casino was recently built by competitors of the Company that includes 1,284 hotel rooms with another 436 rooms still under construction. There are also an additional 1,084 hotel rooms currently under construction by other competitors of the Company and governmental approval has been granted to construct an additional 2,469 hotel rooms. 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 24%. 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. 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 the legalization of casino-style gaming in California could have a material impact on the Company's operations. 4 6 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 eleven dockside gaming facilities, excluding the Company, operating along the Gulf Coast of Mississippi, including one in Bay Saint Louis, one in Waveland, one in Gulfport and eight in Biloxi. There are approximately eight gaming facilities presently planned along the Gulf Coast of which two are licensed. Along the Mississippi River, there are presently fifteen Mississippi dockside casino facilities; one in Natchez, four in Vicksburg, two in Greenville, one near Lula and seven in Tunica. There are approximately fourteen additional proposed casino operations, of which four have been granted gaming licenses, to be located along the Mississippi River, from Natchez in the South to Tunica in the North. There is also one casino currently in operation on an Indian reservation near Philadelphia, Mississippi. In addition to direct competition which the Company faces in the Mississippi market, the Company faces competition from riverboats and a 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 fourteen riverboat licenses and one land-based license have been authorized statewide. At present, there are thirteen riverboats and the land-based casino 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 Indian land, including those located in California, Connecticut, Michigan, Minnesota and Wisconsin. In addition, Indian casino gaming has become a rapidly 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, 1995, the Company employed 987 people at the Sands Regency in Reno, Nevada, including 87 salaried employees and 900 hourly employees. The Copa Casino employed approximately 442 people, including 54 salaried employees and 388 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. 5 7 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 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. 6 8 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. 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) 7 9 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. 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. 8 10 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 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 9 11 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 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. On August 24, 1995, the Copa Casino's two-year gaming license came up for renewal and was renewed on a provisional basis until December 1, 1995. Such provisional renewal occurred so as to allow the Mississippi Gaming Commission and the Mississippi State Port Authority to properly evaluate the hurricane evacuation plan recently prepared and submitted by the Copa Casino. After the evacuation plan has been approved by the Mississippi State Port Authority and the Gaming Commission, the Gaming Commission indicated that it will grant a gaming license renewal for the remaining two years through August 1997. 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 10 12 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 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. 11 13 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. 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 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 several smaller properties in Reno including El Rancho South, a 24-room motel located on a 1.6 acre parcel and other properties consisting of an aggregate area of approximately .6 acres. The Company's Reno hotel/casino property is subject to aggregate encumbrances of approximately $18.6 million as of June 30, 1995. 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. The lease provides for three renewal periods of five years each under the same terms and conditions except that the rental charges shall be adjusted annually, in years six through twenty-two, in accordance with changes in the Consumer Price Index. In addition to the three renewal periods of five years each, the Partnership has the option to further extend the lease for an additional 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 such ten year renewal option is 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 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 will also 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. 13 15 ITEM 3. LEGAL PROCEEDINGS 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 to these two former shareholders of GCI. These note obligations, in the aggregate amount of $6 million, are included in the current maturities of long-term debt on the Company's consolidated balance sheet at June 30, 1995 and are secured by a pledge of GCI's partnership interest in GCP. All accrued interest expense is also included as a current liability on the Company's consolidated balance sheet. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment has been granted, the lawsuit by Green and Carter is demanding the appointment of a receiver for GCI to take possession of and sell GCI's ownership interest in GCP. The lawsuit also seeks attorneys fees in an amount not less than $900,000 which management of the Company believes would not be deemed a reasonable amount in the event of an unfavorable judgment against GCI. In May 1995, GCP and Patrician were joined as necessary parties to the lawsuit. At present, a Charging Order is in place which requires 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 either of its partners. Moreover, a court order has been granted whereby any amounts due or to become due GCI by GCP are to be paid to Green and Carter until the summary judgment against GCI is satisfied. GCP has not generated adequate operating results to allow for any partner distributions and distributions are not expected in the near future. These underlying 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. GCI's only tangible asset, and its source of funds for repayment of the promissory notes, is its partnership interest in GCP. GCI is neither presently in the financial position to make any payments with respect to these note obligations nor is it expected to be in such a position in the near future. As part of the dispute with Green and Carter, issues will have to be resolved concerning an amendment to the GCP partnership agreement, effective January 1, 1993, 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 so as to properly reflect the relative financial risks of Patrician and GCI. Green and Carter claim that GCI's ownership interest in GCP should be the pre-amendment 60% interest. GCI and Patrician contend that the amended ownership interests are valid because the underlying agreement that pledged GCI's interest in GCP to Green and Carter permitted transfers so long as there were no defaults at the time of transfer. The Company will continue to monitor the progress of the lawsuit, the ultimate outcome of which could include the sale of GCI's ownership interest in GCP. 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 1995. 14 16 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.
CASH FOR THE YEARS ENDED JUNE 30, HIGH LOW DIVIDEND - ---------------------------- ------ ------ -------- 1994 First Quarter . . . . . . . . . . . . . . . . . . . $20.25 $12.75 $ .05 Second Quarter. . . . . . . . . . . . . . . . . . . 17.25 11.75 $ .05 Third Quarter . . . . . . . . . . . . . . . . . . . 14.00 10.75 $ .05 Fourth Quarter. . . . . . . . . . . . . . . . . . . 14.50 9.75 $ .05 1995 First Quarter . . . . . . . . . . . . . . . . . . . $12.25 $ 8.75 $ .05 Second Quarter. . . . . . . . . . . . . . . . . . . 10.00 6.25 $ .05 Third Quarter . . . . . . . . . . . . . . . . . . . 8.00 4.50 $ .05 Fourth Quarter. . . . . . . . . . . . . . . . . . . 6.00 5.06 $ .05
- ---------------- The declaration and payment of dividends in the future 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 25, 1995, the Company had 178 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 1995 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 1995 Annual Report, filed as Exhibit 13 to this Form 10-K. 15 17 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 1995 Annual Report, filed as Exhibit 13 to this Form 10-K. Reference is made to the Consolidated Financial Statements and the Notes to the 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 1995 Annual Report is not deemed filed as part of this Form 10-K. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 18 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 6, 1995, 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 6, 1995, 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 6, 1995, 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 6, 1995, filed or to be filed with the Securities and Exchange Commission. 17 19 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, 1995 and 1994 Consolidated Statements of Operations -- Years Ended June 30, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows -- Years Ended June 30, 1995, 1994 and 1993 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, 1995, 1994 and 1993: 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. 18 20 (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).* 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) 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).* 19 21 10(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) Agreement, dated as of January 2, 1995, between David R. Wood and The Sands Regent.** 13 1995 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 20 22 (B) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the last quarter of fiscal 1995. (C) INDEX TO EXHIBITS. (D) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules required by Regulation S-X are excluded from the 1995 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. 21 23 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 27, 1995 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.
SIGNATURE CAPACITY DATE - --------- -------- ---- PETE CLADIANOS, JR. President (Chief September 27, 1995 - ---------------------------- Executive Officer) Pete Cladianos, Jr. and Director KATHERENE LATHAM Chairman of the September 27, 1995 - --------------------------- Board of Directors Katherene Latham DAVID R. WOOD Vice President of September 27, 1995 - --------------------------- Finance and Administration, David R. Wood Treasurer (Chief Financial and Accounting Officer) and Director PETE CLADIANOS III Vice President, September 27, 1995 - --------------------------- Secretary and Director Pete Cladianos III JON N. BENGTSON Director September 27, 1995 - --------------------------- Jon N. Bengtson JOSEPH G. FANELLI Director September 27, 1995 - --------------------------- Joseph G. Fanelli WELDON C. UPTON Director September 27, 1995 - --------------------------- Weldon C. Upton
22 24 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, 1995 and 1994, and for each of the three years in the period ended June 30, 1995, and have issued our report thereon dated August 11, 1995. Such consolidated financial statements and report are included in your 1995 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. [SIG] Deloitte & Touche LLP Reno, Nevada August 11, 1995 23 25 The Sands Regent Schedule II Valuation and Qualifying Accounts (in thousands)
Additions Balance at Charged to Beginning Costs and Balance at Description of Year Expenses Deductions(1) End of Year ----------- ---------- ---------- ------------- ----------- Allowance for Doubtful Accounts Receivable: Year ended June 30, 1995 . . . . . . . . $111 $92 $(56) $147 Year ended June 30, 1994 . . . . . . . . 72 88 (49) 111 Year ended June 30, 1993 . . . . . . . . 94 28 (50) 72
- ---------------- (1) Write-offs of uncollectible accounts receivable, net of recoveries 24 26 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER NUMBERED - ------- PAGE ------------ 10(n) Agreement dated as of January 2, 1995, between David R. Wood and The Sands Regent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1995 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
EX-10.N 2 AGREEMENT BETWEEN DAVID R. WOOD AND SANDS REGENT 1 EXHIBIT 10(N) AGREEMENT This AGREEMENT, dated as of January 2, 1995, is made by and between David R. Wood (hereinafter referred to as the "Executive") and The Sands Regent, a Nevada corporation (the "Company"). RECITALS A. The Executive Compensation Committee of the Board of Directors of the Company has determined that it is in the best interest of the Company's shareholders that appropriate steps should be taken to reinforce and encourage the continued dedication of the Executive to the Executive's assigned duties without distraction arising from the possibility of a Change of Control of the Company. B. In order to induce the Executive to remain in the employ of the Company and to induce the Executive to give the Executive's continued attention and dedication to the Executive's assigned duties in the event of a Change of Control of the Company, the Company desires to provide the Executive with certain benefits and inducements, as set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive do hereby agree as follows: ARTICLE I DEFINITIONS The following terms used in this Agreement, shall have the meaning specified below: SECTION 1.1 -- BOARD OF DIRECTORS. "Board of Directors" shall mean the board of directors of the Company. SECTION 1.2 -- CAUSE. "Cause" shall mean termination of employment with the Company because of (i) the Executive's willful failure or refusal to satisfactorily perform the duties of his position after notice by the Company; (ii) the commission by the Executive of a felony or the willful perpetration by the Executive of a dishonest act against or breach of fiduciary duty toward the Company; or (iii) any other act or omission by the Executive which is injurious in any material respect to the Company. SECTION 1.3 -- CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act") together with its affiliates, excluding employee benefit plans of the Company is or becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the 1934 Act) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) as a result of a proxy contest, merger, consolidation, sale of assets, tender offer or exchange offer or as a result of any combination of the foregoing, Directors who were members of the Board of Directors two years prior to such time and new Directors whose election or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the Directors still in office who were Directors two years prior to such time, cease to constitute at least two-thirds of the members of the Board of Directors; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to 2 represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the shareholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. SECTION 1.4 -- CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. SECTION 1.5 -- COMPANY. "Company" shall mean The Sands Regent, a Nevada corporation, its subsidiaries and affiliates, and any successor to its business, whether direct or indirect, by purchase of securities, merger, consolidation, purchase of all or substantially all of the Company's assets or otherwise. SECTION 1.6 -- DATE OF TERMINATION. "Date of Termination" shall mean in the case of termination of the Executive's employment by the Company for Cause or termination by the Executive for Good Reason or termination for any other reason, the date specified in the Notice of Termination, which date shall not be less than thirty days after the date such Notice of Termination is given. SECTION 1.7 -- DISABILITY. "Disability" shall mean absence from performance of assigned duties for the Company on a full-time basis for 12 consecutive calendar months as a result of incapacity due to medically documented physical or mental illness; provided that the Executive shall not have returned to the full-time performance of the Executive's duties within 30 calendar days of actual receipt of written Notice of Termination for the reason of Disability. Such Notice of Termination may not be given prior to the expiration of the 12-month period of Disability. SECTION 1.8 -- EXECUTIVE. "Executive" shall have the meaning provided in the first paragraph of this Agreement. SECTION 1.9 -- GOOD REASON. "Good Reason" shall mean the occurrence of any of the following events without the Executive's express written consent: (a) the assignment to the Executive of duties inconsistent with the position and status of an executive of the Company, or a substantial alteration in the nature, status or prestige of the Executive's responsibilities as Chief Financial Officer of the Company from those in effect immediately prior to a Change in Control; (b) a reduction by the Company in the Executive's base salary or bonus opportunity as in effect immediately prior to the occurrence of a Change of Control; (c) the reassignment of the Executive to a location which increases the Executive's commute by more than 50 miles on a daily round trip basis; (d) the Executive's assignment to a location other than the principal executive offices of the Company; (e) the Company's failure to continue, or a substantial change in, the Executive's participation in any compensation or benefit plans; (f) the Company's failure to obtain the agreement of any successor to assume the Agreement; 2 3 (g) any other items which in the Company's judgment should give the Executive the right to terminate his employment and receive severance benefits; or (h) any purported termination of the employment of the Executive by the Company which is not effected according to the requirements of a Notice of Termination as defined in Section 1.10 herein. SECTION 1.10 -- NOTICE OF TERMINATION. "Notice of Termination" shall mean a notice, in writing, to the Executive from the Company or to the Company from the Executive, which indicates the specific termination provision enumerated in this Agreement relied upon, and which sets forth in reasonable detail the facts and circumstances alleged to provide a basis for termination of the Executive's employment by the Company or by the Executive. Such notice must be communicated to the Executive in accordance with Section 4.3 herein. SECTION 1.11 -- RETIREMENT. "Retirement" shall mean termination of the Executive's employment on or after the date on which the Executive attains sixty-five years of age or termination in accordance with any retirement agreement entered into between the Executive and the Company. ARTICLE II TERM This Agreement shall be effective commencing on the date hereof and shall continue in effect through February 28, 2000; provided, however, that if a Change of Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for the lesser of (i) a period of 36 months beyond the effective date of the Change of Control; or (ii) a period ending on the date of the Retirement of the Executive. ARTICLE III BENEFITS AND COMPENSATION SECTION 3.1 -- WHEN BENEFITS PAYABLE. No benefits shall be payable under this Agreement and the provisions of this Agreement shall be of no force or effect unless there shall have been a Change in Control, and the Executive's employment with the Company shall have been terminated within three years after the Change in Control. If such a Change in Control has occurred and the Executive's employment with the Company is terminated within three years after the Change in Control, unless such termination is (i) because of the death or Disability of the Executive, or (ii) by the Executive other than for Good Reason, the Executive shall be entitled to the benefits enumerated in this Article 3, under the conditions imposed herein. SECTION 3.2 -- BENEFITS UPON TERMINATION FOR CAUSE. In the event that the Executive's employment with the Company is terminated for Cause, the Executive shall receive the Executive's full base compensation (plus accrued but unpaid vacation benefits) as earned through the Date of Termination at the rate in effect at the time Notice of Termination is given. Following payment of said amount, the Company shall have no further obligations to the Executive under this Agreement. SECTION 3.3 -- BENEFITS UPON RETIREMENT. In the event that the Executive's employment with the Company is terminated by reason of the Executive's Retirement, the Executive shall be entitled to the benefits under the Company's regular 3 4 retirement program, or, if a separate retirement agreement has been entered into between the Executive and the Company, benefits shall be provided according to the terms of that agreement. SECTION 3.4 -- BENEFITS UPON TERMINATION OTHER THAN FOR CAUSE, RETIREMENT OR DISABILITY; OR TERMINATION FOR GOOD REASON. In the event that the employment of the Executive shall be terminated (i) by the Company for any reason other than for Cause, Disability or Retirement within three years after the occurrence of such Change in Control or (ii) by the Executive for Good Reason within three years after the occurrence of such Change in Control, then (a) the Executive shall be entitled to receive: (i) the Executive's full base compensation (plus accrued but unpaid vacation benefits) as earned through the Date of Termination at the rate in effect at the time Notice of Termination is given; (ii) for a 36-month period after such termination (or such lesser number of months up to the date of the Executive's Retirement or until the date the Executive obtains a new job of similar status), life, disability, accident and health insurance coverage substantially the same as that which the Executive received immediately prior to the Change of Control but increased to the extent that such benefits were increased following the Change of Control; and (iii) a lump sum payment (the "Severance Payment") from the Company to the Executive of a dollar amount equal to 300% of (x) the greater of (1) the annual base compensation for the Executive for the twelve-month period immediately preceding the Change of Control or (2) the annual base compensation of the Executive in effect at the time the Notice of Termination is given and (y) any bonus paid during the twelve-month period immediately preceding the time the Notice of Termination is given. (b) all options to purchase securities of the Company then held by the Executive shall be immediately exercisable, without regard to whether such options are exercisable at such time pursuant to the terms of the documents under which such options were granted; provided that if such Change of Control is to be accomplished through a tender offer or an exchange offer, such options shall be exercisable at a time that shall permit the Executive to tender the shares received upon the exercise of the options in such tender or exchange offer; and (c) any securities of the Company then held by the Executive that are subject to any restriction on transfer, other than restrictions imposed only be federal or state securities laws, shall lapse and be of no further force and effect with the result that the Executive shall be permitted to sell, transfer or otherwise dispose of such securities without regard to any such restrictions. SECTION 3.5 -- TAX DEDUCTIBILITY OF BENEFIT PAYMENTS. In the event that any payment or benefit received or to be received by the Executive in connection with the termination of the Executive's employment pursuant to the terms of this Agreement would not be deductible (in whole or in part) by the Company as a result of the operation of Section 280G of the Code, the amount of the Severance Payment shall be reduced (but not below zero) until no portion of the Severance Payment is not deductible as a result of Section 280G of the Code. SECTION 3.5 -- LEGAL FEES AND EXPENSES. If, following termination of the employment of the Executive within three years after a Change in Control, the Executive shall incur any legal fees or expenses as a result of the termination of the Executive's employment (including any such fees or expenses incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), the Company shall pay or reimburse the Executive for all such fees or expenses; provided, however, that if the Executive is terminated for "Cause," the losing party shall pay the attorneys fees and costs of the prevailing party. 4 5 SECTION 3.6 -- NO MITIGATION. Except as provided in Section 3.4(a)(ii) of this Agreement, the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced or offset by any compensation earned by the Executive as a result of employment by another employer or by retirement benefits after the Date of Termination or otherwise. ARTICLE IV MISCELLANEOUS SECTION 4.1 -- SUCCESSORS; BINDING AGREEMENT. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The failure of the Company to obtain such assumption agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive had terminated the Executive's employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. SECTION 4.2 -- SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and be enforceable by, the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of the Executive. If the Executive should die within three years after a Change in Control and during the term of this Agreement and while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or if there is no such designee, to the Executive's estate. SECTION 4.3 -- NOTICE. Notices and all communications provided for in this Agreement shall be in writing and shall be deemed to have been received when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth at the end of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. SECTION 4.4 -- NO WAIVER. No provision of this Agreement may be modified, waived or discharged unless in writing and signed by the Executive and such officer of the Company as may be specifically designated or authorized by the Board of Directors or by a Committee of the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. SECTION 4.5 -- ENTIRE AGREEMENT. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement constitutes the entire agreement of the parties. 5 6 SECTION 4.6 -- CONTROLLING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Nevada. SECTION 4.7 -- INVALID PROVISION. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. SECTION 4.8 -- COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, and all such counterparts together shall constitute but one and the same instrument. SECTION 4.9 -- THE EXECUTIVE'S EMPLOYMENT BY THE COMPANY. Nothing contained in this Agreement (i) obligates the Company or any subsidiary of the Company to employ the Executive in any capacity whatsoever, or (ii) prohibits or restricts the Company (or any such subsidiary) from terminating the employment, if any, of the Executive at any time or for any reason whatsoever, with or without cause. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. "COMPANY" THE SANDS REGENT, a Nevada Corporation Dated: February 6, 1995 By: PETE CLADIANOS, JR. --------------------------------- President By: PETE CLADIANOS, III --------------------------------- Secretary Address: 345 North Arlington Avenue Reno, Nevada 89501 "EXECUTIVE" Dated: February 6, 1995 DAVID R. WOOD ------------------------------------- David R. Wood Address: 4269 Muirwood Circle Reno, Nevada 89509 6 EX-13 3 1995 ANNUAL REPORT 1 EXHIBIT 13 LOGO LOGO LOGO 1995 ANNUAL REPORT 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 18 table games, two keno games and 783 slot machines. The complex has 938 hotel rooms, including 32 suites of various sizes, and also includes three restaurants, a "Winchell's Donut House", a "Pizza Hut", an "Arbys" restaurant operated by a third party, a "Baskin-Robbins" and an "Orange Julius" operated by a third party and four 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 1.6 acre parcel in Reno on which is located a small motel and a bar. 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, commenced operations in September 1993. The Company, through a wholly-owned subsidiary, initially owned a 40% equity interest in the Copa Casino. In February 1994, the Company acquired the remaining ownership interest in Gulfside Casino Partnership through the acquisition of Gulfside Casino, Inc., the other partner at that time. The Company now owns 100% of the Copa Casino. 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 679 slot machines and 29 table games, including craps, roulette, blackjack, caribbean stud, let it ride and poker. In addition, the facility also includes 4 cocktail lounges/bars, a deli-style restaurant, a buffet restaurant operated by a third party 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 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. 3 TO OUR STOCKHOLDERS - -------------------------------------------------------------------------------- 1995 was a trying year; a year filled with obstacles and impediments. We started 1995 in much the same way as we ended 1994. The trend in depressed revenues from our Reno operation continued due, in part, to increased competition from the new Las Vegas mega-resorts and because of traffic delays on Interstate 80 west of Reno caused by road and bridge repair work during the summer and fall of 1994. Adding to this was the weather. During our second and third fiscal quarters, both Nevada and California experienced unusually high levels of snow and rain which inhibited travel. In February, the long awaited Men's American Bowling Congress returned to the Reno area inaugurating Reno's newly constructed state-of-the-art National Bowling Stadium. Continuing through July, this event drew in excess of 100,000 visitors to the Reno area many of whom were guests at our hotel. Our revenues were bolstered as a result of this event but the increase was not sufficient to overcome the decline in revenues that occurred prior to the February commencement date. Our current year fourth quarter operating results attest to the positive impact of the Men's American Bowling Congress. In the fourth quarter, income from operations from our Reno property increased by approximately 14% over the same quarter last year. In Mississippi, we have still not successfully achieved satisfactory operating results. During fiscal 1995, the Copa Casino continued to generate a net loss although operating results in the last half of the year were encouraging. The Copa Casino did manage, however, to produce a positive cash flow in fiscal 1995 in spite of being in a very competitive market that has experienced several casino closings in the last year. The loss from the Copa Casino is representative of some of the problems we have encountered. In December 1994, two former shareholders of one of our subsidiary companies, Gulfside Casino, Inc., filed a lawsuit against that company. Gulfside Casino, Inc. was acquired by us in February 1994 in order for us to own 100% of the Copa Casino and these two former shareholders were owed monies by Gulfside Casino, Inc. at that time. These former shareholders were to be paid by Gulfside Casino, Inc. whose source of funds is partner distributions from the Copa Casino. The Copa Casino has not made partner distributions because Copa Casino operating results do not warrant distributions. As a result, these former shareholders have not been paid amounts due them under the promissory note obligations and have filed a lawsuit to collect all amounts due and owing. In October 1994 and prior to the lawsuit being filed, the Copa Casino received notification from its landlord, the Mississippi State Port Authority, that the State Port Authority would not authorize the construction of a hotel at the Copa Casino's leased site. The Port Authority's refusal was reaffirmed at an August 1995 Port Authority meeting at which we were curtly dismissed. This refusal to allow us to develop our leasehold site appears to be in direct conflict with, and contradicts, our lease agreement with the Port Authority which specifically provides for the construction of a hotel. As a matter of fact, our lease agreement encourages our construction of a hotel since we can extend our lease term for 10 additional years if we build at least a three hundred fifty room hotel. Management of the Copa Casino has also encountered difficulties in developing a mooring system or an evacuation plan which will satisfy the hurricane preparedness requirements of the Mississippi Gaming Commission and the Mississippi State Port Authority. After several mooring/anchoring system designs were found to be inappropriate, we finally developed an evacuation plan that appeared to be workable and submitted that plan to the Mississippi Gaming Commission and the Mississippi State Port Authority. The Mississippi Gaming Commission approved our plan, in concept, and will accept it in lieu of a mooring structure once it has been approved by the Mississippi State Port Authority. We are in the process of responding to Port Authority inquiries and remain hopeful that all issues can be adequately addressed. The Mississippi Gaming 2 4 - -------------------------------------------------------------------------------- Commission granted us a provisional gaming license at our relicensing hearing in August 1995. Such provisional license was issued through December 1, 1995 and will be renewed for the normal two year period once the Mississippi State Port Authority has approved our evacuation plan. Despite the trials, tribulations and frustrations of 1995, the future is exciting. In Reno, there are new challenges that will require us to grow and change. A new mega-resort has entered the Reno market and some of our other competitors are also expanding their existing hotel-casinos. In the near-term, these new facilities have, and will, put pressure on our resources and revenues because new market areas have not been appropriately developed. In the long-term, new visitors should be attracted to Reno and we will endeavor to position ourselves to be a benefactor of this growth. In Mississippi, we will continue various marketing efforts to expand our customer base and to attract repeat business. The 1995 write-down of long-lived assets to estimated net realizable values, relating to our Mississippi operations, will benefit future earnings through reduced depreciation and amortization expense. We will continue to pursue approval of our hurricane evacuation plan and will also continue efforts to obtain approval to develop our leasehold site. Development of our leasehold site is ultimately necessary in order for us to achieve future successes and to remain competitive. We have seen difficult times before and are optimistic that we will see great successes in the future. We are thankful for our spirited and loyal employees in Reno and Mississippi and appreciate our many guests who are our reason for existence. Respectfully, /s/ Pete Cladianos, Jr. ----------------------------------- Pete Cladianos, Jr. President and Chief Executive Officer Reno, Nevada September 27, 1995 3 5 THE SANDS REGENT SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- For the years ended June 30,
1995 1994 1993 1992 1991 -------- ------- ------- ------- ------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Operating revenues(1) $ 60,973 $51,446 $43,877 $41,264 $38,666 Income (loss) from operations (11,748) 8,178 8,608 7,633 5,498 Net income (loss) (11,428) 7,730 5,481 4,877 4,487 Net income (loss) per share $ (2.54) $ 1.76 $ 1.27 $ .97 $ .67 Cash dividends per share $ .20 $ .20 $ .20 $ .15 -- OPERATING DATA: Casino square footage(2) 51,000 51,000 27,000 27,000 27,000 Number of slot machines(2) 1,459 1,483 783 783 766 Number of hotel rooms(2) 938 938 938 938 938 Average hotel occupancy rate 87.1% 89.7% 89.0% 89.3% 85.7% BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(2) $ 12,214 $ 9,804 $ 3,274 $ 9,674 $11,971 Total assets(2) 66,253 82,268 56,559 53,917 57,344 Long-term debt(2) 17,808 27,559 13,676 14,448 1,851 Total stockholders' equity(2) 31,849 44,138 35,423 30,719 48,694
- --------------- (1) Revenues are net of complimentaries. (2) Information presented as of the end of the period. 4 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS COMPARISON OF 1995 TO 1994 A significant reason for the increases in revenue and costs and expenses in fiscal 1995, compared to fiscal 1994, is due to the consolidation of Gulfside Casino Partnership ("GCP") operating results for all of fiscal 1995. The Company increased its ownership in GCP, which owns and operates the Copa Casino, to 100% in February 1994 when the Company acquired all of the issued and outstanding capital stock of Gulfside Casino, Inc. ("GCI"). Prior to such acquisition, the Company, through a wholly owned subsidiary, held a 40% equity ownership interest in GCP and accounted for it under the equity method of accounting. For the year ended June 30, 1995, revenues increased to $61 million compared to $51.4 million for fiscal 1994. Such increase is due to the inclusion of Copa Casino revenues, on a consolidated basis, for the entire 1995 fiscal year. For the same comparable annual periods, income from operations decreased from $8.1 million in fiscal 1994 to a loss from operations of approximately $11.7 million in fiscal 1995 and net income decreased from $7.7 million, or $1.76 per share, to a net loss of $11.4 million or $2.54 per share. The decrease in income from operations is primarily a result of the recognition of an impairment in value of long-lived assets of the Copa Casino and GCI of $17.5 million and a decline in revenues and profits from the Reno operations. Net income and net income per share decreased because of the decrease in income from operations and due to a non-recurring $5.1 million pre-tax gain from the sale of non-operating real property in Reno, Nevada that occured in fiscal 1994. Management believes that the decline in Reno revenue and profits is due to adverse weather conditions in Nevada and California during the second and third quarters of fiscal 1995, increased competition from the new Las Vegas mega-resorts and construction delays on Interstate 80 west of Reno, which is a major artery to Northern California, during the first fiscal quarter. The decrease in lodging revenue of $315,000 in the year ended June 30, 1995, compared to the prior year, is due to a decrease in hotel occupancy and the sale of a motel property. Sold by the Company in March 1994, the motel property contributed approximately $223,000 to lodging revenue in fiscal 1994. Occupancy at the Reno, Nevada hotel (the Copa Casino does not have hotel/motel rooms) decreased from 89.7% in fiscal 1994 to 87.1% in fiscal 1995. For the same comparable periods, the average room rate increased slightly from approximately $32 to $33. The increase in gaming revenue of $11.6 million is composed of gaming revenue from the Copa Casino of $13.1 million which was offset by a decrease in gaming revenue at the Sands Regency in Reno of approximately $1.5 million. The decrease in gaming revenue in Reno, which is primarily slot revenue, is due to the decrease in hotel occupancy and a decrease in gaming revenue per occupied room. Gaming revenue per occupied room decreased from $79 in the year ended June 30, 1994 to $77 in the year ended June 30, 1995. The increase in food and beverage revenue of $837,000 includes the addition of Copa Casino revenue of $1 million. Such increase was offset by a decrease in revenue from the Reno operation due to the decrease in hotel occupancy. The related increase in food and beverage costs and expenses of $539,000 is primarily due to the addition of Copa Casino results of operations. Costs and expenses from the Reno operation did not decrease proportionally, relative to the decrease in revenue, due to an increase in food and beverage product costs. The decrease in other revenue of $2.1 million is composed of a decrease in retail liquor store sales from the Reno operation of $2.7 million which has been partially offset by additional other revenue from the Copa Casino of $462,000. In August 1994, the retail liquor store business, which was operated by the Company, was 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - ------------------------------------------------------------------------------- sold to a third party. Such third party now operates the retail liquor store in Company owned facilities for rent and other consideration paid to the Company. The related decrease in other costs and expenses of $2.6 million is principally due to the elimination of costs and expenses associated with the retail liquor store. The increases in complimentary lodging, food and beverage, deducted from revenue, and gaming costs and expenses of $466,000 and $7.3 million, respectively, are primarily due to the inclusion of the Copa Casino. Approximately $339,000 of the increase in gaming costs and expenses is attributable to the Reno operation and includes increases in salaries, wages and benefits, the cost of complimentary goods and services provided to patrons and general operating supplies. The increase in lodging costs and expenses of $510,000 is primarily due to an increase in hotel salaries, wages and benefits in Reno. Certain general salary, wage and benefit increases were implemented, primarily in fiscal 1995, in order to remain competitive. The increases in maintenance and utilities and general and administrative costs and expenses of $1.2 million and $3.6 million, respectively, are principally due to the addition of Copa Casino results of operations. The Copa Casino general and administrative costs and expenses include significant advertising, marketing and promotional costs. The recognition of an impairment of long-lived assets of $17.5 million in fiscal 1995 was made on a basis consistent with the provisions of recently issued accounting standards and consists 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. The impairment was based upon current political and market conditions and an analysis of projected undiscounted future cash flows. Future operating results will be positively impacted due to the elimination of goodwill amortization expense and reduced depreciation expense. The increase in depreciation and amortization of $1.3 million is due to additional depreciation from the Copa Casino of $1 million and the added amortization of goodwill of $244,000 associated with the acquisition of GCI in February 1994. The remaining goodwill associated with GCI has been written-off in fiscal 1995 and is included in the impairment of long-lived assets. The slight decrease in interest and other income of approximately $35,000 is due to the non-inclusion of interest earned on advances to GCP of approximately $284,000 in the year ended June 30, 1994 which was then included on a pre-consolidation basis. Upon consolidation in the current year, such intercompany income/expense items are eliminated. The above decrease was partially offset by an increase in interest income from the Reno operation as a result of the investment of additional excess funds in the current fiscal year as compared to the prior fiscal year. The increase in interest expense of $1.3 million in the year ended June 30, 1995, compared to the year ended June 30, 1994, is partially a result of additional interest expense from the Copa Casino of $406,000 and from GCI of $237,000. In addition, interest expense increased by approximately $619,000 as a result of additional borrowings by the Company, in fiscal 1994, to finance the operation and expansion of the Copa Casino at interest rates higher in the current fiscal year than in the comparable prior fiscal year. The interest expense of GCI is to former shareholders of GCI and has not been paid by GCI. The equity in loss of unconsolidated affiliate in fiscal 1994 represents the Company's proportionate share, under the equity method of accounting, of loss from GCP that occurred prior to the date of acquisition of GCI and the associated remaining interest in GCP in February 1994. Subsequent to such date, the results of operations of GCP are included on a consolidated basis. 6 8 - ------------------------------------------------------------------------------- The increase in the effective income tax rate or, alternatively, decrease in income tax benefit rate, in the current year compared to the prior year, is the result of the current year write-off of goodwill through an increase in amortization expense of $244,000 and the ultimate elimination of the remaining goodwill balance of $6.8 million upon recording the impairment in long-lived assets. The write-off of goodwill is not deductible for income tax purposes. 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 Regent is not 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 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 in Gulfport, Mississippi. However, because of the limited amount of time that the Copa has been in operation, the 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. The Copa Casino, which opened in September 1993, is not presently generating positive earnings results. It is, however, generating positive earnings before interest, income taxes, depreciation and amortization ("EBITDA"). For the year ended June 30, 1995, the Copa Casino, on a stand alone basis, incurred a net loss of approximately $12.4 million, which included a write-down of long-lived assets of $10.7 million. As of June 30, 1995, the Copa Casino had a working capital deficiency of approximately $600,000 which is an improvement over the prior year working capital deficiency of almost $1.5 million. Management believes that these unsatisfactory operating results are primarily due to the rapid expansion of gaming in Mississippi and Louisiana. Management has undertaken various marketing actions in order to expand the Copa Casino's customer base including advertising efforts and special promotional events and programs designed to attract local residents and senior citizens. Cost containment actions to improve operational efficiency have also been successfully implemented. Management has sought approval to construct land-based facilities, which are planned to include a hotel, and has requested approval to replace its floating casino facility. Such approvals, which are required from the GCP's landlord, the Mississippi State Port Authority at Gulfport (the "Port Authority"), have to date been refused. Management believes that development of its leasehold site is necessary in order for the Copa Casino to be ultimately successful and will continue to pursue obtaining the necessary required approvals. There are no assurances that such efforts will succeed. As of June 30, 1995, the Company's net investment in and advances to GCP and GCI was approximately $6.7 million. The Copa Casino has also been put on notice by the Port Authority that it must have an approved hurricane evacuation plan as specified in the lease between the Copa Casino and the Port Authority. Failure to have an acceptable plan will subject the Copa Casino to legal actions including the possible termination of the lease agreement. The Copa Casino updated its plan in August 1995 and submitted such plan to the Port Authority and the Mississippi Gaming Commission. The Gaming Commission approved the plan, subject to approval by the Port Authority, and issued the Copa Casino a provisional three-month gaming license at the Copa Casino's August 1995 relicensure hearing. The Mississippi Gaming Commission indicated that it would 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - ------------------------------------------------------------------------------- issue a standard two-year gaming license after the Port Authority has reviewed and approved the plan. The Port Authority has been continuously reviewing this updated hurricane evacuation plan and has made various inquiries of the Copa Casino. Copa Casino management has been, and is in the process of, responding to these Port Authority inquiries and comments and is of the belief that all issues can be adequately addressed. COMPARISON OF 1994 TO 1993 As a result of the acquisition of Gulfside Casino, Inc. ("GCI") on February 25, 1994, the Company increased its ownership in Gulfside Casino Partnership ("GCP") to 100%, and, the results of operations and cash flows of GCI and GCP, which operates the Copa Casino, have been consolidated with the Company's results of operations and cash flows from the date of acquisition. Prior to such acquisition, the Company held a 40% equity ownership interest in GCP and accounted for it under the equity method of accounting. A significant reason for the increases in revenue and costs and expenses in fiscal 1994, compared to fiscal 1993, is due to the inclusion of the results of operations of GCP upon consolidation. The Copa Casino commenced operations in September 1993. For the year ended June 30, 1994, net income increased to $7.7 million compared to $5.5 million for fiscal 1993 and income per share increase from $1.27 to $1.76. Revenues increased from $43.9 million in fiscal 1993 to $51.4 million in fiscal 1994. The increase in revenue is primarily due to the inclusion of Copa Casino revenues. The increase in net income is due to a $5.1 million pre-tax gain from the sale of non-operating real property in Reno, Nevada. This gain was partially offset by a $1.1 million flow-through loss, which consisted primarily of preopening costs, from the Copa Casino prior to February 25, 1994. The increase in lodging revenue of $212,000 in the year ended June 30, 1994, compared to the prior year, is due to an increase in hotel occupancy at the Reno, Nevada hotel (the Copa Casino does not have hotel/motel rooms) and an increase in the average room rate. Hotel occupancy increased from 89% in fiscal 1993 to 89.7% in fiscal 1994. For the same comparable periods, the average room rate increased from approximately $31 to $32. The increase in gaming revenue of $7.3 million is due to the inclusion of Copa Casino revenue from February 25, 1994 through June 30, 1994 of $7.6 million. Such increase was slightly offset by a decrease in gaming revenue, primarily slot revenue, at the Reno operation in May and June 1994. Gaming revenue per occupied room in Reno decreased from approximately $83 in the last quarter of fiscal 1993 to $77 in the fourth quarter of fiscal 1994. The increase in food and beverage revenue of $635,000 is significantly due to revenue from the Copa. Such increase was partially offset by a slight decrease in revenue of $162,000 as a result of the subletting of "Baskin-Robbins", previously operated by the Company, to an unrelated third party in June 1993. The related increase in food and beverage costs and expenses of $411,000 is likewise attributable to including Copa Casino operating results. Such increase was offset by reduced costs and expenses from the elimination of "Baskin-Robbins" of $159,000. The decrease in other revenue of $264,000 is composed of a decrease in retail liquor store sales at the Reno operation of approximately $146,000 and a loss on disposal of property from the Copa Casino of 8 10 - ------------------------------------------------------------------------------- $166,000. Such loss was due to the abandonment of leasehold improvements at the Copa Casino's temporary site when the ship was relocated to the permanent site in April 1994. The increases in complimentary lodging, food and beverage, deducted from revenue, and gaming costs and expenses of $352,000 and $3.6 million, respectively, are primarily due to the inclusion of the Copa Casino. Gaming costs and expenses decreased by approximately $284,000, from fiscal 1993 to fiscal 1994, as a result a decrease in Canadian currency discount expense. The Company, like other casinos in the Reno area, exchanges Canadian currency at a rate which is less than the official exchange rate in order to attract and retain Canadian business. The rate offered to Canadian guests in fiscal 1994 more closely approximated the official exchange rate than in fiscal 1993. The slight increase in other costs and expenses is composed of a reduction in liquor store costs of $106,000 as a result of reduced sales revenue. Such reduction was offset by other operating costs and expenses includable from the Copa Casino from February 25, 1994 forward. The increases of $726,000 and $2.8 million in maintenance and utilities and general and administrative costs and expenses, respectively, are principally due to the addition of Copa Casino results of operations. The increase in depreciation and amortization of $563,000 is due to depreciation from the Copa Casino of $436,000 from February 25 to June 30, 1994 and the amortization of goodwill of $122,000 associated with the acquisition of GCI in February 1994. The increase in interest and other income of $76,000, in fiscal 1994 compared to fiscal 1993, is due to interest earned on advances to GCP prior to the date of acquisition of GCI of approximately $194,000. Such increase was partially offset by a decrease in interest earned on excess invested cash due to the reduction in such funds available for investment in fiscal 1994. The increase in interest and other expense is primarily composed of the inclusion of interest expense of the Copa Casino of $93,000, interest expense of GCI to former shareholders of GCI of $123,000 and an increase associated with the Company's variable rate bank debt of $157,000. The amount of variable rate bank debt increased from fiscal 1993 to fiscal 1994 as did the associated interest rates. The equity in loss of unconsolidated affiliate represents the Company's proportionate share, under the equity method of accounting, of loss from GCP that occurred prior to the date of acquisition of GCP in February 1994. Subsequent to such date, the results of operations of GCP are included on a consolidated basis. Approximately $912,000 of the $1.1 million loss is due to the one-time write-off of pre-opening costs when the Copa Casino opened in September 1993. CAPITAL RESOURCES AND LIQUIDITY The Company's working capital decreased from $4.8 million at June 30, 1994 to a deficit of $2.2 million at June 30, 1995. Such decrease was principally due to the reclassification of certain debt obligations from long-term to a current liability. Payments under these obligations, evidenced by promissory notes, are due by GCI to two former shareholders and are past due. In accordance with the terms of the promissory notes, the $6 million balances, previously payable in installments through 1998, have been accelerated and are now classified as current obligations. At June 30, 1995, cash, cash equivalents and short-term investments increased to $12.2 million compared to $9.8 million at June 30, 1994. Cash and cash equivalents provided from operating activities for the years ended June 30, 1995, 1994 and 1993 was $7.3 million, $7.5 million and $8.4 million respectively. Although 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - ------------------------------------------------------------------------------- funds and working capital are generally generated from operations and borrowings to finance capital expenditures, approximately $5.7 million in cash was generated in fiscal 1994 from the sale of nonoperating real property in Reno, Nevada. In fiscal 1994, cash was also generated through the issuance of long-term debt of $5.5 million. In fiscal 1995, cash of $1.7 million was used for the net acquisition of short-term investments, which management considers to be equivalent to cash. In fiscal 1994 and 1993, cash was generated from the net disposal of short-term investments of $293,000 and $909,000, respectively. Uses of cash included the Company's payment of dividends in the amounts of $899,000, $877,000 and $865,000 and payments of long-term debt of $703,000, $419,000 and $2.5 million in fiscal years 1995, 1994 and 1993, respectively. Cash was also utilized for the acquisition of property and equipment in the amounts of $2.7 million, $4 million and $1.5 million in the years ended June 30, 1995, 1994 and 1993, respectively. Approximately $3 million of property and equipment acquired in fiscal 1994 represented original property purchases of the Copa Casino after GCI was acquired in February 1994 and included in the consolidated group. The remaining property and equipment acquisition amounts, for the years indicated, represent primarily furniture, fixtures and equipment replacements and additions. Cash payments of $756,000 in fiscal 1995 and $962,000 in fiscal 1994 were made to satisfy accounts payable for the preceeding years purchase of property and equipment items. The Company also advanced cash to GCP, prior to the Company's acquisition of GCI in February 1994, of $4.8 million in fiscal 1994 and $9.9 million in fiscal 1993. Subsequent to the acquisition of GCI, an additional $2.9 million was advanced to GCP by the Company in fiscal 1994. The Company also expended approximately $1.8 million in fiscal 1994 to acquire a 100% ownership interest in GCI which is net of the cash acquired upon the consolidation of GCI and GCP of $1.6 million. As of June 30, 1995, the Company held cash, cash equivalents and short-term investments in excess of cash needed for the operation of its hotel/casino in Reno, Nevada and casino in Gulfport, Mississippi of approximately $9 million. Such amount is available for expansion, investment and other opportunities that the Company may find attractive. The Company generally invests its excess cash in securities which are readily marketable and are not subject to significant market value fluctuations. The Company presently has local government approval for a major expansion program to be constructed on Company owned properties in Reno, Nevada. As presently approved, construction is to be completed in phases with construction of the next phase, which includes a 5,500 square foot casino expansion, to commence in the spring of 1996. The subsequent phases would include adding in excess of 300 additional hotel rooms, gaming space and other ancillary services and a parking structure. The total estimated cost of the expansion project, if undertaken, is $40 million. It is presently anticipated that the cost of the first phase would be $1.5 million and that approximately $750,000 may be expended in 1996 with the balance paid in 1997. The Company expects to finance this first phase by use of available cash and funds generated from operations. If some or all of the phases of the proposed expansion program are undertaken, potential sources of financing may include bank or other debt, public equity securities, available cash and funds generated from operations, public equity securities, or a combination of these sources. The Company does not anticipate beginning construction on any phase subsequent to the first phase without arranging all or substantially all of the financing of such phase. Properties presently owned by the Company and adjacent to the hotel/casino complex are available for the entire expansion project. Inflation has had very little impact on the Company's operating results. Cost and expense increases have been passed on to the customers through moderate price increases, higher table limits and upgraded slot machine denominations. 10 12 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, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. As discussed in Note 5 to the consolidated financial statements, during the year ended June 30, 1995 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and reported a loss for impairment of long-lived assets of $17.5 million. /s/ Deloitte & Touche LLP Deloitte & Touche LLP RENO, NEVADA AUGUST 11, 1995 11 13 THE SANDS REGENT CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- June 30, 1995 and 1994
1995 1994 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,356,150 $ 9,669,049 Short-term investments 1,857,503 135,000 Accounts and notes receivable, less allowance for possible losses of $147,000 and $111,000 477,352 330,071 Inventories 719,052 1,116,568 Prepaid federal income taxes -- 178,955 Deferred federal income tax asset 15,543 -- Prepaid expenses and other assets 946,374 1,135,736 ----------- ----------- Total current assets 14,371,974 12,565,379 PROPERTY AND EQUIPMENT: Land 8,101,601 8,101,601 Buildings, ship and improvements 45,106,360 53,638,941 Equipment, furniture and fixtures 20,974,442 21,793,684 Construction in progress 507,131 236,207 ----------- ----------- 74,689,534 83,770,433 Less accumulated depreciation and amortization 25,986,710 22,963,543 ----------- ----------- 48,702,824 60,806,890 OTHER ASSETS: Deferred federal income tax asset 1,526,589 -- Goodwill -- 7,195,088 Note receivable 1,250,898 1,258,445 Other 401,007 442,486 ----------- ----------- 3,178,494 8,896,019 ----------- ----------- $ 66,253,292 $ 82,268,288 =========== ===========
- ------------ See notes to consolidated financial statements. 12 14 - --------------------------------------------------------------------------------
1994 1993 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,046,893 $ 3,474,630 Accrued salaries, wages and benefits 1,886,964 1,668,231 Other accrued expenses 1,316,883 712,479 Federal income taxes payable 384,210 -- Deferred federal income tax liability -- 168,058 Current maturities of long-term debt 10,905,995 1,721,624 ------------ ------------ Total current liabilities 16,540,945 7,745,022 LONG-TERM DEBT 17,807,655 27,558,996 DEFERRED FEDERAL INCOME TAX LIABILITY -- 2,732,385 OTHER 56,151 93,579 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 and 6,892,722 shares issued 344,936 344,636 Additional paid-in capital 13,073,803 13,036,603 Retained earnings 40,784,637 53,111,902 ------------ ------------ 54,203,376 66,493,141 Treasury stock, at cost; 2,400,000 shares (22,354,835) (22,354,835) ------------ ------------ Total stockholders' equity 31,848,541 44,138,306 ------------ ------------ $ 66,253,292 $ 82,268,288 ========== ==========
13 15 THE SANDS REGENT CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993
1995 1994 1993 ------------ ----------- ----------- OPERATING REVENUES: Gaming $ 43,601,124 $31,990,341 $24,650,583 Lodging 9,805,719 10,120,918 9,908,708 Food and beverage 8,195,340 7,357,963 6,723,221 Other 1,850,111 3,990,280 4,254,589 ----------- ----------- ----------- 63,452,294 53,459,502 45,537,101 Less complimentary lodging, food and beverage included above 2,479,087 2,013,048 1,660,385 ----------- ----------- ----------- 60,973,207 51,446,454 43,876,716 ----------- ----------- ----------- OPERATING COSTS AND EXPENSES: Gaming 21,826,156 14,517,504 10,952,071 Lodging 5,193,683 4,683,308 4,741,756 Food and beverage 6,724,601 6,185,677 5,774,301 Other 960,201 3,533,687 3,520,504 Maintenance and utilities 4,222,854 2,999,173 2,273,269 General and administrative 11,878,463 8,261,707 5,482,528 Impairment of long-lived assets 17,496,282 -- -- Depreciation and amortization 4,418,769 3,087,613 2,523,868 ----------- ----------- ----------- 72,721,009 43,268,669 35,268,297 ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS (11,747,802) 8,177,785 8,608,419 ----------- ----------- ----------- OTHER INCOME (DEDUCTIONS): Interest and other income 549,978 584,950 509,247 Interest expense (2,562,889) (1,300,644) (926,785) Equity in loss of unconsolidated affiliate -- (1,077,537) (56,987) Gain on disposition of non-operating property -- 5,197,874 -- ----------- ----------- ----------- (2,012,911) 3,404,643 (474,525) ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (13,760,713) 11,582,428 8,133,894 INCOME TAX (PROVISION) BENEFIT 2,332,892 (3,852,531) (2,652,566) ----------- ----------- ----------- NET INCOME (LOSS) $(11,427,821) $ 7,729,897 $ 5,481,328 =========== =========== =========== NET INCOME (LOSS) PER SHARE $ (2.54) $ 1.76 $ 1.27 =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 4,497,588 4,395,100 4,327,254 =========== =========== ===========
- --------------- See notes to consolidated financial statements. 14 16 THE SANDS REGENT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993
Common Stock Additional Treasury Stock --------------------- Paid-in Retained ------------------------ Shares Amount Capital Earnings Shares Amount Total ---------- --------- ------------ ----------- ---------- ------------ ----------- BALANCES, JULY 1, 1992 6,721,722 $ 336,086 $ 11,095,153 $41,642,715 2,400,000 $(22,354,835) $30,719,119 Net income -- -- -- 5,481,328 -- -- 5,481,328 Shares issued on exercise of stock options 14,000 700 86,800 -- -- -- 87,500 Cash dividends ($.20 per share) -- -- -- (865,444) -- -- (865,444) --------- ------- ----------- ----------- --------- ------------ ----------- BALANCES, JUNE 30, 1993 6,735,722 336,786 11,181,953 46,258,599 2,400,000 (22,354,835) 35,422,503 Net income -- -- -- 7,729,897 -- -- 7,729,897 Shares issued on exercise of stock options 16,000 800 99,200 -- -- -- 100,000 Shares issued for acquisition of subsidiary 141,000 7,050 1,755,450 -- -- -- 1,762,500 Cash dividends ($.20 per share) -- -- -- (876,594) -- -- (876,594) --------- ------- ----------- ----------- --------- ------------ ----------- BALANCES, JUNE 30, 1994 6,892,722 344,636 13,036,603 53,111,902 2,400,000 (22,354,835) 44,138,306 Net loss -- -- -- (11,427,821) -- -- (11,427,821) Shares issued on exercise of stock options 6,000 300 37,200 -- -- -- 37,500 Cash dividends ($.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 ========= ======= =========== =========== ========= ============ ===========
- --------------- See notes to consolidated financial statements. 15 17 THE SANDS REGENT CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993
1995 1994 1993 ------------ ----------- ------------ OPERATING ACTIVITIES: Net income (loss) $(11,427,821) $ 7,729,897 $ 5,481,328 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,418,769 3,087,613 2,523,868 Impairment of long-lived assets 17,496,282 -- -- (Gain) loss on disposal of property and equipment 78,322 (4,983,998) 497 Noncash interest income from unconsolidated affiliate -- (302,363) (96,491) Equity in loss of unconsolidated affiliate -- 1,077,537 56,987 Amortization of imputed interest expense 17,100 60,900 -- (Increase) decrease in accounts and notes receivable (147,281) 44,794 (24,037) (Increase) decrease in inventories 397,516 (202,794) (34,748) Decrease in prepaid expenses and other current assets 189,362 494,147 51,912 Decrease in other assets 31,273 25,764 41,123 Increase (decrease) in accounts payable (612,013) (499,437) 144,507 Increase (decrease) in accrued salaries, wages and benefits 218,733 (559,254) 152,030 Increase in other accrued expenses 604,404 180,857 25,669 Increase (decrease) in federal income taxes payable 563,165 (894,084) 60,155 Change in deferred federal income taxes (4,442,575) 2,271,615 42,411 Decrease in other liability (37,428) -- -- ------------ ----------- ------------ Net cash provided by operating activities 7,347,808 7,531,194 8,425,211 ------------ ----------- ------------ INVESTING ACTIVITIES: Purchase of short-term investments (3,251,250) (10,000) (6,728,791) Sale and maturity of short-term investments 1,528,747 303,394 7,638,697 Payments received on note receivable 7,547 2,555 -- Additions to property and equipment (2,657,280) (3,983,943) (1,481,989) Proceeds from sale of property, equipment and other assets 32,756 6,062,445 36,073 Investment in and advances to unconsolidated affiliate -- (4,761,403) (9,922,459) Payments to acquire company and related note receivable, net of cash acquired -- (1,787,641) -- ------------ ----------- ------------ Net cash used in investing activities (4,339,480) (4,174,593) (10,458,469) ------------ ----------- ------------
- --------------- See notes to consolidated financial statements. 16 18 - --------------------------------------------------------------------------------
1995 1994 1993 ------------ ----------- ------------ FINANCING ACTIVITIES: Payment of accounts payable for prior year purchases of property and equipment $ (756,487) $ (962,360) $ -- Issuance of long-term debt -- 5,500,000 -- Long-term debt issuance costs -- -- (137,785) Payments on long-term debt (702,796) (418,947) (2,540,968) Issuance of common stock 37,500 100,000 87,500 Payment of dividends on common stock (899,444) (876,594) (865,444) ------------ ----------- ------------ Net cash provided by (used in) financing activities (2,321,227) 3,342,099 (3,456,697) ------------ ----------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 687,101 6,698,700 (5,489,955) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,669,049 2,970,349 8,460,304 ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,356,150 $ 9,669,049 $ 2,970,349 ============ =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Note receivable acquired upon sale of property and equipment $ -- $ 1,261,000 $ -- ============ =========== ============ Property and equipment acquired by accounts payable $ 59,489 $ 844,190 $ -- ============ =========== ============ Accounts payable converted to long-term debt $ 118,726 $ -- $ -- ============ =========== ============ Other liabilities included in investment in and advances to unconsolidated affiliate $ -- $ 38,684 $ 54,895 ============ =========== ============ Issuance of common stock to acquire company $ -- $ 1,762,500 $ -- ============ =========== ============ Interest paid, net of amount capitalized $ 2,254,248 $ 1,400,993 $ 947,822 ============ =========== ============ Federal income taxes paid $ 1,550,000 $ 2,475,000 $ 2,550,000 ============ =========== ============
17 19 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993 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 of the issued and outstanding stock of GCI was acquired by The Sands Regent on February 25, 1994. Such acquisition has been accounted for under the purchase method of accounting. Artemis was formed by the Company and became the third partner in GCP in April 1995. Prior to the acquisition of GCI, the Company accounted for its 40% equity investment in GCP under the Equity Method of Accounting. Upon acquisition of a 100% interest in GCP, the accounts of GCP have been consolidated with those of the Company. Such consolidation includes the results of operations and cash flows of GCI and GCP from the date of acquisition forward. 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:
1995 1994 1993 ---------- ---------- ---------- Hotel $ 215,661 $ 218,288 $ 206,779 Food and beverage 2,185,106 1,458,350 1,250,280 Other 32,896 19,057 46,448 ---------- ---------- ---------- $2,433,663 $1,695,695 $1,503,507 ========== ========== ==========
18 20 - -------------------------------------------------------------------------------- Other operating revenue is comprised of hotel/casino ancillary services including 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. (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 Effective July 1, 1994, the Company adopted 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" will 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, 1995, all of the Company's investments are classified as available-for-sale. (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 19 21 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993 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. (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. The Company's short-term investments consist primarily of government bonds of high credit quality. The Company limits its investment in and credit exposure to any one governmental agency. The Company does not take possession of these securities which are held for the Company in a custodial account at a financial institution. (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. NOTE 2 -- SHORT-TERM INVESTMENTS Short-term investments are readily marketable and consist primarily of municipal bonds with maturity dates through April 1996. These short-term investments are carried at cost which approximates market. 20 22 - -------------------------------------------------------------------------------- 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% (11% at June 30, 1995). 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 -- ACQUISITION OF COMPANY On February 25, 1994, The Sands Regent acquired all of the issued and outstanding stock of GCI which resulted in the acquisition of the remaining ownership interest in GCP. Summarized operating data of GCP under the equity method of accounting prior to being consolidated with the Company when GCI was acquired is as follows:
1994 1993 ----------- -------- Revenue $12,146,082 $ 2,865 Costs and expenses 14,579,144 142,368 Net loss 3,089,777 166,052 Company's equity in net loss, net of intercompany eliminations 1,077,537 56,987
On a stand alone basis, for the years ended June 30, 1995 and 1994, GCP incurred net losses of $12.4 million and $3.7 million, respectively. Approximately $2.3 million of the loss in fiscal 1994, which was the Company's first year of operations, was due to the write-off of preopening costs and expenses. Approximately $10.7 million of the loss in fiscal 1995 is due to a write-down of GCP long-lived assets to estimated net realizable value on a basis consistent with the provisions of recently issued accounting standards as more fully described in Note 5. As of June 30, 1995, and after the write-down of long-lived assets, current liabilities of GCP exceeded its current assets by $600,000 and its total liabilities exceeded its total assets by $16.3 million. Such excess of total liabilities over total assets results from advances by the Company to GCP, aggregating $25.1 million including accrued interest, which are reflected as liabilities of GCP. Management of GCP continues to undertake various marketing efforts in order to expand the Copa Casino's customer base including advertising efforts and special promotional events and programs designed to attract local residents. Cost containment actions to improve operational efficiency have been undertaken and successfully implemented. In addition, management has sought approval to construct land-based facilities, which are planned to include a hotel, and has requested approval to replace its floating casino facility. Such approvals, which are required from the GCP's landlord, the Mississippi State Port Authority at Gulfport, have to date been refused. Management believes that development of its leasehold site is necessary in order for the Copa Casino to be ultimately successful and will continue to pursue obtaining the necessary required approvals. The ultimate outcome of these uncertainties cannot presently be determined. NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS Based upon current political and market conditions and an analysis of projected undiscounted future cash flows of the GCI and GCP calculated in accordance with the provisions of SFAS No. 121-- "Accounting for 21 23 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993 the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company has determined that the carrying amount of certain long-lived assets of GCI and GCP may not be recoverable. The resultant, calculated impairment of long-lived assets has 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 have been determined by calculating the present value of estimated expected future GCI and GCP cash flows using a discount rate commensurate with the risks involved. NOTE 6 -- LONG-TERM DEBT Long-term debt consists of the following:
June 30, --------------------------- 1995 1994 ----------- ----------- Bank term and revolving line of credit loan; interest 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 Company (a blended rate of 8.9% utilized at June 30, 1995); 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 $18,565,000 $19,109,516 Contract payable to International Game Technology ("IGT") by GCP; principal and interest payments of $137,493, including interest at 12% per annum, due monthly commencing January 1, 1995 through December 1, 1997; principal payments in the aggregate amount of $504,000 past due and unpaid for the period January to June 1995; IGT has waived the potential acceleration of the unpaid balance and does not consider the contract to be in default; secured by certain gaming equipment 4,052,308 4,122,486 Notes payable by GCI to former minority stockholders of GCI issued under a settlement agreement; interest payable at 6% per annum in semi-annual payments; principal payable annually in the amount of $600,000 beginning in November 1994 until November 1998 when the remaining unpaid balances are due in full; principal payments in the aggregate amount of $600,000 past due; no interest paid since May 1994; entire principal balances included in current maturities at June 30, 1995; secured by GCI's partnership interest in GCP 6,000,000 6,000,000 Other 96,342 48,618 ----------- ----------- 28,713,650 29,280,620 Less current maturities 10,905,995 1,721,624 ----------- ----------- Long-term portion $17,807,655 $27,558,996 =========== ===========
22 24 - -------------------------------------------------------------------------------- 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 other 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 occured. The loan agreement also requires that no shareholder, other than the existing major shareholders, may own 20% or more of the issued and outstanding voting stock of the Company. The bank waived non-compliance with one of the bank loan covenants at June 30, 1995. Long-term debt at June 30, 1995 is payable as follows:
Year ending June 30, Amount ------------- ----------- 1996 $10,905,995 1997 4,785,815 1998 4,473,840 1999 4,061,000 2000 4,487,000 ----------- $28,713,650 ===========
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 6.44%) 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 $18.6 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 $56,000 at June 30, 1995 which was based on estimated termination values. The interest rate swap is subject to market risk as interest rates fluctuate. Of the total interest expense of $2,563,000, $1,365,000 and $927,000 in 1995, 1994 and 1993, respectively, none, $64,000 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 permitted 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. 23 25 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993 The following is a summary of activity under the Company's stock option plan:
Incentive Options --------------------------- Number Average Price of Shares per Share --------- ------------- Outstanding, July 1, 1992 156,000 $ 6.25 Options granted 87,000 13.51 Options exercised (14,000) (6.25) ------- ------- Outstanding, June 30, 1993 229,000 9.01 Options cancelled (63,000) (11.41) Options exercised (16,000) (6.25) ------- ------- Outstanding, June 30, 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 ======= =======
At June 30, 1995, options to purchase 72,000 shares of the Company's stock were exercisable and 237,864 shares were available for grant under the stock option plan. NOTE 8 -- FEDERAL INCOME TAXES The income tax (provision) benefit consists of the following:
1995 1994 1993 ----------- ----------- ----------- Current $(2,109,683) $(1,580,916) $(2,610,156) Deferred 4,442,575 (2,271,615) (42,410) ----------- ----------- ----------- $ 2,332,892 $(3,852,531) $(2,652,566) =========== =========== ===========
The Company's effective tax rate differs from the federal statutory rate as follows:
1995 1994 1993 ----- ---- ----- Federal statutory tax rate (34.0)% 34.0% 34.0% Write-off of goodwill 17.8 Tax effect of tax-free interest income (0.4) -- (0.7) Jobs credit (0.5) (1.0) (0.1) Other 0.1 0.3 (0.6) ----- ----- ----- (17.0)% 33.3% 32.6% ===== ===== =====
24 26 - -------------------------------------------------------------------------------- The components of the Company's net deferred federal income tax asset (liability) are as follows at June 30:
1995 1994 ----------- ----------- Deferred tax assets: License acquisition costs $ 1,836,026 $ 1,975,031 Pre-opening costs 817,899 1,076,183 Accrued expenses 279,131 95,947 Other 79,337 168,429 ---------- ---------- 3,012,393 3,315,590 ---------- ---------- Deferred tax liabilities: Property and equipment (1,141,338) (5,825,634) Prepaid expenses (321,768) (386,159) Other (7,155) (4,240) ---------- ---------- (1,470,261) (6,216,033) ---------- ---------- Net deferred federal income tax asset (liability) $ 1,542,132 $(2,900,443) ========== ==========
The Company has a March 31 tax year-end. NOTE 9 -- LEASE COMMITMENTS The Company leases its Mississippi dockside facilities from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority in Gulfport, Mississippi. The initial lease term is for seven years commencing in October 1992. The lease is subject to extension for three renewal periods of five years each and a final renewal period of ten years. The final ten year renewal may only be exercised if the Company constructs, within the city limits of Gulfport, Mississippi, a mimimum of 350 hotel/motel rooms during the first ten years of the lease agreement. The lease provides for a monthly base rental 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 rental shall be adjusted, annually, in accordance with changes in the consumer price index. In addition, the Company leases certain equipment under operating leases expiring in 1997. Total rental expense charged to operations was $534,000, $217,000 and $337,000 for the years ended June 30, 1995, 1994 and 1993, respectively. 25 27 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1995, 1994, 1993 Future minimum payments under the remaining noncancellable term of operating leases are as follows:
Year ending June 30, Amount ----------- ----------- 1996 $ 509,000 1997 506,000 1998 500,000 1999 500,000 2000 125,001 ---------- $ 2,140,001 ==========
NOTE 10 -- CONTINGENCIES In December 1994, a lawsuit was filed in a Mississippi court against GCI because of GCI's failure to make payments on promissory note obligations to two former shareholders of GCI. These note obligations, in the aggegrate amount of $6 million, are included in the current maturities of long-term debt on the Company's consolidated balance sheet at June 30, 1995 and are secured by a pledge of GCI's partnership interest in GCP. All accrued interest expense is also included as a current liability on the Company's consolidated balance sheet. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment has been granted, the lawsuit by these former GCI shareholders is demanding the appointment of a receiver for GCI to take possession of and sell GCI's ownership interest in GCP. The lawsuit also seeks attorneys fees in an amount not less than $900,000 which management of the Company believes would not be deemed a reasonable amount in the event of an unfavorable judgment against GCI. In May 1995, GCP and Patrician were joined as necessary parties to the lawsuit. At present, a Charging Order is in place which requires GCP to respond to inquiries by the two former GCI shareholders for the purpose, amoung other things, of determining what distributions, if any, have been paid by the partnership to either of its partners. Moreover, a court order has been granted whereby any amounts due or to become due GCI by GCP are to be paid to the two former shareholders until the summary judgment against GCI is satisfied. GCP has not generated adequate operating results to allow for any partner distributions and distributions are not expected in the near future. These former shareholder 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. GCI's only tangible asset, and its source of funds for repayment of the promissory notes, is its partnership interest in GCP. GCI is neither presently in the financial position to make any payments with respect to these note obligations nor is it expected to be in such a position in the near future. As part of the dispute with the two former shareholders, issues will have to be resolved concerning an amendment to the GCP partnership agreement, effective January 1, 1993, 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 so as to properly reflect the relative financial risks of Patrician and GCI. The former shareholders of GCI claim that GCI's ownership interest in GCP should be the pre-amendment 60% interest. GCI and Patrician contend that the amended ownership interests are valid because the underlying 26 28 - -------------------------------------------------------------------------------- agreement that pledged GCI's interest in GCP to the two former GCI shareholders permitted transfers so long as there were no defaults at the time of transfer. In addition to the above, GCP has been put on notice by the Mississippi State Port Authority that, in accordance with the GCP lease agreement with the Port Authority, GCP must have an approved hurricane evacuation plan. Failure to have an acceptable plan will subject GCP to legal actions including the possible termination of the lease agreement. GCP had updated its plan in August 1995 and submitted such updated plan to the Port Authority and Mississippi Gaming Commission for approval. The Gaming Commission, at GCP's relicensing hearing in August 1995, indicated that such evacuation plan appeared to be the appropriate method to protect the public interests and to meet the requirements of the Mississippi State Port Authority. So as to allow for the Port Authority's review and approval, the Mississippi Gaming Commission issued a three-month provisional gaming license and indicated that the standard two-year gaming license renewal would be granted after the Port Authority has approved the plan. The State Port Authority has been continuously reviewing this updated hurricane evacuation plan and has requested additional information and made various inquiries of GCP. GCP management has been, and is in the process of, responding to these Port Authority inquiries and comments and is of the belief that all issues can be adequately addressed. The Company will continue to monitor the progress of the lawsuit, the ultimate outcome of which could include the sale of GCI's ownership interest in GCP. 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. NOTE 11 -- CONDENSED QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ----------- 1995 Operating revenues $16,363,237 $13,553,357 $14,384,163 $16,668,603 Income (loss) from operations 1,884,116 158,165 888,411 (14,678,494) Net income (loss) 833,234 (292,738) 323,772 (12,292,089) Net income (loss) per share $0.19 $(0.07) $0.07 $(2.73) 1994 Operating revenues $12,499,227 $10,559,178 $11,970,167 $16,417,882 Income from operations 3,299,810 1,765,196 1,323,372 1,789,407 Net income 1,502,154 1,120,649 818,163 4,288,931 Net income per share $0.35 $0.26 $0.19 $0.96
27 29 - -------------------------------------------------------------------------------- CORPORATE OFFICERS Pete Cladianos, Jr. President and Chief Executive Officer Katherene Latham Chairman of the Board David R. Wood Vice President-Finance and Administration, Treasurer and Chief Financial Officer Pete Cladianos III Vice President and Secretary BOARD OF DIRECTORS Katherene Latham Chairman of the Board Pete Cladianos, Jr. President and Chief Executive Officer David R. Wood(1) Vice President-Finance and Administration, Treasurer and Chief Financial Officer Pete Cladianos III Vice President and Secretary Jon N. Bengtson Joseph G. Fanelli(1) Weldon C. Upton(1) PUBLIC ACCOUNTANTS Deloitte & Touche LLP Reno, Nevada SECURITIES COUNSEL Latham & Watkins Costa Mesa, California TRANSFER AGENT & REGISTRAR First Interstate Bank of California Los Angeles, California - ------------ (1) Standing for re-election to the Board of Directors at the November 6, 1995 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. 28 30 LOGO 345 N. ARLINGTON AVENUE - RENO, NV 89501 - (702) 348-2200 EX-23 4 INDEPENDENT AUDITORS' CONSENT 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 11, 1995, appearing and incorporated by reference in the Annual Report on Form 10-K of The Sands Regent for the year ended June 30, 1995. [SIG] Deloitte & Touche LLP Reno, Nevada September 28, 1995 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 10,356,150 1,857,503 624,352 147,000 719,052 14,371,974 74,689,534 25,986,710 66,253,292 16,540,945 17,807,655 344,936 0 0 31,503,605 66,253,292 8,195,340 60,973,207 6,724,601 34,704,641 38,016,368 0 2,562,889 (13,760,713) (2,332,892) (11,427,821) 0 0 0 (11,427,821) (2.54) (2.54)
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