-----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, SEnilQEY3Tr4ZI/5gZ/1QP+xfJNNfustONtXuUz65SNZAivN9U9WYG/jRbYLGjnd CkCGlTEpbaGEofwrOb2nDA== 0000892569-96-001927.txt : 19960930 0000892569-96-001927.hdr.sgml : 19960930 ACCESSION NUMBER: 0000892569-96-001927 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 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: 96635528 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 FOR FISCAL YEAR ENDED JUNE 30, 1996 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, 1996 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 23, 1996 was $8,050,145. The aggregate market value is computed with reference to the average price per share on such date. Registrant's Common Stock outstanding at September 23, 1996 was 4,498,722 shares. Portions of Registrant's 1996 Annual Report to the Shareholders are incorporated into Part II as set forth herein. Portions of Registrant's definitive Proxy Statement for its November 4, 1996 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. 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, three cocktail lounges, a gift shop, a beauty/barber shop and a liquor store, each operated by third parties, a video arcade, a health club, a swimming pool and over 10,000 square feet of convention and meeting space which can seat up to 650 people. The Company maintains six parking areas on its main hotel/casino property and adjacent to it, including two parking garages, with a total combined capacity for approximately 1,000 vehicles. Although the Company offers, on a very limited basis, complimentary hotel accommodations to select customers, no group arrangements known as "junkets" are conducted. The average room occupancy for fiscal 1996 was 82.9% compared to 87.1% for 1995. The hotel's average room rate for the current fiscal year was approximately $32.00 as compared to $33.00 in the prior fiscal year. As of September 25, 1996, the casino offered 20 table games, including 15 blackjack tables, 1 caribbean stud table, 1 craps table, and 2 roulette tables, 1 let it ride, 2 keno games and approximately 690 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 55% of the Company's revenues in fiscal 1996 and approximately 77% of the gaming revenues were generated by slot machines. The Company generally does not extend credit to its gaming customers. As a result of current adverse market conditions and the uncertainty of future market growth, the Company has cancelled its major expansion plans and allowed its local governmental approvals to expire. In the near term, the Company will concentrate its resources on renovating and improving existing Reno facilities and services. Future expansion plans will be considered based upon future market conditions and the need to add hotel rooms and other major facilities. 1 3 Gulfport, Mississippi. In December 1992, the Company, through Patrician, entered into a partnership agreement with GCI to develop and operate a dockside gaming facility in Gulfport, Mississippi. Located approximately 75 miles from New Orleans, Louisiana and 70 miles from Mobile, Alabama, the facility, known as the "Copa Casino," is a permanently moored 500-foot cruise ship. Gaming operations commenced in mid-September 1993. On February 25, 1994, the Company acquired all of the outstanding stock of GCI as well as certain advances to the Partnership previously due to an affiliate of GCI. GCI's principal asset is its general partnership interest in the Partnership. In April 1995, Artemis was formed as a wholly-owned subsidiary of The Sands Regent and acquired a 1% ownership interest in the Partnership from Patrician. The Company, through Patrician, GCI and Artemis, owns 100% of the Partnership. Mississippi, which legalized casino gaming in September 1991, allows for 24-hour gaming on riverboats or other floating vessels located on or adjacent to approved navigable waterways. Such floating facilities need not cruise into the waterways and, as such, become permanently moored as dockside gaming facilities. Gulfport is a deep-water port located on U.S. Highway 90 on the Mississippi gulf coast. A population of approximately 2.5 million resides within a 100-mile radius, including New Orleans and Mobile. Interstate Highway 10, which is the main thoroughfare between Mobile and New Orleans, lies approximately 10 miles to the north of the port area. The Gulfport-Biloxi metropolitan area has over 7,000 hotel and motel rooms located in the immediate Gulfport-Biloxi area. The Copa Casino consists of approximately 24,000 square feet of casino space located on two decks. As of September 25, 1996, the Copa offered approximately 717 slot machines and 26 table games, including craps, roulette, blackjack, caribbean stud, let it ride and big six. 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. The Copa Casino is permanently moored dockside at a location known as the "Horseshoe Site." Such site, which is leased from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority, is between the East and West Piers of the Mississippi State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of land based facilities, will accommodate surface parking for approximately 840 vehicles. The leased facilities also include a docking structure which accommodates the Copa Casino ship and will allow for mooring of additional vessels. The docking structure also includes a roadway and pedestrian walk which provides access to the Copa Casino entrance. As in Nevada, the Mississippi operations are conducted 24 hours a day every day of the year. Present operations provide for the offering of complimentary food and beverage on a limited basis. Group arrangements, known as "junkets," are not conducted. MARKETING Reno, Nevada. The central component of the Company's marketing philosophy is to utilize travel wholesalers to attract group and air wholesale business to the hotel/casino. This philosophy is based on offering attractive, well-furnished, large hotel accommodations and quality food and beverages at prices slightly lower than those of most major hotel/casinos in Reno. Management believes this strategy has historically enabled the Company to maintain high levels of hotel occupancy. 2 4 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 59% of the hotel's occupancy in fiscal 1996 compared to 61% in fiscal 1995. Most advertising for the Sands Regency is done by travel wholesalers in their markets. The Company also advertises directly in its major United States markets through printed publications, especially during periods of the year when group business operates at reduced levels. Gulfport, Mississippi. The Company has positioned the Copa Casino as a casino for local residents. Emphasis has been placed on providing a casual and friendly atmosphere. To maintain this marketing position, the Company's goal is to provide its products and services at values favored by the Company's guests. The Company also uses numerous, in-house promotional programs to attract local residents and other customers. These Company-sponsored promotional and special event programs include gaming and slot tournaments, football season promotions 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 within a 100-mile radius of Gulfport and local newspaper, 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, which have resulted in positive customer responses, will continue to be undertaken to encourage more frequent visits by customers. In fiscal 1997, the Company plans to acquire a computerized slot player tracking and marketing system which will improve the Company's ability to offer different and more diverse promotions. The system will also provide player tracking information so as to allow the Company to reward gaming customers with complimentary and other promotional goods and services. The Company has also pursued marketing efforts toward developing group business, primarily bus charters and, beginning in October 1996, will expand these efforts to include tour and travel air charters. Through these efforts, 3 5 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 with a goal of increasing the frequency of casino visits by its customers which includes implementing programs to identify and retain selected valued customers and the establishment of promotional programs which cater to senior citizens. The Company has employed sales representatives to market to tour operators, travel agents, social groups, corporations and associations. COMPETITION Reno, Nevada. The Company competes in the greater Reno area with approximately sixteen major casinos and hotel/casinos, some of which are larger than the Sands Regency. In addition, there are numerous other smaller casinos in the greater Reno area. The Company competes for its customers based upon gaming activities, room rates, room size and quality of rooms, food, beverages and location. In the last twelve months, competitors of the Company have constructed approximately 2,700 hotel rooms including a new hotel/casino with 1,700 rooms. This resulted in an increase in Reno area available hotel rooms of approximately 20%. There are also an additional 800 hotel rooms currently under construction by other competitors of the Company and governmental approval has been granted to construct an additional 2,188 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 an additional 19%. 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. Gulfport, Mississippi. The Company's operations on the Gulf Coast of Mississippi are in competition with numerous gaming operations currently established or to be established on vessels or barges moored on the Gulf Coast of Mississippi, and on boats or barges cruising or moored on the Mississippi River. Currently there are ten dockside gaming facilities, excluding the Company, operating along the Gulf Coast of Mississippi, including one in Bay Saint Louis, one in Gulfport and eight in Biloxi. There are also two gaming facilities presently planned along the Gulf Coast which are licensed and under construction. Along the Mississippi River, there are presently eighteen Mississippi dockside casino facilities; one in Natchez, four in Vicksburg, two in Greenville, one near Lula and ten in Tunica. There are two additional proposed casino operations to be located along the Mississippi River in Vicksburg and Greenville which have been granted gaming licenses. There is also one casino currently in operation on an Indian reservation near Philadelphia, Mississippi. In addition to the above, there are also numerous other proposed Mississippi casino operations along the Mississippi River and the Gulf Coast. Requiring both site approval and gaming licenses, such proposed operations are at various stages in the developmental process without assurances that development and operation will occur. 4 6 In addition to direct competition which the Company faces in the Mississippi market, the Company faces competition from riverboats and a possibly reopened land-based casino in the State of Louisiana, which is an important market area for the Company's Gulfport casino. Current Louisiana legislation permits unlimited stakes gaming and a total of fifteen riverboat licenses and one land-based license have been authorized statewide. At present, there are thirteen riverboats in operation. Besides these State of Louisiana gaming operations, it is also anticipated that gaming may be implemented on Indian reservations near Gulfport and New Orleans. In the event that all, or a significant number, of these proposed facilities are licensed, built and operated, management of the Company believes that this added capacity may have an adverse effect on its Gulfport casino operation. Management believes that the principal competitive factors will include ease of access, availability of parking, attractiveness of casino vessels and surrounding property, proximity to other gaming facilities, and quality of food and entertainment offered. General. To a significantly lesser extent, the Company competes with gaming facilities in New Jersey, Colorado, South Dakota, Illinois, Iowa and other parts of the world. The Company also competes with various gaming operations on Indian land, including those located in California, Oregon, Washington, Connecticut, Michigan, Minnesota and Wisconsin. Indian casino gaming has become a growing sector of the gaming industry as a result of the Indian Gaming Regulatory Act of 1988, which generally permits unrestricted gaming on Indian land in any state that allows similar forms of gaming, whether or not restricted. Other states may legalize various forms of gaming that may compete with the Company. In any jurisdiction where the Company may commence operations, it will face competition for desirable sites and qualified personnel. EMPLOYEES At June 30, 1996, the Company employed 979 people at the Sands Regency in Reno, Nevada, including 91 salaried employees and 888 hourly employees. The Copa Casino employed 466 people, including 57 salaried employees and 409 hourly employees. None of the Company's employees is represented by a union. The Company has not experienced any work stoppages or other significant labor problems and management considers its labor relations to be good. REGULATION AND LICENSING-GAMING Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) The Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulation. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board") and the City of Reno, (together, the "Nevada Gaming Authorities"). The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures 5 7 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. 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. 6 8 Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of the directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or Zante, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. 7 9 The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. The Company's stock certificates do bear such a legend. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who has become involved in a gaming venture outside of 8 10 Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. Mississippi. The ownership and operation of a gaming business in Mississippi is subject to extensive laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder by the Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi State Tax Commission Regulations for Gaming Establishments ("Mississippi Tax Regulations") promulgated by the Mississippi State Tax Commission ("Mississippi Tax Commission"). The Mississippi Commission and Mississippi Tax Commission (together the "Mississippi Gaming Authorities") are empowered to oversee and enforce the Mississippi Act. Gaming in Mississippi can be legally conducted only on floating vessels of a certain minimum size in navigable waters of the Mississippi River or in waters of the State of Mississippi (so called dockside gambling) which lie adjacent and to the south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison and Jackson, and only in counties in Mississippi in which the registered voters have not voted to prohibit such activities. The voters in Jackson County, the southeastern most county of Mississippi, have voted to prohibit gaming in that county. However, gaming could be approved in Jackson County in any subsequently held referendum. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted (i) honestly and competitively, (ii) free of criminal and corruptive influences, and (iii) in a manner which protects the rights of the creditors of gaming operations. The laws, regulations and supervisory procedures of the Mississippi Act seek to (i) establish and maintain response accounting practices and procedures; (ii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding assets and revenues, providing reliable record keeping, and making periodic reports to the Mississippi Gaming Authorities; and (iii) provide a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company. The Mississippi Act requires that a person (including any corporation or other entity) must be licensed to conduct gaming activities in Mississippi. A license will be issued only for a specified location which has been approved as a gaming site by the Mississippi Commission prior to issuing such license. Gaming licenses are issued for an initial two year period and are renewable every two years thereafter. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a material degree of control over the licensee, either directly or indirectly, must be found suitable by the Mississippi Commission. The Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, only after an extensive investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. Other parties, including the Partnership's or the 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 9 11 Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable cause. The Partnership holds the gaming license to the Copa Casino gaming facility in Gulfport, Mississippi. Patrician, GCI and Artemis, all wholly-owned subsidiaries of the Company, have been approved as partners of the Partnership. The license is not transferrable. In October 1994, the Mississippi Gaming Commission adopted a regulation requiring, as a condition of licensure or license renewal, that a gaming establishment's site development plan include certain infrastructure facilities in close proximity to the casino complex which will amount to at least 25% of the cost of the casino facility. Parking facilities, roads, sewage and water systems or facilities normally provided by governmental entities do not meet the infrastructure requirement. The Mississippi Gaming Commission found the Copa Casino to be in compliance with this regulation as a result of its construction of a general purpose pier facility and other improvements that inure to the benefit of the Mississippi State Port Authority. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or persons who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations, which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but the filing of such petition does not necessarily stay any action taken by the Mississippi Commission pending a decision by the Circuit Court. The Partnership must submit detailed financial and operating reports to the Mississippi Gaming Authorities. Substantially all loans, leases, sales of securities and other financing transactions entered into by the Partnership must be reported to, and, in some cases, approved by, the Mississippi Gaming Authorities. Under the Mississippi Regulations, a gaming license may not be held by a publicly traded company, although an affiliate corporation, such as the Company, may be publicly held so long as the Company receives the approval of the Mississippi Commission. The Company has received such approval of the Mississippi Commission. In addition, approval of any public offering of the securities of the Company must be obtained from the Mississippi Commission if any part of the proceeds from that offering are intended to be used to construct, acquire or finance the operation of gaming facilities in Mississippi or to retire or extend obligations incurred for any such purpose. Under the Mississippi Regulations, a person is prohibited from acquiring control of the Company without prior approval of the Mississippi Commission. The Company is also prohibited from consummating a plan of recapitalization proposed by management in opposition to an attempted acquisition of control of the Company and which involves the issuance of a significant dividend to Common Stockholders, where such dividend is financed by borrowing from financial institutions or the issuance of debt securities. In addition, the Company is prohibited from repurchasing any of its voting securities under circumstances (subject to certain exemptions) where the repurchase involves more than one percent of the Company's outstanding Common Stock at a price in excess of 110% of the then market value of the Company's Common Stock from a person who owns and has for less than one year owned more than three percent of the Company's outstanding Common Stock, unless the repurchase has been approved by a majority of the Company's 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. 10 12 Any person who, directly or indirectly, or in associations with others, acquires beneficial ownership of more than five percent of the Common Stock of the Company must notify the Mississippi Commission of this acquisition and may be required to be found suitable by the Mississippi Commission. Any person who becomes a beneficial owner of more than 10% of the Company's Common Stock must apply for a finding of suitability by the Mississippi Commission. Furthermore, regardless of the amount of securities purchased, any person who acquires any beneficial ownership in the Common Stock of the Company may be required to be found suitable if the Mississippi Commission has reason to believe that the acquisition and ownership would be inconsistent with the declared policy of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit with the State Tax Commission a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission shall not be permitted to have any direct or indirect ownership in the Company's Common Stock. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in the Company's Common Stock if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or revoked by the Mississippi Commission, the Company is not permitted to pay such person for services rendered, or to employ or enter into any contract with such person. The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi, and corporations whose stock is publicly traded that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof (commonly referred to as "greenmail") and before a corporate acquisition opposed by management can be consummated. Mississippi's gaming regulations also requires prior approval by the Mississippi Commission if the Company were to adopt a plan of recapitalization proposed by the Company's Board of Directors in opposition to a tender offer made directly to its stockholders for the purposes of acquiring control of the Company. Neither the Partnership, the Company nor any controlled affiliate may engage in gaming activities in Mississippi and outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require, among other things, that there be adequate governmental regulation of gaming in the out-of-state location and that there is a means of the Mississippi Commission to have access to information concerning the out-of-state gaming operations and persons associated with them. REGULATION AND LICENSING - ALCOHOLIC BEVERAGES Nevada. The sale of alcoholic beverages by the Company is subject to supervision, control and regulation by the City of Reno, which issues licenses deemed to be nontransferable, revocable privileges, and which has full power to limit, condition, suspend or revoke such licenses. The Company is presently licensed to sell alcoholic beverages. Any adverse regulatory act with respect to this license could have an adverse effect upon the operations of the Company. 11 13 Mississippi. The sale of alcoholic beverages by the Copa Casino is subject to regulation by the Mississippi State Tax Commission, which issues licenses which are both revocable and non-transferable, and which has full power to limit, condition, suspend or revoke any such license. The Partnership is currently licensed to sell alcoholic beverages as an "On-Premises Retailer." Any adverse regulatory act with respect to this license could have an adverse effect upon the operation of the Partnership. The sale of light wine and beer by Copa Casino is also subject to regulation by the Mississippi State Tax Commission, which issues licenses which are both revocable and non-transferable, and which has the full power to limit, condition, suspend or revoke any such license. However, the enforcement of laws regulating the acquisition, use, sale and distribution of light wine and beer is left to local law enforcement agencies. The Partnership is currently licensed to sell light wine and beer as a "Retailer" under a beer permit and privilege license. Any adverse regulatory act with respect to this license could have an adverse effect upon the operation of the Partnership. 12 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 consisting of an aggregate area of approximately .6 acres. The Company's Reno hotel/casino property is subject to aggregate encumbrances of approximately $15.5 million as of June 30, 1996. Gulfport, Mississippi. The Copa Casino gaming facilities are located on two decks of a 500 foot cruise ship owned by Gulfside Casino Partnership. These two decks also include four cocktail lounges/bars, a deli-style restaurant, a buffet restaurant operated by a third party and a gift shop. The deck below the two casino decks contains a surveillance area, a vault, count rooms, security and various operations and administrative offices. An additional three decks on the ship are available for future expansion of gaming and dining facilities. The engines for such cruise ship are disabled. All gaming activities are conducted while moored dockside. The Copa Casino is permanently moored dockside at a location known as the "Horseshoe Site." Such site, which is leased from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority, is between the East and West Piers of the Mississippi State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of land-based facilities, will accommodate surface parking for approximately 840 vehicles. The leased facilities also include a docking structure which accommodates the Copa Casino ship and will allow for mooring of additional vessels. The docking structure also includes a four-lane roadway and a pedestrian walk which provides access to the Copa Casino entrance. The initial term of the lease, as amended, is seven years and ends in October 1999. The lease provides for three renewal periods of five years each and one renewal period of ten years if the Partnership, within the first ten years of the lease agreement, constructs, on the leased premises or within the city limits of Gulfport, a hotel with a minimum of 350 units. If any of such renewal options are exercised, the lease term will be extended under the same terms and provisions of the lease agreement except that the rental amounts will be adjusted and revised annually, in years six through thirty-two, in accordance with changes in the Consumer Price Index. The lease provides for an annual rental of $500,000 (the "Minimum Rental") plus five percent (5%) of the gross annual gaming revenues over $25,000,000 (the "Percentage Rental"). In addition to the Minimum Rental and Percentage Rental set forth above, the Partnership is also required to pay, monthly, 3% of the gross monthly revenues on all activities other than gaming (the "Additional Percentage Rent"). The Minimum Rental is to be paid in advance, in equal monthly installments of $41,667 on the first day of every month during the lease year. For each month, the Percentage Rental and the Additional Percentage Rental must be calculated and the amounts due, if any, are to be paid on or before the 10th day of the following month. In July 1996, Copa Casino was notified by the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority that its lease will be cancelled and terminated at the end of the initial lease term in October 1999 because the Copa Casino's leased site is needed by the Mississippi State Port Authority to accommodate a purported expansion of Port facilities. Such notice of termination, among other items, 13 15 is presently the subject of litigation between the Copa Casino and the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority as further described in Item 3. Legal Proceedings. If the Copa Casino is required to vacate its existing site and no suitable replacement sites can be found, the Company's results of operations could be materially adversely affected. ITEM 3. LEGAL PROCEEDINGS GCI MATTER In December 1994, a lawsuit was filed by Terry W. Green and Joel R. Carter, Sr. ("Green and Carter") in the Chancery Court of Harrison County, Mississippi, First Judicial District against GCI because of GCI's failure to make payments on promissory note obligations of GCI to Green and Carter. These note obligations, in the aggregate amount of $6 million, plus interest, are secured by a pledge of GCI's partnership interest in GCP. Although these promissory notes and the accrued interest thereon are obligations of GCI, they are reflected as current liabilities in the Company's Consolidated Balance Sheets at June 30, 1996 and 1995 upon consolidation. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment was granted, the lawsuit by Green and Carter is demanding the appointment of a receiver 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. In August 1995, a Charging Order was entered 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. Part of the dispute with Green and Carter concerns their security interest in GCI's ownership of GCP. GCI's interest in GCP has been reduced from an original 60% to the present .006% interest as a result of an amendment to the partnership agreement and a partner capital call. An amendment to the GCP partnership agreement was entered into, 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 and to cure a partnership breach by GCI. Specifically, and prior to the acquisition of GCI by The Sands Regent in February 1994, GCI had breached the partnership agreement by failing to properly contribute monies to the partnership. This resulted in additional funding by Patrician and the amendment was entered into to cure the breach since GCI was not in the position to contribute required funding. An additional partner capital call occurred in January 1996 for the purpose of improving the partnership capital structure. Patrician and Artemis complied with the capital call and GCI failed to comply. As a result, and in accordance with the partnership agreement, CGI's interest in GCP was reduced from 20% to .006%. Green and Carter claim that GCI's ownership interest in GCP should be the pre-amendment, pre-capital call 60% interest. GCI and Patrician contend that the amended ownership interests are valid because they were undertaken for valid business reasons and that they were permitted in accordance with the underlying agreement that pledged GCI's interest in GCP to Green and Carter. Further, the partnership amendments which provided, or allowed, for the change in partner ownership interests were found to be valid in a June 1996 arbitration award between Patrician and GCI. In July 1996, as a result of a court hearing, the Chancery Court rendered a judgment that the reallocation of GCI's interest in the partnership had no effect on the lien position of Green and Carter. Further Green and Carter were 14 16 given until November 1996 to exhaust their legal remedies in collecting against the judgment. Failing collection or other resolution by November 1996, the Court will consider additional measures including, but not limited to, the appointment of a receiver. GCI has filed a motion for reconsideration with the Chancery Court for which a hearing has not yet been set. GCI's only tangible asset, and its source of funds for repayment of the promissory notes, is its partnership interest in GCP. The 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 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. The ultimate resolution of such matter is not presently subject to reasonable estimation but could include a dispossession of a 60% right to receive partnership profits and surplus. PORT MATTER In July 1996, the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the "Port") filed a declaratory judgment action against GCP in the Chancery Court of Harrison County, Mississippi, First Judicial District. Such lawsuit seeks Court interpretation of certain provisions of the lease between MDECD and the Port and GCP including whether the Port must approve the substitution of another gaming vessel for the present gaming vessel and whether the Port must approve the construction of a hotel on the lease premises. In addition to the lawsuit, MDECD and the Port also notified GCP that its lease will be cancelled and terminated at the end of the initial lease term in October 1999 because GCP's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. In August 1996, GCP filed a separate lawsuit against MDECD and the Port in the Circuit Court of the First Judicial District of Harrison County, Mississippi, for breach of contract, breach of covenant of good faith and fair dealing, misrepresentation and breach of covenant of quite enjoyment. The lawsuit seeks an award for compensatory damages in an amount not less that $20 million and a declaratory judgment quieting the lease term and allowing the development of the leased premise. The lawsuit also requests a jury trial which is not generally available in Chancery Court. In connection with the filing of the above Circuit Court action, GCP has responded to the Chancery Court action filed by the MDECD and Port by requesting that such action be dismissed or, in the alternative, transferred and consolidated with GCP's Circuit Court action. MDECD and the Port have, in turn, responded by indicating it is their belief that the Chancery Court is the proper forum and that GCP's Circuit Court action be either dismissed or transferred to the Chancery Court. A hearing was held in Circuit Court on September 20, 1996 with respect to the MDECD and Port request to dismiss GCP's Circuit Court action against the MDECD and Port or transfer it to Chancery Court. A ruling is expected in October 1996. Such legal actions between the Company and MDECD and the Port are in the early stages and management believes that the outcome is not presently predictable or subject to reasonable estimation. OTHER The Company is also a party to various other legal actions, proceedings and pending claims arising in the normal course of its business. Management does not expect the outcome of these claims or suits to have a material adverse effect on the Company's financial position or results of future operations. 15 17 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 1996. 16 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Common Stock of the Company is traded in the NASDAQ National Market System under the symbol "SNDS" and the following table sets forth the range of high and low closing sales prices as reported by NASDAQ.
CASH FOR THE YEARS ENDED JUNE 30, HIGH LOW DIVIDEND - ---------------------------- ---- --- -------- 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 1996 First Quarter........... $ 6.25 $4.50 $.05 Second Quarter.......... 6.25 4.50 $.05 Third Quarter........... 5.50 3.62 $.05 Fourth Quarter.......... 5.75 3.50 --
- ----------- In May 1996, the Board of Directors of the Company suspended the payment of cash dividends. The declaration and payment of dividends in the future, if any, will be determined by the Board of Directors in light of the conditions then existing, including the Company's earnings, financial condition, capital requirements and other factors. As of September 23, 1996, the Company had 170 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 1996 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 1996 Annual Report, filed as Exhibit 13 to this Form 10-K. 17 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA There is hereby incorporated by reference the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in the Company's 1996 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 1996 Annual Report is not deemed filed as part of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated by reference the information appearing under the caption "Directors and Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on November 4, 1996, 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 4, 1996, 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 4, 1996, 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 4, 1996, filed or to be filed with the Securities and Exchange Commission. 19 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS. Included in Part II of this Report: Independent Auditors' Report Consolidated Balance Sheets -- June 30, 1996 and 1995 Consolidated Statements of Operations -- Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Years Ended June 30, 1996, 1995 and 1994 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, 1996, 1995 and 1994: Independent Auditors' Report on Schedules Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 20 22 (a)(3) EXHIBITS 3(a)(i) Restated Articles of Incorporation of the Company (Exhibit 3(a) to the Company's Registration Statement (Registration No. 2-93453) on Form S-1).* 3(a)(ii) Certificate of Amendment to the Restated Articles of Incorporation of the Company, dated November 2, 1987 (Exhibit 4(a) to the Company's Form 10-Q for the quarter ended December 31, 1987).* 3(b)(i) Amended and Restated Bylaws of the Company, as amended April 29, 1985, and currently in effect (Exhibit 3(b) to the Company's Form 10-K for the fiscal year ended June 30, 1985).* 3(b)(ii) Resolution of Amendment to the Bylaws of the Company, dated November 2, 1987 (Exhibit 4(b) to the Company's Form 10-Q for the quarter ended December 31, 1987).* 3(b)(iii) Certificate of Amendment of the Amended and Restated Code of Bylaws, as Amended, of The Sands Regent, dated January 10, 1996.** 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).* 21 23 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).* 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.** (Exhibit 10(n) to the Company's Form 10-K for the fiscal year ended June 30, 1995).* 10(o) Lease Agreement by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated August 20, 1992. ** 10(p) Amendment to Lease and Approval of Stock Purchase by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated October 28, 1992. ** 22 24 10(q) Second Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., Lessee, and Gulfside Casino Partnership, Substitute Lessee, dated May 12, 1993. ** 10(r) Third Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino Partnership, dated June 21, 1994. ** 13 1996 Annual Report to Shareholders.** 21 Subsidiaries: Zante, Inc., Patrician, Inc., and Artemis, Inc., Nevada Corporations, and Gulfside Casino, Inc., a Mississippi corporation, are wholly owned by the Company. Patrician, Inc., Gulfside Casino, Inc., and Artemis, Inc., are the sole partners in Gulfside Casino Partnership, a Mississippi general partnership. 23 Independent Auditors' Consent to the incorporation by reference into specified registration statement on Form S-8 of their reports contained in or incorporated by reference into this report.** 27 Financial Data Schedule.** ------------------------------- * Incorporated by reference ** Filed herewith (b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the last quarter of fiscal 1996. (c) INDEX TO EXHIBITS. (d) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules required by Regulation S-X are excluded from the 1996 Annual Report to the Shareholders by Rule 14a-3(b)(1). See Schedule II to the Financial Statements appearing under Item 14(a)(2) hereof. 23 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SANDS REGENT Date: September 26, 1996 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 26, 1996 - --------------------------- Executive Officer) Pete Cladianos, Jr. and Director KATHERENE LATHAM Chairman of the September 26, 1996 - --------------------------- Board of Directors Katherene Latham JON N. BENGTSON Executive Vice President, September 26, 1996 - --------------------------- Chief Operating Officer and Jon N. Bengtson Director DAVID R. WOOD Executive Vice President, September 26, 1996 - --------------------------- Treasurer, Chief Financial and David R. Wood Accounting Officer and Director PETE CLADIANOS III Executive Vice President, September 26, 1996 - --------------------------- Secretary and Director Pete Cladianos III JOSEPH G. FANELLI Director September 26, 1996 - --------------------------- Joseph G. Fanelli WELDON C. UPTON Director September 26, 1996 - --------------------------- Weldon C. Upton
24 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Sands Regent: We have audited the consolidated financial statements of The Sands Regent and subsidiaries as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, and have issued our report thereon dated August 9, 1996. Such consolidated financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Sands Regent and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Reno, Nevada August 9, 1996 25 27 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, 1996 ................... $147 $136 $(176) $107 Year ended June 30, 1995 ................... 111 92 (56) 147 Year ended June 30, 1994 ................... 72 88 (49) 111
- --------------- (1) Write-offs of uncollectible accounts receivable, net of recoveries 26 28 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - ------ ---- 3(b)(iii) Certificate of Amendment of the Amended and Restated Code of Bylaws, as Amended, of The Sands Regent, dated January 10, 1996 ............... 10(o) Lease Agreement by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated August 20, 1992 ........................................... 10(p) Amendment to Lease and Approval of Stock Purchase by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated October 28, 1992 ................................... 10(q) Second Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., Lessee, and Gulfside Casino Partnership, Substitute Lessee, dated May 12, 1993 .............. 10(r) Third Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino Partnership, dated June 21, 1994 ................... 13 1996 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-3.B.III 2 CERTIFICATE OF AMENDMENT OF CODE OF BYLAWS 1 EXHIBIT 3(b)(iii) CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CODE OF BYLAWS, AS AMENDED OF THE SANDS REGENT, A NEVADA CORPORATION The undersigned, Pete Cladianos III, hereby certifies that he is the duly elected and acting Secretary of The Sands Regent, a Nevada corporation (this "Corporation"), and that (i) attached hereto as Exhibit A is a true, correct and complete copy of the amendment to Section 5.01 of Article V of the Amended and Restated Code of Bylaws of this Corporation, as amended (the "Bylaws") as duly adopted by Unanimous Written Consent of the Board of Directors as of January 10, 1996; (ii) attached hereto as Exhibit B is a true, correct and complete copy of the amendment to Section 5.05 of Article V of the Bylaws of this Corporation as duly adopted by Unanimous Written Consent of the Board of Directors as of January 10, 1996; (iii) attached hereto as Exhibit C is a true, correct and complete copy of the amendment to Section 5.06 of Article V of the Bylaws of this Corporation as duly adopted by Unanimous Written Consent of the Board of Directors as of January 10, 1996; (iv) Section 5.08 of Article V of the Bylaws of this Corporation was deleted in its entirety as duly adopted by Unanimous Written Consent of the Board of Directors as of January 10, 1996; and (v) attached hereto as Exhibit D is a true, correct and complete copy of the amendment to Section 5.09 of Article V of the Bylaws of this Corporation as duly adopted by Unanimous Written Consent of the Board of Directors as of January 10, 1996. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of January 10, 1996. PETE CLADIANOS --------------------------------- Pete Cladianos III Secretary 2 EXHIBIT A AMENDMENT TO SECTION 5.01 OF ARTICLE V OF THE AMENDED AND RESTATED CODE OF BYLAWS, AS AMENDED OF THE SANDS REGENT, A NEVADA CORPORATION Section 5.01 of Article V of the Amended and Restated Code of Bylaws of this Corporation, as amended, is hereby amended to read in its entirety as follows: "Section 5.01. Officers. The Officers of the Corporation shall consist of a Chairman of the Board of Directors, President, Chief Operating Officer, Treasurer/Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, and other Vice Presidents as the case might be, Secretary, and other such officers and assistant officers as may be deemed necessary by the Board of Directors of the Corporation, provided, however, that the President of the Corporation shall be a member of the Board of Directors. Each officer so elected shall hold office until his successor is elected and qualified, but shall be subject to removal at any time by the vote or written consent of a majority of the Directors, provided, however, that a vote or written consent of two-thirds (2/3rds) of the Directors shall be required to remove from office the President, Chief Operating Officer, Treasurer/Chief Financial Officer or any Executive Vice President of the Corporation." A-1 3 EXHIBIT B AMENDMENT TO SECTION 5.05 OF ARTICLE V OF THE AMENDED AND RESTATED CODE OF BYLAWS, AS AMENDED OF THE SANDS REGENT, A NEVADA CORPORATION Section 5.05(A) is hereby added to Article V of the Amended and Restated Code of Bylaws of this Corporation, as amended, to read in its entirety as follows: "Section 5.05(A). Chief Operating Officer. Subject to the powers of the Chairman of the Board and the President, the Chief Operating Officer shall be the principal officer in charge of the operations of the Corporation and shall have such other powers and duties of management as from time to time may be assigned to him or her by the Board of Directors or the President." B-1 4 EXHIBIT C AMENDMENT TO SECTION 5.06 OF ARTICLE V OF THE AMENDED AND Restated CODE OF BYLAWS, AS AMENDED OF THE SANDS REGENT, A NEVADA CORPORATION Section 5.06 of Article V of the Amended and Restated Code of Bylaws of this Corporation, as amended, is hereby amended to read in its entirety as follows: "Section 5.06. Duties of the Executive Vice President. The Executive Vice President (or if there be more than one, the Executive Vice Presidents in the order of their rank or, if of equal rank, then in the order designated by the Board or, in the absence of any designation, then in the order of their appointment) shall possess the power and may perform the duties of the President in his absence or disability and shall perform such other duties as the Bylaws may provide or the Board of Directors or the President may prescribe from time to time." C-1 5 EXHIBIT D AMENDMENT TO SECTION 5.09 OF ARTICLE V OF THE AMENDED AND RESTATED CODE OF BYLAWS, AS AMENDED OF THE SANDS REGENT, A NEVADA CORPORATION Section 5.09 of Article V of the Amended and Restated Code of Bylaws of this Corporation, as amended, is hereby amended to read in its entirety as follows: "Section 5.09. Duties of the Treasurer. The Treasurer is the Chief Financial Officer of the Company and shall have general custody of all the funds and securities of the Company and have general supervision of the collection and disbursement of funds of the Company. He shall endorse on behalf of the Company for collection, checks, notes, and other obligations, and shall immediately deposit the same to the credit of the Company in such bank or banks or depositories as the Board of Directors may designate. He may sign, with the President, or such other person or persons as may be designated for that purpose by the Board of Directors, all bills of exchange or promissory notes of the Company. He shall enter or cause to be entered regularly in the books of the Company a full and accurate account of all money received and paid by him on account of the Company; shall at all reasonable times exhibit his books and accounts to any Director of the Company upon application at the office of the Company during business hours; and shall furnish at meetings of the Board of Directors, or whenever required by the Board of Directors or the President, a statement of the financial condition of the Corporation. The Treasurer shall also perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws. The Treasurer may be required to furnish bond for the faithful performance of his duties in such amount as shall be determined by the Board of Directors." D-1 EX-10.O 3 LEASE AGREEMENT 1 EXHIBIT 10(o) STATE OF MISSISSIPPI COUNTY OF HARRISON LEASE AGREEMENT This Lease Agreement entered into by and between the State of Mississippi, appearing herein by and through its duly authorized agencies, the MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT and the MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT, hereinafter collectively referred to as LESSOR, and Gulfside Casinos, Inc., a Mississippi corporation, hereinafter referred to as LESSEE, who are desirous of entering into said Lease Agreement for the leasing of certain lands and berth space at said Port Facility so as to facilitate a dockside/gaming entertainment operation by LESSEE; NOW, THEREFORE, in consideration of mutual covenants and stipulations herein contained, the parties do mutually contract and agree, each for itself and its heirs, successors, and assigns, as follows: I LEASED PREMISES The MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT and the MISSISSIPPI DEPARTMENT of ECONOMIC AND COMMUNITY DEVELOPMENT, LESSOR, hereby lease and provide unto Gulf Side Casinos, Inc., LESSEE, certain premises of the LESSOR, being hereinafter referred to as the LEASED PREMISES and described in Exhibit "A" including the following, to-wit: Parcel 1, Berth Area Parcel 2, Landside Area and Facility Parcel 3, Parking Area PROVIDED, however, that the property so described above is hereby leased to LESSEE subject to any and all restrictions and conditions imposed upon the LESSOR in the deeds under which the State of Mississippi obtained said land, said deeds being on file and of record in the office of the Chancery Clerk of the First Judicial District of Harrison County, Mississippi. II USE OF PREMISES LESSEE shall use the Leased Premises for the purpose of providing a dockside 1 2 gaming/entertainment operation on a vessel which may include a vessel which complies with the Mississippi Gaming Control Act of 1990 (the "Vessel") and which will be docked and securely moored at the Leased Premises. The Vessel is described in Exhibit "B" which shall be prepared and attached hereto upon the approval of the vessel by LESSOR as provided herein. Subject to the limitations set forth below, LESSEE shall have reasonable access to the roadways of the Port for egress and ingress and to the areas between the Vessel's Berth Area, the Landside Area and Facility and the Parking Area to accommodate LESSEE's operations. Such rights of ingress and egress shall be non-exclusive and the activities on such areas and roadways shall not interfere with the rights of the Port or its other users. LESSEE shall have the exclusive rights to use said parking area subject to the right of LESSOR for its use in its operation of the Port, which use shall not be inconsistent with LESSEE's use. It is recognized and acknowledged that the business of the Port is commerce and shipping, and any use by the LESSEE of all or any of the Leased Premises shall not interfere with any operations of the Port or its other users, it being agreed that the continued operations of the Port is to have precedence. III LEASEHOLD AND RELATED PAYMENTS The payment for the Leased Premises and other necessaries furnished hereunder to the LESSEE and its Vessel in furtherance of LESSEE's operations shall be as follows: (1) Beginning six (6) months from the date of the approval provided in paragraph V(4) or upon arrival of the Vessel at the Port or upon commencement of any improvements on the Leased Premises, whichever occurs first, and on or before the first day of each month thereafter LESSEE shall pay LESSOR the amount of $18,000 per month in advance until such time as LESSEE's gaming license is issued or twelve (12) months from the date of this Lease Agreement, whichever is first. If LESSEE does not have a gaming license within the time allowed or any extension thereof, then the Lease may, at the option of LESSOR, be extended upon terms mutually agreeable to the parties. In the event an agreement to extend the terms hereof is unattainable, LESSEE shall, at the request of the Port, remove any Vessel from the Leased Premises at LESSEE's expense. Should, after request, the LESSEE fails to so remove the Vessel within 30 days from such request, the LESSOR may do so at LESSEE's expense in 2 3 addition to all other remedies provided under this Lease or by law. (2) Upon obtaining a gaming license as contemplated herein, the annual Rental for gaming operations shall be $500,000 ("Rental") plus five per cent (5%) of the gross annual gaming revenues on the Vessel as defined in the Mississippi Gaming Control Act over $25,000,000.00 ("Percentage Rental"). In addition to the Rental and Percentage Rental set forth above, LESSEE shall also pay monthly to LESSOR three percent (3%) of the gross monthly revenues on all activities other than gaming conducted by LESSEE, and/or its assignees or sublessees or any other persons on the Leased Premises or on the Vessel ("Additional Percentage Rental"). In-house transfers which are presented for payment through internally generated transactions shall be exempt from the 3% gross monthly fees. The Rental shall be paid by LESSEE, in advance, in equal monthly installments of $41,666.66 each on the first day of every month during the lease year. For each month, a calculation of the Percentage Rental, as defined herein, and the Additional Percentage Rental, as defined herein, will be made and the amounts due paid on or before the 10th day of the next month. For such calculation, LESSEE is to submit on or before the 20th day of each month a copy of the monthly revenue reports submitted to the State Tax Commission showing gross gaming revenues as defined by Mississippi Gaming Control Act of 1990, and a report of all other gross monthly revenues from all other activities conducted on the Vessel and the Leased Premises, along with a calculation of the additional Rental due. LESSEE shall provide to LESSOR reasonable access at reasonable times and places to all financial books and records related to the operations contemplated under this Lease regardless of the location of such books and records. Upon reasonable advance notice, LESSEE shall provide reasonable access to all financial books and records of LESSEE's entire operations. LESSEE's entire operations include all activities conducted on the Vessel and the Leased Premises by any person or corporation and the other activities of LESSEE or its affiliated persons or corporations wherever located. Affiliated shall mean a person or corporation who owns ten percent (10%) or more of the common stock of LESSEE or a corporation in which LESSEE owns ten percent (10%) or more of the common stock, or any person or corporation that can exert control over LESSEE or that LESSEE can exert control over or any person or corporation closely connected or associated with 3 4 LESSEE or dependent upon or subordinate to LESSEE. LESSEE shall furnish within three (3) months after the end of LESSEE's fiscal year, a certified audit of all activities conducted on the Vessel and the Leased Premises during that year. LESSOR will accept an annual audit by an independent Certified Public Accountant auditor at LESSEE's expense. If LESSOR has good reason to question the audit, then the LESSOR shall have the right to audit the books. If there is any material discrepancy in the financial information reported in the initial audit, then the cost of such audit will be borne by LESSEE. (3) If LESSEE shall fail to make timely payment of any and all Rentals as set forth hereunder within ten (10) days from the due date thereof, at the discretion of LESSOR, LESSEE will be placed in default as provided herein or LESSEE shall pay in addition to the amount due, 4% of such amount due. Such action by LESSOR shall not waive any other rights provided herein. (4) The property, docking space, parking lot and other property provided by the LESSOR hereunder are necessaries provided to the Vessel which is to be operated and owned by LESSEE and are, therefore, liens upon the vessel pursuant to the Federal Maritime Lien Act, 46 U.S.C. Section 971-975 and liens pursuant to any other federal or state law. This paragraph is a stipulation which may be entered in any court of jurisdiction as evidence of such lien. (5) The obligation of LESSEE to continue payment of all Rental obligations shall continue whether or not the Vessel is out of service for any reason except as otherwise provided herein. During any three year period, LESSEE shall be allowed one (1) period not to exceed sixty (60) days for repairs and renovations to the Vessel. LESSEE shall not be required to pay rent during such repair and renovation period. IV TERM The term of this Lease ("Term") shall be five (5) years. The Term and commencement of LESSEE's obligations to pay rent and other charges shall commence six (6) months from the date of approval provided for in paragraph V(4) or upon arrival of the Vessel at the Port or commencement of improvements on the Leased Premises, whichever occurs first. If LESSEE has complied with all the terms, covenants and conditions of this Lease, as of the expiration of the Primary Term, the LESSEE shall have the option to extend the Lease for three 4 5 (3) renewal periods of five (5) years each under the same terms and provisions of the Lease except the annual Rental for the Leased Premises shall be adjusted and revised yearly for the sixth (6th) through the twentieth (20th) year by an amount equal to the changes in the Consumer Price Index U.S. City Average, all items (hereinafter called "Price Index") as provided in the Leasehold and Related Payment Provision herein. The Price Index shall mean the average for all items shown on the U.S. City Average for all urban consumers, using the years 1982 through 1984 as a base of 100. Said annual Rental for the primary term of the Lease shall be multiplied by a fraction, the numerator of which shall represent the Price Index as it exists for the first month of the renewal period and the denominator shall be the September, 1992, Index. The Rental shall further be subject to the following provisions: (A) The Price Index for the first month of the fifth year of the Primary Term of this Lease shall be designated as the Base Price Index; (B) Promptly after the end of the Primary Term of the Lease and of each year of the extended Lease thereafter, the Rental rate shall be adjusted so that the ratio of the Price Index for the first month following the end of said Lease year to the adjusted Rental charges shall be the same as the ratio of the Base Price Index to the Rental charges in the first year of the Lease; (C) No such adjustment shall reduce the Rental charges below the Rental charges during the initial year of the extended Lease. As soon as practical, after the annual anniversary of each year, LESSOR shall notify LESSEE of such Rental adjustment and upon request provide the supporting data that is the basis for the annual rent for the Leased Premises. To exercise each option to renew, LESSEE shall send, not later than ninety (90) days prior to the date such renewal period is to begin, a written notice to LESSOR at its office in Gulfport of LESSEE's exercise of such renewal option. If LESSEE fails to timely give such notice of exercise of its option, then the option shall have expired and be of no force and effect. V PRE-CONDITIONS FOR LESSEE OPERATIONS Prior to commencing operation of dockside gaming activities permitted and authorized by the Mississippi Gaming Control Act of 1990, the following conditions must be met: 5 6 (1) This Lease Agreement must be executed and in effect. (2) LESSOR must preapprove in writing any Vessel which LESSEE proposes to locate and operate on the Leased Premises. If prior approval is not obtained, LESSEE shall not be allowed to permanently dock and will be required immediately to remove the vessel at its expense. LESSOR may at its discretion, at LESSEE's expense, remove any unapproved Vessel located at the Port by LESSEE. If prior approval is not obtained, the Lease shall automatically terminate as provided for hereunder. (3) Submission of proof satisfactory to the LESSOR that LESSEE has legal ownership or entitlement to the Vessel including a copy of Bill of Sale or other evidence of title or the charter party, if any, showing LESSEE's ownership interest or legal right to the Vessel. (4) LESSEE shall have a maximum of 120 days from the date of this lease in which to obtain approval from the United States Bankruptcy Court for the _________ District of Texas to purchase the vessel "The Pride of Galveston" or to purchase some other vessel acceptable to LESSOR. (5) LESSEE shall submit all data submitted to the Mississippi Gaming Commission for its license or otherwise and all data received from such Commission. By entering into this Lease, LESSEE gives its full consent for LESSOR to review and inspect and to request and receive any information from the Mississippi Gaming Commission, law enforcement agencies or any other agency or group related to LESSEE, its owners, operators, employees or any person or business associated with LESSEE and, if it should be necessary or convenient for the purposes of LESSOR, agrees to execute or have executed any consent forms or other documents which will aid LESSOR in receiving such information. (6) LESSEE shall submit detailed information on the Vessel, including the size, configuration, condition, and maximum occupancy of passengers and the name and present location of the Vessel and all documents reflecting certifications required under the Mississippi Gaming Control Act of 1990 and regulations thereto or required by any other governmental agency. (7) LESSEE shall submit to the LESSOR a copy of LESSEE's gaming license filed with the Mississippi State Gaming Commission. (8) LESSEE shall submit in writing to the LESSOR the type and location of all 6 7 business ventures and operations contemplated for the Vessel and the Leased Premises whether operated by LESSEE or any other person. Prior to commencing any venture or operation, LESSEE must obtain LESSOR's approval. (9) LESSEE shall, with the assistance of a licensed marine surveyor, perform an annual investigation to determine whether maintenance dredging under and around the Vessel and any other area in the harbor is necessary so as to provide adequate water depth and width in the event the Vessel must be removed or relocated as provided in paragraph XVII of the Lease. LESSOR shall receive copies of all dredging reports by the Marine surveyor which shall certify at what location dredging IS necessary to provide an adequate pathway for removal of the Vessel, if necessary. LESSEE at its own expense, shall perform all dredging identified in the report in a timely manner. LESSEE's failure to dredge as required shall result in automatic termination of the Lease as provided hereunder. Whenever possible, LESSOR will allow LESSEE to coordinate its dredging activities with the regular maintenance dredging at the Port. (10) At the same time as the lease payments hereunder begin in accordance with paragraph III(1) above, LESSEE shall deposit $125,000 with LESSOR as security for LESSEE's full performance of every term, covenant, and condition of this Lease. If LESSEE defaults in respect to any term, provision, covenant or condition of this Lease including, but not limited to, payment of any Rentals, the LESSOR may use, apply or retain all or any part of the security deposit for payment of any Rentals in default or for any other sum which the LESSOR may expend or be required to expend by reason of LESSEE's default. LESSEE shall immediately deposit with LESSOR additional sums of money to bring the security amount back to the required level. If LESSEE fully complies with all the terms, provisions and conditions of this Lease, the security deposit or any balance thereof shall be returned to LESSEE after the expiration of this Agreement or any extension hereof. VI RESPONSIBILITY FOR OPERATIONS It is expressly understood and agreed that the LESSOR shall have no obligation or responsibility for the LESSEE's business operations, LESSEE being solely responsible therefor. The LESSOR shall have no obligation to furnish any utilities including, but not limited to, electricity, water, sewer, and gas. However, LESSOR shall provide easements for the necessary 7 8 utilities to be located in the sole discretion of the LESSOR. LESSEE must obtain separate meters for said utility service(s), and LESSEE shall be responsible for maintaining utilities in accord with normal business practice. If some, or all of the utilities cannot be metered separately, then, LESSEE shall deposit with LESSOR an amount to be determined by LESSOR, which shall be in addition to the security deposit required in paragraph V(9) herein, and which will reasonably assure payment for such utility use in the event LESSEE defaults. LESSOR shall have no obligation to furnish services including, but not limited to, garbage or trash pickup, plumbing hookup, pest control, or any other facilities or services, and shall not be required or expected to furnish any equipment or labor to repair, alter, or remedy any defect, inadequacy, or insufficiency in the Leased Premises, LESSEE agreeing to accept the physical condition of the Leased Premises "as is" as of the effective date of this Agreement, except as is otherwise expressly provided. It is the intention of this Lease that LESSOR only furnish the premises described in Article I hereof. VII LESSEE OPERATION REQUIREMENTS The purpose of this Lease is for LESSEE to locate a preapproved Vessel and for construction of preapproved improvements to the Vessel and Leased Premises, and upon issuance of a gaming license, for LESSEE to operate on a continuous day-to-day basis, a dockside gaming operation on the approved Vessel and for LESSEE to operate other preapproved activities on the Leased Premises. After the Lease is executed and all other terms and conditions met, LESSEE may bring the subject Vessel to the Leased Premises or other temporary location approved by LESSOR, to refurbish, repair and construct improvements thereon. LESSOR shall provide LESSEE with a temporary location for making repairs and improvements to the Vessel and for gaming after a gaming license is granted to LESSEE. LESSOR shall give LESSEE up to 12 months from the date LESSEE obtains a gaming license to complete improvements on the Leased Premises and move the Vessel to its permanent location. However, the granting of this 12 month period is contingent upon LESSEE making reasonable progress on the improvements. LESSOR shall have the absolute right to require LESSEE to relocate the Vessel from its temporary location, as necessary for Port operations. 8 9 LESSOR shall provide LESSEE with eight (8) hours notice of LESSOR's intention to require relocation of the Vessel. LESSEE shall operate on a continuous day-to-day basis, except for the time when the Vessel is taken out of service for purpose of drydock for preapproved repairs and as a result of an Act of God as provided for hereunder, but the Vessel shall not be removed for any period longer than 3 months, and during the period said Vessel is not in service Rentals will continue to accrue as provided for in Article III. At no time shall the Vessel be removed from the Leased Premises for repair or drydock unless LESSEE obtains prior written approval for removal and for the time period required. LESSEE shall certify to LESSOR that work permits required under the Mississippi Gaming Act and issued by the Gaming Commission have been duly issued to any person involved in any activity on the Vessel or the Leased Premises including, but not limited to, gaming, restaurant, lounge, shops, etc., and that such permits are in full force and effect. If, however, a work permit by the Gaming Commission is not required for any such person, LESSEE shall perform a background investigation substantially similar to that required for the issuance of a work permit by the Gaming Commission and certify to LESSOR that such an investigation has been performed, that the investigation is substantially similar to that conducted by the State, and that the employee reflects the integrity, fidelity and character necessary to perform the respective duties required in that activity. If information is available to LESSOR which indicates a need for supplemental investigation, LESSEE shall certify that a request for such additional investigation has been made to the Mississippi Gaming Commission, if applicable, or, if applicable, that LESSEE has performed the additional investigation. The result of the investigation shall be certified to LESSOR. The Vessel, the Leased Premises and all activities thereon shall meet and comply with all applicable federal, state, county, municipal and other governmental regulations, if any, which may be applicable. LESSEE shall take all reasonable steps necessary to control noise pollution and to provide adequate crowd control features on the Vessel and Leased Premises. LESSOR has no responsibility to do so but may, in its sole discretion, provide, at the sole expense of LESSEE, additional noise control or crowd control as it deems necessary, which expenses shall not be 9 10 unreasonable. LESSEE shall use commercially reasonable efforts (i) to recruit, hire and train Mississippi residents as and to be employees of LESSEE'S operations, including employees performing management services, (ii) to contract with businesses located in Mississippi, including locally owned and operated businesses ("Mississippi Businesses"), for the construction, renovation, maintenance and repair of improvements related to LESSEE'S operation, (iii) to contract with Mississippi Businesses for the purchase, repair and maintenance of equipment, furnishings and other tangible personal property used in LESSEE'S operation and (iv) to contract with Mississippi Businesses to provide goods and services to LESSEE'S operation. VIII PARKING AREA LESSEE shall, at its own expense, maintain on the Leased Premises adequate parking areas for the LESSEE's employees, suppliers and customers. LESSEE shall at all times during the Lease, at its own expense: (1) Erect and maintain sufficient floodlighting and other means of illumination to illuminate the parking area during all twilight and evening hours; (2) Erect and maintain a fence or other barrier suitable to and approved by LESSOR around the parking and other areas. IX SECURITY LESSEE shall have sole responsibility to provide, at its expense, adequate security for the Vessel and the Leased Premises including security on and off the Vessel and in the parking area. LESSOR has no responsibility to do so but may in its sole discretion, if it determines necessary, require additional security at LESSEE's expense which expense shall not be unreasonable. X MARKETING PLAN Prior to the commencement of LESSEE'S operation, Lessee shall submit to Lessor a marketing plan. Said plan shall describe in detail, the methods by which Lessee intends to attract patrons to LESSEE'S operation. This plan shall specifically address how LESSEE, will work with and coordinate its marketing efforts with local and state tourism groups to promote tourism, entertainment and retirement communities in the State of Mississippi, including the Gulf 10 11 Coast area. XI MAINTENANCE/REPAIR LESSEE shall maintain the Vessel and all portions of the Leased Premises and adjoining areas in a safe, neat and sanitary condition free of dirt, rubbish, and unlawful obstructions. Throughout the term hereof, LESSEE, at its expense shall take good care of, and make all necessary repairs to the Vessel and Leased Premises and all buildings, parking areas, dock facilities, and other improvements, regardless of whether interior or exterior, structural or nonstructural, ordinary or extraordinary, or foreseen or unforeseen. As used in this Article, "repairs" include all necessary replacements, renewals, alterations, additions, and betterments. All repairs made by the LESSEE shall be at least equal in quality and class to the original work. LESSOR has no responsibility to do so but may in its discretion determine whether repairs to the Vessel, Leased Premises and adjoining areas are adequate and acceptable under this Article and may require such repairs that LESSOR, in its sole discretion, determines are appropriate. If repairs are not adequate or acceptable to LESSOR, the LESSOR may, at its sole discretion, take such action as it deems appropriate, and LESSEE shall be liable to and immediately reimburse LESSOR for all of LESSOR's associated costs. If LESSEE fails to reimburse LESSOR, LESSOR may use funds from LESSEE's security deposit. XII IMPROVEMENTS BY LESSEE (1) LESSEE agrees, at its own expense, to cause the following improvements, alterations and additions: (For the provisions of subsections A, B, C, D, and E below, see Exhibit C.) (A) To Berth Area. All such improvements, alternations and additions shall be completed by _____________________. (B) to Landside Area and Facility. 11 12 All such improvements, alterations and additions shall be completed by ______________________. (C) to Parking Area. All such improvements, alterations and additions shall be completed by _______________________. (D) to the Vessel. All such improvements, alterations and additions shall be completed by _______________________. (E) to Other Port Areas. All such improvements, alterations and additions shall be completed by _______________________. (2) LESSEE shall not make any additions, alternations or improvements which exceed $25,000 in or to the Vessel or the Leased Premises without LESSOR's prior written consent. Additions, alterations and improvements shall not be broken into small segments which prevent them to exceed $25,000. Before commencing such alternations, LESSEE shall submit the plans and specifications thereof to LESSOR, for LESSOR's written approval. Plans and specifications shall include but not be limited to the improvements to the Vessel and the Leased Premises including improvements necessary to secure the Vessel at dockside. All work to be done by LESSEE shall be performed in strict accordance with the approved plans and specifications. The aforementioned plans and specifications and LESSEE's work shall comply with all applicable governmental laws, rules, regulations, codes and orders. LESSEE shall at time of completion provide LESSOR with an audited statement as to actual construction costs of said improvements. (3) LESSEE shall at its sole cost and expense pay all fees and obtain all permits from competent governmental authorities and obtain a certificate of completion (or equivalent) and all 12 13 other approvals required to enable it to open for business. LESSEE shall promptly furnish to LESSOR all certificates and approvals required by the governing authorities. (4) All materials used for such improvements, alterations and additions shall be new and both workmanship and materials shall be of first class quality. All architects, engineers, contractors, subcontractors, materialmen and workmen shall be licensed (if required by law) and skilled in their profession and trade. (5) LESSEE shall not permit the accumulation of building supplies, equipment, waste material, or rubbish on the Leased Premises, and during the construction and upon completion shall cause all rubbish, implements, materials, and equipment to be removed from the Leased Premises. If LESSEE shall fail to remove materials, LESSOR, at its option, may remove the debris at LESSEE's expense. (6) LESSOR may place a representative on the job during the course of the construction, at LESSEE's expense, for the purpose of making inspections and insuring that LESSEE and LESSEE's contractors, suppliers and materialmen comply with these requirements. XIII LESSEE'S LIENS LESSEE shall not suffer any mechanic's or materialmen's liens to be filed against the Leased Premises by reason of work, labor, services performed or materials furnished to LESSEE or to anyone holding part of the Vessel or the Leased Premises under LESSEE. If such lien shall at any time be filed against the Vessel or the Leased Premises, LESSEE may contest the same in good faith but notwithstanding such contest LESSEE shall, within thirty (30) days after the filing thereof, cause such lien to be released of record by payment, bond, or order of a court of competent jurisdiction or otherwise. In the event LESSEE shall fail to release of record any such lien within the aforesaid period, LESSOR may (but shall not be obligated to) remove said lien by paying the full amount thereof or by bonding it or by any other method LESSOR deems appropriate, without investigating the validity thereof and irrespective of the fact that the LESSEE may contest the propriety or the amount thereof, and LESSEE, upon demand, shall pay LESSOR the amount so paid in connection with the discharge of said lien together with all LESSOR's expenses incurred in connection therewith including attorneys fees. LESSOR may at its sole discretion waive payment of such liens, and LESSEE may then contest the validity of 13 14 said lien, at LESSEE's own expense. Nothing contained in this Lease shall be construed as a consent by LESSOR to subject the Vessel or the Leased Premises to any lien or liability under the lien laws of the State of Mississippi or otherwise. XIV ASSUMPTION OF EXPANSION EXPENSES Any and all expansion, improvements or expenses on Port facilities which, at the sole discretion of the LESSOR are reasonably necessary as a result of LESSEE's operations under this Lease, shall be made at the expense of LESSEE. In the event LESSOR has entered into lease agreements with other entities whereby said entities will also conduct dockside gaming operation, and the improvement or expansion or expense is reasonably necessary as a result of the common use of all LESSEES, then all expenditures shall be prorated among the LESSEES on the basis of the need for such expenditures caused by each LESSEE. Each LESSEE's pro rata share of the costs and expenses shall be determined by mutual agreement of the LESSEES. Should LESSEES be unable to agree, LESSOR shall determine the allocation in its sole discretion. These expansions, improvements and expenses may include, but are not limited to, the following: (1) Roadways and easements; (2) Parking area; (3) Supplemental security; (4) Fire protection; (5) Utilities - electrical, sewer, gas, water, etc.; (6) Traffic congestion solutions on LESSOR's property; (7) Relocation of navigation apparatuses, including but not limited to range lights. XV CANCELLATION FOR EXPANSION LESSOR shall have the right to cancel this Lease at any time after the expiration of the Primary Term of this Lease for reason of Port expansion of its own facilities to handle expanded shipping and related commerce activities, unrelated to any business or enterprise which may compete with LESSEE's operations, upon the LESSOR giving 12 months written notice to the 14 15 LESSEE. Within the 12 months notice period, LESSEE hereby obligates itself, its employees, agents, subsidiaries, and all others under its control to wholly and totally remove itself from the Leased Premises. In such event, the LESSOR shall be liable to the LESSEE for new improvements and other structures placed on the Leased Premises and constructed by the LESSEE only to the extent of the depreciated value thereof. For purposes of this paragraph, the new improvements and other structures constructed by LESSEE shall be depreciated at the rate of ten percent (10%) per annum minimum depreciation but in any case shall be fully depreciated over the term of this Lease even if to do so requires a higher rate of depreciation. Should it be necessary for the LESSOR to exercise its rights under this Article, LESSOR shall use its best efforts to aid the LESSEE in obtaining property on the Port facility for the relocation of LESSEE's operation, and LESSEE shall have the right of first refusal for any available location on LESSOR's premises which LESSOR determines does not interfere with normal Port operations. If the original location of the LESSEE should later become available for gaming activities, then LESSEE shall have the right of first refusal for such location. XVI LAWS AND REGULATIONS LESSEE shall abide by all applicable Municipal, State, and Federal laws and regulations and the published tariff and rules and regulations of the Mississippi State Port Authority at Gulfport. LESSEE shall not do any act or permit any activity on the Vessel or the Leased Premises or in any operations thereon which would constitute a violation of any law or ordinance. If LESSEE or its officers, directors, shareholders or key employees shall be convicted of the breach of any state, federal or local ordinance, relative to LESSEE's operations which conviction causes the Gaming Commission to suspend or cancel LESSEE's gaming license, said violation shall, at the option of the LESSOR, be sufficient grounds for immediate termination of the Lease and removal of the Vessel at the sole expense of LESSEE. If any permits which have been issued for the operation of the casino, gaming equipment or sale of alcohol on the premises are suspended for a period in excess of 60 continuous days, such suspension shall at the option of LESSOR be sufficient grounds for termination of the Lease and removal of the Vessel as provided hereunder. In the event any law changes or any law is interpreted by a court of competent jurisdiction 15 16 in a manner which renders the gaming operations of the LESSEE legally impossible, in whole or in part, LESSEE or LESSOR may terminate the agreement at its option upon 20 days written notice. LESSEE or LESSOR must exercise this option within 6 months of such change or interpretation or the same shall be null and void. XVII TRAFFIC CONTROL PLAN LESSEE shall submit to LESSOR a traffic control plan. Said plan shall describe, in detail, the method in which LESSEE intends to prevent the traffic associated with LESSEE's operation from interfering with the normal operations of the Port. XVIII INTERRUPTION OF OPERATIONS AND PLAN FOR REMOVAL OF VESSEL LESSEE shall submit to LESSOR a plan for removal of the Vessel for Class 3 hurricane, and said plan shall include the time when removal will commence. The plan must then be approved by the LESSOR. The plan for removal and relocation of the Vessel, in addition to emergency situations, shall also apply for removal and relocation upon the termination of the Lease. The plan shall state the harbor or port, which will accept relocation of the Vessel, and LESSEE must furnish in writing from the receiving harbor or port a statement that it has approved the Vessel for relocation at its harbor and that it will not withdraw such permission when a hurricane has entered the Gulf. If the approving harbor or port withdraws its relocation offer, LESSEE must notify LESSOR immediately and propose an alternative complying plan which must be approved by LESSOR. If the Vessel is incapable of moving under it's own power, LESSEE shall include in the removal and relocation plan a copy of an agreement with a tug company/owner providing that the Vessel will be removed and relocated by said tug owner/operator to the preapproved harbor at the time provided in the plan of removal. Any relocation that is required of the Vessel shall be at the sole expense of LESSEE. To assure performance of relocation in the event of emergency or termination of the Lease, LESSEE shall post a bond or similar security, not to exceed $50,000.00, as determined by LESSOR, to assure LESSOR that LESSEE will remove the Vessel as contemplated herein. If LESSOR shall request LESSEE to remove the Vessel when required hereunder, LESSEE's failure to remove shall 16 17 constitute sufficient grounds for termination of the Lease, and LESSOR may utilize the security to accomplish the removal. Nothing in this provision, however, will operate so as to place any liability upon the LESSOR for damages to or by the Vessel, to the LESSOR, to other vessels, or to any third person, all of which shall be the sole responsibility of LESSEE. Should a casualty, storm, or Act of God result in damages or destruction to the majority of the Vessel or improvements on the Leased Premises, and the Vessel or Leased Premises are rendered inoperable by such casualty, storm or Act of God for a period of thirty (30) continuous days or more, LESSEE shall have the right to suspend this Agreement ten (10) days after giving written notice to the LESSOR until the LESSEE can repair LESSEE's Vessel or improvements to the Leased Premises to such a state that it can reasonably resume operations, provided, however, that such suspension shall not exceed ninety (90) days. LESSEE shall use all reasonable efforts in good faith to repair in a timely manner its Vessel, improvements and/or facilities on the Leased Premises and resume operations as soon as reasonably possible. During the period of such suspension, the Rental payments shall abate, and such suspension shall have the effect of extending the current terms of this Agreement. Failure to resume lease payments within ninety (90) days shall be considered a breach of this Agreement, unless LESSEE can show that the improvements, repair or restoration are under way and proceeding with due diligence but for reasons beyond LESSEE's control the work cannot be completed within the ninety (90) day period. In such case, LESSOR may, upon sufficient proof that LESSEE is using its best efforts to complete the work, agree to allow up to ninety (90) days additional time for continued restoration of the premises. During the time period in which LESSEE is performing restoration and repairs on the Vessel or Leased Premises, LESSOR may use the Leased Premises for Port purposes so long as use does not interfere with repairs. Nothing herein, however, shall abridge, modify, or change the provision of this Lease describing the conditions imposed upon the LESSEE for Breach of Agreement. The repair period allowed in this paragraph shall not be extended by or combined with the repair and renovation period allowed under paragraph III(5) of this Lease. 17 18 XIX INDEMNIFICATION BY LESSEE LESSEE will protect, indemnify, and save harmless the State of Mississippi, its political subdivisions, the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport, and their employees, agents, servants, board members, commissioners, and executive officers and directors from and against all liabilities, obligations, claims, damages, penalties, causes of action, and expenses (including without limitation, attorneys fees) arising or occurring during the term of the Lease or any period during which LESSEE is occupying the Leased Premises by reason of: (1) Any accident, injury or death of person or loss or damage to property occurring on the Leased Premises or Vessel, or arising out of or in any way associated with any activity of LESSEE, its affiliated persons or corporations, employees or assigns, on the Vessel, the Leased Premises, the Port property or otherwise, except to the extent caused by LESSOR's sole negligence or misconduct. (2) Any failure on the part of LESSEE to perform or comply with any of the terms of this Lease; (3) The performance of any labor or services or the furnishing of any materials or other property in respect to the Vessel or the Leased Premises or any part thereof; (4) Any claims for air pollution and/or water pollution or diminution of water quality occurring as a result of any release or disposal of petroleum based products and/or chemicals and/or hazardous substances which occurs in connection with, in any way, LESSEE's operation, which may cause accident, injury, or death of person or loss or damage to property. In case any action, suit or proceeding brought against LESSOR by reason of any such occurrence set forth in this paragraph, LESSEE, upon LESSOR's request, will at LESSEE's expense resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated by LESSEE and approved by LESSOR. The obligation by LESSEE as aforesaid shall survive any termination of this Lease. XX INSURANCE LESSEE agrees to procure and maintain, at its sole cost and expense, during the term of 18 19 this Agreement, insurance of the types and minimum amount, as follows: (1) Workers Compensation Insurance in full compliance with all applicable State and Federal laws and regulations, including a specific endorsement covering liability for Federal Longshoremen's and Harbor Workers' Compensation Act. (2) Employers Liability Insurance in the minimum amounts of $1,000,000.00 per individual claim, covering injury or death to any employee which may be outside the scope of or in addition to liability under any Workers Compensation statute or Federal Longshoremen's and Harbor Workers Compensation Act. (3) Protection and Indemnity Insurance including masters and members of crew with minimum limits of $5,000,000.00 including all provisions of The Jones Act. Any applicable deductible per master or member and/or third party not to be greater than $25,000. (4) Hull Collision Insurance with minimum limits of $5,000,000.00 covering collisions with all objects fixed or floating with deductible per occurrence not greater than $25,000. (5) Commercial General Liability Insurance including Products and Completed Operations covering third party liabilities of the Leased Premises, and the LESSEE's operations anywhere in the Port area with a minimum of $5,000,000.00 Combined Single Limit per occurrence/$ 10,000,000.00 Aggregate for bodily injury or property damage and a deductible not greater than $25,000. (6) Automobile Liability Insurance on all vehicles owned, leased or operated by LESSEE while on Port property including those vehicles which are hired or non-owned and used in the course of the LESSEE's business, with minimum limits of $5,000,000.00 Combined Single Limit per occurrence for bodily injury or property damage. (7) All policies required to be carried under this paragraph shall be written on an occurrence basis, shall name the State of Mississippi, the Mississippi State Port Authority at Gulfport, and the Mississippi Department of Economic and Community Development as additional insureds, and shall provide that the insureds thereon waive subrogation against the State of Mississippi and the said political subdivisions thereof. Said policies shall specifically state that the insurers at risk are primary insurers and that no claim will be made by the insurers that any other insurers of the State of Mississippi, the State Port Authority at Gulfport, or the Mississippi Department of Economic and Community Development are a primary or contributing 19 20 insurer with respect to any liability covered thereby. All such policies shall provide that the State of Mississippi, the State Port Authority at Gulfport and the Mississippi Development of Economic and Community Development are in no way obligated for the payment of the premiums thereon and shall provide that said policies may not be canceled without thirty (30) days prior written notice to the State Port Authority at Gulfport. (8) All such policies shall be issued by insurance companies with a current rating by Best of A-X(10) and which said companies must also be acceptable to the LESSOR. (9) Should LESSEE at any time during the term of this Agreement fail to provide any insurance required herein, the LESSOR may terminate this Agreement after fifteen (15) days written notice to LESSEE or may, but shall not be required to, procure any of the insurance required by this section to be carried by LESSEE, either to protect the LESSOR and/or LESSEE, and the LESSEE shall pay to the LESSOR the costs of any premiums and other costs of procuring said insurance to the LESSOR within fifteen (15) days after demand by the LESSOR. Should LESSEE fail to pay such costs, LESSOR may use the security deposit provided in paragraph V(9) to reimburse such costs. (10) LESSEE shall provide the LESSOR with certificates of insurance required by this Agreement in a form acceptable to the LESSOR evidencing policies of insurance by companies or persons in amounts and with the coverages and endorsements as required by this section. Prior to expiration of any insurance contract as provided herein, LESSEE shall provide to LESSOR certification evidencing renewal of said insurance. (11) LESSEE shall provide to the LESSOR copies of all insurance contracts insuring LESSEE's operations contemplated herein. (12) LESSEE shall provide liquor liability insurance and other insurance typically required for operations or business contemplated by LESSEE on the Vessel or on the Leased Premises in an amount to be approved by LESSOR. XXI CONDITIONS FOR PLACEMENT OF A SIGN BY LESSEE LESSEE may place and maintain on the Port property a sign advertising its business. The content, exact location, materials and style of such sign shall be subject to the LESSOR's absolute right of approval. It is understood and agreed that said sign shall comply with all state 20 21 or local law, rule or ordinance. LESSEE shall, at its expense, take good care of and make all necessary repairs to said sign. In the event LESSEE's sign is damaged, LESSEE shall repair or replace the sign within 60 days. LESSEE shall indemnify and hold LESSOR harmless from and against any liability loss, cost, damage, or expense arising out of the erection, maintenance, existence or removal of the sign, and shall repair any damage resulting from such installation maintenance or removal. Upon termination of this Agreement, LESSEE shall remove the sign and repair all damage caused by such removal. XXII ASSIGNMENT LESSEE shall not assign, sublet, or mortgage or use as collateral for a loan or otherwise convey any interest or right in this Lease Agreement, the Vessel (except for the initial financing but not including additional amounts which may be loaned thereunder), or the Leased Premises during the Initial Term or any extensions or renewals of this Agreement without the prior written consent of the LESSOR, which consent shall not be unreasonably withheld. LESSOR shall have the right to approve of any change in ownership of the Lease, the Leased Premises and/or the Vessel. LESSOR shall have the right to approve any sublease, assignment or any sort of transfer in the Lease Agreement, the Leased Premises or the Vessel and LESSEE's failure to obtain prior approval shall be sufficient grounds for termination of this Lease as provided hereunder. Any attempt by the LESSEE to act otherwise shall render this Agreement null and void at the sole option of LESSOR, and the LESSOR shall become entitled to immediate possession of the Leased Premises, including all improvements thereon. XXIII TARIFF CHARGES This Lease Agreement is subject to the Rules and Regulations and Tariff duly published by the Mississippi State Port Authority. In the event of a conflict between the tariff and this Agreement, the Lease Agreement shall prevail, and conflicting tariff charges are not in addition to Rental payments as set forth herein unless for additional services outside of the rights under this Lease. 21 22 XXIV HOLDING OVER Any holding over after the expiration of the Initial Term or Extended Term, as applicable, shall be subject to the statutory double rent provided for hold over tenants. In all other respects, if LESSEE shall remain in occupancy as a hold-over tenant, LESSEE shall otherwise be subject to the terms and conditions specified herein. Nothing set forth herein shall be construed to authorize any such holding over or to limit LESSOR's remedies in the event thereof. XXV RIGHT OF ENTRY LESSOR or its designee shall have the right to enter the Vessel and Leased Premises for all lawful purposes and to whatever extent necessary or appropriate to enable LESSOR to exercise all of its rights under this Lease. The exercise by LESSOR of its rights to entry hereunder shall not be construed as an eviction of LESSEE, and the rent payable hereunder shall not abate by reason thereof. XXVI DEFAULT AND TERMINATION OF AGREEMENT The occurrence of any of the following events shall constitute default by LESSEE under this Lease: (1) LESSEE's failure to pay any installment of rent or any other obligation hereunder involving the payment of money and such failure shall continue for a period of ten (10) days after the LESSOR gives written notice of such default. (2) LESSEE's willful failure to provide records or accurately report gross revenues as provided for hereunder which such failure shall continue for a period of ten (10) days after the LESSOR gives written notice of such default. (3) LESSEE's failure to comply with any term, provision, or covenant of this Lease, within 10 days after written notice thereof to LESSEE except as specifically provided for herein to the contrary. (4) LESSEE's filing of a Petition seeking bankruptcy protection or being adjudged insolvent. (5) LESSEE deserting or vacating or commencing to desert or vacate the Leased Premises 22 23 and/or LESSEE's removal or attempt to remove the Vessel permanently or temporarily from the Leased Premises without prior written consent of LESSOR, excepting to comply with any state or federal rules or regulations. (6) LESSEE's doing or permitting to be done anything which creates a lien upon the Vessel or the Leased Premises without prior written consent. (7) The subleasing or assigning or any sort of transfer which substantially changes the ownership interest, title or otherwise of the Vessel or any business or venture from the currently approved owner or operator to any other entity or person without prior written consent of LESSOR. (8) LESSEE's failure to comply with any laws of the federal, state, county, municipal or any other governmental authority. (9) Suspension of any permits or licenses for a period in excess of 60 continuous days. (10) Interference with Port shipping and commerce operations by LESSEE its assignees or sublessees. Without waiving any other rights and without any notice or demand whatsoever, LESSOR may take any one or more of the actions permissible at law to insure performance by LESSEE of LESSEE's covenants and obligations under this Lease. LESSEE agrees to reimburse LESSOR on demand for any expenses including attorneys fees which LESSOR may incur in effecting compliance with LESSEE's obligations under this Lease, and LESSEE further agrees that LESSOR shall not be liable for any damages resulting to the LESSEE for such actions. Upon default LESSOR may enter upon and take possession of the Leased Premises and all improvements thereto and continue to demand from LESSEE the monthly Rentals and other charges provided for in this Lease. If a default should occur which is beyond any control of the LESSEE such as passage of a new law which would allow only Mississippians to own any interest in a gaming operation, then LESSEE shall have twelve (12) months time to cure such default. During this time, LESSEE shall pay all Rental and other charges provided in this Lease. 23 24 XXVIII SURRENDER, REMOVAL AND RESTORATION BY LESSEE On the last day of the term or on the sooner termination thereof or as a result of default as provided herein, LESSEE shall: (1) Peaceably surrender the Leased Premises including all improvements thereto, broom clean and in good order and condition and repair except for reasonable wear and tear; and (2) LESSEE shall remove from the Leased Premises all equipment, signs, movable furniture and trade fixtures installed by LESSEE at its expense. Any such property not so removed may, at LESSOR's election and, without limiting LESSOR's right to compel removal thereof by mandatory injunction, the right of which is hereby granted by LESSEE, be deemed to be abandoned by LESSEE to LESSOR. Any damage to the Leased Premises caused by LESSEE in the removal of LESSEE's property shall be repaired by LESSEE at its expense. Title to all alterations, additions, improvements and repairs on the Leased Premises shall vest in LESSOR from the date of installation and the same shall remain on and be surrendered to LESSOR with the Leased Premises as a part thereof without disturbance and without charge. This clause specifically does not apply to the Vessel. XXIX LEGAL EXPENSES: REMEDIES CUMULATIVE If LESSEE breaches or fails to comply with any provision of the Agreement, the LESSEE shall reimburse the LESSOR for all costs, including reasonable attorneys fees, in enforcing the LESSOR's rights under this Agreement. LESSOR's and LESSEE's rights and remedies in the enforcement of this Lease shall be cumulative and may be exercised and enforced concurrently. Any right or remedy conferred upon LESSOR or upon LESSEE tinder this Lease shall not be deemed to be exclusive of any 24 25 other right of remedy LESSOR or LESSEE may have at law or in equity. XXX WAIVER Waiver by LESSOR of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained. No covenant, term or condition of this Lease shall be deemed to be waived unless such waiver shall be in writing signed by LESSOR. XXXI ENTIRE AGREEMENT This Lease and the exhibits attached hereto all of which form a part hereof set forth all the covenants, promises, agreements, conditions and understandings between LESSOR and LESSEE concerning the Leased Premises. There are not oral agreements or understandings between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all provisions, negotiations, arrangements, agreements and understandings, if any, between the parties hereto and with respect to the subject matter hereof and none thereof shall be used to interpret or construe this Lease. Except as otherwise provided for herein no subsequent alteration, amendment, change or addition to this Lease shall be binding upon the LESSOR or LESSEE unless reduced to writing and signed by each of them. XXXII CAPTIONS AND INTERPRETATIONS The captions, section numbers, article numbers and indices appearing in this Lease in no way define, limit, construe or describe the scope or intent of such section or articles of this Lease. The language in all parts of this Lease shall, in all cases, be construed as a part of the whole according to its fair meaning and not strictly for or against LESSOR or LESSEE. Should a court be called upon to interpret a provision hereof, no weight shall be given, nor shall any construction or interpretation be influenced by any presumption of preparation of the Lease by LESSOR or by LESSEE. XXXIII PARTIAL INVALIDITY If any term, covenant, or condition of this Lease or the application thereof to any person or 25 26 circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. XXXIV SUCCESSORS All rights and liabilities herein given to or imposed upon the respective parties hereto shall, except as may otherwise herein be provided, extend to and bind the respective heirs, executors, administrators, successors and assigns of the said parties. No right shall, however, inure to the benefit of any assignee of LESSEE unless the assignment to such assignee has been made in accordance with the provisions set forth in this instrument with respect to such assignment. XXXV SURVIVAL OF LESSEE'S OBLIGATIONS All obligations of LESSEE which by their nature involve performance, and any particular, after the end of the term or after the end of any Extended Term, as applicable, which cannot be ascertained to have been fully performed until after the end of such term or Extended Term, as the case may be, shall survive the expiration or sooner termination of the term or Extended Term, as the case may be. XXXVI NOTICES Any notice required to be given under this Agreement shall be deemed given when deposited in the United States Mail, postage prepaid, certified mail, to the parties at the addresses below: LESSOR: Mississippi State Port Authority at Gulfport Executive Director P.O. Box 40 Gulfport, MS 39502 LESSEE: Gulfside Casinos, Inc. c/o Don Laughlin Riverside Resort Hotel & Casinos 1650 Casino Drive Laughlin, Nevada 89029 26 27 With a copy to: Hugh Keating, Esquire Registered Agent of Gulfside Casinos, Inc. P.O. Drawer W Gulfport, MS 39502 XXXVII GOVERNING LAW This Lease shall be governed by, construed, and enforced in accordance with the laws of the State of Mississippi. WITNESS OUR SIGNATURES, this the 20th day of August ---------- -----------------, 1992. - ATTEST: GULFSIDE CASINOS, INC. [SIG] By: [SIG] ------------------------------------ Title ATTEST: MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT [SIG] By: /s/ CHARLES WEBB ------------------------------------ Charles Webb, President ATTEST: MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT [SIG] By: /s/ JIMMY HEIDEL ------------------------------------ Jimmy Heidel, Executive Director 27 28 [SEAL] [MAP] MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT EXHIBIT "A" PARCEL: BERTH AREA LEASED PREMISES (4.1677 A.+/-) PARCEL NO. 1 Sht. 1 of 6 29 LEGAL DESCRIPTION PARCEL 9.1 BERTH AREA That certain parcel of land and property situated and being in Section 9, T8S,R11W City of Gulfport, Harrison County, Ms., and more particularly described as follows: Commencing at the intersection of the center line of the L. & N. R.R. (CSX) R.O.W. and the G. & S.I. R.R. (I.G.G.R.R.) R.O.W.; thence 500 degrees 14'16"W a distance of 830.87 ft. to a point; thence S31 degrees 05'44"E a distance of 619.92 ft. to a point on the South R.O.W. of U.S. Hwy. 90; thence N70 degrees 21'12"E a distance of 50.07 ft. to a point; thence S36 degrees 57'19"E a distance of 108.66 ft. to a point; thence S69 degrees 14'55"E a distance of 60.0 ft. to a point; thence N67 degrees 04'35"E a distance of 41.35 ft. to a point; thence S32 degrees 09'04"E a distance of 2378.70 ft. to a point; thence N57 degrees 50'56"E a distance of 100.0 ft. to a point; thence S31 degrees 52'58"E a distance of 537.81 ft. to a point; thence S31 degrees 53'29"E a distance of 548.21 ft. to a point; thence S57 degrees 52'12"W a distance of 272.32 ft. to the POINT OF BEGINNING; thence S57 degrees 52'12"W a distance of 133.65 ft. to a point; thence S32 degrees 01'15"E a distance of 998.46 ft. to a point; thence N57 degrees 52'12"E a distance of 200.0 ft. to a point; thence N34 degrees 54'51"W a distance of 600.75 ft. to a point; thence N36 degrees 43'07"W a distance of 16.38 ft. to a point; thence N57 degrees 50'56"E a distance of 30.21 ft. to a point; thence N36 degrees 48'37"W a distance of 256.86 ft. to a point; thence N51 degrees 43'38"W a distance of 128.8 ft. to the point of beginning. Said parcel contains 0.3828 acres, more or less, of fast lands and 3.7849 acres, more or less, of bottom lands for a total of 4.1677 acres, more or less. [SIG] James R. Clarke, R.L.S. July 13, 1992 [SEAL] EXHIBIT "A" PARCEL NO. 1 Berth Area Sht. 2 of 6 92-7-63 30 [SEAL] [MAP] MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT EXHIBIT "A" PARCEL: LANDSIDE AREA & FACILITY LEASED PREMISES (1.7291 A.+/-) PARCEL NO. 2 Sht. 3 of 6 31 [SEAL] [MAP] MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT EXHIBIT "A" PARCEL: PARKING AREA LEASED PREMISES (4.8819 A.+/-) PARCEL NO. 3 Sht. 5 of 6 32 LEGAL DESCRIPTION OF PARCEL No. 3: PARKING AREA That certain parcel of land and property situated and being in Section 9, T8S, R11W, City of Gulfport, Harrison County, Ms., and more particularly described as follows: Commencing at the intersection of the center line of the L. & N. R.R. ( CSX ) R.O.W. and the G. & S.I. R.R. ( I.G.G.R.R. ) R.O.W.; thence SOO degrees 14' 16" W a distance of 830.87 ft. to a point; thence S31 degrees 05' 44" E a distance of 619.92 ft. to a point on the South R.O.W. of U.S. Hwy. 90; thence N70 degrees 21' 12" E a distance of 50.07 ft. to a point; thence S36 degrees 57' 19" E a distance of 108.66 ft. to a point; thence S69 degrees 14' 55" E a distance of 60.0 ft to a point; thence N67 degrees 04' 35" E a distanc of 41.35 ft. to a point; thence S32 degrees 09' 04" E a distance of 2378.70 ft. to a point; thence N57 degrees 50' 56" E a distance of 100.0 ft. to a point; thence S31 degrees 52' 58" E a distance of 537.81 ft. to the POINT OF BEGINNING; thence S77 degrees 02' 46" E a distance of 295.74 ft. to a point; thence S32 degrees 11' 47" E a distance of 253.02 ft. to a point; thence S13 degrees 56' 25" W a distance of 164.83 ft. to a point; thence S32 degrees 06' 40" E a distance of 353.35 ft. to a point; thence S57 degrees 50' 56" W a distance of 300.72 ft. to a point; thence N32 degrees 09' 04" W a distance of 4.74 ft. to a point; thence N36 degrees 48' 37" W a distance of 256.86 ft. to a point; thence N51 degrees 43' 38" W a distance of 128.8 ft. to a point; thence N57 degrees 52' 12" E a distance of 272.32 ft. to a point; thence N31 degrees 53' 29" W a distance of 548.21 ft. to the point of beginning. Said parcel contains 4.8819 acres, more or less. /s/ JAMES R. CLARKE ----------------------------- James R. Clarke, R.L.S. July 13, 1992 [SEAL] EXHIBIT "A" PARCEL NO. 3 Parking Area Sht. 6 of 6 92-7-63 33 EXHIBIT "C" Article XII, IMPROVEMENTS BY LESSEE, are as follows: (A) TO BERTH AREA: Prior to commencing gaming at dockside, LESSEE will secure all necessary dredging permits and contract to dredge the permanent mooring area to accommodate the vessel. Mooring dolphins will be installed to secure the vessel. Concrete and timber piers will be constructed to handle the anticipated loads, plus a safety factor, metal gang-ways will interconnect piers to vessels and will be designed to service the anticipated loads plus a safety factor. Water, sewer, telephone, power and television utility connections will be connected to the vessel and supported from pier structure. Plans and specifications will be submitted to the Mississippi State Port Authority for review and approval in accord with the applicable provisions of the lease. All such improvements, alterations and additions shall be completed within twelve (12) months from date of receipt of gaming license. (B) TO LAND SIDE AREA AND FACILITY: LESSEE will install a covered unloading/loading canopy and walkway to protect patrons from inclement weather. A dining and entertainment complex consisting of at least twenty thousand (20,000) square feet will be constructed in conformity with all applicable local, state and federal regulations and designed and constructed in such a manner as to withstand hurricane winds but be readily demolished and removed when necessary. Landscaping, area lighting and a decorative gazebo will be installed to compliment the vessel. The canopy, covered walkways, landscaping, area lighting and gazebo will be constructed within twelve (12) months from the date of the issuance of a gaming license. All other such improvements, alterations and additions shall be completed within five (5) years from the date of issuance of a state gaming license. Plans and specifications will be submitted to the Mississippi State Port Authority for review and approval in accord with the applicable provisions of the lease. (C) PARKING AREA: LESSEE will make the following improvements to the leased area for patron parking: Sub-surface draining systems which comply with all applicable local, state and federal regulations and requirements for storm water collection and release on property owned by the Mississippi State Port Authority. Asphalt pavement for parking of automobiles and buses in such a manner so as to allow the use of that area for tractor trailer parking and maneuvering in the event LESSOR shall have use of the property in the future as provided for in the Lease. Area lighting which will meet or exceed all applicable local, state and federal regulations. Paving, striping and legends and traffic signed to direct pedestrians and vehicles. Striping will include handicap spaces as required by all local, state and federal laws and regulations. Plans and specifications will be submitted to the Mississippi State Port Authority for review and approval in accord with the applicable provisions of the lease. All such improvements, alterations and additions shall be completed prior to the Page 1 of 2 pages 34 commencement of gaming operations open to the public. (D) TO THE VESSEL: For any Vessel preapproved in accordance with this lease, all necessary improvements, alterations and additions shall be completed prior to the commencement of gaming operations open to the public. Plans and specifications will be submitted to the Mississippi State Port Authority for review and approval in accord with the applicable provisions of the lease. (E) TO OTHER PORT AREAS: See applicable lease provisions. Page 2 of 2 pages EX-10.P 4 AMENDMENT TO LEASE AND APPROVAL OF STOCK PURCHASE 1 EXHIBIT 10(p) STATE OF MISSISSIPPI COUNTY OF HARRISON AMENDMENT TO LEASE AND APPROVAL OF STOCK PURCHASE WHEREAS, the State of Mississippi, through its duly authorized agencies, the Mississippi State Port Authority at Gulfport, and the Mississippi Department of Economic and Community Development, hereinafter referred to as Lessor, entered into a lease agreement with Gulfside Casinos, Inc., hereinafter referred to as Lessee, providing for the leasing of certain property at the Mississippi State Port Authority at Gulfport, Mississippi (the "Lease"); and WHEREAS, Article XXII of the Lease provides that Lessor has the right to approve of any change of ownership of Gulfside Casino, Inc.; and WHEREAS, Stanley B. McDonald purchased a majority of the outstanding shares of stock in Gulfside Casino, Inc. from Don Laughlin; and WHEREAS, Lessor does desire to give its approval of the acquisition of the majority of Gulfside Casino, Inc., stock by Stanley B. McDonald; and WHEREAS, Lessee changed its name to Gulfside Casino, Inc., evidenced by amended Articles of Incorporation filed on October 5, 1992; and WHEREAS, the parties hereto are desirous of amending the Lease Agreement in certain particulars; NOW, THEREFORE, in consideration of the mutual covenants and stipulations contained in the Lease, the parties do mutually contract and agree as follows: 1. The State of Mississippi, acting through its duly authorized agencies, the Mississippi State Port Authority at Gulfport and the Mississippi Department of Economic and Community Development, does hereby approve the purchase of a majority of the shares of Gulfside Casino, Inc.'s stock by Stanley B. McDonald. 2. The Lessee hereunder shall be Gulfside Casino, Inc., a Mississippi Corporation. 3. The effective date of said Lease between Lessor and Gulfside Casino, Inc. shall be October 5, 1992. 4. The Lease shall be amended as follows: 2 XXII NOTICES LESSEE: Gulfside Casino, Inc. c/o Stanley B. McDonald Suite 2200, 520 Pike Street Seattle, WA 98101 and Hugh D. Keating, Registered Agent Dukes, Dukes, Keating & Faneca, P.A. P.O. Drawer W Gulfport, MS 39502 WITNESS OUR SIGNATURES, this the 25th day of October, 1992. GULFSIDE CASINO, INC. BY: [SIG] ---------------------------------- TITLE: President MISSISSIPPI STATE FORT AUTHORITY AT GULFPORT BY: [SIG] ---------------------------------- TITLE: President MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT BY: [SIG] ---------------------------------- TITLE: ---------------------------------- EX-10.Q 5 SECOND LEASE AMENDMENT 1 EXHIBIT 10(q) STATE OF MISSISSIPPI COUNTY OF HARRISON SECOND LEASE AMENDMENT This Second Lease Amendment entered into between the State of Mississippi appearing herein by and through its duly authorized agencies, the MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT and the MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT, hereinafter collectively referred to as LESSOR and Gulfside Casino, Inc., hereinafter referred to as LESSEE. WHEREAS, on August 20, 1992, LESSOR and LESSEE entered into a certain Lease Agreement ("Lease"); and on October 28, 1992, LESSOR and LESSEE entered into a Lease Amendment thereto; and WHEREAS, LESSOR and LESSEE are desirous of again amending said Lease in certain particulars; NOW THEREFORE, in consideration of the mutual covenants and stipulations contained in the Lease, the parties do mutually contract and agree as follows: 1. ARTICLE I - LEASED PREMISES Article I - Leased Premises is amended as follows: (a) Exhibit "A", which contains the description of the LEASED PREMISES, is replaced with Exhibit "A-1" attached hereto and incorporated herein by reference, which contains the revised description of the LEASED PREMISES, which reflects the agreement that the Vessel contemplated hereunder will be docked at the north end of the main ship harbor rather than on the southwest end of the East Pier. However, in the event that LESSEE is unable to obtain the necessary permits and approvals for the dredging and mitigation required for the location of the LESSEE on the LEASED PREMISES described in Exhibit "A-1", the premises described in Exhibit "A" shall once again become the LEASED PREMISES. (b) The following paragraph shall be added as the new second paragraph of Article I - Leased Premises: 1 2 "LESSEE agrees to acquire the leasehold interests currently held by the Center of International Seamen and Truckers, Inc., which is the subject of a Lease Agreement with LESSOR dated April 1, 1992 for the sum of One Hundred Ninety Thousand Dollars ($190,000.00), and the leasehold interests of I.T.O. Corporation which is the subject of a lease agreement with LESSOR dated September 14, 1990 for a sum not to exceed Two Hundred Fifty Thousand Dollars ($250,000.00). These acquisitions shall be completed by July 1, 1993 or within ten (10) days of LESSEE's receipt of the permits and approvals for the dredging and mitigation required for the location of LESSEE to the LEASED PREMISES described in Exhibit "A-1", whichever is later. Once said acquisitions are complete, the above described properties will become part of the LEASED PREMISES. LESSEE's failure to acquire the referenced leasehold properties shall at the option of the LESSOR constitute a default under the Lease." (c) The following language is added as a new last paragraph to Article I of the Lease Agreement: "If LESSOR elects to utilize the southwest end of the East Pier for a dockside gaming operation and if LESSEE has fully complied with the terms and conditions of this Lease, LESSEE shall have the exclusive right to place a dockside gaming operation at its former location as described in Exhibit "A". Said right shall expire five (5) years from the date of October 5, 1992. The exercise of such right shall be subject to the following conditions: (a) LESSOR shall notify LESSEE in writing of its intent to lease the above-described location for use as a dockside gaming operation. 2 3 LESSEE must notify LESSOR within thirty (30) days from the date of receipt of LESSOR's notice of intent to lease for dockside gaming purposes of LESSEE's acceptance to lease said location. (b) The new lease agreement shall contain substantially the same terms and conditions as contained in this Lease Agreement as existed prior to the Second Amendment set forth herein. (c) If LESSEE declines to lease said location or fails to reply to LESSOR's notice, LESSOR may negotiate for the lease of said location with other interested parties. Notwithstanding the foregoing, LESSOR is under no obligation to lease said location to LESSEE or to a third party during the five (5) year period specified above or at any other time." 2. ARTICLE 11 - USE OF PREMISES The following language shall be added to the second paragraph of Article II: "Gulfport Towing Company, Inc. shall have the right to utilize the roadway included in the description of the LEASED PREMISES contained in Exhibit A-1, for ingress and egress to its leased premises which is the subject of the lease agreement between Gulfport Towing Company, Inc. and LESSOR dated July 30, 1983." 3 4 3. ARTICLE IV - TERM The following paragraph is added immediately prior to the second to the last paragraph of Article IV - Term of the Lease Agreement: "In addition to the three (3) renewal periods of five (5) years each, LESSEE shall have the option to further extend the Lease for an additional period of ten (10) years if LESSEE, within the first ten (10) years of this Agreement, constructs, on the Leased Premises or within the city limits of Gulfport, Mississippi, a Hotel with a minimum of 350 units, and has complied with all terms, covenants and conditions of the Lease. If such renewal option is exercised, the Lease term may be extended under the same terms and provisions of this Lease Agreement except that the annual Rentals for the Leased Premises shall be adjusted and revised yearly by an amount equal to the changes in the Consumer Price Index U.S. City Average all items, in the manner set forth above." 4. ARTICLE VII - LESSEE'S OPERATION REQUIREMENTS (a) The following sentences shall be added to paragraph 3 of Article VII: "In the event LESSEE is unable to obtain the necessary permits and approvals for the dredging and mitigation required for the location of the LESSEE on the LEASED PREMISES described in Exhibit "A-1", LESSEE shall have the remaining portion of the above-described twelve (12) month period to locate the Vessel to LEASED PREMISES described in Exhibit "A". However, in no instance shall LESSEE have less than six (6) months from the date LESSEE receives written notification from the proper governmental agencies of LESSEE's inability to obtain said permits and approvals to move the Vessel to the LEASED PREMISES described in Exhibit "A". LESSEE shall, 4 5 within five (5) days of the receipt of said notification, provide LESSOR with a copy thereof. LESSEE's right to move to the Exhibit "A-1" location shall expire when the permits thereafter are granted or when the Vessel is moved to the Exhibit "A"location, whichever may first occur." (b) The following language shall be added as the new paragraphs 9 and 10 of Article VII: "LESSEE shall have the right to dredge and fill portions of the Berth Area south of the fast land, all of which is described in Exhibit "A-1". Prior to performing any dredging or filling, LESSEE shall obtain written approval from LESSOR, which shall specifically state which portions of the Berth Area may be dredged or filled subject to the appropriate permits or approvals required by law. All fill must be contained behind sheet pile to prevent the reliction of such fill. Said dredging and filling shall not encroach on Dole's and Chiquita's existing berthing areas. As provided in this Lease Agreement, LESSEE is required to obtain all permits and approvals required or necessary in connection with dredging, filling and mitigation. However, LESSOR will use its reasonable efforts to assist LESSEE in obtaining the necessary permits and approvals to facilitate LESSEE's relocation to its permanent site. LESSOR agrees to allow LESSEE to utilize LESSOR's name in the attempt to obtain such approvals and permits and to utilize LESSOR's mitigation site. LESSOR's agreement to assist shall in no way relieve LESSEE of its sole obligation and duty to obtain such permits and approvals." (c) The following language shall be added as the last five (5) paragraphs of Article VII: 5 6 "LESSOR shall, if required by law or any regulatory agency with jurisdiction, remove, cleanup and cure at its expense any and all hazardous waste, toxic or non-toxic substances and materials or contaminants of type or nature whatsoever, known or unknown, which existed prior to LESSEE's entry into use and possession of the Leased Premises described in Exhibit "A-1". LESSEE covenants that it will ensure that it is in compliance with environmental laws, including laws that impose cleanup obligations upon termination of this Lease. LESSEE further covenants that it will limit its use of the Leased Premises to activities disclosed herein, and shall at all times conduct its operations as contemplated herein so as not to release hazardous substances or subject LESSOR to cleanup costs. LESSEE shall not without prior written consent of LESSOR, install any tanks or equipment containing asbestos or PCBs. LESSEE shall comply with all environmental laws and obtain all necessary permits. All environmental permits shall be issued in the name of LESSEE. If any release of hazardous substances shall occur during the term of this Lease, LESSEE shall notify LESSOR of any releases, although LESSEE shall remain responsible for reporting any releases to the appropriate governmental agency. LESSEE shall provide to LESSOR a copy of any environmental reports, studies or analyses with regard to the Leased Premises. LESSOR shall, at its option, at termination of this Lease, request LESSEE to perform an environmental assessment of the Leased Premises to establish whether adverse environmental conditions were caused by the LESSEE and 6 7 therein require LESSEE at its expense to perform approved cleanup of the Leased Premises. LESSEE shall assume full responsibility to pay for and implement any investigation, cleanup, or other response action required in relation to any release of hazardous substances or other environmental condition during the term of this Lease. Any response action required shall be performed to the satisfaction of LESSOR and in compliance with law and regulatory agencies." 5. ARTICLE XII - IMPROVEMENTS BY LESSEE (a) The following new paragraph "(7)" shall be added to Article XII of the Lease Agreement: "(7) LESSEE shall have the right to construct a small marina in the Berth Area south of the fast land, all of which is described in Exhibit "A-1" to be used in conjunction with LESSEE's gaming operation. Before commencing construction of said marina, LESSEE must obtain LESSOR's written approval of the size and location thereof, and must obtain all appropriate and necessary permits or approvals therefor. LESSOR shall also have the right, as provided in paragraph (2) of this Article, to approve the plans and specifications of the marina. LESSEE shall not be required to utilize the LESSOR's linehandlers to assist vessel(s) which may berth at said marina. However, if LESSEE utilizes LESSOR's linehandlers, LESSEE shall pay the applicable tariff charge for such services. Said marina shall not in any way interfere with the use of the Port for commerce and shipping." 7 8 (b) Notwithstanding the provisions herein, the second sentence of the first paragraph of Section (B) of Exhibit "C", which provides for the construction of a dining and entertainment complex, is hereby deleted in its entirety. 6. ARTICLE XVIII - INTERRUPTION OF OPERATIONS AND PLANS FOR REMOVAL OF VESSEL The last sentence of the first paragraph of Article XVIII of the Lease Agreement is hereby amended as follows: "LESSEE's failure to remove the Vessel shall at option of LESSOR constitute sufficient grounds for termination of the Lease, unless LESSEE has obtained written approval from the Civil Defense allowing the Vessel to remain at the Port." 7. ARTICLE XXII - ASSIGNMENT (a) The following language is added as a new second paragraph to Article XXII: "It is LESSOR's understanding that LESSEE is negotiating to sub-let a portion of Dole Fresh Fruit Company's ("Dole") leasehold property at the Port. LESSOR will not participate in such negotiations, but will consider a request for any such sublease in strict accordance with the lease agreement between Dole and LESSOR." (b) The following additional language is added as a new third paragraph to Article XXII: "LESSOR does hereby ratify and approve the substitution, transfer, conveyance and assignment of the LESSEE's right, title and interest under the Lease Agreement dated August 20, 1992, and effective October 5, 1992, and all amendments thereto, to Gulfside Casino Partnership, a Mississippi general partnership, comprised of Gulfside Casino, 8 9 Inc., a Mississippi corporation, and Patrician, Inc., a Nevada corporation, authorized to transact and conduct business in the State of Mississippi." 8. ARTICLE XXXVI - NOTICES This Article is hereby amended to provide that notice to the LESSEE shall be deemed given when deposited in the United States mail, postage prepaid, certified mail, to the parties at the addresses below: LESSOR: Mississippi State Port Authority at Gulfport Executive Director P.O. Box 40 Gulfport, MS 39502 LESSEE: Gulfside Casino Partnership c/o Pete Cladianos, Jr. P.O. Box 1600 Gulfport, MS 39502 With copy to: Hugh D. Keating, Attorney Gulfside Casino Partnership P.O. Drawer W Gulfport, MS 39502 All terms and conditions under the original Lease Agreement and the Amendment dated October 28, 1992 which have not been amended shall remain unchanged and remain in full force and effect. WITNESS OUR SIGNATURES, this the 12th day of May 1993. ATTEST: MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT, LESSOR [SIG] By: /s/ JAMES B. HEIDEL -------------------------- James B. Heidel Executive Director ATTEST: MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT, LESSOR [SIG] By: /S/ DOUG MEDLEY -------------------------- Doug Medley President 9 10 ATTEST: GULFSIDE CASINO, INC., LESSEE [SIG] By: [SIG] -------------------------- Title: -------------------------- ATTEST: GULFSIDE CASINO PARTNERSHIP, SUBSTITUTE LESSEE [SIG] By: [SIG] -------------------------- Title: -------------------------- 10 11 EXHIBIT "A-1" HORSESHOE LEASE AREA [MAP] 12 LEGAL DESCRIPTION HORSESHOE LEASE AREA B & M NO. 1736 A parcel located in Section 9, Township 8 South, Range 11 West, City of Gulfport, Harrison County, Mississippi, more particularly described as follows: BEGINNING at the intersection of the South right-of-way of U.S. Highway 90 and the East right-of-way of Mid-South Railroad and thence N 70 degrees 21' 12" E along said South right-of-way for a distance of 66.73 feet; thence S 06 degrees 18' 29" W for a distance of 1119.44 feet; thence N 59 degrees 01' 22" E for a distance of 372.54 feet; thence S 30 degrees 58' 38" for a distance of 557.82 feet; thence S 07 degrees 19' 22" W for a distance of 539.39 feet; thence S 45 degrees 01' 03" E for a distance of 256.07 feet to the North limits of the Commercial Harbor of the Mississippi State Port at Gulfport; thence S 59 degrees 01' 22" W along said North limits for a distance of 650.07 feet; thence N 30 degrees 58' 38" W along said North limits for a distance of 269.31 feet; thence S 59 degrees 01' 22" W along said North limits for a distance of 178.10 feet to the East right-of-way of Mid-South Railroad; thence along said East right-of-way the following seven calls: N 27 degrees 07' 21" W for a distance of 63.00 feet; thence along a curve to the right having a radius of 412.50 feet for a distance of 203.99 feet; thence N 01 degrees 12' 39" E for a distance of 46.14 feet; thence along a curve to the right having a radius of 762.50 feet for a distance of 177.39 feet; thence N 14 degrees 32' 25" E for a distance of 177.70 feet; thence along a curve to the left having a radius of 1197.71 feet for a distance of 172.09 feet; thence N 06 degrees 18' 29" E for a distance of 1481.55 feet to the South right-of-way of U.S. Highway 90 and the POINT OF BEGINNING. The above described parcel contains 11.1 acres, more or less, of fast lands and 11.1 acres, more or less, of bottom lands for a total of 22.2 acres, more or less. Revised 4/21/93 EX-10.R 6 THIRD LEASE AMENDMENT 1 EXHIBIT 10(r) STATE OF MISSISSIPPI COUNTY OF HARRISON THIRD-LEASE AMENDMENT This Third Lease Amendment entered into between the State of Mississippi appearing herein by and through its duly authorized agencies, the MISSISSIPPI DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT and the MISSISSIPPI STATE PORT AUTHORITY AT GULFPORT, hereinafter referred to as LESSOR and Gulfside Casino Partnership d/b/a Copa Casino, hereinafter referred to as LESSEE. WHEREAS, on August 20, 1992, LESSOR and LESSEE entered into that certain Lease Agreement ("Lease"); and on October 28, 1992, LESSOR and LESSEE entered into a Lease Amendment thereto; and on May 12, 1993, LESSOR and LESSEE entered into a Second Lease Amendment thereto; and WHEREAS, LESSOR and LESSEE are desirous of again amending said Lease in certain particulars; NOW, THEREFORE, in consideration of the mutual covenants and stipulations contained in the Lease, the parties do mutually contract and agree as follows: 1. ARTICLE I - LEASED PREMISES (a) The first sentence of the second paragraph of Article I - Leased Premises - as amended by the Second Lease Amendment dated May 12, 1993, shall be amended as follows: "LESSEE has acquired the leasehold interest formerly held by the Center of International Seaman and Truckers, Inc., which was subject to the lease agreement with LESSOR dated April 1, 1992 for the sum of One Hundred Ninety Thousand Dollars ($190,000), and LESSEE agrees to acquire the leasehold interest of I.T.O. Corporation which is the subject of a lease agreement with LESSOR dated July 10, 1985 for an amount equal to the cost associated with the relocation and reconstruction of existing office facilities or construction of new office facilities for I.T.O. Corporation on, and to the property described in Exhibit "I" attached hereto and incorporated herein by reference. (b) The last two sentences of section (b) of Article I - Leased Premises of the Second Lease Amendment dated May 12, 1993, are hereby deleted and two (2) new paragraphs are added as follows: "The Lessee has paid the sum of $190,000 to the Center of International Seamen and Truckers, Inc. As a result, the leasehold interests of said Center of International Seamen and Truckers, Inc. described in the lease dated April 1, 1992, has been and is hereby canceled and is hereby transferred and leased unto the LESSEE herein which now constitutes part of the Leased Premises." "Once the relocation and reconstruction or new construction for the I.T.O. Corporation offices facilities is completed and accepted by the LESSOR, whichever the case may be, the LESSOR shall immediately re-enter into possession of the Leased Premises described in that certain Lease Agreement dated July 10, 1985, between I.T.O. Corporation and the LESSOR herein and LESSOR shall cause I.T.O. Corporation to vacate and surrender the quiet use, enjoyment and possession of the Leased Premises described therein. Immediately thereafter, LESSOR shall provide LESSEE with notice that said Leased Premises have been vacated and abandoned by I.T.O. Corporation and such premises shall be and hereby are granted, conveyed, and leased unto the LESSEE herein and shall become part of the Leased Premises." 2 2. ARTICLE IV - TERM (a) The first sentence of the first paragraph of Article IV - TERM as stated in the original Lease Agreement dated August 20, 1992 shall be amended as follows: "The term of this Lease ("Term") shall be seven (7) years." (b) The first sentence of the second paragraph of Article IV - TERM as stated in the original Lease Agreement dated August 20, 1992 shall be amended as follows: "If LESSEE has complied with all the terms, covenants and conditions of this Lease, as of the expiration of the Primary Term, the LESSEE shall have the option to extend the Lease for three (3) renewal periods of five (5) years each under the same terms and conditions of the Lease except the annual rental for the leased premised shall be adjusted and revised yearly for the eighth (8th) through the twenty-second (22nd) year by an amount equal to the changes in the Consumer Price Index U.S. City Average, all items (hereinafter called "Price Index") as provided in the Leasehold and Related Payment provision herein." 3. ARTICLE III - LEASEHOLD AND RELATED PAYMENTS The following sentence shall be added as the new second sentence of the first paragraph of Section 2 of Article III - LEASEHOLD AND RELATED PAYMENTS; "During the 6th and 7th year of the Primary Term, the annual Rental shall be adjusted and revised yearly by an amount equal to the Consumer Price Index in the manner set out in Article IV - Term." All terms and conditions under the original Lease Agreement and the Amendments thereto which have not been amended by this Agreement shall remain unchanged and remain in full force and effect. WITNESS OUR SIGNATURES, this the 21st day of June, 1994. ATTEST: Mississippi Department of Economic and Community Development [SIG] By: /s/ James B. Heidel ------------------------------- James B. Heidel Executive Director ATTEST: Mississippi State Port Authority at Gulfport [SIG] By: /s/ H. E. Blakeslee ------------------------------- H. E. Blakeslee ATTEST: Gulfside Casino Partnership ------------------------------ [SIG] By: Patrician, Inc., General Partner Name: /s/ Pete Cladianos, Jr. ------------------------------- Pete Cladianos, Jr. Title: President EX-13 7 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 LOGO LOGO LOGO 1996 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 20 table games, two keno games and 690 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 three cocktail lounges. The Company's facilities also include a gift shop, a video arcade, a beauty/barber shop and a liquor store, each operated by third parties, a health club, a swimming pool and over 10,000 square feet of convention and meeting space which can seat up to 650 people. The Company maintains six parking areas on its main hotel/casino property and adjacent to it, including two parking garages, with a total combined capacity for approximately 1,000 vehicles. The Company's property holdings also include a .5 acre lot, located one-half block from the hotel/casino site, used for the Company's personnel office and for storage and several smaller properties located in Reno aggregating approximately .6 acres. The Company's Reno hotel/casino operations are conducted 24 hours a day every day of the year. Although the Company offers, on a very limited basis, complimentary hotel accommodations to select customers, no group arrangements known as "junkets" are conducted. GULFPORT, MISSISSIPPI PROPERTIES AND OPERATIONS The Copa Casino, which is owned and operated by Gulfside Casino Partnership ("GCP"), commenced operations in September 1993. The three partners in Gulfside Casino Partnership, Patrician, Inc. ("Patrician"), Gulfside Casino, Inc. ("GCI") and Artemis, Inc. ("Artemis") are all wholly owned by the Company. The Copa Casino is located aboard a 500 foot cruise ship owned by the partnership. In Mississippi, all gaming facilities must be constructed on floating facilities on or juxtapositional to approved navigable waterways. Such facilities need not cruise into the waterways and, as such, become permanently moored as dockside gaming facilities. The Copa Casino is also permanently moored. The Copa Casino consists of approximately 24,000 square feet of gaming area located on two decks. The Copa offers 717 slot machines and 26 table games, including craps, roulette, blackjack, caribbean stud, let it ride and big six. In addition, the facility also includes four 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. 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 - -------------------------------------------------------------------------------- 1996 was a difficult year in which we achieved some satisfaction in the midst of numerous frustrating events. In Mississippi, and despite much adversity, it appears that we have been successful in achieving profitable operating results from the Copa Casino. This is due, in part, to marketing efforts to expand our customer base and to attract and retain repeat business. Our efforts to control costs have also contributed to improved Copa profitability. Unfortunately, achieving profitable operating results at the Copa has been somewhat overshadowed by a dispute and lawsuit with our landlord, the Mississippi State Port Authority. We have been attempting, for several years, to build a hotel at our Mississippi site, to do other landbased development and to replace our existing ship with a barge. This required the approval of the Port which approval was refused on numerous occasions. We had undertaken discussions with the Port to find a new location for the Copa because of the Port's indication that our current site would be needed by the Port in the future. These discussions seemed to be positive concerning a specific location and then broke down because the Port significantly changed its position. Thereafter, in July, the Port notified the Copa that the Copa's lease would be canceled and terminated at the end of the initial lease term in October 1999, because the Port purportedly needs the Copa's current location for expansion of Port facilities. The Port also filed a lawsuit against the Copa requesting the court to rule that, among other things, the lease does allow for the Port's termination of the lease. The Copa subsequently filed a legal action against the Port, in Mississippi Circuit Court, for breach of the lease agreement, failure to deal fairly and in good faith and various misrepresentions to us. We are asking the court to allow us to develop our site, replace our gaming vessel and require the Port to provide the Copa Casino a lease comparable to that of the Port's other gaming tenant. Because of the past damages we have suffered by the Port's continued refusal to allow us to grow and expand, we are also asking for compensation for our lost profits and opportunities. In addition to the above, the lawsuit by two former shareholders of one of our subsidiary companies, Gulfside Casino, Inc., is ongoing without an immediate resolution in sight. These two former shareholders have not been paid amounts due them under promissory note oligations which existed prior to The Sands Regent's 1994 acquisition of Gulfside Casino, Inc. Gulfside Casino, Inc.'s only source of funds to pay these obligations is its ownership interest in the Copa Casino. Because of the Port, and other reasons, the Copa has not been in the position to make partner distributions to provide payment on these promissory notes. A court hearing has been set for November in which the appointment of a receiver may be considered. As in many lawsuits, we can not predict the outcomes of the above actions. In the meantime, we will continue our efforts to improve our operating results and will continue to strive for excellence in the services we provide to our guests. In Reno, we continue to be disappointed in our operating results. Competition has been fierce with the addition of approximately 2,700 hotel rooms to the Reno area market in the last year. This equates to an increase in the number of available hotel rooms of approximately 20% which is significant. In addition to the added Reno area hotel rooms, Mega-resorts and other hotel rooms continue to be built in Las Vegas at an amazing pace. We believe that these new Las Vegas resorts, combined with attractive Las Vegas air service, have also contributed to the competitive pressures on our, and other Reno area hotel/casino, operations. In order to improve our Reno operating results in the long term, we are undertaking various improvements to our Reno facilities to allow us to attract and retain our valued customers. First and foremost, we are renovating our main casino area, many of our hotel rooms and the exterior of our facilities. On the exterior of 2 4 - -------------------------------------------------------------------------------- our hotel/casino complex, we have resurfaced and overlayed some of our parking areas. We have also repainted the exterior of all of our facilities using a different color scheme so as to give a new appearance to our hotel towers and other buildings. Our hotel room renovation, which has been generally completed, consisted of carpeting, wallcovering and furniture repairs and replacements, as needed. Our main casino remodeling, which is presently underway, will be a complete facelift resulting in a brand new appearance designed to take us into the 21st century. We are, or will be, changing our carpet, redoing the wallcoverings and ceiling tiles and changing many light fixtures and decorative chandeliers. We are also changing the casino floor layout of our slot machines to create a vibrant customer friendly atmosphere. Along with the casino remodeling, we have acquired, and are currently installing, a new state-of-the-art computerized player marketing/tracking system. Geared primarily to the slot players, but also to be utilized for our keno and table game customers, this program will provide us with many new marketing tools. It will allow us to offer some innovative marketing programs to attract new customers and to reward our current guests for their patronage of our gaming facilities. We believe all of these improvements and changes will enhance our Reno operation and will ultimately contribute to a growth in revenues and profits. Unfortunately, it is still very difficult to project when we will see the fruits of our labor. Nevertheless, we will continue to use our best efforts to control costs, and to improve revenues. In Mississippi, we will continue with the efforts that have contributed to our current operating successes. We will also diligently and feverishly pursue our objective to improve our Mississippi facilities with a goal to be a long-term successful hotel/casino operation. As always, we appreciate our many fine customers and guests and the exemplary services provided by our honored and loyal employees in both Reno and Mississippi. Respectfully, [SIG] Pete Cladianos, Jr. President and Chief Executive Officer Reno, Nevada September 26, 1996 3 5 THE SANDS REGENT SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- For the years ended June 30,
1996 1995 1994 1993 1992 ------- -------- ------- ------- ------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Operating revenues(1)................. $60,410 $ 60,973 $51,446 $43,877 $41,264 Income (loss) from operations......... 4,675 (11,748) 8,178 8,608 7,633 Net income (loss)..................... 2,042 (11,428) 7,730 5,481 4,877 Net income (loss) per share........... $ .45 $ (2.54) $ 1.76 $ 1.27 $ .97 Cash dividends per share.............. $.15.... $ .20 $ .20 $ .20 $ .15 OPERATING DATA: Casino square footage(2).............. 51,000 51,000 51,000 27,000 27,000 Number of slot machines(2)............ 1,407 1,459 1,483 783 783 Number of hotel rooms(2).............. 938 938 938 938 938 Average hotel occupancy rate.......... 82.9% 87.1% 89.7% 89.0% 89.3% BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(2)..................... $11,557 $ 12,214 $ 9,804 $ 3,274 $ 9,674 Total assets(2)....................... 64,311 66,253 82,268 56,559 53,917 Long-term debt(2)..................... 14,816 17,808 27,559 13,676 14,448 Total stockholders' equity(2)......... 33,216 31,849 44,138 35,423 30,719
- --------------- (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 1996 TO 1995 For the year ended June 30, 1996, revenues decreased to $60.4 million compared to $61 million for fiscal 1995 and income from operations increased to $4.7 million as compared to a loss from operations of approximately $11.7 million in fiscal 1995. For the same comparable periods, net income increased from a net loss of $11.4 million, or a $2.54 loss per share, in fiscal 1995 to net income of $2 million, or $.45 per share, in fiscal 1996. The decrease in revenues is composed of an increase in revenues from the Copa Casino which was offset by a decrease in revenues from the Sands Regency. The increases in income from operations, net income and net income per share are a result of the prior year recognition of an impairment in value of long-lived assets of the Copa Casino and GCI of $17.5 million which did not occur in fiscal 1996. In addition, income from operations, net income and net income per share have been positively affected from improved operating results from the Copa Casino and negatively impacted from declining operating results at the Sands Regency in fiscal 1996 compared to fiscal 1995. Management believes that the decline in Reno revenue and profits is due to increased competition from new and expanded Reno area hotel/casinos and from the Las Vegas mega-resorts. The decrease in lodging revenue of $673,000, in the year ended June 30, 1996 compared to the prior year, is due to a decrease in Sands Regency hotel occupancy at a lower average daily room rate. In fiscal 1995, hotel occupancy was 87.1% at an average daily room rate of approximately $33. In fiscal 1996, hotel occupancy was 82.9% at an average daily room rate of $32. The increase in gaming revenue of $395,000 million is comprised of an increase in gaming revenue from the Copa Casino of approximately $2.7 million which was offset by a decrease in gaming revenue at the Sands Regency of approximately $2.3 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 $77 in the year ended June 30, 1995 to approximately $73 in the year ended June 30, 1996. The decrease in food and beverage revenue of $313,000 includes a decrease in food revenue at the Sands Regency of approximately $369,000 and the elimination of Copa Casino buffet revenue of approximately $266,000. During approximately the first four months of fiscal 1995, the Copa Casino was involved in the operation of a buffet style restaurant located on its facilities. Thereafter, such buffet style restaurant was operated by a third party. The decrease in Sands Regency food revenue is primarily due to the decrease in hotel occupancy. These decreases were partially offset by improved Copa Casino food and beverage revenues as a result of an overall increase in business volumes. The increase in other revenue of $326,000 is principally comprised of a gain on the sale of a small motel previously owned and operated by the Sands Regency of $506,000 and a decrease in retail liquor store sales of approximately $267,000. In August 1994, the retail liquor store business, which was operated by the Company in Reno, was sold to a third party. Such third party now operates the retail liquor store in Company owned facilities for rent and other consideration paid to the Company. The increase in complimentary lodging, food and beverage, deducted from revenue, of $298,000 is primarily due to an increase in complimentary lodging in Reno, as a result of changes in the Company's lodging programs and packages offered to attract and retain guests. 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- The increase in gaming costs and expenses of $380,000 is comprised of, for the Copa Casino, an increase in gaming taxes and licenses of $259,000, a decrease in estimated health benefit costs of $163,000 and a decrease in the cost of complimentary goods and services provided to Copa Casino guests of $124,000. The net remaining increase is attributable to the Sands Regency and includes an increase in the cost of complimentary goods and services in the amount of $185,000, due to increased complimentary services provided to Sands Regency guests, and general increases in salaries, wages and benefits and other costs. The decrease in food and beverage costs and expenses of $225,000, in fiscal 1996 compared to fiscal 1995, consists primarily of the elimination of costs and expenses associated with the buffet style restaurant at the Copa Casino. The decrease in other costs and expenses of $295,000 is primarily due to the elimination of costs and expenses associated with the sale of the retail liquor store business in August 1994 which was previously operated by the Sands Regency. The increase in maintenance and utilities costs and expenses of $381,000 in the year ended June 30, 1996, compared to the year ended June 30, 1995, is principally due to hurricane preparedness costs and expenses for the Copa Casino, both in general and for Hurricane Opal. The increase in general and administrative costs and expenses of $1.1 million consists primarily of increased advertising, promotional and customer solicitation costs for the Copa Casino of approximately $790,000 and increased legal costs of approximately $190,000 related, in part, to the Copa Casino's leased site development conflict with the Mississippi State Port Authority. The prior year recognition of an impairment of long-lived assets of $17.5 million, which did not occur in fiscal 1996, consisted of a write-down of Copa Casino property and equipment of $10.7 million and the write-off of goodwill, which originated when GCI was purchased in February 1994, of approximately $6.8. The impairment was based upon political and market conditions and an analysis, at June 30, 1995, of projected undiscounted future cash flows. The decrease in depreciation and amortization expense of $784,000 includes the elimination of goodwill amortization of $366,000 as a result of the write-off of Gulfside Casino, Inc. goodwill in June 1995 when the Company recognized an impairment in long-lived assets associated with the Copa Casino. Likewise, due to the recognition of such impairment, the decrease in depreciation and amortization expense also includes a decrease in Copa Casino depreciation expense of approximately $585,000. The decrease in interest expense, in fiscal 1996 compared to fiscal 1995, is primarily a result of a reduction in interest-bearing debt owed by the Company. As further indicated in the Company's Notes to the Consolidated Financial Statements, the decrease in the statutory rate to arrive at the effective income tax rate, in the current fiscal year, is primarily a result of the tax effect of tax-free interest income earned by the Company and the utilization of general business credits. The increase in the effective income tax rate from the statutory rate in the prior year is primarily the result of the prior year write-off of goodwill in connection with the recognition of impairment in long-lived assets. 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 has not been affected as severely as many other hotel/casinos in the Reno area because the Company attracts high levels of group business during that period. This group business and the Company's flexible pricing strategy have historically enabled the Company to maintain relatively high levels of hotel occupancy. Management 6 8 - -------------------------------------------------------------------------------- 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 relatively limited amount of time that gaming has existed on the Mississippi gulfcoast and the rapid expansion of gaming in Mississippi and nearby Louisiana, the nature and extent of seasonal fluctuations, if any, are subject to change. COMPARISON OF 1995 TO 1994 A significant reason for the increases in revenue and costs and expenses in fiscal 1995, compared to fiscal 1994, was due to the consolidation of 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 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 was 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 was 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 occurred in fiscal 1994. Management believes that the decline in Reno revenue and profits was 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, was 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 was 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, was 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 was primarily due to the addition of Copa Casino results of operations. Costs and expenses from the Reno operation did not 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- 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 was 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 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, were primarily due to the inclusion of the Copa Casino. Approximately $339,000 of the increase in gaming costs and expenses was 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 was 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, were principally due to the addition of Copa Casino results of operations. The Copa Casino general and administrative costs and expenses included 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 1995 issued accounting standards and consisted of a write-down of Copa Casino property and equipment of $10.7 million and the write-off of goodwill, which originated when GCI was purchased in February 1994, of approximately $6.8. The impairment was based upon political and market conditions and an analysis of projected undiscounted future cash flows. Operating results subsequent to fiscal 1995 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 was 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 was 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 was 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 fiscal 1995, 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 1995 fiscal year as compared to the 1994 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, was 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 8 10 - -------------------------------------------------------------------------------- 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. 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. CAPITAL RESOURCES AND LIQUIDITY The Company's working capital deficit of $2.4 million at June 30, 1996 was approximately the same as at June 30, 1995. The negative working capital is principally due to the fiscal 1995 reclassification of certain debt obligations from long-term to current. Payments under these obligations, evidenced by promissory notes, are due by GCI to two former shareholders and are past due. Such former shareholders have been granted a monetary judgment against GCI for the principal and interest amounts due as further described in Note 10 of the Company's Notes to Consolidated Financial Statements in the 1996 Annual Report. As a result, the $6 million balances are now classified as current obligations. At June 30, 1996, cash, cash equivalents and short-term investments increased to $11.6 million compared to $12.2 million at June 30, 1995. Cash and cash equivalents provided from operating activities for the years ended June 30, 1996, 1995 and 1994 was $5.1 million, $7.3 million and $7.5 million respectively. Although the Company's operations and capital expenditures are financed primarily from funds generated from operations and borrowings, approximately $5.7 million in cash was generated in fiscal 1994 from the sale of non-operating real property in Reno, Nevada and approximately $735,000 in cash was generated in fiscal 1996 from the sale of non-hotel/casino properties. In fiscal 1994, cash was also generated through the issuance of long-term debt of $5.5 million. In fiscal 1996 and 1994, cash was generated from the net disposal of short-term investments of $1.7 million and $293,000, respectively. In fiscal 1995, cash of $1.7 million was used for the net acquisition of short-term investments. Management considers short-term investments, which generally mature in one year or less, to be equivalent to cash. Uses of cash included the Company's payment of dividends in the amounts of $675,000, $899,000 and $877,000 and payments of long-term debt of $3.1 million, $703,000 and $419,000 in fiscal years 1996, 1995 and 1994, respectively. Cash was also utilized for the acquisition of property and equipment in the amounts of $2.6 million, $2.7 million and $4 million in the years ended June 30, 1996, 1995 and 1994, 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. 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- 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. 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, 1996, 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 has a revolving term loan from several Banks with an outstanding principal balance as of June 30, 1996 of $15.6 million. The Company was not in compliance with certain of the financial covenants contained in the agreement governing this loan at June 30, 1996. Subsequent to that date, the Company entered into an agreement with the Banks whereby compliance with these covenants is waived at June 30, 1996 and certain of the covenants are modified, or compliance there to waived, until the quarter ended September 30, 1997 at which time the Company expects to be in compliance with the covenants. As consideration for such waiver and covenant modifications, the Banks have required the Company to presently pay the April 1, 1997 scheduled principal reduction payment in the amount of $1.7 million and to make an additional permanent principal payment in the amount of $1.25 million. The Company's previous major expansion plans in Reno have been cancelled due to current adverse market conditions and the uncertainty of future market growth. The Company has also allowed the local government approval of its expansion program to expire. In the near term, the Company will concentrate its resources on renovating and improving existing Reno facilities and services. Future expansion plans will be considered based upon future market conditions and the need to add hotel rooms and other major facilities. In July 1996, GCP received notice from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority (the"Port") that GCP's lease for the present Copa Casino site would not be extended beyond its initial term of October 1999 because GCP's site was needed by the Port. Such notice of termination, among other things, is the subject of litigation among the parties. If GCP is required to vacate the current leased site in October 1999, the Company's results of operations could be materially adversely affected. Inflation has had only a slight impact on the Company's operating results. Cost and expense increases have generally been passed on to the customers through moderate price increases, higher table limits and upgraded slot machine denominations. 10 12 THE SANDS REGENT CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994
1996 1995 1994 ----------- ------------ ----------- OPERATING REVENUES: Gaming $43,996,174 $ 43,601,124 $31,990,341 Lodging 9,132,778 9,805,719 10,120,918 Food and beverage 7,882,377 8,195,340 7,357,963 Other 2,175,831 1,850,111 3,990,280 ----------- ------------ ----------- 63,187,160 63,452,294 53,459,502 Less complimentary lodging, food and beverage included above 2,776,918 2,479,087 2,013,048 ----------- ------------ ----------- 60,410,242 60,973,207 51,446,454 ----------- ------------ ----------- OPERATING COSTS AND EXPENSES: Gaming 22,205,937 21,826,156 14,517,504 Lodging 5,158,603 5,193,683 4,683,308 Food and beverage 6,499,231 6,724,601 6,185,677 Other 665,220 960,201 3,533,687 Maintenance and utilities 4,604,013 4,222,854 2,999,173 General and administrative 12,967,352 11,878,463 8,261,707 Impairment of long-lived assets -- 17,496,282 -- Depreciation and amortization 3,635,219 4,418,769 3,087,613 ----------- ------------ ----------- 55,735,575 72,721,009 43,268,669 ----------- ------------ ----------- INCOME (LOSS) FROM OPERATIONS 4,674,667 (11,747,802) 8,177,785 ----------- ------------ ----------- OTHER INCOME (DEDUCTIONS): Interest and other income 591,126 549,978 584,950 Interest expense (2,394,743) (2,562,889) (1,300,644) Equity in loss of unconsolidated affiliate -- -- (1,077,537) Gain on disposition of non-operating property -- -- 5,197,874 ----------- ------------ ----------- (1,803,617) (2,012,911) 3,404,643 ----------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES 2,871,050 (13,760,713) 11,582,428 INCOME TAX (PROVISION) BENEFIT (828,688) 2,332,892 (3,852,531) ----------- ------------ ----------- NET INCOME (LOSS) $ 2,042,362 $(11,427,821) $ 7,729,897 =========== ============ =========== NET INCOME (LOSS) PER SHARE $ 0.45 $ (2.54) $ 1.76 =========== ============ =========== WEIGHTED AVERAGE SHARES OUTSTANDING 4,498,722 4,497,588 4,395,100 =========== ============ ===========
- ------------ See notes to consolidated financial statements. 11 13 THE SANDS REGENT CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- June 30, 1996 and 1995
1996 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $11,356,980 $10,356,150 Short-term investments 200,000 1,857,503 Accounts and notes receivable, less allowance for possible losses of $107,000 and $147,000 400,018 477,352 Inventories 789,199 719,052 Prepaid federal income taxes 141,369 -- Deferred federal income tax asset -- 15,543 Prepaid expenses and other assets 979,555 946,374 ----------- ----------- Total current assets 13,867,121 14,371,974 PROPERTY AND EQUIPMENT: Land 8,094,823 8,101,601 Buildings, ship and improvements 45,376,570 45,106,360 Equipment, furniture and fixtures 21,762,273 20,974,442 Construction in progress 231,264 507,131 ----------- ----------- 75,464,930 74,689,534 Less accumulated depreciation and amortization 28,051,014 25,986,710 ----------- ----------- 47,413,916 48,702,824 OTHER ASSETS: Deferred federal income tax asset 899,908 1,526,589 Note receivable 1,244,263 1,250,898 Other 885,705 401,007 ----------- ----------- 3,029,876 3,178,494 ----------- ----------- $64,310,913 $66,253,292 =========== ===========
- ------------ See notes to consolidated financial statements. 12 14 - --------------------------------------------------------------------------------
1996 1995 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,281,286 $ 2,046,893 Accrued salaries, wages and benefits 1,686,932 1,886,964 Other accrued expenses 1,376,101 1,316,883 Federal income taxes payable -- 384,210 Deferred federal income tax liability 126,469 -- Current maturities of long-term debt 10,789,021 10,905,995 ------------ ------------ Total current liabilities 16,259,809 16,540,945 LONG-TERM DEBT 14,816,286 17,807,655 OTHER 18,723 56,151 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value, 5,000,000 shares authorized, none issued -- -- Common stock, $.05 par value, 20,000,000 shares authorized, 6,898,722 shares issued 344,936 344,936 Additional paid-in capital 13,073,803 13,073,803 Retained earnings 42,152,191 40,784,637 ------------ ------------ 55,570,930 54,203,376 Treasury stock, at cost; 2,400,000 shares (22,354,835) (22,354,835) ------------ ------------ 33,216,095 31,848,541 ------------ ------------ Total stockholders' equity $ 64,310,913 $ 66,253,292 ========== ==========
13 15 THE SANDS REGENT CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994
1996 1995 1994 ----------- ------------ ----------- OPERATING ACTIVITIES: Net income (loss) $ 2,042,362 $(11,427,821) $ 7,729,897 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,635,219 4,418,769 3,087,613 Impairment of long-lived assets -- 17,496,282 -- (Gain) loss on disposal of property and equipment (482,978) 78,322 (4,983,998) Noncash interest income from unconsolidated affiliate -- -- (302,363) Equity in loss of unconsolidated affiliate -- -- 1,077,537 Amortization of imputed interest expense -- 17,100 60,900 (Increase) decrease in accounts and notes receivable 77,334 (147,281) 44,794 (Increase) decrease in inventories (70,147) 397,516 (202,794) (Increase) decrease in prepaid expenses and other current assets (33,181) 189,362 494,147 (Increase) decrease in other assets (494,904) 31,273 25,764 Increase (decrease) in accounts payable 332,286 (612,013) (499,437) Increase (decrease) in accrued salaries, wages and benefits (200,032) 218,733 (559,254) Increase in other accrued expenses 59,218 604,404 180,857 Increase (decrease) in federal income taxes payable (525,579) 563,165 (894,084) Change in deferred federal income taxes 768,693 (4,442,575) 2,271,615 Decrease in other liability (37,428) (37,428) -- ------------ ----------- ------------ Net cash provided by operating activities 5,070,863 7,347,808 7,531,194 ------------ ----------- ------------ INVESTING ACTIVITIES: Purchase of short-term investments (583,257) (3,251,250) (10,000) Sale and maturity of short-term investments 2,240,760 1,528,747 303,394 Payments received on note receivable 6,635 7,547 2,555 Additions to property and equipment (2,588,447) (2,657,280) (3,983,943) Proceeds from sale of property, equipment and other assets 735,320 32,756 6,062,445 Investment in and advances to unconsolidated affiliate -- -- (4,761,403) Payments to acquire company and related note receivable, net of cash acquired -- -- (1,787,641) ------------ ----------- ------------ Net cash used in investing activities (188,989) (4,339,480) (4,174,593) ------------ ----------- ------------
- --------------- See notes to consolidated financial statements. 14 16 - --------------------------------------------------------------------------------
1996 1995 1994 ----------- ------------ ----------- FINANCING ACTIVITIES: Payment of accounts payable for prior year purchases of property and equipment (97,893) (756,487) (962,360) Issuance of long-term debt -- -- 5,500,000 Payments on long-term debt (3,108,343) (702,796) (418,947) Issuance of common stock -- 37,500 100,000 Payment of dividends on common stock (674,808) (899,444) (876,594) ----------- ----------- ---------- Net cash provided by (used in) financing activities (3,881,044) (2,321,227) 3,342,099 ----------- ----------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 1,000,830 687,101 6,698,700 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,356,150 9,669,049 2,970,349 ----------- ----------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $11,356,980 $10,356,150 $9,669,049 =========== =========== ========== 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 =========== =========== ========== Issuance of common stock to acquire company $ -- $ -- $1,762,500 =========== =========== ========== Interest paid, net of amount capitalized $ 2,022,546 $ 2,254,248 $1,400,993 =========== =========== ========== Federal income taxes paid $ 1,075,000 $ 1,550,000 $2,475,000 =========== =========== ==========
15 17 THE SANDS REGENT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994
Common Stock Additional Treasury Stock --------------------- Paid-in Retained ------------------------ Shares Amount Capital Earnings Shares Amount Total ---------- --------- ------------ ----------- ---------- ------------ ----------- BALANCES, JULY 1, 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 ($.20 per share) -- -- -- (899,444) -- -- (899,444) --------- -------- ----------- ----------- --------- ------------ ----------- BALANCES, JUNE 30, 1995 6,898,722 344,936 13,073,803 40,784,637 2,400,000 (22,354,835) 31,848,541 Net income -- -- -- 2,042,362 -- -- 2,042,362 Cash dividends ($.15 per share) -- -- -- (674,808) -- -- (674,808) --------- ------- ----------- ----------- --------- ------------ ----------- BALANCES, JUNE 30, 1996 6,898,722 $344,936 $13,073,803 $42,152,191 2,400,000 $(22,354,835) $33,216,095 ========= ======== =========== =========== ========= ============ ===========
- --------------- See notes to consolidated financial statements. 16 18 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 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:
1996 1995 1994 ---------- ---------- ---------- Hotel $ 380,869 $ 215,661 $ 218,288 Food and beverage 2,073,504 2,185,106 1,458,350 Other 39,112 32,896 19,057 ---------- ---------- ---------- $2,493,485 $2,433,663 $1,695,695 ========== ========== ==========
17 19 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 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 The Company accounts for its short-term investments in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115- "Accounting for Certain Investments in Debt and Equity Securities". This statement requires that unrealized gains and losses on securities defined as "available-for-sale" 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, 1996, the Company's short-term investments were not subject to the provisions of SFAS No. 115. (f) INVENTORIES Inventories consist primarily of food, beverage and operating supplies and are stated at the lower of cost (determined on an average cost basis) or market. (g) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of impairment write-downs to estimated net realizable values. Depreciation and amortization is computed primarily by the straight line method over the estimated useful lives of the assets. These lives range between 5 to 35 years for buildings, ship and improvements and 5 to 20 years for equipment, furniture and fixtures. Assets sold or otherwise disposed of are removed from the property accounts and the resulting gains or losses are included in income. (h) GOODWILL In fiscal 1995, goodwill, which represented the excess of cost over net assets of the acquisition of GCI in February 1994, was written-off to reflect the net realizable value of long-lived assets on a basis consistent with the provisions of recently issued accounting standards as more fully described below. Prior to such write-down, goodwill was being amortized on a straight-line basis over a period of 20 years. (i) IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") No. 121- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " was issued by the Financial Accounting Standards Board in March 1995. The Company adopted the provisions of SFAS No. 121 during the fourth quarter of the year ended June 30, 1995 which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for 18 20 - -------------------------------------------------------------------------------- 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) STOCK-BASED COMPENSATION AWARDS Statement of Financial Accounting Standards ("SFAS") No. 123- "Accounting for Awards of Stock-Based Compensation" was issued by the Financial Accounting Standards Board in October 1995 and effective for the Company's fiscal year ending June 30, 1997. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions where equity securities are issued for goods and services. It defines a fair value based method of accounting for an employee stock option, or similar equity instrument, and encourages such method of accounting for all employee stock compensation plans. However, and as allowed by SFAS No. 123, the Company intends to continue to follow the provisions of APB Opinion No. 25- "Accounting for Stock Issued to Employees" which measures compensation costs for employee stock compensation plans using the intrinsic value based method of accounting. The Company believes that the adoption of SFAS No. 123 will not have a material effect on the financial position or results of operations of the Company. (k) 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. (l) 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. (m) 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. 19 21 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 (n) 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. (o) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 -- SHORT-TERM INVESTMENTS Short-term investments consist of certificates of deposit which are carried at cost, which approximates market. NOTE 3 -- NOTE RECEIVABLE The note receivable is due in monthly principal and interest payments calculated over 30 years using an annual interest rate of prime plus 2% (10.25% at June 30, 1996). 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 ----------- Revenue $12,146,082 Costs and expenses 14,579,144 Net loss 3,089,777 Company's equity in net loss, net of intercompany eliminations 1,077,537
On a stand alone basis, GCP generated net income of $326,000 in the year ended June 30, 1996 and incurred a net loss of $12.4 million in the year ended June 30, 1995. Approximately $10.7 million of the loss in fiscal 1995 was due to a write-down of GCP long-lived assets to estimated net realizable value on a basis consistent with the provisions of accounting standards as more fully described in Note 5. As of June 30, 1996, GCP's total liabilities exceeded its total assets by $12.7 million. Such excess of total liabilities over total assets results from advances by the Company to GCP, aggregating $20.9 million including accrued interest, which are reflected as liabilities of GCP. 20 22 - -------------------------------------------------------------------------------- Management of GCP 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 has filed a legal action against the Mississippi State Port Authority as more fully described in Note 10. NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS Based upon 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 the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ", the Company made a determination during the year ended June 30, 1995 that the carrying amount of certain long-lived assets of GCI and GCP may not be recoverable. The resultant, calculated impairment of long-lived assets necessitated a write-down of $17.5 million as follows: 1) $6.8 million of Goodwill which represented the excess of cost over net assets of the acquisition of GCI in February 1994; 2) $5.3 million for the GCP ship which contains the Copa Casino operation; 3) $3.7 million for the GCP leasehold improvements at the Copa Casino operating site; and 4) $1.7 million for Copa Casino gaming equipment, primarily slot machines. The estimated net realizable values of these long-lived assets at June 30, 1995 were determined by calculating the present value of estimated expected future GCI and GCP cash flows using a discount rate commensurate with the risks involved. 21 23 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 NOTE 6 -- LONG-TERM DEBT Long-term debt consists of the following:
June 30, --------------------------- 1996 1995 ----------- ----------- 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 7.9% utilized at June 30, 1996); 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 $15,553,000 $18,565,000 Contract payable to International Game Technology ("IGT") by GCP; amended in August 1996 to include principal and interest payments of $55,000, including interest at 10% per annum, due monthly commencing September 1, 1996 through August 1, 1999 at which time the remaining unpaid principal balance of $3.2 million is due in full; secured by certain gaming equipment 4,052,307 4,052,307 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 $1.2 million past due; no interest paid since May 1994; entire principal balances included in current maturities at June 30, 1996 and 1995; secured by GCI's partnership interest in GCP 6,000,000 6,000,000 Other -- 96,343 ----------- ----------- 25,605,307 28,713,650 Less current maturities 10,789,021 10,905,995 ----------- ----------- Long-term portion $14,816,286 $17,807,655 =========== ===========
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 occurred. 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 certain of the bank loan covenants at June 30, 1996 and provided for modification of certain covenants, or waiver of compliance therewith, until the quarter ended September 30, 1997. As consideration for such waivers and covenant modifications, the bank 22 24 - -------------------------------------------------------------------------------- has required the Company to presently pay the April 1, 1997 scheduled principal reduction payment in the amount of $1.7 million and to make an additional principal payment in the amount of $1.25 million which is included in current maturities. Long-term debt at June 30, 1996 is payable as follows:
Year ending June 30, Amount ----------- ----------- 1997 $10,789,021 1998 3,965,819 1999 4,380,062 2000 6,470,405 ----------- $25,605,307 ===========
The Company entered into an interest rate swap agreement, effective April 1, 1994, to fix the variable interest rate due on the bank term and revolving line of credit loan. Under such agreement, the Company pays the bank interest at a fixed rate of 6.25% per annum on the notional amount and the bank pays the Company interest at a variable rate (currently 5.5%) 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 $15.6 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 an asset of $25,104 at June 30, 1996 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 $2,395,000, $2,563,000 and $1,365,000 in 1996, 1995 and 1994, respectively, none, none and $64,000 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, 1996, 1995, 1994 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, 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 Options granted 250,000 3.58 Options cancelled (24,000) (6.25) Options exercised -- -- ------- ------- Outstanding, June 30, 1996 334,000 $ 4.71 ======= =======
At June 30, 1996, options to purchase 60,000 shares of the Company's stock were exercisable and 11,864 shares were available for grant under the stock option plan. NOTE 8 -- FEDERAL INCOME TAXES The income tax (provision) benefit consists of the following:
1996 1995 1994 --------- ----------- ----------- Current $ (59,995) $(2,109,683) $(1,580,916) Deferred (768,693) 4,442,575 (2,271,615) --------- ----------- ----------- $(828,688) $ 2,332,892 $(3,852,531) ========= =========== ===========
The Company's effective tax rate differs from the federal statutory rate as follows:
1996 1995 1994 ----- ----- ---- Federal statutory tax rate 35.0% (35.0)% 35.0% Surtax exemption (1.0) 1.0 (1.0) Write-off of goodwill -- 17.8 -- Tax effect of tax-free interest income (2.5) (0.4) -- General business credits (2.3) (0.5) (1.0) Other (0.3) 0.1 0.3 ---- ----- ---- 28.9% (17.0)% 33.3% ==== ===== ====
24 26 - -------------------------------------------------------------------------------- The components of the Company's net deferred federal income tax asset are as follows at June 30:
1996 1995 ----------- ----------- Deferred tax assets: License acquisition costs $ 1,697,021 $ 1,836,026 Pre-opening costs 559,614 817,899 Alternative minimum tax credit 523,386 -- Accrued expenses 160,276 279,131 Other 52,671 79,337 ----------- ----------- 2,992,968 3,012,393 ----------- ----------- Deferred tax liabilities: Property and equipment (1,876,410) (1,141,338) Prepaid expenses (333,049) (321,768) Other (10,070) (7,155) ----------- ----------- (2,219,529) (1,470,261) ----------- ----------- Net deferred federal income tax asset $ 773,439 $ 1,542,132 =========== ===========
The Company has a March 31 tax year-end. NOTE 9 -- LEASE COMMITMENTS GCP leases its Mississippi dockside facilities from the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority in Gulfport, Mississippi (the "Port"). The lease provides for an initial lease term of seven years commencing in October 1992. The lease also provides for three extension options of five years each and a final extension option of ten years. The final ten year extension option may only be exercised if GCP 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 rent of $41,667 plus 5% of gross annual gaming revenue in excess of $25 million. Additionally, the lease requires monthly payments equal to 3% of non-gaming revenue. Beginning in October 1997, the base rent shall be adjusted, annually, in accordance with changes in the consumer price index. In July 1996, GCP was notified by MDECD and the Port that its lease will be canceled and terminated at the end of the initial lease term in October 1999 because the Company's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. Such notice of termination, among other items, is presently the subject of litigation between GCP and MDECD and the Port as further described in Note 10. In addition to the Mississippi dockside facilities lease, the Company leases certain equipment under operating leases expiring in 1997. Total rental expense charged to operations was $538,000, $534,000 and $217,000 for the years ended June 30, 1996, 1995 and 1994, respectively. 25 27 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 Future minimum payments under the remaining noncancellable term of operating leases are as follows:
Year ending June 30, Amount ----------- ---------- 1997 $ 506,000 1998 500,000 1999 500,000 2000 125,001 ---------- $1,631,001 ==========
NOTE 10 -- CONTINGENCIES GCI matter In December 1994, a lawsuit was filed in a Mississippi Chancery Court against GCI because of GCI's failure to make payments on promissory note obligations of GCI to two of its former shareholders. These note obligations, in the aggregate amount of $6 million, plus interest, are secured by a pledge of GCI's partnership interest in GCP. Although these promissory notes and the accrued interest thereon are obligations of GCI, they are reflected as current liabilities in the Company's Consolidated Balance Sheets at June 30, 1996 and 1995 upon consolidation. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment was granted, the lawsuit is demanding the appointment of a receiver 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. In August 1995, a Charging Order was entered which requires GCP to respond to inquiries by the two former GCI shareholders for the purpose, among other things, of determining what distributions, if any, have been paid by the partnership to its partners. Moreover, a court order was granted whereby any amounts due or to become due GCI by GCP are to be paid to the two former shareholders, pro-rata, until the their judgments against GCI are satisfied. Part of the dispute with the two former shareholders concerns their security interest in GCI's ownership of GCP. GCI's interest in GCP has been reduced from an original 60% to the present .006% interest as a result of an amendment to the partnership agreement and a partner capital call. An amendment to the GCP partnership agreement was entered into, 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 and to cure a partnership breach by GCI. Specifically, and prior to the acquisition of GCI by the Sands Regent in February 1994, GCI had breached the partnership agreement by failing to properly contribute monies to the partnership. This resulted in additional funding by Patrician and the amendment was entered into to cure the breach since GCI was not in the position to contribute required funding. An additional partner capital call occurred in January 1996 for the purpose of improving the partnership capital structure. Patrician and Artemis complied with the capital call and GCI failed to comply. As a result, 26 28 - -------------------------------------------------------------------------------- and in accordance with the partnership agreement, as amended, GCI's interest in GCP was reduced from 20% to .006%. The two former shareholders of GCI claim that GCI's ownership interest in GCP should be the pre-amendment, pre-capital call 60% interest. GCI and Patrician contend that the amended ownership interests are valid because they were undertaken for valid business reasons and that they were permitted in accordance with the underlying agreement that pledged GCI's interest in GCP to the two former GCI shareholders. Further, the partnership amendments which provided, or allowed, for the change in partner ownership interests were found to be valid in a June 1996 arbitration award between Patrician and GCI. In July 1996, as a result of a court hearing, the Chancery Court rendered a judgement that the reallocation of GCI's interest in the partnership had no effect on the lien position of the two former GCI shareholders. Further, the two former shareholders were given until November 1996 to exhaust their legal remedies in collecting against the judgement. Failing collection or other resolution by November 1996, the Court shall consider additional measures including, but not limited to, the appointment of a receiver. GCI has filed a motion for reconsideration with the Chancery Court for which a hearing has not yet been set. GCI's only tangible asset, and its source of funds for repayment of the promissory notes, is its partnership interest in GCP. These two 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 is not 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. The ultimate resolution of such matter is not presently subject to reasonable estimation but could include a dispossession of a 60% right to receive partnership profits and surplus. Port matter In July 1996, the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the "Port") filed a declaratory judgement action against the Copa Casino in a Mississippi Chancery Court. Such lawsuit seeks Chancery Court interpretation of certain provisions of the lease between MDECD and the Port and the Copa Casino including whether the Port may terminate the lease on a date certain, whether the Port must approve the substitution of another gaming vessel for the present gaming vessel and whether the Port must approve the construction of a hotel on the leased premises. In addition to the lawsuit, MDECD and the Port also notified the Copa Casino that its lease will be canceled and terminated at the end of the initial lease term in October 1999 because the Copa Casino's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. In August 1996, the Company filed a separate lawsuit against MDECD and the Port in Mississippi Circuit Court for breach of contract, breach of covenant of good faith and fair dealing, misrepresentation and breach of covenant of quiet enjoyment. The lawsuit seeks an award for compensatory damages in an amount not less than $20 million and a declaratory judgement quieting the lease term and allowing the development of the leased premise. The lawsuit also requests a jury trial which is not generally available in Chancery Court. In connection with the filing of the Circuit Court action, the Company has responded to the Chancery Court action filed by the MDECD and Port by requesting that such action be dismissed or, in the alternative, transferred and consolidated with the Company's Circuit Court action. MDECD and the Port have, in turn, responded by indicating it is their belief that the Chancery Court is the proper forum and that the Company's 27 29 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1996, 1995, 1994 Circuit Court action be either dismissed or transferred to the Chancery Court. A Circuit Court hearing has been scheduled for September 20, 1996 with respect to the MDECD and Port request to dismiss the Company's Circuit Court action or transfer it to Chancery Court. Such legal actions between the Company and MDECD and the Port are in the early stages and management believes that the outcome is not presently predictable or subject to reasonable estimation. Other In February 1996, GCP's hurricane evacuation plan was approved by the Mississippi State Port Authority and, as a result, GCP's standard two-year gaming license was renewed by the Mississippi Gaming Commission. The hurricane plan had previously been under review by the Mississippi State Port Authority and GCP had, since August 1995, been operating under provisional gaming licenses. 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 ---------- ---------- ---------- ----------- 1996 Operating revenues $16,054,749 $14,037,918 $15,299,849 $15,017,726 Income from operations 2,217,331 336,522 1,247,123 873,691 Net income (loss) 1,188,329 (3,841) 543,797 314,077 Net income (loss) per share $0.26 -- $0.12 $0.07 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)
NOTE 12 -- SUBSEQUENT EVENT (UNAUDITED) On September 20, 1996, a hearing was held in Mississippi Circuit Court with respect to the MDECD and Port request to dismiss the Company's Circuit Court action against the MDECD and Port or transfer it to Chancery Court. A ruling is expected in October 1996. 28 30 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 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. [SIG] Deloitte & Touche LLP Reno, Nevada August 9, 1996 29 31 - -------------------------------------------------------------------------------- CORPORATE OFFICERS Pete Cladianos, Jr. David R. Wood President and Chief Executive Officer Executive Vice President, Treasurer and Chief Financial Officer Katherene Latham Chairman of the Board Pete Cladianos III(1) Executive Vice President and Secretary Jon N. Bengtson Executive Vice President and Joseph G. Fanelli Chief Operating Officer Weldon C. Upton David R. Wood Executive Vice President, PUBLIC ACCOUNTANTS Treasurer and Chief Financial Officer Deloitte & Touche LLP Reno, Nevada Pete Cladianos III Executive Vice President and Secretary SECURITIES COUNSEL Latham & Watkins BOARD OF DIRECTORS Costa Mesa, California Katherene Latham(1) Chairman of the Board TRANSFER AGENT & REGISTRAR Chase Mellon Shareholder Services, LLC Pete Cladianos, Jr.(1) Ridgefield Park, New Jersey President and Chief Executive Officer Jon N. Bengtson Executive Vice President and Chief Operating Officer
- ------------ (1) Standing for re-election to the Board of Directors at the November 4, 1996 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. 30 32 LOGO 345 N. ARLINGTON AVENUE - RENO, NV 89501 - (702) 348-2200 EX-23 8 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 9, 1996, appearing and incorporated by reference in the Annual Report on Form 10-K of The Sands Regent for the year ended June 30, 1996. Deloitte & Touche LLP Reno, Nevada September 26, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 11,356,980 200,000 507,018 107,000 789,199 13,867,121 75,464,930 28,051,014 64,310,913 16,259,809 14,816,286 0 0 344,936 32,871,159 64,310,913 7,882,377 60,410,242 6,499,231 34,528,991 21,206,584 0 2,394,743 2,871,050 828,688 2,042,362 0 0 0 2,046,362 .45 .45
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