-----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, VfkfRFJPGFkginfqb2x4JoxwnAbSsgVLZmDC0NrhxBbdUDQCpulZzZRJIInYxgXk Bllw7maI2CvgKogp4KcFWw== 0000892569-97-002653.txt : 19970929 0000892569-97-002653.hdr.sgml : 19970929 ACCESSION NUMBER: 0000892569-97-002653 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 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: SEC FILE NUMBER: 000-14050 FILM NUMBER: 97686256 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 THE YEAR ENDED JUNE 30, 1997 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM: COMMISSION FILE NUMBER: 0-14050 THE SANDS REGENT (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------------- 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, 1997 was $5,320,149. The aggregate market value is computed with reference to the average price per share on such date. Registrant's Common Stock outstanding at September 23, 1997 was 4,498,722 shares. Portions of Registrant's 1997 Annual Report to the Shareholders are incorporated into Part II as set forth herein. Portions of Registrant's definitive Proxy Statement for its November 3, 1997 Annual Meeting of Shareholders are incorporated into Part III as set forth herein. =============================================================================== 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 60%, 39% and 1%, respectively, of the Partnership. Gaming operations for the Copa Casino commenced in September 1993. Reno, Nevada. The Sands Regency hotel/casino has approximately 27,000 square feet of gaming space and 938 hotel rooms, including 32 suites of various sizes. The complex also includes three restaurants, a Donut House, a "Pizza Hut", and an "Arby's" restaurant, a "Baskin-Robbins" and an "Orange Julius" operated by third parties. The facilities also include three cocktail lounges, a gift shop, a beauty/barber shop and a liquor store, each operated by third parties, a video arcade, a health club, a swimming pool and over 10,000 square feet of convention and meeting space which can seat up to 650 people. The Company maintains six parking areas on its main hotel/casino property and adjacent to it, including two parking garages, with a total combined capacity for approximately 1,000 vehicles. Although the Company offers, on a very limited basis, complimentary hotel accommodations to select customers, no group arrangements known as "junkets" are conducted. The average room occupancy for fiscal 1997 was 84.4% compared to 82.9% for 1996. The hotel's average room rate for the current fiscal year was approximately $29.00 as compared to $32.00 in the prior fiscal year. As of September 16, 1997, the casino offered 20 table games, including 13 blackjack tables, 1 caribbean stud table, 1 craps table, and 2 roulette tables, 2 let it ride tables and 1 three-card poker table; 2 keno games and approximately 684 slot machines. In connection with the supervision of its gaming activities, the Company's policies include stringent controls, cross-checks and recording of all receipts and disbursements. The Company's Reno, Nevada operations are conducted 24 hours a day, every day of the year. The primary source of revenues and income to the Company is its gaming activities, although the hotel, bars, shops, restaurants and other services are an important adjunct to the gaming activities. The Company's operating and marketing philosophy emphasizes high volume business, offering large, attractive hotel rooms at reasonable prices to travel group wholesalers, primarily from Western Canada, the Pacific Northwest and Northern California. Gaming accounted for approximately 54% of the Company's revenues in fiscal 1997 and approximately 73% of the gaming revenues were generated by slot machines. The Company generally does not extend credit to its gaming customers. As a result of adverse market conditions in 1996 and the uncertainty of future market growth, the Company has cancelled its major expansion plans and allowed its local governmental approvals to expire. In the near term, the Company will concentrate its resources on renovating and improving existing Reno facilities and services. Future expansion plans will be considered based upon future market conditions and the need to add hotel rooms and other major facilities. 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 16, 1997, the Copa offered approximately 735 slot machines and 26 table games, including craps, roulette, blackjack, caribbean stud, let it ride, big six and three-card poker. In addition, the facility also includes 4 cocktail lounges/bars, a deli-style restaurant, a buffet restaurant, a gift shop and various ancillary services and facilities. The deck below the two casino decks contains a surveillance area, a vault, count rooms and security and various operations and administrative offices. An additional three decks on the ship are available for future expansion of gaming and dining facilities. The Copa Casino is permanently moored dockside at a location known as the "Horseshoe Site." Such site, which is leased from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority, is between the East and West Piers of the Mississippi State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of land based facilities, will accommodate surface parking for approximately 840 vehicles. The leased facilities also include a docking structure which accommodates the Copa Casino ship and will allow for mooring of additional vessels. The docking structure also includes a roadway and pedestrian walk which provides access to the Copa Casino entrance. As in Nevada, the Mississippi operations are conducted 24 hours a day every day of the year. Present operations provide for the offering of complimentary food and beverage on a limited basis. Group arrangements, known as "junkets," are not conducted. MARKETING Reno, Nevada. The central component of the Company's marketing philosophy is to utilize travel wholesalers to attract group and air wholesale business to the hotel/casino. This philosophy is based on offering attractive, well-furnished, large hotel accommodations and quality food and beverages at prices slightly lower than those of most major hotel/casinos in Reno. Management believes this strategy has historically enabled the Company to maintain high levels of hotel occupancy. 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 aggressively packages and markets convention and military reunion business which require 300 rooms or less. Other travel package arrangements are also being promoted which are geared toward individual travelers. The Company undertakes, from time to time, direct advertising in select Western cities in order to promote and increase the individual traveler business. The Company uses a flexible approach to pricing its rooms which is designed to maintain high occupancy levels. Hotel rooms are offered at discount prices to travel wholesalers, as much as six months in advance of arrival, for block sales of rooms used in travel packages. This is particularly important to the Company because of the impact of hotel occupancy on the level of gaming activity. The Company is particularly dependent upon group business from November through February because of the seasonal decline in other sources of business. During these months, a substantial amount of the Sands Regency's hotel capacity is normally prebooked 30 to 180 days in advance on a cancelable basis. During the summer months, the Company relies on direct advertising of its room rates to attract individual customers. The Sands Regency is the lead hotel/casino in the Reno area for several major travel wholesalers who serve major cities in the West, Midwest and Southwest United States and in Western and Central Canada. Group and air wholesale business accounted for approximately 62% of the hotel's occupancy in fiscal 1997 compared to 59% in fiscal 1996. Most advertising for the Sands Regency is done by travel wholesalers in their markets. The Company also advertises directly in its major United States markets through printed publications, especially during periods of the year when group business operates at reduced levels. Gulfport, Mississippi. The Company has positioned the Copa Casino as a casino for local residents. Emphasis has been placed on providing a casual and friendly atmosphere. To maintain this marketing position, the Company's goal is to provide its products and services at values favored by the Company's guests. The Company also uses numerous, in-house promotional programs to attract local residents and other customers. These Company-sponsored promotional and special event programs include gaming and slot tournaments, football season promotions, give-a-way programs and seasonal promotions. The Company has implemented a variety of outside advertising campaigns in order to attract "drive-up" gaming customers. This includes billboards within a 100-mile radius of Gulfport and newspaper, radio and television advertising in the local market and in the New Orleans area on a selective basis. In addition, the Company has implemented drive-up promotions and programs to generate more frequent customer visits and to identify valued customers. Direct mail programs, which have resulted in positive customer responses, will continue to be undertaken to encourage more frequent visits by customers. In fiscal 1997, the Company acquired a computerized slot player tracking and marketing system which has improved the Company's ability to offer different and more diverse promotions. The system also provides player tracking information so as to allow the Company to reward gaming customers with complimentary and other promotional goods and services. The Company has also pursued marketing efforts toward developing group business, primarily bus charters and, beginning in fiscal 1997, hotel promotional programs to entice visits from hotel/motel guests staying in the many non-casino hotel/motel rooms in the local area. The Company has been successful in attracting bus charters from various areas within a 500-mile radius including Atlanta, Georgia and Florida. 3 5 The Company will continue to utilize various marketing strategies with a goal of increasing the frequency of casino visits by its customers which includes implementing programs to identify and retain selected valued customers and the establishment of promotional programs which cater to senior citizens. The Company has employed sales representatives to market to tour operators, travel agents, social groups, corporations and associations. COMPETITION Reno, Nevada. The Company competes in the greater Reno area with approximately sixteen major casinos and hotel/casinos, some of which are larger than the Sands Regency. In addition, there are numerous other smaller casinos in the greater Reno area. The Company competes for its customers based upon gaming activities, room rates, room size and quality of rooms, food, beverages and location. Competitors of the Company have received governmental approval to construct an additional 2,580 hotel rooms, none of which are presently under construction. Such governmental approval does not provide assurance that all of these rooms will be built. If construction is completed on all hotel rooms presently under construction or approved for construction, the hotel room capacity in the greater Reno area will increase by approximately an additional 16%. In the event all approved hotel rooms are built, and depending on the time frames during which they are completed, management of the Company believes that this added capacity may have an adverse effect on operations of the Company. The Company's Reno operations compete, to a lesser extent, with gaming operations in other parts of the state of Nevada, such as Laughlin, Las Vegas and Lake Tahoe. California currently sponsors a state lottery and allows other non-casino style gaming, including parimutuel wagering, card parlors, bingo and off-track betting. There is also casino style gaming on various Native American lands in California. The Company believes that such non-casino style gaming does not have a significant impact on the Company's operations. The Company believes, however, that Native American gaming in California does have somewhat of an impact on the Company's gaming operation and that the general legalization of casino-style gaming in California could have a material impact on the Company's operations. Gulfport, Mississippi. The Company's operations on the Gulf Coast of Mississippi are in competition with numerous gaming operations currently established or to be established on vessels or barges moored on the Gulf Coast of Mississippi, and on boats or barges cruising or moored on the Mississippi River. Currently there are ten dockside gaming facilities, excluding the Company, operating along the Gulf Coast of Mississippi, including one in Bay Saint Louis, one in Gulfport and eight in Biloxi. There are also two gaming facilities presently planned along the Gulf Coast which are licensed and under construction. Along the Mississippi River, there are presently twenty Mississippi dockside casino facilities; one in Natchez, four in Vicksburg, three in Greenville, one near Lula and eleven in Tunica. There is one additional proposed casino operation to be located along the Mississippi River in Vicksburg which has been granted a gaming license and other proposed casinos which are presently involved in litigation regarding proposed locations. There is also one casino currently in operation on an Indian reservation near Philadelphia, Mississippi. In addition to the above, there are also numerous other proposed Mississippi casino operations along the Mississippi River and the Gulf Coast. Requiring both site approval and gaming licenses, such proposed operations are at various stages in the developmental process without assurances that development and operation will occur. 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 fourteen riverboats in operation. Besides these State of Louisiana gaming operations, it is also anticipated that gaming may be implemented on Indian reservations near Gulfport and New Orleans. In the event that all, or a significant number, of these proposed facilities are licensed, built and operated, management of the Company believes that this added capacity may have an adverse effect on its Gulfport casino operation. Management believes that the principal competitive factors will include ease of access, availability of parking, attractiveness of casino vessels and surrounding property, proximity to other gaming facilities, and quality of food and entertainment offered. General. To a significantly lesser extent, the Company competes with gaming facilities in New Jersey, Colorado, South Dakota, Illinois, Iowa and other parts of the world. The Company also competes with various gaming operations on Native American land, including those located in California, Arizona, Oregon, Washington, Connecticut, Michigan, Minnesota and Wisconsin. Indian casino gaming has become a growing sector of the gaming industry as a result of the Indian Gaming Regulatory Act of 1988, which generally permits unrestricted gaming on Indian land in any state that allows similar forms of gaming, whether or not restricted. Other states may legalize various forms of gaming that may compete with the Company. In any jurisdiction where the Company may commence operations, it will face competition for desirable sites and qualified personnel. EMPLOYEES At June 30, 1997, the Company employed 933 people at the Sands Regency in Reno, Nevada, including 89 salaried employees and 844 hourly employees. The Copa Casino employed 486 people, including 60 salaried employees and 426 hourly employees. None of the Company's employees is represented by a union. The Company has not experienced any work stoppages or other significant labor problems and management considers its labor relations to be good. REGULATION AND LICENSING-GAMING Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) The Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulation. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board") and the City of Reno, (together, the "Nevada Gaming Authorities"). The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through 5 7 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 9 11 Company's lenders, holders of evidences of indebtedness, underwriters and employees, may be required to be licensed, and such applications for licensing, if any, may be denied for any cause deemed reasonable by the Mississippi Commission. The Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable cause. The Partnership holds the gaming license to the Copa Casino gaming facility in Gulfport, Mississippi. Patrician, GCI and Artemis, all wholly-owned subsidiaries of the Company, have been approved as partners of the Partnership. The license is not transferrable. In October 1994, the Mississippi Gaming Commission adopted a regulation requiring, as a condition of licensure or license renewal, that a gaming establishment's site development plan include certain infrastructure facilities in close proximity to the casino complex which will amount to at least 25% of the cost of the casino facility. Parking facilities, roads, sewage and water systems or facilities normally provided by governmental entities do not meet the infrastructure requirement. The Mississippi Gaming Commission found the Copa Casino to be in compliance with this regulation as a result of its construction of a general purpose pier facility and other improvements that inure to the benefit of the Mississippi State Port Authority. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or persons who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations, which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but the filing of such petition does not necessarily stay any action taken by the Mississippi Commission pending a decision by the Circuit Court. The Partnership must submit detailed financial and operating reports to the Mississippi Gaming Authorities. Substantially all loans, leases, sales of securities and other financing transactions entered into by the Partnership must be reported to, and, in some cases, approved by, the Mississippi Gaming Authorities. Under the Mississippi Regulations, a gaming license may not be held by a publicly traded company, although an affiliate corporation, such as the Company, may be publicly held so long as the Company receives the approval of the Mississippi Commission. The Company has received such approval of the Mississippi Commission. In addition, approval of any public offering of the securities of the Company must be obtained from the Mississippi Commission if any part of the proceeds from that offering are intended to be used to construct, acquire or finance the operation of gaming facilities in Mississippi or to retire or extend obligations incurred for any such purpose. Under the Mississippi Regulations, a person is prohibited from acquiring control of the Company without prior approval of the Mississippi Commission. The Company is also prohibited from consummating a plan of recapitalization proposed by management in opposition to an attempted acquisition of control of the Company and which involves the issuance of a significant dividend to Common Stockholders, where such dividend is financed by borrowing from financial institutions or the issuance of debt securities. In addition, the Company is prohibited from repurchasing any of its voting securities under circumstances (subject to certain exemptions) where the repurchase involves more than one percent of the Company's outstanding Common Stock at a price in excess of 110% of the then market value of the Company's Common Stock from a person who owns and has for less than one year owned more than three percent of the Company's outstanding Common Stock, unless the repurchase has been approved by a majority of the Company's 10 12 shareholders voting on the issue (excluding the person from whom the repurchase is being made) or the offer is made to all other shareholders for the Company. Any person who, directly or indirectly, or in associations with others, acquires beneficial ownership of more than five percent of the Common Stock of the Company must notify the Mississippi Commission of this acquisition and may be required to be found suitable by the Mississippi Commission. Any person who becomes a beneficial owner of more than 10% of the Company's Common Stock must apply for a finding of suitability by the Mississippi Commission. Furthermore, regardless of the amount of securities purchased, any person who acquires any beneficial ownership in the Common Stock of the Company may be required to be found suitable if the Mississippi Commission has reason to believe that the acquisition and ownership would be inconsistent with the declared policy of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit with the State Tax Commission a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission shall not be permitted to have any direct or indirect ownership in the Company's Common Stock. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in the Company's Common Stock if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or revoked by the Mississippi Commission, the Company is not permitted to pay such person for services rendered, or to employ or enter into any contract with such person. The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi, and corporations whose stock is publicly traded that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof (commonly referred to as "greenmail") and before a corporate acquisition opposed by management can be consummated. Mississippi's gaming regulations also requires prior approval by the Mississippi Commission if the Company were to adopt a plan of recapitalization proposed by the Company's Board of Directors in opposition to a tender offer made directly to its stockholders for the purposes of acquiring control of the Company. Neither the Partnership, the Company nor any controlled affiliate may engage in gaming activities in Mississippi and outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require, among other things, that there be adequate governmental regulation of gaming in the out-of-state location and that there is a means of the Mississippi Commission to have access to information concerning the out-of-state gaming operations and persons associated with them. REGULATION AND LICENSING - ALCOHOLIC BEVERAGES Nevada. The sale of alcoholic beverages by the Company is subject to supervision, control and regulation by the City of Reno, which issues licenses deemed to be nontransferable, revocable privileges, and which has full power to limit, condition, suspend or revoke such licenses. The Company is presently licensed to sell alcoholic beverages. Any adverse regulatory act with respect to this license could have an adverse effect upon the operations of the Company. 11 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 a smaller property in Reno consisting of an area of approximately .2 acres. The Company's Reno hotel/casino property is subject to aggregate encumbrances of approximately $11.0 million as of June 30, 1997. Gulfport, Mississippi. The Copa Casino gaming facilities are located on two decks of a 500 foot cruise ship owned by Gulfside Casino Partnership. These two decks also include four cocktail lounges/bars, a deli-style restaurant, a buffet restaurant operated by a third party and a gift shop. The deck below the two casino decks contains a surveillance area, a vault, count rooms, security and various operations and administrative offices. An additional three decks on the ship are available for future expansion of gaming and dining facilities. The engines for such cruise ship are disabled. All gaming activities are conducted while moored dockside. The Copa Casino is permanently moored dockside at a location known as the "Horseshoe Site." Such site, which is leased from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority, is between the East and West Piers of the Mississippi State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of land-based facilities, will accommodate surface parking for approximately 840 vehicles. The leased facilities also include a docking structure which accommodates the Copa Casino ship and will allow for mooring of additional vessels. The docking structure also includes a four-lane roadway and a pedestrian walk which provides access to the Copa Casino entrance. The initial term of the lease, as amended, is seven years and ends in October 1999. The lease provides for three renewal periods of five years each and one renewal period of ten years if the Partnership, within the first ten years of the lease agreement, constructs, on the leased premises or within the city limits of Gulfport, a hotel with a minimum of 350 units. If any of such renewal options are exercised, the lease term will be extended under the same terms and provisions of the lease agreement except that the rental amounts will be adjusted and revised annually, in years six through thirty-two, in accordance with changes in the Consumer Price Index. The lease provides for an annual rental of $500,000 (the "Minimum Rental") plus five percent (5%) of the gross annual gaming revenues over $25,000,000 (the "Percentage Rental"). In addition to the Minimum Rental and Percentage Rental set forth above, the Partnership is also required to pay, monthly, 3% of the gross monthly revenues on all activities other than gaming (the "Additional Percentage Rent"). The Minimum Rental is to be paid in advance, in equal monthly installments of $41,667 on the first day of every month during the lease year. For each month, the Percentage Rental and the Additional Percentage Rental must be calculated and the amounts due, if any, are to be paid on or before the 10th day of the following month. In July 1996, Copa Casino was notified by the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority that its lease will be cancelled and terminated at the end of the initial lease term in October 1999 because the Copa Casino's leased site is needed by the Mississippi State Port Authority to accommodate a purported expansion of Port facilities. Such notice of termination, among other items, is presently the subject of litigation between the Copa Casino and the Mississippi 13 15 Department of Economic and Community Development and the Mississippi State Port Authority as further described in Item 3. Legal Proceedings. If the Copa Casino is required to vacate its existing site and no suitable replacement sites can be found, the Company's results of operations could be materially adversely affected. ITEM 3. LEGAL PROCEEDINGS GCI MATTER In December 1994, a lawsuit was filed by Terry W. Green and Joel R. Carter, Sr. ("Green and Carter") in the Chancery Court of Harrison County, Mississippi, First Judicial District against GCI because of GCI's failure to make payments on promissory note obligations of GCI to Green and Carter. These note obligations, in the aggregate amount of $6 million, plus interest, are secured by a pledge of GCI's partnership interest in GCP. Although these promissory notes and the accrued interest thereon are obligations of GCI, they are reflected as current liabilities in the Company's Consolidated Balance Sheets at June 30, 1997 and 1996 upon consolidation. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment was entered, the lawsuit by Green and Carter also demanded the appointment of a receiver to take possession of and sell GCI's ownership interest in GCP and sought attorneys fees which were subsequently awarded in January 1997 in the amount of $54,000. In May 1995, GCP and Patrician were joined as necessary parties to the lawsuit. In August 1995, a Charging Order was entered which required GCP to respond to inquiries by Green and Carter for the purpose, among other things, of determining what distributions, if any, have been paid by the partnership to its partners. Moreover, a court order was granted whereby any amounts due or to become due GCI by GCP are to be paid to Green and Carter, pro-rata, until the summary judgment against GCI is satisfied. In July 1996, following a court hearing, the Chancery Court rendered a judgment that the reallocation of GCI's interest in the partnership may be appropriate as to the GCP partners but had no effect on the lien position of Green and Carter. This ruling related to the reduction in GCI's ownership interest in GCP from an original 60% interest to a .006% interest as a result of an amendment to the partnership agreement and a partner capital call. The amendment to the GCP partnership agreement was entered in April 1994 whereby the profit and loss allocation percentages were amended from 40% to 80% for Patrician and from 60% to 20% for GCI. Such amendment was entered into to cure a monetary partnership breach by GCI which occurred prior to the Company's acquisition of GCI and to properly reflect the relative financial risks of Patrician and GCI. The partner capital call occurred in January 1996 and was for the purpose of improving the partnership capital structure. Patrician and Artemis complied with the capital call; however, GCI failed to comply. As a result, and in accordance with the partnership agreement, GCI's interest in GCP was reduced from 20% to .006%. In May 1997, the Partnership Agreement was again amended to restore the original 60% interest as to GCI. Such was done to resolve the Chancery Court ruling dilemma. In the above July 1996 court ruling, Green and Carter were also given until November 1996 to exhaust their legal remedies in collecting against the judgment. Failing collection or other resolution by November 1996, the Court would consider additional measures including, but not limited to, the appointment of a receiver. In January 1997, the Chancery Court issued an amendment judgment which reaffirmed the prior judgments and reserved ruling on the necessity to appoint a receiver. The ruling also charged GCP, under Mississippi law, with the obligation to pay the GCI judgment amounts to Green and Carter and to pay Green and Carter 60% of all monies not designated for normal operational expenses on a monthly basis, commencing February 1, 1997, until the judgments due Green and Carter were satisfied. GCP was also required to provide a monthly accounting of income and operating expenses to Green and Carter. 14 16 To date, the required monthly reports have been made which report that no monies are available for distribution by GCP and that no monies have been distributed by GCP. Such reports continue to be made irrespective of the fact that GCI had filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. GCI, GCP and Patrician, as joined parties to such lawsuit, have filed an appeal with the Mississippi Supreme Court because it is the Company's belief that the Chancery Court's rulings are incorrect and not supported by the facts or the law. A hearing has not yet been scheduled on such appeal. On January 31, 1997, GCI filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court of the Southern District of Mississippi, Southern Division. A Plan of Reorganization was filed with the related Disclosure Statement expected to be filed in late September 1997. Actions have not yet been taken to dispose of the bankruptcy case. Green and Carter have filed a motion in the United States Bankruptcy Court for relief from the automatic stay provisions under Section 3 of the Bankruptcy Code which prohibits payments on pre-petition obligations. Such motion contends that the automatic stay provisions should not apply because the obligations are payable by GCP and not the bankrupt entity GCI. It is the Company's belief that the automatic stay provisions under the United States Bankruptcy Code, which are applicable to the creditors of GCI, appropriately apply to Green and Carter and that GCP is prohibited from making any payment or distribution to these individuals who are creditors of GCI. GCP and GCI have filed briefs in opposition to the motion for relief from the automatic stay properly stating that the debtor to Green and Carter is GCI and not GCP. Further, that the Chancery Court judgment created, or clarified, an obligation of GCP to make payments to Green and Carter only to the extent that GCP may otherwise have a requirement to make payments to GCI. Notwithstanding this, GCI and GCP further contend that any payments that may be required to be made by GCP to GCI should appropriately be paid into the bankrupt estate of GCI and should not be distributed to pre-petition, or other, creditors of GCI. A hearing on such motion is presently scheduled for October 1, 1997. In the event the motion for relief from the automatic stay is granted, Green and Carter may continue legal action in the Chancery Court which was consistent with a May 28, 1997 Chancery Court ruling and which could include the appointment of a receiver. GCI's only tangible asset is its partnership interest in GCP. GCI has filed for Chapter 11 Bankruptcy protection and is also not otherwise in the financial position to make any payments with respect to the note obligations due Green and Carter. It is the Company's belief that GCI's Plan of Reorganization, which contemplates making certain payments to Green and Carter from new equity funding to GCI, represents a reasonable, equitable and final resolution and settlement to the GCI litigation and bankruptcy issues. However, confirmation and acceptance of the filed Plan of Reorganization is not assured. As such, the ultimate resolution of this matter is not presently subject to reasonable estimation and could include a dispossession of a 60% right to receive partnership profits and surplus. In February 1997, Carter and Green also each filed separate lawsuits in U. S. District Court for the Southern District of Mississippi, Biloxi Division, against The Sands Regent and certain officers and directors of The Sands Regent and GCI. Such lawsuits allege breach of various common law duties and contractual interference by the defendants and seek compensatory and punitive damages. Such actions are in the preliminary discovery stages. Management, and the individual defendants, believe these actions to be without merit and will vigorously defend them. 15 17 PORT MATTER In July 1996, the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the "Port") filed a declaratory judgment action against GCP in the Chancery Court of Harrison County, Mississippi, First Judicial District. Such lawsuit seeks Court interpretation of certain provisions of the lease between MDECD and the Port and GCP including whether the Port may terminate the lease on a date certain, whether the Port must approve the substitution of another gaming vessel for the present gaming vessel and whether the Port must approve the construction of a hotel on the lease premises. In addition to the lawsuit, MDECD and the Port also notified GCP that its lease will be cancelled and terminated at the end of the initial lease term in October 1999 because GCP's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. In July 1997, the MDECD and the Port filed a second amended complaint, in addition to the original declaratory relief action, seeking damages and to immediately terminate the lease related to certain dredging activities conducted on GCP's leased premises by contractors engaged by GCP. In response to the initial MDECD and Port action and the second amended complaint, GCP filed counterclaims against the MDECD and Port claiming various tort and contract breaches including wrongful failure to approve the substitution of a gaming barge for the present gaming ship, wrongful failure to allow GCP to construct a hotel on the leased premises, breach of covenant of good faith and fair dealing, misrepresentation, breach of covenant of quiet enjoyment and wrongfully allowing activities at the Port to cause the accumulation of sand and silt under and adjacent to the GCP gaming vessel. GCP's lawsuit seeks an award for compensatory damages in an amount not less than $200 million and a declaratory judgment quieting the lease term and allowing the development of the leased premises. The lawsuit is presently set for trial on October 6, 1997 with respect to the liability issues and both parties have been engaged in active discovery matters, including depositions and exchange of documents, for most of calendar 1997. In the event GCP is successful on any or all of its claims and counterclaims, a separate trial on damages will be held which is currently scheduled during the first week of December 1997. Management believes that the outcome of this lawsuit is not presently predictable or subject to reasonable estimation. OTHER The Company is also a party to various other legal actions, proceedings and pending claims arising in the normal course of its business. Management does not expect the outcome of these claims or suits to have a material adverse effect on the Company's financial position or results of future operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of fiscal 1997. 16 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.
FOR THE YEARS ENDED JUNE 30, HIGH LOW DIVIDEND - ---------------------------- ---- --- -------- 1996 First Quarter.......................................... $6.25 $ 4.50 $.05 Second Quarter......................................... 6.25 4.50 $.05 Third Quarter.......................................... 5.50 3.62 $.05 Fourth Quarter......................................... 5.75 3.50 - 1997 First Quarter.......................................... $5.13 $3.13 - Second Quarter......................................... 3.75 2.63 - Third Quarter.......................................... 3.13 2.50 - Fourth Quarter......................................... 3.50 1.63 -
----------- In fiscal 1996, the Board of Directors of the Company suspended the payment of cash dividends. The declaration and payment of dividends in the future, if any, will be determined by the Board of Directors in light of the conditions then existing, including the Company's earnings, financial condition, capital requirements and other factors. As of September 22, 1997, the Company had 158 shareholders of record and in excess of 400 beneficial shareholders. ITEM 6. SELECTED FINANCIAL DATA There is hereby incorporated by reference the information appearing under the caption "The Sands Regent - Selected Financial Data" in the Company's 1997 Annual Report, filed as Exhibit 13 to this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS There is hereby incorporated by reference the information appearing under the caption "The Sands Regent - Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report, filed as Exhibit 13 to this Form 10-K. 17 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA There is hereby incorporated by reference the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in the Company's 1997 Annual Report, filed as Exhibit 13 to this Form 10-K. Reference is made to the Consolidated Financial Statements and the Notes to Consolidated Financial Statements in Item 14(a)(1) hereof. With the exception of the aforementioned information and the information in Items 6 and 7, the Company's 1997 Annual Report is not deemed filed as part of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated by reference the information appearing under the caption "Directors and Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on November 3, 1997, filed or to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference the information appearing under the caption "Compensation of Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on November 3, 1997, filed or to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information appearing under the captions "Principal Shareholders" and "Directors and Executive Officers" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on November 3, 1997, filed or to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on November 3, 1997, filed or to be filed with the Securities and Exchange Commission. 19 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS. Included in Part II of this Report: Independent Auditors' Report Consolidated Balance Sheets -- June 30, 1997 and 1996 Consolidated Statements of Operations -- Years Ended June 30, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- Years Ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (A)(2) FINANCIAL STATEMENT SCHEDULES. Included in Part IV of this Report: As of and for the Years Ended June 30, 1997, 1996 and 1995: Independent Auditors' Report on Schedules Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 20 22 (A)(3) EXHIBITS 3(a)(i) Restated Articles of Incorporation of the Company (Exhibit 3(a) to the Company's Registration Statement (Registration No. 2-93453) on Form S-1).* 3(a)(ii) Certificate of Amendment to the Restated Articles of Incorporation of the Company, dated November 2, 1987 (Exhibit 4(a) to the Company's Form 10-Q for the quarter ended December 31, 1987).* 3(b)(i) Amended and Restated Bylaws of the Company, as amended April 29, 1985, and currently in effect (Exhibit 3(b) to the Company's Form 10-K for the fiscal year ended June 30, 1985).* 3(b)(ii) Resolution of Amendment to the Bylaws of the Company, dated November 2, 1987 (Exhibit 4(b) to the Company's Form 10-Q for the quarter ended December 31, 1987).* 3(b)(iii) Certificate of Amendment of the Amended and Restated Code of Bylaws, as Amended, of The Sands Regent, dated January 10, 1996 (Exhibit 3(b)(iii) to the Company's Form 10-K for the fiscal year ended June 30, 1996).* 4(a) Amended Trust Agreement, dated February 22, 1987, among Antonia Cladianos II as trustor and beneficiary and Pete Cladianos, Jr. as trustee (Exhibit 4(a) to the Company's Form 10-K for the fiscal year ended June 30, 1987).* 4(b) Amended Trust Agreement, dated February 19, 1987, among Pete Cladianos III as trustor and beneficiary and Pete Cladianos, Jr. as trustee (Exhibit 4(b) to the Company's Form 10-K for the fiscal year ended June 30, 1987).* 10(a) Amended and Restated Stock Option Plan for Executive and Key Employees of the Sands Regent and Forms of Stock Option Agreements (Exhibit 4(a) to the Company's Registration Statement (Registration No. 33-59574) on Form S-8).* 10(b) Deferred Compensation Plan for Directors of the Company (Exhibit 10(e) to the Company's Registration Statement (Registration No. 2-93453) on Form S-1).* 10(c) Form of Indemnity Agreement for Directors and Officers of the Company (Exhibit 10(f) to the Company's Form 10-K for the fiscal year ended June 30, 1988).* 10(d) Loan Agreement, dated March 31, 1993, by and between First Interstate Bank of Nevada, National Association, First Interstate Bank of California, The Daiwa Bank, Limited and Zante, Inc. and the related Term and Revolving Credit Promissory Note; Guarantee of Loan by the Sands Regent; Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents (Exhibit 10(b) to the Company's Form 10-Q for the Quarter ended March 31, 1993).* 10(e) First Amendment to Loan Agreement, dated June 27, 1994, by and between First Interstate Bank of Nevada, National Association, The Daiwa Bank Limited and Zante, Inc., Borrower, and The Sands Regent, Guarantor (Exhibit 10(e) to the Company's Form 10-K for the fiscal year ended June 30, 1994).* 10(f) Second Amendment to Loan Agreement and Term and Revolving Credit Promissory Note, dated October 15, 1996, by and between Wells Fargo Bank, National Association, The Sumitomo Bank Limited and Zante, Inc., Borrower, and The Sands Regent, Guarantor.** 21 23 10(g) International Swap Dealers Association, Inc. Master Agreement for interest rate swap, dated March 23,1994, by and between First Interstate Bank of Nevada N.A. and Zante, Inc., and the related Guarantee by The Sands Regent and Letter Agreement of Confirmation (Exhibit 10(f) to the Company's Form 10-K for the fiscal year ended June 30, 1994).* 10(h) General Partnership Agreement, effective as of December 31, 1992, between Gulfside Casino, Inc. and Patrician, Inc. (a wholly-owned subsidiary of the Sands Regent) (Exhibit 10(a) to the Company's Form 10-Q for the Quarter ended March 31, 1993).* 10(i) First Amendment to Gulfside Casino, a Mississippi General Partnership, General Partnership Agreement, dated April 15, 1994, between Gulfside Casino, Inc. and Patrician, Inc. (both wholly owned subsidiaries of The Sands Regent) (Exhibit 10(a) to the Company's Form 10-Q for the Quarter ended March 31, 1994).* 10(j) Second Amendment to Gulfside Casino, a Mississippi General Partnership, General Partnership Agreement, dated December 9, 1994, between Gulfside Casino, Inc. and Patrician, Inc., (both wholly-owned subsidiaries of The Sands Regent)(Exhibit 10(a) to the Company's Form 10-Q for the Quarter ended December 31, 1994).* 10(k) Unanimous Consent to Action in Lieu of Special Call Meeting of the Board for Gulfside Casino Partnership, amending, among other items, the Gulfside Casino General Partnership Agreement, dated May 30, 1997, by and between Patrician, Inc., Gulfside Casino, Inc. and Artemis, Inc.** 10(l) Agreement for the Purchase of Stock of the Gulfside Casino, Inc. and certain Assets of McDonald Limited, dated February 25,1994 (Exhibit 2(a) to the Company's Form 8-K/A for event reporting date of February 14, 1994).* 10(m) Gulfside Casino, Inc. Settlement Agreement, dated August 20, 1993, by and between Gulfside Casino, Inc., a Mississippi Corporation, and Joel R. Carter, Sr. and Terry Green (Exhibit 10(j) to the Company's Form 10-K for the year ended June 30,1994).* 10(n) Settlement Agreement dated November 2, 1984, by and between Hughes Properties, Inc., and Zante, Inc. (Exhibit 10(u) to the Company's Registration Statement (Registration No. 2-93453) on Form S-1).* 10(o) Franchise Agreement dated October 9, 1986 and as amended on October 9, 1986, by and between Roma Corporation and Zante, Inc. (Exhibit 10(r) to the Company's Form 10-K for the fiscal year ended June 30, 1987).* 10(p) Agreement, dated as of January 2, 1995, between David R. Wood and The Sands Regent (Exhibit 10(n) to the Company's Form 10-K for the fiscal year ended June 30, 1995).* 10(q) Lease Agreement by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated August 20, 1992 (Exhibit 10(o) to the Company's Form 10-K for the fiscal year ended June 30, 1996).* 22 24 10(r) Amendment to Lease and Approval of Stock Purchase by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., dated October 28, 1992 (Exhibit 10(p) to the Company's Form 10-K for the fiscal yer ended June 30, 1996).* 10(s) Second Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino, Inc., Lessee, and Gulfside Casino Partnership, Substitute Lessee, dated May 12, 1993 (Exhibit 10(q) to the Company's Form 10-K for the fiscal year ended June 30, 1996).* 10(t) Third Lease Amendment by and between the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority at Gulfport and Gulfside Casino Partnership, dated June 21, 1994 (Exhibit 10(r) to the Company's Form 10-K for the fiscal year ended June 30, 1996).* 13 1997 Annual Report to Shareholders.** 21 Subsidiaries: Zante, Inc., Patrician, Inc., and Artemis, Inc., Nevada Corporations, and Gulfside Casino, Inc., a Mississippi corporation, are wholly owned by the Company. Patrician, Inc., Gulfside Casino, Inc.,and Artemis, Inc., are the sole partners in Gulfside Casino Partnership, a Mississippi general partnership. 23 Independent Auditors' Consent to the incorporation by reference into specified registration statement on Form S-8 of their reports contained in or incorporated by reference into this report.** 27 Financial Data Schedule. ------------------------------- * Incorporated by reference ** Filed herewith (B) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the last quarter of fiscal 1997. (C) INDEX TO EXHIBITS. (D) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules required by Regulation S-X are excluded from the 1997 Annual Report to the Shareholders by Rule 14a-3(b)(1). See Schedule II to the Financial Statements appearing under Item 14(a)(2) hereof. 23 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SANDS REGENT Date: September 25, 1997 By: PETE CLADIANOS, JR. ------------------- Pete Cladianos, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - --------- -------- ---- PETE CLADIANOS, JR. President (Chief September 25, 1997 - ------------------- Executive Officer) Pete Cladianos, Jr. and Director KATHERENE LATHAM Chairman of the September 25, 1997 - ------------------- Board of Directors Katherene Latham JON N. BENGTSON Executive Vice President, September 25, 1997 - ------------------- Chief Operating Officer and Jon N. Bengtson Director DAVID R. WOOD Executive Vice President, September 25, 1997 - ------------------- Treasurer, Chief Financial and David R. Wood Accounting Officer and Director PETE CLADIANOS III Executive Vice President, September 25, 1997 - ------------------- Secretary and Director Pete Cladianos III JOSEPH G. FANELLI Director September 25, 1997 - ------------------- Joseph G. Fanelli WELDON C. UPTON Director September 25, 1997 - ------------------- Weldon C. Upton
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, 1997 and 1996, and for each of the three years in the period ended June 30, 1997, and have issued our report thereon dated August 8, 1997. Such consolidated financial statements and report are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Sands Regent and subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Reno, Nevada August 8, 1997 25 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, 1997 . . . . . . . . $ 107 $ 103 $ ( 91) $ 119 Year ended June 30, 1996 . . . . . . . . 147 136 (176) 107 Year ended June 30, 1995 . . . . . . . . 111 92 (56) 147
- --------------- (1) Write-offs of uncollectible accounts receivable, net of recoveries 26 28 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - ------ -------- 10(f) Second Amendment to Loan Agreement and Term and Revolving Credit Promissory Note, dated October 15, 1996, by and between Wells Fargo Bank, National Association, The Sumitomo Bank Limited and Zante, Inc., Borrower, and The Sands Regent, Guarantor . . . . . . . . . . . . . . . . . . 10(k) Unanimous Consent to Action in Lieu of Special Call Meeting of the Board for Gulfside Casino Partnership, amending, among other items, the Gulfside Casino General Partnership Agreement, dated May 30, 1997, by and between Patrician, Inc., Gulfside Casino, Inc. and Artemis, Inc . . . . . . . . . . 13 1997 Annual Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Independent Auditors' Consent to the incorporation by reference into specified registration statement on Form S-8 of their reports contained in or incorporated by reference into this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EX-10.F 2 SECOND AMENDMENT TO LOAN AGREEMENT 1 EXHIBIT 10(f) SECOND AMENDMENT TO LOAN AGREEMENT AND TERM AND REVOLVING CREDIT PROMISSORY NOTE THIS SECOND AMENDMENT TO LOAN AGREEMENT AND TERM AND REVOLVING CREDIT PROMISSORY NOTE ("Second Amended Agreement") is entered into as of the 15th day of October, 1996, by and among ZANTE, INC., a Nevada corporation ("Borrower"), THE SANDS REGENT, a Nevada corporation ("Sands Regent") and WELLS FARGO BANK, National Association and THE SUMITOMO BANK, LIMITED (collectively the "Lenders") and WELLS FARGO BANK, National Association, as administrative and collateral agent for the Lenders (herein, in such capacity, called the "Agent Bank" and, together with the Lenders, collectively referred to as the "Banks"). R_E_C_I_T_A_L_S: WHEREAS: A. On or about March 31, 1993, First Interstate Bank of Nevada, National Association ("FINV"), First Interstate Bank of California ("FICAL") and The Daiwa Bank, Limited (hereinafter "Daiwa" and together with FINV and FICAL collectively referred to as the "Closing Lenders") entered into a Loan Agreement (hereinafter referred to as the "Original Loan Agreement") with Borrower under the terms of which, among other things, the Closing Lenders agreed to loan to Borrower a principal sum not to exceed Twenty-Three Million Six Hundred Nine Thousand Five Hundred Sixteen Dollars ($23,609,516.00) as evidenced by a Term and Revolving Credit Promissory Note of even date therewith (as amended, the "Original Note"). B. On or about January 26, 1994, FINV acquired all interest of FICAL in and to the Loan pursuant to that certain Assignment and Assumption Agreement for Participation Interest in Loan of even date therewith. C. On or about June 27, 1994, FINV and Daiwa entered into a First Amendment to Loan Agreement with Borrower (the "First Amendment to Loan Agreement", and together with the Original Loan Agreement, the "Existing Loan Agreement"), under the terms of which, among other things, the financial covenants set forth by Section 5.14 of the Original Loan Agreement were modified. 2 D. The Sumitomo Bank, Ltd. acquired the interest of Daiwa by Assignment and Assumption Agreement for Participation in Loan dated as of February 2, 1996. Wells Fargo Bank, National Association, is the successor by merger to First Interstate Bank of Nevada, National Association. E. Borrower and Lenders desire to amend the Existing Loan Agreement and Original Note for the purpose of: (i) waiving certain financial covenant non-compliance for the Fiscal Quarters more particularly hereinafter described, (ii) amending certain financial covenants effective as of the Fiscal Quarter ending September 30, 1996, (iii) requiring principal prepayment as hereinafter described and amending the Scheduled Maximum Principal Amount schedule attached as Exhibit A to the Note, and (iv) prohibiting Distributions by Borrower to Sands Regent. F. Banks have agreed to the amendments and modifications to the Existing Loan Agreement and Note set forth in Recital Paragraph E hereinabove on the terms and conditions more particularly hereinafter described. G. In this Second Amended Agreement all capitalized words and terms not otherwise defined or redefined herein shall have the respective meanings and be construed herein as provided in Section 1.01 of the Existing Loan Agreement and any reference to a provision of the Existing Loan Agreement shall be deemed to incorporate that provision as a part hereof in the same manner and with the same effect as if the same were fully set forth herein. NOW, THEREFORE, in consideration of the foregoing and other good and valuable considerations, the parties hereto do agree to amend the Existing Loan Agreement and Original Note by substituting the amended terms and provisions as hereinafter set forth, which amended terms shall be deemed effective as of the Second Amendment Effective Date, unless otherwise specifically provided, as follows: 1. Additional/Amended Definitions. Section 1.01 of the Existing Loan Agreement entitled "Definitions" shall be amended by the following additions and modifications to the definitions set forth hereinbelow which shall supersede and restate, where previously defined, the applicable definition as originally set forth in the Existing Loan Agreement: "Capital Expenditures" shall mean, for any period, without duplication, the aggregate of all expenditures - 2 - 3 (whether paid in cash or accrued as liabilities during that period and including capitalized lease liabilities) by the Borrower during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed or capital asset accounts reflected in the consolidated balance sheet of the Borrower (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by Borrower to the extent of (a) the gross amount of such purchase price less (b) the cash proceeds or trade-in credit of the equipment being traded in at such time), but excluding capital expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or refinanced from insurance proceeds paid on account of the loss of or damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation of or the exercise of the power of eminent domain with respect to such assets being replaced or restored. "Closing Lenders" shall have the meaning ascribed to such term in Recital Paragraph A of the Second Amended Agreement. "Distributions" shall mean and collectively refer to any and all cash dividends, loans, management fees, payments, advances, stock redemptions or repurchases or other distributions, fees or compensation of any kind or character whatsoever made by Borrower to Sands Regent. "Existing Loan Agreement" shall have the meaning ascribed to such term in Recital Paragraph C of the Second Amended Agreement. "First Amendment to Loan Agreement" shall have the meaning ascribed to such term in Recital Paragraph C of the Second Amended Agreement. "Loan Agreement" shall mean the Existing Loan Agreement as amended by the Second Amended Agreement, as such instrument may hereafter be amended, modified, renewed or restated. "Note" shall mean the Original Note as amended by the Second Amended Agreement as such instrument may hereafter be amended, modified, renewed or restated. - 3 - 4 "Original Loan Agreement" shall have the meaning ascribed to such term in Recital Paragraph A of the Second Amended Agreement. "Original Note" shall have the meaning ascribed to such term in Recital Paragraph A of the Second Amended Agreement. "Scheduled Maximum Principal Amount" shall mean the maximum principal amount which may be outstanding and unpaid as of any date of determination as set forth on the schedule setting forth the dates and Scheduled Maximum Principal Amount which may be outstanding and unpaid on the Note as of and subsequent to the Second Amendment Effective Date, a copy of which schedule of Scheduled Maximum Principal Amount is marked "Exhibit A", affixed to the Second Amended Agreement and by this reference incorporated herein and made a part hereof, which schedule of Scheduled Maximum Principal Amount shall, as of the Second Amendment Effective Date, fully restate and supersede the schedule of Scheduled Maximum Principal Amount attached as Exhibit A to the Original Note. "Second Amended Agreement" shall mean the Second Amendment to Loan Agreement and Term and Revolving Credit Promissory Note dated as of October 15, 1996, executed by and among Borrower, Sands Regent and Banks. "Second Amendment Effective Date" shall mean September 30, 1996, subject to the satisfaction of each of the Conditions Precedent set forth in Paragraph 9 of the Second Amended Agreement. "Second Amendment Execution Date" shall mean the date as of which the Second Amended Agreement has been executed by Borrower, Sands Regent and each of the Banks. 2. Compliance Waiver and Amendment of Fixed Charge Coverage Ratio. Effective as of June 30, 1996, Borrower's compliance with the Fixed Charge Coverage Ratio as set forth in Section 5.14(b) of the Original Loan Agreement, as restated by Section 5.14(c) of the First Amendment to Loan Agreement, is hereby waived for the Fiscal Quarter ended June 30, 1996. Furthermore, as of the Second Amendment Effective Date, Section 5.14(b) of the Original Loan Agreement, as restated by Section 5.14(c) of the First Amendment to Loan Agreement, shall be and is hereby fully amended and restated in its entirety as follows: - 4 - 5 "Section 5.14(c). Commencing as of the Second Amendment Effective Date, Borrower shall maintain a minimum Fixed Charge Coverage Ratio as of the end of each Fiscal Quarter, calculated on a cumulative basis with respect to each such Fiscal Quarter and the most recently ended three (3) preceding Fiscal Quarters on a rolling four (4) Fiscal Quarter basis, in accordance with the following schedule:
FIXED CHARGE FISCAL QUARTER END COVERAGE RATIO =============================================================================== As of the Fiscal Quarters ending on September 30, 1996 and December 31, 1996 0.65 to 1.00 As of the Fiscal Quarter ending on March 31, 1997 0.75 to 1.00 As of the Fiscal Quarter ending on June 30, 1997 1.00 to 1.00 As of the Fiscal Quarter ending on September 30, 1997 and as of the end of each Fiscal Quarter through the Maturity Date 1.50 to 1.00"
3. Compliance Waiver of Adjusted Fixed Charged Coverage Ratio. Effective as of June 30, 1996, Banks hereby waive compliance with the provisions of the Adjusted Fixed Charge Coverage Ratio set forth in Section 5.14(d) of the First Amendment to Loan Agreement for the Fiscal Quarter ending on June 30, 1996 through the Fiscal Quarter ending June 30, 1997. Borrower acknowledges and agrees that Banks are entitled to require strict compliance with Section 5.14(d) as set forth in the First Amendment to Loan Agreement as of the Fiscal Quarter ending September 30, 1997 as well as each Fiscal Quarter thereafter occurring through the Maturity Date. 4. Waiver and Amendment of Maximum Capital Expenditure Requirement. Effective as of June 30,1996, the limitation imposed on Capital Expenditures as set forth in Section 5.14(a) of the Original Loan Agreement, as restated by Section 5.14(a) of the First Amendment to Loan Agreement, shall be and is hereby waived for the Fiscal Year ended June 30, 1996. Furthermore, Section 5.14(a) as set forth in the Original Loan Agreement, as restated by Section 5.14(a) of the - 5 - 6 First Amendment to Loan Agreement, shall be and is hereby further amended and restated in its entirety as follows: "Section 5.14(a). Notwithstanding the provisions contained in Section 5.03, the Borrower shall not, without the prior written consent of Lenders, make Capital Expenditures or acquire additional fixed assets or equipment or enter into capital leases in an aggregate amount during any applicable Fiscal Year, which exceeds: (i) Three Million Four Hundred Thousand Dollars ($3,400,000.00) for the Fiscal Year ending June 30, 1997, or (ii) five percent (5%) of its gross revenues for its then most recently completed prior Fiscal Year for each Fiscal Year ending on and after June 30, 1998 through the Maturity Date." 5. Restatement of Dividend Restriction and Substitution of Distribution Prohibition. Section 5.14(e) of the Original Loan Agreement, as restated by Section 5.14(g) of the First Amendment to Loan Agreement, shall be and is hereby amended, restated and superseded in its entirety as follows for the period commencing on the Second Amendment Effective Date through June 30, 1997: "Section 5.14(g). Borrower shall not make or advance Distributions of any kind or character whatsoever to Sands Regent without the prior written consent of Lenders." Subsequent to June 30, 1997, Section 5.14(g) shall read and provide as set forth in the First Amendment to Loan Agreement. 6. Modification of Scheduled Maximum Principal Amounts. As of the Second Amendment Effective Date, the Scheduled Maximum Principal Amount schedule attached as Exhibit A to the Original Note shall be restated and superseded in its entirety by the Scheduled Maximum Principal Amount schedule marked "Exhibit A", affixed to the Second Amended Agreement and by this reference incorporated herein and made a part hereof. 7. Consent of and Guaranty Affirmation by Sands Regent. Sands Regent joins in execution of this Second - 6 - 7 Amended Agreement for the purpose of: (i) evidencing its consent and agreement to the terms and conditions set forth herein, (ii) acknowledging that all references in the Sands Regent Guaranty to the "Loan Agreement" and "Note" shall include the Existing Loan Agreement and Original Note as amended hereby and (iii) ratifying, confirming and reaffirming the Sands Regent Guaranty in all respects as being fully applicable to and unconditionally guaranteeing the prompt and full payment and performance of the Loan Agreement and the Note. 8. Amendment Fee. On or before the Second Amendment Effective Date, Borrower shall pay to Agent Bank for the benefit of Lenders a non-refundable fee (the "Second Amendment Fee") in the amount of Fifty-Four Thousand Eight Hundred Seventy-Five Dollars ($54,875.00) to be promptly distributed by Agent Bank to Lenders in proportion to their respective Participation Interests in the Loan. 9. Conditions Precedent to Second Amendment Effective Date. The occurrence of the Second Amendment Effective Date is subject to Agent Bank having received the following documents, in each case in a form and substance reasonably satisfactory to Lenders: a. Execution and delivery by each of the Borrower, Sands Regent and Banks of four (4) counterpart originals of the Second Amended Agreement. b. Delivery to Agent Bank of a copy of a corporate resolution for each of the Borrower and Sands Regent authorizing the execution and delivery of this Second Amended Agreement and each document, agreement and instrument to be executed and delivered by Borrower and/or Sands Regent in connection herewith. c. Payment by Borrower and receipt by Agent Bank of the Second Amendment Fee on or before the Second Amendment Execution Date; d. Payment by Borrower and receipt by Agent Bank of a principal reduction payment in the amount of Four Million Five Hundred Seventy-Eight Thousand Dollars ($4,578,000.00) or such other amount as may be necessary to reduce the outstanding unpaid principal of the Loan to be no greater than Ten Million Nine Hundred Seventy-Five Thousand Dollars ($10,975,000.00) as of the Second Amendment Execution Date. - 7 - 8 e. Reimbursement to Agent Bank by Borrower for all reasonable fees and out-of-pocket expenses incurred by Agent Bank in connection with the Second Amended Loan Agreement, including, but not limited to, reasonable attorneys' fees of Henderson & Nelson, and all other like expenses remaining unpaid as of the Second Amendment Execution Date; and f. Such other documents, instruments or conditions as may reasonably be required by Lenders. 10. Representations and Warranties. To induce Banks to enter into this Second Amended Agreement, Borrower hereby: (i) ratifies and reaffirms the representations and warranties set forth in Article IV of the Existing Loan Agreement; (ii) warrants and represents that each such representation and warranty shall be true and correct as of the Second Amendment Execution Date, other than representations and warranties which expressly speak as of a different date which shall be true and correct as of such date; and (iii) represents and warrants that, as of the Second Amendment Execution Date, after giving effect to the waivers and amendments set forth in the Second Amended Agreement, no Event of Default or event with which the giving of notice or passage of time would constitute an Event of Default has occurred and remains continuing. 11. No Other Changes. That all of the other terms and provisions of the Existing Loan Agreement and Original Note shall remain unchanged and in full force and effect except as specifically modified herein. 12. Entire Agreement. The Existing Loan Agreement and Original Note as modified by this Second Amended Agreement together with the other Loan Documents constitute the entire agreement between the parties and supersedes all prior agreements whether written or oral with respect to the subject matter hereof, including, but not limited to, any term sheets furnished by Banks to Borrower and/or Sands Regent and any negotiations, discussions or commitments for the lending or advance of any funds or monies other than as specifically set forth in the Existing Loan Agreement and Original Note, as amended by the Second Amended Agreement. Neither the Existing Loan Agreement or the Original Note, as modified hereby, nor any provision therein, or herein, may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. - 8 - 9 13. Counterpart. This Second Amended Agreement may be executed in any number of separate counterparts with the same effect as if the signatures hereto and hereby were upon the same instrument. All such counterparts shall together constitute but one and the same document. 14. Additional/Replacement Exhibits Attached. The following replacement Schedules and Exhibits are attached hereto and incorporated herein and made a part of the Loan Agreement as follows: Exhibit A - Scheduled Maximum Principal Amount schedule - 9 - 10 IN WITNESS WHEREOF, the parties hereto have executed the foregoing Second Amended Agreement as of the day and year first above written. LENDERS: BORROWER: WELLS FARGO BANK, National Association, ZANTE, INC., successor by merger to FIRST INTERSTATE a Nevada corporation BANK OF NEVADA, National Association, Agent Bank and Lender By /s/ DAVID R. WOOD --------------------- David R. Wood, Treasurer By /s/ ROB MEDEIROS -------------------------- Rob Medeiros, SANDS REGENT, Vice President a Nevada corporation THE SUMITOMO BANK, LIMITED, Lender By /s/ DAVID R. WOOD --------------------- David R. Wood, Treasurer By /s/ DAVID M. LAWRENCE ------------------------- Name David M. Lawrence ----------------------- Title Vice President & Manager ---------------------- By /s/ BRADFORD E. CHAMBERS ------------------------- Name Bradford E. Chambers ----------------------- Title Vice President ---------------------- - 10 - 11 SCHEDULED MAXIMUM PRINCIPAL AMOUNT ----------------------------------
============================================================================= SCHEDULED MAXIMUM AMOUNT OF PRINCIPAL DATE OF DETERMINATION REDUCTION AMOUNT ============================================================================= 04-01-96 to Second Amendment -0- $15,553,000 Effective Date - ----------------------------------------------------------------------------- Second Amendment Effective $4,578,000 $10,975,000 Date to 09-30-97 - ----------------------------------------------------------------------------- 10-01-97 to 03-31-98 $1,793,000 $ 9,182,0000 - ----------------------------------------------------------------------------- 04-01-98 to 09-30-98 $1,884,000 $ 7,298,000 - ----------------------------------------------------------------------------- 10-01-98 to 03-31-99 $1,980,000 $ 5,318,000 - ----------------------------------------------------------------------------- 04-10-99 to 09-30-99 $2,081,000 $ 3,237,000 - ----------------------------------------------------------------------------- 10-01-99 to date immediately $2,188,000 $ 1,049,000 preceding Maturity Date - ----------------------------------------------------------------------------- Maturity Date $1,049,000 -0- (All outstanding sums fully due) =============================================================================
EXHIBIT "A" TO SECOND AMENDED AGREEMENT AND TO TERM AND REVOLVING CREDIT PROMISSORY NOTE EX-10.K 3 UNANIMOUS CONSENT TO ACTION IN LIEU OF SPECIAL CAL 1 EXHIBIT 10(k) UNANIMOUS CONSENT TO ACTION IN LIEU ----------------------------------- OF SPECIAL CALL MEETING OF THE ------------------------------ BOARD FOR GULFSIDE CASINO PARTNERSHIP ------------------------------------- WHEREAS, GULFSIDE CASINO, INC., a Mississippi Corporation, ("GULFSIDE") and PATRICIAN, INC., a Nevada Corporation, ("PATRICIAN") entered into that certain General Partnership Agreement effective December 31, 1992, wherein GULFSIDE was originally vested with a 60% interest and PATRICIAN was vested with a 40% interest; and, WHEREAS, the First Amendment to the Partnership Agreement was entered into by and between GULFSIDE and PATRICIAN on April 15, 1994, and made effective on January 1, 1993, in order to accurately reflect the financial risk of each partner and to cure various breaches by GULFSIDE CASINO, INC. and which First Amendment caused the profits and losses of the Partnership between GULFSIDE and PATRICIAN to be reallocated as follows: 80% interest in PATRICIAN and 20% interest in GULFSIDE; and, WHEREAS, the Second Amendment to the Partnership Agreement was entered into by and between GULFSIDE and PATRICIAN on December 9, 1994 and contained, among other things, provisions related to additional contributions to capital; and, WHEREAS, PATRICIAN was designated in accordance with Article IX of the Partnership Agreement as the construction manager and as the operations manager; and, WHEREAS, PATRICIAN transferred a portion of an interest equivalent to one percent (1%) in the partnership to ARTEMIS, INC., a Nevada Corporation (herein "ARTEMIS") in order to ensure the 1 2 continuity of the Partnership in the event of dissolution of one of its partners; and, WHEREAS, the Chancery Court of Harrison County, Mississippi, First Judicial District, entered its Amended Judgment dated January 13, 1997, in the matter styled "Terry W. Green and Joel R. Carter, Sr. v. Gulfside Casino, Inc., Gulfside Casino Partnership, Mississippi Partnership and Patrician, Inc.", Cause No. 106,741; and, WHEREAS, GULFSIDE CASINO, INC. filed a Voluntary Petition pursuant to Title 11 of the United States Bankruptcy Code on January 31, 1997, in the United States Bankruptcy Court for the Southern District of Mississippi, Southern Division, Case No. 97-07499; and, WHEREAS, the Chancery Court of Harrison County, Mississippi, First Judicial District entered its Judgment dated May 29, 1997, in Cause No. 106,741; and, WHEREAS, the Defendants in the above referenced Chancery Court proceeding have taken an appeal to the Mississippi Supreme Court and dispute certain findings of fact and conclusions of law set forth in the Amended Judgment dated January 13, 1997, and intend to do likewise relative to the Judgment dated May 29, 1997, in order to protect their respective rights and interests in the Partnership; and, WHEREAS, notwithstanding the perfection of the appeal to the Mississippi Supreme Court, the Partnership and its partners, in an effort to comply with the spirit and intent of the Amended Judgment 2 3 of the Chancery Court dated January 13, 1997, and the subsequent Judgment dated May 29, 1997, and without waiving any rights under the appeals or otherwise, find that a reallocation of the ownership interest in the Partnership will facilitate a resolution of the time consuming, costly and disruptive litigation pending in Chancery Court proceeding Cause No. 106,741, by and through the Chapter 11 Reorganization of GULFSIDE CASINO, INC. in the United States Bankruptcy Court; and, WHEREAS, GULFSIDE CASINO PARTNERSHIP, by and through its partners, finds that a reallocation of the interest originally vested in GULFSIDE CASINO, INC. should eliminate the substantive issues between the parties to the litigation pending before the Chancery Court of Harrison County, Mississippi, First Judicial District, in Cause No. 106,741; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises and covenants contained herein, GULFSIDE, PATRICIAN and ARTEMIS hereby agree as follows: 1. PERCENTAGE INTEREST. The Partnership Agreement shall be amended to provide for the reallocation of profits and losses in the Partnership to restore the 60% interest originally vested in GULFSIDE CASINO, INC. which reallocation will result in the following ownership: 60% to GULFSIDE, 39% to PATRICIAN and 1% to ARTEMIS, effective May 30, 1997. 2. CAPITAL CALL. The Capital Call Notice dated January 24, 1996, and subsequent Capital Call pursuant to Article VI of the General Partnership Agreement is hereby reversed and rescinded. 3 4 3. CONTINUING EFFECT. Except as set forth to the contrary herein, all other terms and conditions of the Partnership Agreement, as amended, remain in full force and effect. 4. RESERVATION OF RIGHTS. The Partnership and its partners hereby reserve any and all rights, claims, demands, charges, defenses, affirmative defenses and assignments of error on appeal, in law and in equity, which have been raised or may be raised in any litigation, including the litigation pending before the Chancery Court of Harrison County, Mississippi, First Judicial District, in Cause No. 106,741, in the Chapter 11 Bankruptcy proceeding for GULFSIDE CASINO, INC. in United States Bankruptcy Court for the Southern District of Mississippi, Southern Division, Case No. 97-07499, and/or in any other proceeding which has been or may be filed or alleged by the Plaintiffs arising out of or in any way related to the disputes between the Plaintiffs and the Partnership or any of its partners in the above referenced proceedings. 5. WAIVER OF NOTICE. The undersigned partners do hereby consent and agree to the actions and matters set forth hereinabove and do hereby waive any and all requirements of notice relative to such actions as allowed under Article VIII of the Partnership Agreement. 6. EFFECTIVE DATE. This Unanimous Consent to Action is effective immediately upon the date of last execution by the parties hereto. 4 5 WITNESS THE SIGNATURES OF THE PARTNERS on the date set forth below: PATRICIAN, INC., GULFSIDE CASINO, INC., a Nevada Corporation, General Partner Managing Partner BY: /s/ PETE CLADIANOS, JR. BY: /s/ PETE CLADIANOS, JR. -------------------------------- ----------------------------- PETE CLADIANOS, JR. PETE CLADIANOS, JR. DATE: 5-30-97 DATE: 5-30-97 ----------- ----------- BY: /s/ JON N. BENGTSON BY: /s/ JON N. BENGTSON -------------------------------- ----------------------------- JON N. BENGTSON JON N. BENGTSON DATE: May 30, 1997 DATE: May 30, 1997 ---------------- ---------------- BY: /s/ DAVID R. WOOD BY: /s/ DAVID R. WOOD -------------------------------- ----------------------------- DAVID R. WOOD DAVID R. WOOD DATE: May 30, 1997 DATE: May 30, 1997 ---------------- ---------------- ARTEMIS, INC. BY: /s/ PETE CLADIANOS, JR. -------------------------------- PETE CLADIANOS, JR. DATE: 5-30-97 ----------- BY: /s/ JON N. BENGTSON -------------------------------- JON N. BENGTSON DATE: May 30, 1997 ---------------- BY: /s/ DAVID R. WOOD -------------------------------- DAVID R. WOOD DATE: May 30, 1997 ---------------- 5 EX-13 4 1997 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 [THE SANDS REGENT LOGO] [THE SANDS REGENCY LOGO] [COPA CASINO LOGO] 1997 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 684 slot machines. The complex has 938 hotel rooms, including 32 suites of various sizes, and also includes three restaurants, a Donut House, a "Pizza Hut", and an "Arbys" restaurant, a "Baskin-Robbins" and an "Orange Julius" operated by third parties. The facilities also include three cocktail lounges. The Company's facilities also include a gift shop, a video arcade, a beauty/barber shop and a liquor store, each operated by third parties, a health club, a swimming pool and over 10,000 square feet of convention and meeting space which can seat up to 650 people. The Company maintains six parking areas on its main hotel/casino property and adjacent to it, including two parking garages, with a total combined capacity for approximately 1,000 vehicles. The Company's property holdings also include a .5 acre lot, located one-half block from the hotel/casino site, used for the Company's personnel office and for storage and a smaller property located in Reno of approximately .2 acres. The Company's Reno hotel/casino operations are conducted 24 hours a day every day of the year. Although the Company offers, on a very limited basis, complimentary hotel accommodations to select customers, no group arrangements known as "junkets" are conducted. GULFPORT, MISSISSIPPI PROPERTIES AND OPERATIONS The Copa Casino, which is owned and operated by Gulfside Casino Partnership ("GCP"), commenced operations in September 1993. The three partners in Gulfside Casino Partnership, Patrician, Inc. ("Patrician"), Gulfside Casino, Inc. ("GCI") and Artemis, Inc. ("Artemis") are all wholly owned by the Company. The Copa Casino is located aboard a 500-foot cruise ship owned by the partnership. In Mississippi, all gaming facilities must be constructed on floating facilities on or juxtapositional to approved navigable waterways. Such facilities need not cruise into the waterways and, as such, become permanently moored as dockside gaming facilities. The Copa Casino is also permanently moored. The Copa Casino consists of approximately 24,000 square feet of gaming area located on two decks. The Copa offers 735 slot machines and 26 table games, including craps, roulette, blackjack, caribbean stud, three card poker and big six. In addition, the facility also includes four cocktail lounges/bars, a deli-style restaurant, a buffet restaurant and various ancillary services and facilities. The Copa Casino is permanently moored dockside at a location known as the "Horseshoe Site." Such location, which is leased to the partnership by the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority, is between the East and West Piers of the Mississippi State Port in Gulfport, Mississippi. This location, which includes 8.3 acres of land based facilities, will accommodate surface parking for approximately 840 vehicles. The leased facilities also include a docking structure which accommodates the Copa Casino ship. The docking structure also includes a roadway and pedestrian walk which provides access to the Copa Casino entrance. As in Nevada, the Mississippi operations are conducted 24 hours a day every day of the year. Present operations provide for the offering of complimentary food and beverage on a limited basis. Group arrangements, known as "junkets" are not conducted. 3 TO OUR STOCKHOLDERS - -------------------------------------------------------------------------------- In Reno, as anticipated, our revenues declined during the three quarters ended March 31, 1997 and improved in the fourth quarter. Such decrease in revenues and profitability at the Sands Regency continues to be due to increased competition from Las Vegas Mega-resorts, Indian casinos in the Pacific Northwest and Reno area market dilution as a result of the 25% increase in hotel rooms in the last 24 months. We were also negatively impacted by floods and other unusual weather conditions in Reno and our major market areas in the third quarter. In the fourth quarter, revenues and profitability at the Sands Regency improved over last year. These improvements were due to the Women's International Bowling Congress, a city-wide event held in Reno from February to July 1997, and aggressive marketing efforts undertaken by the Company. During the year, we undertook and completed a renovation of our main casino area improving and updating the ambiance. We also installed a state-of-the-art player marketing-tracking system which has been operating since approximately December 1996. With these improvements and additions, coupled with the renovation of a significant number of our hotel rooms in the last several years, we believe that our Reno facility is an up-to-date and well maintained property. Looking ahead for the Sands Regency, we believe the Reno market will continue to grow and absorb the increased hotel and casino capacity added over the last several years. In February 1998, the Men's American Bowling Congress will start and we anticipate it will make a positive contribution to us and the Reno area as a whole. We will continue our aggressive marketing efforts directed toward both group and air wholesale business and small convention business. We are also looking at new marketing approaches and promotional programs, some of which have been successful at the Copa Casino, to increase our business and profitability. In Mississippi, operating profit and net income were down, compared to last year, despite an increase in revenues. Such declines were due, in part, to a loss on the write-off of property and equipment items, extraordinary dredging costs and increased legal costs. The loss on disposal of property and equipment includes the write-off of the undepreciated cost of a slot monitoring/accounting system, which was replaced in 1997, and the write-off of certain capitalized costs for projects no longer deemed viable. The dredging costs were a result of dredging under and around our gaming ship necessitated, primarily, by unusual and rapid siltation. This rapid siltation appears to have been caused by other vessels in the Port and is the responsibility of, and part of our lawsuit with, the Port. The increase in legal costs are significantly attributable to the lawsuit with the Port and the Mississippi Department of Community and Economic Development. With respect to this lawsuit, the trial date of October 6, 1997 is rapidly approaching and preparation for it has been time consuming and costly. Although we are somewhat optimistic about our situation and position, we can not predict the outcome which will likely have an important impact on the future of the Copa Casino. In addition to the above lawsuit, legal action with the two former shareholders of Gulfside Casino, Inc., a partner in the Copa Casino, is ongoing. An unfavorable ruling in Chancery Court in Harrison County Mississippi, entered in January 1997, has been appealed to the Mississippi Supreme Court on the grounds that the judgment was incorrect and not based on the facts or the law. In addition, Gulfside Casino, Inc., the creditor to the two former shareholders, has filed for protection under Chapter 11 of the United States Bankruptcy Code. We believe that Bankruptcy Court is the proper forum to resolve the dispute with these individuals although they are attempting to circumvent such jurisdiction by requesting that the Bankruptcy Court allow them to continue to pursue their action in Chancery Court. 2 4 - -------------------------------------------------------------------------------- The most recent obstacle for the Copa Casino is our entrance off highway 90. Highway 90 is being widened, by utilizing the Port's frontage road, to accommodate increased traffic. This includes the demolition of our entrance which was accessible off the frontage road. Although delayed by the Port, a new signalized intersection will be provided to serve as our new entrance which should significantly enhance access to our facility. We expect completion by December 1997 and until then, access to our facilities will continue to be difficult. In spite of these difficulties, the Copa continues to make the best of the situation. We have implemented numerous innovative marketing programs and promotions which have been successful in attracting visitors. We also have many loyal customers who are diligently trudging through the construction. As always, we are thankful for, and appreciate our many loyal employees in both Reno and Gulfport. We are also very appreciative of our guests, many of whom come to see us again and again, and year-after-year. Respectfully, [SIG] Pete Cladianos, Jr. President and Chief Executive Officer Reno, Nevada September 25, 1997 3 5 THE SANDS REGENT SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- For the years ended June 30,
1997 1996 1995 1994 1993 ------- ------- -------- ------- ------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Operating revenues(1) $57,521 $59,858 $ 60,497 $51,446 $43,877 Income (loss) from operations (114) 4,675 (11,748)(2) 8,178 8,608 Net income (loss) (762) 2,042 (11,428)(2) 7,730 5,481 Net income (loss) per share $ (.17) $ .45 $ (2.54)(2) $ 1.76 $ 1.27 Cash dividends per share -- $ .15 $ .20 $ .20 $ .20 OPERATING DATA: Casino square footage(3) 51,000 51,000 51,000 51,000 27,000 Number of slot machines(3) 1,409 1,407 1,459 1,483 783 Number of hotel rooms(3) 938 938 938 938 938 Average hotel occupancy rate 84.4% 82.9% 87.1% 89.7% 89.0% BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(3) $ 7,894 $11,557 $ 12,214 $ 9,804 $ 3,274 Total assets(3) 61,053 64,311 66,253 82,268 56,559 Long-term debt(3) 4,658 14,816 17,808 27,559 13,676 Total stockholders' equity(3) 32,454 33,216 31,849 44,138 35,423
- --------------- (1) Revenues are net of complimentaries. (2) Includes a write-off attributable to an impairment in long-lived assets of GCP and GCI. The negative impact of such write-off on income (loss) from operations, net income (loss) and net income (loss) per share was approximately $17.5 million, $13.9 million and $3.08, respectively. (3) Information presented as of the end of the period. 4 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS COMPARISON OF 1997 TO 1996 For the year ended June 30, 1997, revenues decreased to $57.5 million compared to $59.9 million for the year ended June 30, 1996 and income from operations decreased from $4.7 million to a loss from operations of $114,000. For the same comparable periods, net income decreased from $2 million, or $.45 per share, in fiscal 1996, to a net loss of $762,000, or a $.17 loss per share, in fiscal 1997. The decrease in revenues is composed of an increase in revenues from the Copa Casino of approximately $900,000 which was offset by a decrease in revenues from the Sands Regency of approximately $3.3 million. The decrease in income from operations is composed of a decrease from the Copa Casino of approximately $1.0 million and a decrease from the Sands Regency of $3.8 million. The decrease in Copa Casino income from operations is due to increased costs and expenses whereas the decrease in income from operations from the Sands Regency is due primarily to a decrease in revenue. The decreases in net income and net income per share, are also attributable to both the Sands Regency and the Copa Casino operations. The Copa Casino contributed approximately $741,000 to the consolidated net income in fiscal 1997 compared to $1.3 million in fiscal 1996. For the same comparable periods, the Sands Regency incurred a net loss of approximately $1.5 million in fiscal 1997 compared to net income in fiscal 1996 of $705,000. Such declines in revenues, income from operations, net income (loss) and net income (loss) per share at the Sands Regency are primarily due to increased competition from new and expanded Reno area hotel/casinos and from new Las Vegas mega-resorts. Unusually poor weather conditions in Northern Nevada, Northern California and the Pacific Northwest, during the third quarter of fiscal 1997, also contributed to the decline in Sands Regency revenues. The increase in Copa Casino revenues is due to an increase in customer counts while the decrease in profitability is due to increased costs and expenses. The decrease in lodging revenue of $671,000, in the year ended June 30, 1997 compared to the prior year, is due to a decrease in the average daily room rate at the Sands Regency. The average daily rate decreased from $32 in fiscal 1996 to approximately $29 in fiscal 1997. For the same periods hotel occupancy increased from 82.9% for the year ended June 30, 1996 to 84.4% in the year ended June 30, 1997. The decrease in gaming revenue of $606,000 is a result of a decrease in gaming revenue from the Sands Regency of approximately $1.7 million which was offset by an increase in gaming revenue from the Copa Casino of $1.1 million. The decrease in gaming revenue in Reno consists of a decrease in Sands Regency casino gaming revenue of $2.2 million which was offset by increased gaming revenue from the Company's slot route operation of $477,000. The decrease in Sands Regency gaming revenue primarily consists of a decrease in slot revenue and is due to a decline in gaming revenue per occupied room. Gaming revenue per occupied room decreased from $71 in the year ended June 30, 1996 to approximately $64 in the year ended June 30, 1997. The increase in slot route revenue is due to the Company's acquisition of a slot route business in June 1996 which operates slot machines at various non-casino businesses (convenience stores and cocktail lounges) in the Reno area. The slight increase in food and beverage revenue of $28,000, in fiscal 1997 compared to fiscal 1996, consists of an increase from the Copa Casino of approximately $101,000 and a decrease from the Sands Regency of $73,000. The increase at the Copa Casino is in beverage revenue and the decrease at the Sands Regency is in restaurant revenue as a result of a slight decrease per occupied room. 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- The decrease in other revenue of $990,000 includes a decrease from the Copa Casino of approximately $371,000 and a decrease from the Sands Regency of $619,000. The decrease at the Copa Casino is due to the write-off of the undepreciated cost of a slot monitoring/accounting system which was replaced in fiscal 1997 and the write-off of certain capitalized costs for projects no longer deemed viable. The decrease at the Sands Regency is due to the nonrecurrence of a prior year gain on the sale of a small motel owned and operated by the Sands Regency. The increase in complimentary lodging, food and beverage, deducted from revenue, of $98,000 consists of an increase from the Sands Regency of $203,000 which was offset by a decrease from the Copa Casino of $105,000. The increase at the Sands Regency is composed of an increase in complimentary hotel accomodations of approximately $74,000 and an increase in complimentary food and beverages of $129,000. The increase in complimentary lodging is partially a result of changes in the Company's lodging programs and packages offered to attract and retain guests. The increase in gaming costs and expense of $1.3 million in the year ended June 30, 1997, compared to the year ended June 30, 1996, is comprised of increases from the Copa Casino of $698,000 and from the Sands Regency of $614,000. The increase in Copa Casino costs and expenses is primarily attributable to the increase in associated gaming revenue. The increase in Sands Regency gaming costs and expenses includes increases in the cost of complimentary goods and services provided of $297,000, costs and expenses associated with the new slot route operation of $425,000 and costs of approximately $338,000 associated with the preferred players club which was implemented in December 1996. These increases at the Sands Regency have been offset by a decrease in gaming taxes and licenses of $192,000 and a decrease in various other costs and expenses of approximately $254,000. The decrease in taxes and licenses is due to the decrease in associated gaming revenue. The decrease in lodging costs and expenses of $240,000 includes an increase in the allocation of costs and expenses to gaming relative to the provision of complimentary lodging of $65,000 and a decrease in various other lodging costs and expenses. The slight increase in food and beverage costs and expenses of $68,000, in fiscal 1997 compared to fiscal 1996, consists of a decrease from the Sands Regency of approximately $222,000 and an increase from the Copa Casino of $290,000. The increase from the Copa Casino is due to a decrease in the allocation of costs and expenses to gaming relative to the provision of complimentary food and beverage of $80,000 and an increase in the cost of beverages provided. The decrease from the Sands Regency consists primarily of an increase in the allocation of costs and expenses to gaming relative to the provision of complimentary food and beverage. The increase in maintenance and utilities costs and expenses of $195,000 includes an increase from the Copa Casino of $145,000 and an increase from the Sands Regency of approximately $50,000. The increase from the Copa Casino is due to maintenance dredging performed under and around the ship totaling approximately $316,000 through June 30, 1997 which costs were greater than the prior year hurricane preparedness costs and expenses associated with Hurricane Opal. The increase from the Sands Regency primarily consists of painting costs of $162,000 which was offset by a decrease in other costs of approximately $112,000. The increase in painting costs is due to the painting of the exterior of the Company's Reno facilities and the interior of the five story parking structure. 6 8 - -------------------------------------------------------------------------------- The increase in general and administrative costs and expenses of $934,000 consists principally of an increase from the Copa Casino of $628,000 and an increase from the Sands Regency of $299,000. The increase from the Copa Casino is attributable to increases in legal costs of $570,000 and in wages and benefits of $238,000 which were offset by a decrease in advertising and promotional costs of approximately $176,000. The increase in legal costs is significantly related to the disputes and legal actions with the State Port of Mississippi at Gulfport as further discussed in Notes 9 and 10 to the Company's Consolidated Financial Statements. The increase in general and administrative costs and expenses for the Sands Regency consists primarily of an increase in advertising and promotional costs of approximately $389,000 reduced by a decrease in property taxes of $185,000. The increase in depreciation and amortization expense of $170,000 is primarily attributable to the Sands Regency and is due to additional depreciation taken on assets placed in service in fiscal 1997 and 1996. During such years, significant property and equipment additions and replacements were undertaken. The increase in interest and other income of approximately $188,000 is primarily attributable to the Sands Regency. In fiscal 1997, the Sands Regency recognized a gain of $374,000 on the sale of a non-casino property in Reno which was offset by a reduction in interest income. Interest income decreased as a result of a reduction in excess cash held in investments. The decrease in interest and other expense of $468,000, in fiscal 1997 compared to fiscal 1996, is primarily due to a principal reduction in an interest bearing long-term debt obligation of the Sands Regency in October 1996. As further indicated in the Company's Notes to the Consolidated Financial Statements, the effective income tax rate differs from the statutory rate, in the current fiscal year, as a result of one-time differences including tax-free interest income and deductible tax credits. As is true for other hotel/casinos in the Reno area, demand for the Company's facilities declines in the winter. Operating margins and, to a lesser extent, revenues are lower during the second and third fiscal quarters due to lower room rates and a lower level of gaming play per occupied room. The Sands Regency has not historically been affected as severely as many other hotel/casinos in the Reno area because the Company attracts high levels of group business during that period. This group business and the Company's flexible pricing strategy have historically enabled the Company to maintain relatively high levels of hotel occupancy. Management anticipates that the trend of experiencing lower operating margins in the second and third quarters of each fiscal year will continue. It appears that such seasonal trends are also applicable to the Copa Casino. However, because of the limited amount of time that the Copa has been in operation, the relatively limited amount of time that gaming has existed on the Mississippi gulfcoast and the rapid expansion of gaming in Mississippi and nearby Louisiana, the nature and extent of seasonal fluctuations, if any, are subject to change. COMPARISON OF 1996 TO 1995 For the year ended June 30, 1996, revenues decreased to $59.9 million compared to $60.5 million for fiscal 1995 and income from operations increased to $4.7 million as compared to a loss from operations of approximately $11.7 million in fiscal 1995. For the same comparable periods, net income increased from a net loss of $11.4 million, or a $2.54 loss per share, in fiscal 1995 to net income of $2 million, or $.45 per share, in 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- fiscal 1996. The decrease in revenues was composed of an increase in revenues from the Copa Casino which was offset by a decrease in revenues from the Sands Regency. The increases in income from operations, net income and net income per share were a result of the prior year recognition of an impairment in value of long-lived assets of the Copa Casino and GCI of $17.5 million which did not occur in fiscal 1996. In addition, income from operations, net income and net income per share had been positively affected from improved operating results from the Copa Casino and negatively impacted from declining operating results at the Sands Regency in fiscal 1996 compared to fiscal 1995. Management believed that the decline in Reno revenue and profits is due to increased competition from new and expanded Reno area hotel/casinos and from the Las Vegas mega-resorts. The decrease in lodging revenue of $673,000, in the year ended June 30, 1996 compared to the prior year, was due to a decrease in Sands Regency hotel occupancy at a lower average daily room rate. In fiscal 1995, hotel occupancy was 87.1% at an average daily room rate of approximately $33. In fiscal 1996, hotel occupancy was 82.9% at an average daily room rate of $32. The increase in gaming revenue of $318,000 was comprised of an increase in gaming revenue from the Copa Casino of approximately $2.7 million which was offset by a decrease in gaming revenue at the Sands Regency of approximately $2.4 million. The decrease in gaming revenue in Reno, which was primarily slot revenue, was due to the decrease in hotel occupancy and a decrease in gaming revenue per occupied room. Gaming revenue per occupied room decreased from $75 in year ended June 30, 1995 to approximately $71 in the year ended June 30, 1996. The decrease in food and beverage revenue of $313,000 included a decrease in food revenue at the Sands Regency of approximately $369,000 and the elimination of Copa Casino buffet revenue of approximately $266,000. During approximately the first four months of fiscal 1995, the Copa Casino was involved in the operation of a buffet style restaurant located on its facilities. Thereafter, such buffet style restaurant was operated by a third party. The decrease in Sands Regency food revenue was primarily due to the decrease in hotel occupancy. These decreases were partially offset by improved Copa Casino food and beverage revenues as a result of an overall increase in business volumes. The increase in other revenue of $326,000 was principally comprised of a gain on the sale of a small motel previously owned and operated by the Sands Regency of $506,000 and a decrease in retail liquor store sales of approximately $267,000. In August 1994, the retail liquor store business, which was operated by the Company in Reno, was sold to a third party. Such third party operated the retail liquor store in Company owned facilities for rent and other consideration paid to the Company. The increase in complimentary lodging, food and beverage, deducted from revenue, of $298,000 was primarily due to an increase in complimentary lodging in Reno, as a result of changes in the Company's lodging programs and packages offered to attract and retain guests. The increase in gaming costs and expenses of $295,000 was comprised of, for the Copa Casino, an increase in gaming taxes and licenses of $259,000, a decrease in estimated health benefit costs of $163,000 and a decrease in the cost of complimentary goods and services provided to Copa Casino guests of $124,000. The net remaining increase was attributable to the Sands Regency and includes an increase in the cost of complimentary goods and services in the amount of $185,000, due to increased complimentary services provided to Sands Regency guests, and general increases in salaries, wages and benefits and other costs. The decrease in food and beverage costs and expenses of $225,000, in fiscal 1996 compared to fiscal 1995, consisted primarily of the elimination of costs and expenses associated with the buffet style restaurant at the 8 10 - -------------------------------------------------------------------------------- Copa Casino. The decrease in other costs and expenses of $295,000 was primarily due to the elimination of costs and expenses associated with the sale of the retail liquor store business in August 1994 which was previously operated by the Sands Regency. The increase in maintenance and utilities costs and expenses of $381,000 in the year ended June 30, 1996, compared to the year ended June 30, 1995, was principally due to hurricane preparedness costs and expenses for the Copa Casino, both in general and for Hurricane Opal. The increase in general and administrative costs and expenses of $1.1 million consisted primarily of increased advertising, promotional and customer solicitation costs for the Copa Casino of approximately $790,000 and increased legal costs of approximately $190,000 related, in part, to the Copa Casino's leased site development conflict with the Mississippi State Port Authority. The prior year recognition of an impairment of long-lived assets of $17.5 million, which did not occur in fiscal 1996, consisted of a write-down of Copa Casino property and equipment of $10.7 million and the write-off of goodwill, which originated when GCI was purchased in February 1994, of approximately $6.8 million. The impairment was based upon political and market conditions and an analysis, at June 30, 1995, of projected undiscounted future cash flows. The decrease in depreciation and amortization expense of $784,000 included the elimination of goodwill amortization of $366,000 as a result of the write-off of Gulfside Casino, Inc. goodwill in June 1995 when the Company recognized an impairment in long-lived assets associated with the Copa Casino. Likewise, due to the recognition of such impairment, the decrease in depreciation and amortization expense also included a decrease in Copa Casino depreciation expense of approximately $585,000. The decrease in interest expense, in fiscal 1996 compared to fiscal 1995, was primarily a result of a reduction in interest-bearing debt owed by the Company. As further indicated in the Company's Notes to the Consolidated Financial Statements, the decrease in the statutory rate to arrive at the effective income tax rate, in the year ended June 30, 1996, was primarily a result of the tax effect of tax-free interest income earned by the Company and the utilization of general business credits. The increase in the effective income tax rate from the statutory rate in fiscal 1995 was primarily the result of the write-off of goodwill in connection with the recognition of an impairment in long-lived assets in fiscal 1995. CAPITAL RESOURCES AND LIQUIDITY The Company's working capital declined from a deficit of $2.4 million at June 30, 1996 to a deficit of $12.6 million at June 30, 1997. Such decline is primarily due to an early repayment of principal on the Company's bank debt of $1.3 million, the reclassification of $7.3 million of bank debt at June 30, 1997 from non-current to current and the purchase of property and equipment, for cash, of approximately $3.1 million. The early repayment of bank debt was a result of an agreement between the Company and Wells Fargo Bank and Sumitomo Bank, Ltd. amending certain financial covenants of the long-term debt loan agreement in October 1996. Such amendment resulted in the Company's compliance with the financial covenants at June 30, 1996 and September 30, 1996 and it was anticipated that the Company would also be in compliance thereafter. As part of the consideration for such amendment, the Company made a prepayment of $1.3 million which would otherwise have been due on the loan maturity date of March 31, 2000. 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- Subsequent to such October 1996 amendment to the bank loan agreement, the Company has been, and is, in noncompliance with certain of the required financial covenants related to operating results due to net losses from the Sands Regency. As a result, the bank has declared an Event of Default in accordance with the terms of the loan agreement which entitles the bank to a default interest rate of prime plus three percent and allows the bank to accelerate the loan principal balance. Although the bank has not accelerated the loan principal balance, the Company has included the entire balance as a current liability of which approximately $7.3 million would have otherwise been reflected as non-current. The Company is currently in discussions with the bank regarding restructuring the loan agreement. In the event such discussions are unsuccessful and the bank accelerates the loan balance, the Company is not in a financial position to pay-off the loan obligation. Further, the Company's ability to make the future scheduled semi-annual principal payments is subject to significant improvements in the Company's operating results which is presently not anticipated. Management believes that its efforts to enter into a restructured loan agreement, with monthly principal and interest payments due over a longer period than the current remaining loan term of approximately three years, will be successful. However, there are no assurances that such will be the result. In addition to the non-compliance with certain financial covenants, majority shareholders of the Company have entered into an agreement to sell all of their common stock in the Company, aggregating approximately 46 percent, to a third party. Such transaction is subject to certain regulatory approvals and the approval of the bank. Without bank approval, such transaction would violate certain additional bank loan covenants. At June 30, 1997, cash, cash equivalents and short-term investments decreased to $7.9 million compared to $11.6 million at June 30, 1996. Cash and cash equivalents provided from operating activities for the years ended June 30, 1997, 1996 and 1995 was $3.3 million, $5.1 million and $7.3 million, respectively. Although the Company's operations and capital expenditures are financed primarily from funds generated from operations and borrowings, cash of approximately $475,000 and $735,000 was generated in fiscal 1997 and 1996, respectively, from the sale of non-hotel/casino properties located in Reno, Nevada. In fiscal 1997, cash was also generated through the issuance of long-term debt of $498,000 and in fiscal 1996, cash was generated from the net disposal of short-term investments of $1.7 million. In fiscal 1995, cash of $1.7 million was used for the net acquisition of short-term investments. The Company's short-term investments, which generally mature in one year or less, represent temporarily invested cash funds which are generally readily convertible to cash. Uses of cash included the Company's payment of dividends in the amounts of $675,000 and $899,000 in fiscal years 1996 and 1995, respectively, and payments of long-term debt of $4.9 million, $3.1 million and $703,000 in fiscal 1997, 1996 and 1995. Cash was also utilized for the acquisition of property and equipment in the amounts of $3.1 million, $2.6 million and $2.7 million in the years ended June 30, 1997, 1996 and 1995, respectively. The property and equipment acquisition amounts, for the years indicated, represent primarily furniture, fixtures and equipment replacements and additions. Cash payments of $98,000 in fiscal 1996 and $756,000 in fiscal 1995 were made to satisfy accounts payable for the preceeding years purchases of property and equipment items. At June 30, 1997, the Company estimates that all of its cash funds are necessary for operational purposes. The Company generally invests its excess cash in securities which are readily marketable and that are not subject to significant market value fluctuations. 10 12 - -------------------------------------------------------------------------------- Future expansion plans for the Reno and Gulfport facilities will be considered based upon future market conditions, available financial resources and the need to add hotel rooms and other major facilities. Expansion at the Gulfport facility has also been denied by the Mississippi State Port Authority at Gulfport and the Mississippi Department of Economic and Community Development which disapproval is part of on-going litigation as further discussed below and in Note 10 to the Company's Notes to Consolidated Financial Statements. A judgement has been entered against Gulfside Casino, Inc. ("GCI"), as further discussed in Note 10 to the Company's Notes to Consolidated Financial Statements, requiring certain payments by Gulfside Casino Partnership ("GCP") to two former shareholders of Gulfside Casino, Inc. Such payments are to be applied against promissory notes payable and related accrued interest, aggregating approximately $7.1 million at June 30, 1997 until such amounts are paid in full. At present, the circumstances requiring such payments, including excess monies not designated for Gulfside Casino Partnership operational purposes, have not been met. Further, as a result of the GCI filing for protection under Chapter 11 of the United States Bankruptcy Code, management believes that the automatic stay provisions under the Bankruptcy Code restricts payments to GCI creditors, including payment to the two former shareholders. The two former GCI shareholders have filed a motion in Bankruptcy Court for relief from the automatic stay provisions of the Bankruptcy Code which prohibits payments on pre-petition obligations. Such motion, which is scheduled to be heard on October 1, 1997, contends that the automatic stay provisions should not apply because the obligations are payable by GCP and not the bankrupt entity GCI. It is the Company's belief that the automatic stay provisions under the United States Bankruptcy Code, which are applicable to the creditors of GCI, appropriately apply to these two former GCI shareholders and that GCP is prohibited from making any payment or distribution to these individuals who are creditors of GCI. Notwithstanding the above, GCI and GCP further contend that any payments that may be required to be made by GCP to GCI should appropriately be paid into the bankrupt estate of GCI and should not be distributed to pre-petition, or other, creditors of GCI. In the event the motion for relief from the automatic stay is granted, the two former GCI shareholders may continue legal action in the Chancery Court which could include the appointment of a receiver. In July 1996, GCP received notice from the Mississippi Department of Economic and Community Development and the Mississippi State Port Authority (the "Port") that GCP's lease for the present Copa Casino site would not be extended beyond its initial term of October 1999 because GCP's site was needed by the Port. Such notice of termination and the Port's refusal to allow the Company to undertake an expansion of its Gulfport facility, including building a hotel, among other items, are the subject of a lawsuit between the parties. The lawsuit is presently set for trial on October 6, 1997 with respect to the liability issues. In the event GCP is successful on any or all of its claims and counterclaims, a separate trial on damages will be held which is currently scheduled during the first week of December 1997. If GCP is unsuccessful and is required to vacate the current leased site in October 1999, the Company's results of operations could be materially adversely affected and the Company's investment in the Mississippi gaming operation may not be recovered. At June 30, 1997, the book value of the Company's net investment in and advances to (including accrued interest) the Mississippi gaming operation was approximately $2.6 million. 11 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- Inflation has had only a slight impact on the Company's operating results. Cost and expense increases have generally been passed on to the customers through moderate price increases, higher table limits and upgraded slot machine denominations. Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. Such statements are identified by the words "anticipates", "believes", "expects", "intends", "future", or words of similar import. Various important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the following: increased competition in existing markets or the opening of new gaming jurisdictions; a decline in the public acceptance of gaming; the limitation, conditioning or suspension of any of the Company's gaming licenses; adverse outcomes in any of the Company's various material legal proceedings in Mississippi; increases in or new taxes imposed on gaming revenues or gaming devices; a finding of unsuitability by regulatory authorities with respect to the Company's officers, directors or key employees; loss or retirement of key executives; significant increases in fuel or transportation prices; adverse economic conditions in the Company's key markets; severe and unusual weather in the Company's key markets and adverse results of significant litigation matters. 12 14 THE SANDS REGENT CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995
1997 1996 1995 ----------- ------------ ------------ OPERATING REVENUES: Gaming $42,837,923 $ 43,443,535 $ 43,125,137 Lodging 8,461,714 9,132,778 9,805,719 Food and beverage 7,910,110 7,882,377 8,195,340 Other 1,186,327 2,175,831 1,850,111 ----------- ------------ ----------- 60,396,074 62,634,521 62,976,307 Less complimentary lodging, food and beverage included above 2,874,795 2,776,918 2,479,087 ----------- ------------ ----------- 57,521,279 59,857,603 60,497,220 ----------- ------------ ----------- OPERATING COSTS AND EXPENSES: Gaming 22,106,717 20,794,534 20,499,506 Lodging 4,918,433 5,158,603 5,193,683 Food and beverage 6,566,859 6,499,231 6,724,601 Other 678,566 665,220 960,201 Maintenance and utilities 5,658,004 5,462,777 5,073,517 General and administrative 13,901,048 12,967,352 11,878,463 Impairment of long-lived assets -- -- 17,496,282 Depreciation and amortization 3,805,522 3,635,219 4,418,769 ----------- ------------ ----------- 57,635,149 55,182,936 72,245,022 ----------- ------------ ----------- INCOME (LOSS) FROM OPERATIONS (113,870) 4,674,667 (11,747,802) ----------- ------------ ----------- OTHER INCOME (DEDUCTIONS): Interest and other income 779,508 591,126 549,978 Interest expense (1,926,378) (2,394,743) (2,562,889) ----------- ------------ ----------- (1,146,870) (1,803,617) (2,012,911) ----------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES (1,260,740) 2,871,050 (13,760,713) INCOME TAX (PROVISION) BENEFIT 498,928 (828,688) 2,332,892 ----------- ------------ ----------- NET INCOME (LOSS) $ (761,812) $ 2,042,362 $(11,427,821) =========== ============ =========== NET INCOME (LOSS) PER SHARE $ (.17) $ 0.45 $ (2.54) =========== ============ =========== WEIGHTED AVERAGE SHARES OUTSTANDING 4,498,722 4,498,722 4,497,588 =========== ============ ===========
- --------------- See notes to consolidated financial statements. 13 15 THE SANDS REGENT CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- June 30, 1997 and 1996
1997 1996 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,643,681 $11,356,980 Short-term investments 250,000 200,000 Accounts receivable, less allowance for possible losses of $119,000 and $107,000 418,018 400,018 Inventories 640,023 789,199 Federal income tax refund receivable 1,062,657 141,369 Prepaid expenses and other assets 1,297,392 979,555 ----------- ----------- Total current assets 11,311,771 13,867,121 PROPERTY AND EQUIPMENT: Land 8,092,923 8,094,823 Buildings, ship and improvements 45,753,424 45,376,570 Equipment, furniture and fixtures 24,775,831 21,762,273 Construction in progress 171,955 231,264 ----------- ----------- 78,794,133 75,464,930 Less accumulated depreciation and amortization 31,059,712 28,051,014 ----------- ----------- 47,734,421 47,413,916 OTHER ASSETS: Deferred federal income tax asset 422,434 899,908 Note receivable 1,237,156 1,244,263 Other 347,079 885,705 ----------- ----------- 2,006,669 3,029,876 ----------- ----------- $61,052,861 $64,310,913 =========== ===========
- --------------- See notes to consolidated financial statements. 14 16 - --------------------------------------------------------------------------------
1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,712,531 $ 2,281,286 Accrued salaries, wages and benefits 1,815,841 1,686,932 Other accrued expenses 1,691,557 1,376,101 Deferred federal income tax liability 239,683 126,469 Current maturities of long-term debt 17,480,492 10,789,021 ------------ ------------ Total current liabilities 23,940,104 16,259,809 LONG-TERM DEBT 4,658,474 14,816,286 OTHER -- 18,723 COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value, 5,000,000 shares authorized, none issued -- -- Common stock, $.05 par value, 20,000,000 shares authorized, 6,898,722 shares issued 344,936 344,936 Additional paid-in capital 13,073,803 13,073,803 Retained earnings 41,390,379 42,152,191 ------------ ------------ 54,809,118 55,570,930 Treasury stock, at cost; 2,400,000 shares (22,354,835) (22,354,835) ------------ ------------ Total stockholders' equity 32,454,283 33,216,095 ------------ ------------ $ 61,052,861 $ 64,310,913 ============ ============
15 17 THE SANDS REGENT CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995
1997 1996 1995 ----------- ----------- ------------ OPERATING ACTIVITIES: Net income (loss) $ (761,812) $ 2,042,362 $(11,427,821) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,805,522 3,635,219 4,418,769 Impairment of long-lived assets -- -- 17,496,282 (Gain) loss on disposal of property and equipment 15,341 (482,978) 78,322 Amortization of imputed interest expense -- -- 17,100 (Increase) decrease in accounts and notes receivable (18,000) 77,334 (147,281) (Increase) decrease in inventories 149,176 (70,147) 397,516 (Increase) decrease in prepaid expenses and other current assets (317,837) (33,181) 189,362 (Increase) decrease in other assets 128,420 (494,904) 31,273 Increase (decrease) in accounts payable 207,268 332,286 (612,013) Increase (decrease) in accrued salaries, wages and benefits 128,909 (200,032) 218,733 Increase in other accrued expenses 315,456 59,218 604,404 Change in federal income taxes payable/receivable (921,288) (525,579) 563,165 Change in deferred federal income taxes 590,688 768,693 (4,442,575) Decrease in other liability (18,723) (37,428) (37,428) ------------ ----------- ------------ Net cash provided by operating activities 3,303,120 5,070,863 7,347,808 ------------ ----------- ------------ INVESTING ACTIVITIES: Purchase of short-term investments (50,000) (583,257) (3,251,250) Sale and maturity of short-term investments -- 2,240,760 1,528,747 Payments received on note receivable 7,107 6,635 7,547 Additions to property and equipment (3,105,448) (2,588,447) (2,657,280) Proceeds from sale of property, equipment and other assets 501,490 735,320 32,756 ------------ ----------- ------------ Net cash used in investing activities (2,646,851) (188,989) (4,339,480) ------------ ----------- ------------
- --------------- See notes to consolidated financial statements. 16 18 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ------------ FINANCING ACTIVITIES: Payment of accounts payable for prior year purchases of property and equipment -- (97,893) (756,487) Issuance of long-term debt 497,940 -- -- Payments on long-term debt (4,867,508) (3,108,343) (702,796) Issuance of common stock -- -- 37,500 Payment of dividends on common stock -- (674,808) (899,444) ------------ ----------- ------------ Net cash used in financing activities (4,369,568) (3,881,044) (2,321,227) ------------ ----------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,713,299) 1,000,830 687,101 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,356,980 10,356,150 9,669,049 ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,643,681 $11,356,980 $ 10,356,150 ============ =========== ============ Supplemental cash flow information: Property and equipment acquired by accounts payable $ 223,977 $ -- $ 59,489 ============ =========== ============ Property and equipment acquired by long-term debt $ 903,227 $ -- $ -- ============ =========== ============ Property and equipment acquired by conversion of other assets $ 400,000 $ -- $ -- ============ =========== ============ Accounts payable converted to long-term debt $ -- $ -- $ 118,726 ============ =========== ============ Interest paid, net of amount capitalized $ 1,594,085 $ 2,022,546 $ 2,254,248 ============ =========== ============ Federal income taxes paid $ -- $ 1,075,000 $ 1,550,000 ============ =========== ============
17 19 THE SANDS REGENT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995
Common Stock Additional Treasury Stock ---------------------- Paid-in Retained ------------------------- Shares Amount Capital Earnings Shares Amount Total ---------- --------- ------------ ------------ ---------- ------------ ------------ BALANCES, JULY 1, 1994 6,892,722 $ 344,636 $ 13,036,603 $ 53,111,902 2,400,000 $(22,354,835) $ 44,138,306 Net loss -- -- -- (11,427,821) -- -- (11,427,821) Shares issued on exercise of stock options 6,000 300 37,200 -- -- -- 37,500 Cash dividends ($.20 per share) -- -- -- (899,444) -- -- (899,444) --------- -------- ------------ ------------ --------- ------------- ------------ BALANCES, JUNE 30, 1995 6,898,722 344,936 13,073,803 40,784,637 2,400,000 (22,354,835) 31,848,541 Net income -- -- -- 2,042,362 -- -- 2,042,362 Cash dividends ($.15 per share) -- -- -- (674,808) -- -- (674,808) --------- -------- ------------ ------------ --------- ------------- ------------ BALANCES, JUNE 30, 1996 6,898,722 344,936 13,073,803 42,152,191 2,400,000 (22,354,835) 33,216,095 Net loss -- -- -- (761,812) -- -- (761,812) --------- -------- ------------ ------------ --------- ------------- ------------ BALANCES, JUNE 30, 1997 6,898,722 $ 344,936 $ 13,073,803 $ 41,390,379 2,400,000 $(22,354,835) $ 32,454,283 ========= ======== ============ ============ ========= ============= ============
- --------------- See notes to consolidated financial statements. 18 20 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Sands Regent and its wholly-owned subsidiaries Zante, Inc. ("Zante"), Patrician, Inc. ("Patrician"), Artemis, Inc. ("Artemis") and Gulfside Casino, Inc. ("GCI"), and Gulfside Casino Partnership ("GCP") (together the "Company"). Patrician, GCI and Artemis are the sole partners in GCP. All significant intercompany balances and transactions have been eliminated in consolidation. (B) NATURE OF OPERATIONS The Company owns and operates The Sands Regency Hotel/Casino in Reno, Nevada and the Copa Casino in Gulfport, Mississippi. The Copa Casino, which is owned by GCP, was licensed and commenced operations in September 1993. The Company's operations are conducted in the hotel-casino industry and include gaming activities, hotel, restaurant and other related support facilities. Because of the integrated nature of these operations, the Company is considered to be engaged in one industry segment. Casino operations are subject to extensive regulation in the States of Nevada and Mississippi by the respective state Gaming Authorities. Management believes that the Company's procedures for supervising casino operations and recording casino and other revenues comply in all material respects with the applicable regulations. (C) OPERATING REVENUES In accordance with industry practice, the Company recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. Lodging, food and beverage furnished without charge to customers are included in gross revenues at a value which approximates retail and then deducted as complimentary services to arrive at net revenues. The cost of such complimentary services is charged to gaming operating costs and expenses. The estimated costs of providing the complimentary services are as follows:
1997 1996 1995 ---------- ---------- ---------- Hotel $ 445,572 $ 380,869 $ 215,661 Food and beverage 2,221,535 2,073,504 2,185,106 Other 51,843 39,112 32,896 ---------- ---------- ---------- $2,718,950 $2,493,485 $2,433,663 ========== ========== ==========
Other operating revenue is comprised of hotel/casino ancillary services and includes any gain or loss on the sale of property and equipment previously used in the Company's operations and a retail liquor store owned and operated by the Company through August 1994 at which time the business was sold to a third party. Related costs and expenses are included in other operating costs and expenses. 19 21 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 (D) CASH AND CASH EQUIVALENTS Cash equivalents include all short-term investments with an original maturity of three months or less. Such investments, carried at cost which approximates market, are readily marketable with no significant investment in any individual issuer. (E) SHORT-TERM INVESTMENTS The Company accounts for its short-term investments in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115 -- "Accounting for Certain Investments in Debt and Equity Securities". This statement requires that unrealized gains and losses on securities defined as "available-for-sale" be excluded from income and be reported in a separate component of stockholders' equity. Securities that the Company has the ability and positive intent to hold to maturity are classified as "held-to-maturity" and are reported at the lower of aggregate cost or market. As of June 30, 1997, the Company's short-term investments were not subject to the provisions of SFAS No. 115. (F) INVENTORIES Inventories consist primarily of food, beverage and operating supplies and are stated at the lower of cost (determined on an average cost basis) or market. (G) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of impairment write-downs to estimated net realizable values. Depreciation and amortization is computed primarily by the straight line method over the estimated useful lives of the assets. These lives range between 5 to 35 years for buildings, ship and improvements and 5 to 20 years for equipment, furniture and fixtures. Assets sold or otherwise disposed of are removed from the property accounts and the resulting gains or losses are included in income. (H) GOODWILL In fiscal 1995, goodwill, which represented the excess of cost over net assets of the acquisition of GCI in February 1994, was written-off to reflect the net realizable value of long-lived assets on a basis consistent with the provisions of recently issued accounting standards as more fully described below. Prior to such write-down, goodwill was being amortized on a straight-line basis over a period of 20 years. (I) IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " was issued by the Financial Accounting Standards Board in March 1995. The Company adopted the provisions of SFAS No. 121 during the fourth quarter of the year ended June 30, 1995 which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. 20 22 - -------------------------------------------------------------------------------- (J) INCOME TAXES Income taxes are accounted for in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109 -- "Accounting for Income Taxes". In accordance with SFAS No. 109, the asset and liability method of accounting for income taxes is utilized whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (K) FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with reporting and disclosure requirements of the Statement of Financial Accounting Standards ("SFAS") No. 107 -- "Disclosures about Fair Values of Financial Instruments", the Company calculates the fair value of financial instruments and includes this additional information in the Company's Notes to Consolidated Financial Statements when the fair value is different than the book value of those financial instruments. When fair value is equal to book value, no additional disclosure is made. Fair value is determined using quoted market prices whenever available. When quoted market prices are not available, the Company uses alternative valuation techniques such as calculating the present value of estimated future cash flows utilizing discount rates commensurate with the risks involved. (L) CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and short-term investments. The Company maintains cash in bank accounts with balances, at times, in excess of Federally insured limits. The Company has not experienced any losses in such accounts. (M) NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed by using the weighted average number of shares and common stock equivalents outstanding for the period. (N) RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") In February 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 128 entitled "Earnings Per Share". This statement establishes standards for computing and presenting earnings per share and is effective for financial statements issued for periods ending after December 15, 1997. Earlier application of this statement is not permitted and, upon adoption, requires restatement, as applicable, of all prior period earnings per share data presented. Management does not believe this new SFAS will have a material effect on the presentation or computation of earnings per share. On June 30, 1997, the FASB issued SFAS No. 130 entitled "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Such 21 23 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 pronouncement is effective for financial statements issued for years beginning after December 15, 1997. Management does not believe this new SFAS will have a material impact on the financial statements of the Company. On June 30, 1997, the FASB issued SFAS No. 131 entitled "Disclosures About Segments of an Enterprise and Related Information". This statement redefines how operating segments are determined and requires qualitative disclosure of certain financial and descriptive information about a company's operating segments and is effective for fiscal years beginning after December 15, 1997. Management believes that the segment information required to be disclosed under SFAS 131 will be more comprehensive than previously provided, including expanded disclosure of income statement and balance sheet items for each of its reportable operating segments. The Company has not completed an analysis of which operating segment information may be reported. (O) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (P) RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform to the 1997 presentation. NOTE 2 -- SHORT-TERM INVESTMENTS Short-term investments consist of certificates of deposit which are carried at cost, which approximates market. NOTE 3 -- NOTE RECEIVABLE The note receivable is due in monthly principal and interest payments calculated over 30 years using an annual interest rate of prime plus 2% (10.5% at June 30, 1997). Subject to a minimum interest rate of 8%, the interest rate shall be adjusted semi-annually. The unpaid balance is payable in full in March 1999. The note is secured by a first deed of trust on motel real property in Reno, Nevada and is a joint and several obligation of, and guaranteed by, the makers. NOTE 4 -- OPERATION OF GULFSIDE CASINO PARTNERSHIP On a stand alone basis, GCP dba Copa Casino incurred a net loss of $281,000 in the year ended June 30, 1997 and generated net income of $326,000 in the year ended June 30, 1996. As of June 30, 1997, GCP's total liabilities exceeded its total assets by $16.2 million. Such excess of total liabilities over total assets results from advances by the Company to GCP, aggregating $26 million including accrued interest, which are reflected as liabilities of GCP. 22 24 - -------------------------------------------------------------------------------- Management of GCP was notified in July 1996 that its lease with the Mississippi State Port Authority will be cancelled and terminated at the end of the primary lease term in October 1999. Further, GCP's requests to substitute a barge for its present gaming vessel and to construct land based facilities, including a hotel, have been refused by the Mississippi State Port Authority. Management of GCP believes that in order to be ultimately successful, it must have a stable, long-term lease arrangement and be allowed to develop its leasehold site to provide adequate gaming, lodging and entertainment facilities. As discussed in Notes 9 and 10, such issues, among others, are the subject of a lawsuit between the GCP and the Mississippi State Port Authority. NOTE 5 -- IMPAIRMENT OF LONG-LIVED ASSETS The Company made a determination during the year ended June 30, 1995 that the carrying amount of certain long-lived assets of GCI and GCP may not be recoverable based upon analysis of projected undiscounted future cash flows of the GCI and GCP calculated in accordance with the provisions of SFAS No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ". The resultant, calculated impairment of long-lived assets necessitated a write-down of $17.5 million as follows: 1) $6.8 million of Goodwill which represented the excess of cost over net assets of the acquisition of GCI in February 1994; 2) $5.3 million for the GCP ship which contains the Copa Casino operation; 3) $3.7 million for the GCP leasehold improvements at the Copa Casino operating site; and 4) $1.7 million for Copa Casino gaming equipment, primarily slot machines. The estimated net realizable values of these long-lived assets at June 30, 1995 were determined by calculating the present value of estimated expected future GCI and GCP cash flows using a discount rate commensurate with the risks involved. 23 25 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 NOTE 6 -- LONG-TERM DEBT Long-term debt consists of the following:
June 30, --------------------------- 1997 1996 ----------- ----------- Bank term and revolving line of credit loan; interest originally at prime or LIBOR plus an amount in excess of such amounts, respectively, of up to 2% and 3.65%, depending on defined performance levels of the Sands Regency (a rate of 8.4% utilized at June 30, 1997 which was increased effective July 1, 1997 as indicated below); collateralized by a first deed of trust on the real property and equipment used in the Reno, Nevada hotel/casino operation; interest payable monthly; principal due semi-annually in such amounts so as to reduce the advanced and unpaid principal balance to the maximum scheduled unpaid balance due as of specified dates; payable in full in 2000; presently in default of certain financial covenants as further described below $10,975,000 $15,553,000 Capital lease obligation; imputed interest at 8.6%; payable in monthly principal and interest payments in the amount of $26,794 over 60 months at which time a one dollar purchase option is exercisable; assets under the capital lease, with an original cost of $1,303,000 and accumulated depreciation of approximately $41,000 at June 30, 1997, are included in property and equipment and are being depreciated over their estimated useful lives 1,259,600 -- Contract payable to International Game Technology ("IGT") by GCP; principal and interest payments of $55,000, including interest at 10% per annum, due monthly commencing September 1, 1996 through August 1, 1999 at which time the remaining unpaid principal balance of $3.2 million is due in full; secured by certain gaming equipment 3,831,186 4,052,307 Notes payable by GCI to former minority stockholders of GCI as issued pursuant to a settlement agreement in August 1993; interest at 6% per annum and unpaid since May 1994; secured by GCI's ownership interest in GCP which is 60% at June 30, 1997; principal payments past due since 1994; in accordance with a Chancery Court judgement, as further described in Note 10, the entire principal balance, is due in full and is included in current maturities at June 30, 1997 and 1996 6,000,000 6,000,000 Other 73,180 -- ----------- ----------- 22,138,966 25,605,307 Less current maturities 17,480,492 10,789,021 ----------- ----------- Long-term portion $ 4,658,474 $14,816,286 =========== ===========
The bank loan is covered under a loan agreement which requires the Company to comply with certain financial covenants, restricts future encumbrances and requires certain existing major shareholders of the Company to continue to hold a significant ownership interest in the Company and to be involved in the management of the Company. The financial covenants include restrictions on investment activities and the sale or disposition of a significant portion of the Company's assets and also limit annual capital expenditures. The financial covenants additionally require the maintenance of certain financial ratios and restrict the payment of dividends if an event of default has occurred. The loan agreement also requires that no 24 26 - -------------------------------------------------------------------------------- shareholder, other than the existing major shareholders, may own 20% or more of the issued and outstanding voting stock of the Company. The Company is presently in non-compliance with certain of the required financial covenants related to operating results. As a result, the bank has declared an Event of Default, in accordance with the terms of the loan agreement, which entitles the bank to a default interest rate of prime plus three percent and allows the bank to accelerate the loan principal balance. Although the bank has not accelerated the loan principal balance, the Company has included the entire balance as currently payable. Effective July 1, 1997, interest due on the loan is at prime plus three percent with prime plus .75 percent payable monthly and the remaining interest to be accrued until payment is requested by the bank. In addition to the non-compliance with certain financial covenants, majority shareholders of the Company have entered into an agreement to sell all of their common stock in the Company, aggregating approximately 46 percent, to a third party. Such transaction is subject to certain regulatory approvals and the approval of the bank. Without bank approval, such transaction would violate certain additional bank loan covenants. The Company is currently in discussions with the bank regarding restructuring the loan agreement. In the event such discussions are unsuccessful and the bank accelerates the loan balance, the Company is not in a financial position to pay-off the loan obligation. Further, the Company's ability to make the future scheduled semi-annual principal payments is subject to significant improvements in the Company's operating results which is presently not anticipated. Management believes that its efforts to enter into a restructured loan agreement, with monthly principal and interest payments due over a longer period than the current remaining loan term of approximately three years, will be successful. Long-term debt at June 30, 1997 is payable as follows:
Year ending June 30, Amount ----------- ------ 1998 $17,480,492 1999 583,284 2000 3,533,114 2001 284,666 2002 257,410 $22,138,966
The Company entered into an interest rate swap agreement, effective April 1, 1994, to fix the variable interest rate due on the bank term and revolving line of credit loan. Under such agreement, the Company pays the bank interest at a fixed rate of 6.25% per annum on the notional amount and the bank pays the Company interest at a variable rate (currently 5.94%) based on the London Interbank Offer Rate ("LIBOR") on the notional amount. The notional amount of the swap coincides with the maximum amount of amortized borrowings that may be made under the bank term and revolving line of credit loan (currently $11 million). The notional amount may be reduced by the Company, in whole or in part, upon notice by the Company to the bank and a fair market settlement of such reduction between the parties. The fair value of the interest rate swap agreement is a liability of approximately $7,000 at June 30, 1997 which was based on estimated termination values. The interest rate swap is subject to market risk as interest rates fluctuate. 25 27 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 Of the total interest expense of $1,926,000, $2,395,000 and $2,563,000 in 1997, 1996 and 1995, respectively, $97,000, none and none has been capitalized into construction costs. NOTE 7 -- STOCK OPTION AND STOCK INCENTIVE PLANS The Company's amended and restated stock option plan provides for the granting of incentive stock options as well as non-qualified stock options to executives and key employees. The plan presently permits for the grant of options covering a maximum of 500,000 shares of the Company's common stock. The Company has reserved shares to cover these requirements. The plan will continue until the year 2002, unless terminated earlier. Under the plan, the per share exercise price of an option cannot be less than 100% of the fair market value of the shares at date of grant or 110% of the fair market value in the case of incentive stock options granted to stockholders owning more than 10% of the outstanding common shares. The options generally vest 20% each year after grant. The following table summarizes activity of the Company's stock option plan which includes only incentive stock option grants:
Weighted Number of Average Options Exercise Price ---------- -------------- Options Outstanding ------------------- Outstanding, July 1, 1994 150,000 $ 8.29 Options cancelled (36,000) (10.50) Options exercised (6,000) (6.25) ------- ------- Outstanding, June 30, 1995 108,000 7.67 Options granted 250,000 3.58 Options cancelled (24,000) (6.25) Options exercised -- -- ------- ------- Outstanding, June 30, 1996 334,000 4.71 ------- ------- Outstanding, June 30, 1997 334,000 $ 4.71 ======= ======= Options Exercisable ------------------- At June 30, 1995 72,000 $ 6.25 ======= ======= At June 30, 1996 60,000 $ 6.25 ======= ======= At June 30, 1997 122,000 $ 5.78 ======= =======
Of the 250,000 options granted in the year ended June 30, 1996, 190,000 options were issued for an exercise price equal to fair market value and 60,000 options were issued at an exercise price equal to 110% of fair market value or $3.85 per share. At June 30, 1997, options to purchase 11,864 shares were available for grant under the stock option plan. 26 28 - -------------------------------------------------------------------------------- The following table sets forth certain information with respect to stock option grants outstanding at June 30, 1997:
Options Outstanding ---------------------------------------- Options Exercisable Weighted ------------------------ Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ----------------- ----------- ----------- -------- ----------- -------- $ 3.50 to $ 3.85 250,000 8.8 years $ 3.58 50,000 $ 3.58 6.25 to 6.25 60,000 3.2 6.25 60,000 6.25 12.63 to 12.63 24,000 5.6 12.63 12,000 12.63 ------- --------- ------ ------- ------ $ 3.50 to $12.63 334,000 7.6 years $ 4.71 122,000 $ 5.78 ======= ========= ====== ======= ======
In fiscal 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 -- "Accounting for Awards of Stock-Based Compensation" which was issued by the Financial Accounting Standards Board in October 1995 and is effective for years beginning after December 15, 1995. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans and for transactions where equity securities are issued for goods and services. It defines a fair value based method of accounting for an employee stock option, or similar equity instrument, and encourages such method of accounting for all employee stock compensation plans. As provided by SFAS No. 123, the Company has elected to continue to follow the provisions of APB Opinion No. 25 -- "Accounting for Stock Issued to Employees" which measures compensation costs for employee stock compensation plans using the intrinsic value based method of accounting. Accordingly, no compensation cost has been recognized. The following table indicates the Company's net income and net income per share assuming that compensation costs for the Company's stock option plan grants were determined using the fair value based method prescribed by SFAS 123. The table also discloses the weighted average assumptions used in estimating the fair value of each option grant on the date of the grant, using the Black-Scholes option pricing model, and the estimated weighted average fair value of the options granted. The model assumes no expected future dividend payments on the Company's common stock for the options granted:
June 30, ------------------------ 1997 1996 --------- ---------- Net income (loss): As reported $(761,812) $2,042,362 Pro forma (888,768) 2,017,065 Net income (loss) per share: As reported $ (0.17) $ 0.45 Pro forma (0.20) 0.45 Weighted average assumptions: Expected stock price volatility -- 80% Risk-free interest rate -- 6.1% Expected option lives -- 3.6 years Estimated fair value of options granted -- $ 2.03
27 29 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 Because the accounting method prescribed by SFAS 123 has not been applied to options granted prior to July 1, 1995, the compensation costs reflected in the above pro forma amounts may not be representative of that to be expected in future years. The Company's Board of Directors approved an amendment to the Company's stock option plan increasing the number of shares that may be granted from 500,000 shares to 800,000 shares and extending the period during which options may be granted from 2002 to 2007. Such amendment is subject to shareholder approval which is scheduled at the November 1997 annual meeting of shareholders. NOTE 8 -- FEDERAL INCOME TAXES The Company's income tax (provision) benefit consists of the following:
1997 1996 1995 ---------- ---------- ----------- Current $1,089,608 $ (59,995) $(2,109,683) Deferred (590,680) (768,693) 4,442,575 ---------- --------- ----------- $ 498,928 $ (828,688) $ 2,332,892 ========== ========= ===========
The Company's effective tax rate differs from the federal statutory rate as follows:
1997 1996 1995 ----- ---- ----- Federal statutory tax rate (35.0)% 35.0% (35.0) Surtax exemption 1.0 (1.0) 1.0 Write-off of goodwill -- -- 17.8 Tax effect of tax-free interest income (3.0) (2.5) (0.4) General business credits (2.3) (2.3) (0.5) Other (0.3) (0.3) 0.1 ----- ---- ----- (39.6)% 28.9% (17.0) ===== ==== =====
The components of the Company's net deferred federal income tax asset are as follows at June 30:
1997 1996 ----------- ----------- Deferred tax assets: License acquisition costs $ 1,558,015 $ 1,697,021 Pre-opening costs 301,330 559,614 Alternative minimum tax credit 980,725 523,386 Accrued expenses 160,681 160,276 Other 45,636 52,671 ----------- ----------- 3,046,387 2,992,968 ----------- ----------- Deferred tax liabilities: Property and equipment (2,404,650) (1,876,410) Prepaid expenses (441,113) (333,049) Other (17,873) (10,070) ----------- ----------- (2,863,636) (2,219,529) ----------- ----------- Net deferred federal income tax asset $ 182,751 $ 773,439 =========== ===========
The Company has a March 31 tax year-end. 28 30 - -------------------------------------------------------------------------------- NOTE 9 -- LEASE COMMITMENTS GCP leases its dockside facilities from the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority in Gulfport, Mississippi (the "Port"). The lease provides for an initial lease term of seven years commencing in October 1992. The lease also provides for three extension options of five years each and a final extension option of ten years. The final ten year extension option may only be exercised if the GCP constructs, within the city limits of Gulfport, Mississippi, a minimum of 350 hotel/motel rooms during the first ten years of the lease agreement. The lease provides for a monthly base rent of $41,667 plus 5% of gross annual gaming revenue in excess of $25 million. Additionally, the lease requires monthly payments equal to 3% of non-gaming revenue. Beginning in October 1997, the base rent shall be adjusted, annually, in accordance with changes in the consumer price index. In July 1996, GCP was notified by MDECD and the Port that its lease will be cancelled and terminated at the end of the initial lease term in October 1999 because the Company's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. Such notice of termination, among other items, is presently the subject of litigation between the Company and MDECD and the Port as further described in Note 10. Total rental expense charged to operations was $523,000, $538,000 and $534,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Future minimum payments under the remaining noncancellable term of operating leases are as follows:
Year ending June 30, Amount ----------- ---------- 1998 $ 500,000 1999 500,000 2000 125,001 ---------- $1,125,001 ==========
NOTE 10 -- CONTINGENCIES GCI matter In December 1994, a lawsuit was filed in Mississippi Chancery Court against GCI because of GCI's failure to make payments on promissory note obligations of GCI to two of its former shareholders. These note obligations, in the aggregate amount of $6 million, plus interest of $1.1 million at June 30, 1997, are secured by a pledge of GCI's partnership interest in GCP and are reflected, upon consolidation, as current liabilities in the Company's Consolidated Balance Sheets at June 30, 1997 and 1996. These promissory notes were owed by GCI when The Sands Regent purchased GCI in February 1994 and have not been assumed or guaranteed by The Sands Regent. In addition to demanding payment of the $6 million plus interest, for which a partial summary judgment was entered, the lawsuit also demanded the appointment of a receiver to take possession of and sell GCI's ownership interest in GCP and sought attorneys fees which were subsequently awarded in January 1997 in the amount of $54,000. In May 1995, GCP and Patrician were joined as necessary parties to the lawsuit. 29 31 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 In August 1995, a Charging Order was entered which required GCP to respond to inquiries by the two former GCI shareholders for the purpose, among other things, of determining what distributions, if any, have been paid by the partnership to its partners. Moreover, a court order was granted whereby any amounts due or to become due GCI from GCP are to be paid to the two former shareholders, pro-rata, until the their judgments against GCI are satisfied. Under such Charging Order, no amounts were due or distributed to GCI or the two former shareholders. In July 1996, following a court hearing, the Chancery Court rendered a judgement that the reallocation of GCI's interest in the partnership may be appropriate as to the GCP partners but had no effect on the lien position of the two former GCI shareholders. This ruling related to the reduction in GCI's ownership interest in GCP from an original 60% interest to a .006% interest as a result of an amendment to the partnership agreement and a partner capital call. The amendment to the GCP partnership agreement was entered in April 1994 whereby the profit and loss allocation percentages were amended from 40% to 80% for Patrician and from 60% to 20% for GCI. Such amendment was entered into to cure a monetary partnership breach by GCI which occurred prior to the Company's acquisition of GCI and to properly reflect the relative financial risks of Patrician and GCI. The partner capital call occurred in January 1996 and was for the purpose of improving the partnership capital structure. Patrician and Artemis complied with the capital call; however, GCI failed to comply. As a result, and in accordance with the partnership agreement, GCI's interest in GCP was reduced from 20% to .006%. In the July 1996 ruling, the two former shareholders were also given until November 1996 to exhaust their legal remedies in collecting against the judgement. Failing collection or other resolution by November 1996, the Court would consider additional measures including, but not limited to, the appointment of a receiver. The effect of the July 1996 judgement was that the two former shareholders of GCI are secured by GCI's pre-amendment, pre-capital call 60% ownership interest in GCP. The fact that the partnership amendments which provided or allowed for the change in partner ownership interests were found to be valid in a June 1996 arbitration award between Patrician and GCI was ruled as inconsequential relative to the two former shareholders. GCI subsequently filed a motion for reconsideration of the judgement with the Chancery Court, which was unsuccessful. In January 1997, the Chancery Court issued an amended judgement which reaffirmed the prior judgements and reserved ruling on the necessity to appoint a receiver. The ruling also charged GCP, under Mississippi law, with the obligation to pay the GCI judgement amounts to the two former shareholders and to pay the two former shareholders 60% of all monies not designated for normal operational expenses on a monthly basis, commencing February 1, 1997, until the judgements due the two former shareholders were satisfied. GCP was also required to provide a monthly accounting of income and operating expenses to the two former shareholders. To date, the required monthly reports have been made which report that no monies are available for distribution by GCP and that no monies have been distributed by GCP. Such reports continue to be made irrespective of the fact that GCI has filed for bankruptcy protection under chapter 11 of the United States Bankruptcy Code. 30 32 - -------------------------------------------------------------------------------- GCI, GCP and Patrician, as joined parties to such lawsuit, have filed an appeal with the Mississippi Supreme Court because it is the Company's belief that the Chancery Court's rulings are incorrect and not supported by the facts or the law. A hearing has not yet been scheduled on such appeal. On January 31, 1997, GCI filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. A Plan of Reorganization was filed with the related Disclosure Statement expected to be filed in late September 1997. Actions have not yet been taken to dispose of the bankruptcy case. On May 30, 1997, the GCP Partnership Agreement was amended to restore GCI's ownership interest in GCP to the original 60% which included reversing the January 1996 capital call. Such reallocation was undertaken in order to resolve the GCI ownership/security dilemma created in the Chancery Court judgments and to facilitate a resolution of the Chancery Court proceeding by and through the Chapter 11 reorganization of GCI in the United States Bankruptcy Court. The two former GCI shareholders have filed a motion in the United States Bankruptcy Court for relief from the automatic stay provisions under Section 3 of the Bankruptcy Code which prohibits payments on pre-petition obligations. Such motion contends that the automatic stay provisions should not apply because the obligations are payable by GCP and not the bankrupt entity GCI. It is the Company's belief that the automatic stay provisions under the United States Bankruptcy Code, which are applicable to the creditors of GCI, appropriately apply to these two former GCI shareholders and that GCP is prohibited from making any payment or distribution to these individuals who are creditors of GCI. GCP and GCI have filed briefs in opposition to the motion for relief from the automatic stay properly stating that the debtor to these two former GCI shareholders is GCI and not GCP. Further, that the Chancery Court judgement created, or clarified, an obligation of GCP to make payments to the two former shareholders only to the extent that GCP may otherwise have a requirement to make payments to GCI. Notwithstanding this, GCI and GCP further contend that any payments that may be required to be made by GCP to GCI should appropriately be paid into the bankrupt estate of GCI and should not be distributed to pre-petition, or other, creditors of GCI. A hearing on such motion is presently scheduled for October 1, 1997. In the event the motion for relief from the automatic stay is granted, the two former GCI shareholders may continue legal action in the Chancery Court which was consistent with a May 28, 1997 Chancery Court ruling and which could include the appointment of a receiver. GCI's only tangible asset is its partnership interest in GCP. GCI has filed for Chapter 11 Bankruptcy protection and is also not otherwise in the financial position to make any payments with respect to the note obligations due the two former GCI shareholders. It is the Company's belief that GCI's Plan of Reorganization, which contemplates making certain payments to these two former shareholders from new equity funding to GCI, represents a reasonable, equitable and final resolution and settlement to the GCI litigation and bankruptcy issues. However, confirmation and acceptance of the filed Plan of Reorganization is not assured. As such, the ultimate resolution of this matter is not presently subject to reasonable estimation and could include a dispossession of a 60% right to receive partnership profits and surplus. In February 1997, the above two former shareholders of GCI each filed separate lawsuits in U. S. District Court for the Southern District of Mississippi, Biloxi Division, against The Sands Regent and certain officers and directors of The Sands Regent and GCI. Such lawsuits allege breach of various common law duties and contractual interference by the defendants and seek compensatory and punitive damages. Such actions are in 31 33 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- For the years ended June 30, 1997, 1996, 1995 the preliminary discovery stages. Management, and the individual defendants, believe these legal actions to be without merit and will vigorously defend them. Port matter In July 1996, the Mississippi Department of Economic and Community Development ("MDECD") and the Mississippi State Port Authority at Gulfport (the "Port") filed a declaratory judgement action against the Copa Casino in a Mississippi Chancery Court. Such lawsuit seeks Chancery Court interpretation of certain provisions of the lease between MDECD and the Port and the Copa Casino including whether the Port may terminate the lease on a date certain, whether the Port must approve the substitution of another gaming vessel for the present gaming vessel and whether the Port must approve the construction of a hotel on the leased premises. In addition to the lawsuit, MDECD and the Port also notified the Copa Casino that its lease will be canceled and terminated at the end of the initial lease term in October 1999 because the Copa Casino's current leased site is needed by the Port to accommodate a purported expansion of Port facilities. In July 1997, the MDECD and the Port filed a second amended complaint, in addition to the original declaratory relief action, seeking damages and to immediately terminate the lease related to certain dredging activities conducted on the Copa Casino leased premises by contractors engaged by the Copa Casino. In response to the initial MDECD and Port action and the second amended complaint, the Copa Casino filed counterclaims against the MDECD and Port claiming various tort and contract breaches including wrongful failure to approve the substitution of a barge for the present Copa ship, wrongful failure to allow Copa Casino to construct a hotel on the leased premises, breach of covenant of good faith and fair dealing, misrepresentation, breach of covenant of quiet enjoyment and wrongfully allowing activities at the Port to cause the accumulation of sand and silt under and adjacent to the Copa vessel. The Copa Casino's lawsuit seeks an award for compensatory damages in an amount not less than $200 million and a declaratory judgement quieting the lease term and allowing the development of the leased premise. The lawsuit is presently set for trial on October 6, 1997 with respect to the liability issues and both parties have been engaged in active discovery matters, including depositions and exchange of documents for most of calendar 1997. In the event the Copa Casino is successful on any or all of its claims and counterclaims, a separate trial on damages will be held which is currently scheduled during the first week of December 1997. Management believes that the outcome of this lawsuit is not presently predictable or subject to reasonable estimation. At June 30, 1997, the book value of the Company's net investment in and advances to (including accrued interest) the Mississippi gaming operation was approximately $2.6 million. Other The Company is party to other legal actions, proceedings and pending claims arising in the normal conduct of business. Management believes that the final outcomes of these matters will not have a material adverse effect upon the Company's financial position or results of operations. 32 34 - -------------------------------------------------------------------------------- NOTE 11 -- CONDENSED QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- 1997 Operating revenues $15,600,664 $13,536,196 $13,183,107 $15,201,312 Income (loss) from operations 837,879 (1,322,500) (227,621) 598,372 Net income (loss) 303,908 (808,794) (371,069) 114,143 Net income (loss) per share $0.07 $(0.18) $(0.08) $0.02 1996 Operating revenues $16,054,749 $14,037,918 $15,299,849 $14,465,087 Income from operations 2,217,331 336,522 1,247,123 873,691 Net income (loss) 1,188,329 (3,841) 543,797 314,077 Net income (loss) per share $0.26 -- $0.12 $0.07
33 35 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of The Sands Regent: We have audited the accompanying consolidated balance sheets of The Sands Regent and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Sands Regent and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Reno, Nevada August 8, 1997 34 36 - -------------------------------------------------------------------------------- CORPORATE OFFICERS Pete Cladianos, Jr. President and Chief Executive Officer Katherene Latham Chairman of the Board Jon N. Bengtson Executive Vice President and Chief Operating Officer David R. Wood Executive Vice President, Treasurer and Chief Financial Officer Pete Cladianos III Executive Vice President and Secretary BOARD OF DIRECTORS Katherene Latham Chairman of the Board Pete Cladianos, Jr. President and Chief Executive Officer Jon N. Bengtson(1) Executive Vice President and Chief Operating Officer David R. Wood(1) Executive Vice President, Treasurer and Chief Financial Officer Pete Cladianos III Executive Vice President and Secretary Joseph G. Fanelli Weldon C. Upton PUBLIC ACCOUNTANTS Deloitte & Touche LLP Reno, Nevada SECURITIES COUNSEL Latham & Watkins Costa Mesa, California TRANSFER AGENT & REGISTRAR Chase Mellon Shareholder Services, LLC Ridgefield Park, New Jersey - ------------ (1) Standing for re-election to the Board of Directors at the November 3, 1997 Annual Meeting. FORM 10-K REPORT A copy of the Company's Annual Report to the Securities and Exchange Commission on Form 10-K is available to shareholders without charge by writing to The Sands Regent, Attention: David R. Wood, 345 North Arlington Avenue, Reno, Nevada 89501. 35 37 [THE SANDS REGENT LOGO] 345 N. ARLINGTON AVENUE - RENO, NV 89501 - (702) 348-2200 EX-23 5 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 8, 1997, appearing and incorporated by reference in the Annual Report on Form 10-K of The Sands Regent for the year ended June 30, 1997. Deloitte & Touche LLP Reno, Nevada September 25, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 7,643,681 250,000 537,018 119,000 640,023 11,311,771 78,794,133 31,059,712 61,052,861 23,940,104 4,658,474 0 0 344,936 32,109,347 61,052,861 7,910,110 57,635,149 6,566,859 34,270,575 23,364,574 0 1,926,378 (1,260,740) (498,928) (761,812) 0 0 0 (761,812) (.17) (.17)
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