-----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, SVQSODFknLSacIAJso1rDAL74Ht11Y7vqCxkY8GrLpZfIBL0c9x7qfW9mlqIg5Bp 2xmoNN89IwqqYPUOYN8ehw== 0000892569-99-002551.txt : 19991227 0000892569-99-002551.hdr.sgml : 19991227 ACCESSION NUMBER: 0000892569-99-002551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718684 BUSINESS ADDRESS: STREET 1: 345 N ARLINGTON AVE CITY: RENO STATE: NV ZIP: 89501 BUSINESS PHONE: 7023482210 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, 1999 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, 1999 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: (775) 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 22, 1999 was $3,015,313. The aggregate market value is computed with reference to the average price per share on such date. Registrant's Common Stock outstanding at September 22, 1999 was 4,495,722 shares. Portions of Registrant's 1999 Annual Report to the Shareholders are incorporated into Part II as set forth herein. Portions of Registrant's definitive Proxy Statement for its November 1, 1999 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 casino/hotel in downtown Reno, Nevada. In December 1998, the Company sold the three wholly-owned subsidiaries, Patrician, Inc., Gulfside Casino, Inc. and Artemis, Inc., including the 100% owned Gulfside Casino Partnership, which owned and operated the Copa Casino, in Gulfport, Mississippi. Prior to the sale, the Company held a 100% interest in these three subsidiaries, and the Copa Casino, since February 1994. From September 1993, when gaming operations commenced, to February 1994, the Company held a 40% interest in the Copa Casino. The Sands Regency casino/hotel has approximately 27,000 square feet of gaming space and 836 hotel rooms, including 29 suites of various sizes. The complex also includes three restaurants, a coffee house/deli-style restaurant, a "Pizza Hut", and an "Arby's" restaurant operated by a third party. The facilities also include an entertainment show room, three cocktail lounges, a gift shop, a beauty/barber shop operated by a third party, a video arcade, a health club, a swimming pool and almost 12,000 square feet of convention and meeting space which can seat up to 950 people. The Company maintains multiple parking areas on its main casino/hotel property and adjacent to it, including a parking garage, 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 1999 was 76.4% compared to 83.3% for fiscal 1998. The hotel's average room rate for the current fiscal year was approximately $34.00 as compared to $31.00 in the prior fiscal year. In early April 1999, the Company discontinued the use of 102 older motel rooms which were subsequently razed, leaving 836 tower hotel rooms available for use. As of September 20, 1999, the casino offered 20 table games, including 14 blackjack tables, 1 craps table, and 2 roulette tables, 1 let it ride table, 1 three-card poker table and 1 pai gow poker table; 2 keno games and approximately 685 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 52% of the Company's revenues from continuing operations in Reno in fiscal 1999 and approximately 73% of the gaming revenues were generated by slot machines. The Company generally does not extend credit to its gaming customers. The Company has concentrated its resources on renovating and improving its 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 MARKETING Traditionally, the central component of the Company's marketing philosophy has been to utilize travel wholesalers to attract group and air wholesale business to the casino/hotel. 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 casino/hotels in Reno. Because of the significant increase in the number of Reno area hotel rooms in the last several years and increased competition from other gaming venues, competition for wholesale business has intensified. This has resulted in the Sands Regency developing other areas for revenue generating opportunities. The Sands Regency has developed a more comprehensive casino marketing program with an emphasis on guest retention, data base marketing and an increase in advertising awareness. In addition, programs are being developed to attract business segments that had previously been largely untapped, such as Reno area residents and residents from Northern California, particularly the Sacramento metropolitan area. The Company's player tracking system is instrumental in the data base marketing efforts and in guest recognition. This system allows the casino marketing efforts to more effectively identify good customers and develop special events, programs and activities that appeal to them. An aggressive promotion and player events schedule has also been implemented to allow the Sands Regency to retain guests for longer periods of time and generate incremental visits. The Company will also continue to use a flexible approach to pricing its rooms which is designed to maximize occupancy levels. Hotel rooms are offered at discount prices to travel wholesalers 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 has historically been 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 cancellable basis. Significant group and air wholesale market areas continue to include 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 Canada, the Midwest, Southwest and Southern California. The Sands Regency is the lead casino/hotel 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 55% of the hotel's occupancy in fiscal 1999 compared to 61% in fiscal 1998. In addition to the group and air wholesale business, the Company aggressively packages and markets group and military reunion business which require 300 rooms or less. Other travel package arrangements are also promoted which are geared toward individual travelers. The Sands Regency will continue to rely on advertising by travel wholesalers in their markets. In both the local market and selected feeder markets, such as Northern California, the Sands Regency has increased advertising efforts including radio, billboard, print and local television. During periods of time when wholesale business operates at reduced levels, the Company will also continue to utilize print advertising in its other major market areas, with an emphasis on room rates, to attract individual customers. These efforts will continue into the future as the Sands Regency strives to strengthen its position in the Reno market. 2 4 COMPETITION The Company competes in the greater Reno area with approximately sixteen major casinos and casino/hotels, 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 3,900 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 23%. 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. 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, 1999, the Company employed 755 people at the Sands Regency in Reno, Nevada, including 85 salaried employees and 670 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 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"). 3 5 The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Zante operates the Sands Regency casino/hotel 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 4 6 could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of the directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or Zante, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) 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 5 7 pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. The Company's stock certificates do bear such a legend. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment 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 6 8 refreshments. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who has become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. REGULATION AND LICENSING - ALCOHOLIC BEVERAGES 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. 7 9 ITEM 2. PROPERTIES The Company operates the casino and hotel towers at the Sands Regency on a Company-owned 6.3 acre site in downtown Reno. The casino/hotel site also includes a large outdoor swimming pool, pool house and other buildings and facilities. Garage and surface parking are provided at the casino/hotel site and also on a 2.7 acre site located adjacent to the casino/hotel site. In addition, the Company's personnel office is located one-half block from the casino/hotel 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 casino/hotel facility, the Company owns a smaller property in Reno consisting of an area of approximately .2 acres. The Company's Reno casino/hotel property is subject to aggregate encumbrances of approximately $10.5 million as of June 30, 1999. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various 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 1999. 8 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Trading under the symbol "SNDS", the Common Stock of the Company has been listed on the Nasdaq SmallCap Market since January 6,1999. Prior to such date, the Company was traded on the Nasdaq National Market. 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 ---- --- 1998 First Quarter............................................ $3.00 $ 1.94 Second Quarter........................................... 2.50 1.63 Third Quarter............................................ 2.63 1.56 Fourth Quarter........................................... 2.64 1.63 1999 First Quarter............................................ $2.00 $ .75 Second Quarter........................................... 1.50 .75 Third Quarter............................................ 1.44 .88 Fourth Quarter........................................... 2.56 .94
- ----------- The Shareholders approved a one-for-two reverse stock split at a Special Meeting of Shareholders on March 2, 1999. The purpose for the reverse split was to increase the market price per share so as to aid the Company in remaining eligible for continued listing on the Nasdaq SmallCap Market. Management of the Company has neither effectuated, nor does it presently intend to effectuate, the reverse split because the trading price of the Company's Common Stock presently exceeds the minimum eligibility requirements. 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, 1999, the Company had 148 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 1999 Annual Report, filed as Exhibit 13 to this Form 10-K. 9 11 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 1999 Annual Report, filed as Exhibit 13 to this Form 10-K. 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 1999 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 1999 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. 10 12 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 1, 1999, 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 1, 1999, 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 1, 1999, 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 1, 1999, filed or to be filed with the Securities and Exchange Commission. 11 13 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, 1999 and 1998 Consolidated Statements of Operations -- Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity -- Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- Years Ended June 30, 1999, 1998 and 1997 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, 1999, 1998 and 1997: 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. 12 14 (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) Amendment to the Amended and Restated Stock Option Plan for Executive and Key Employees of The Sands Regent, dated November 4, 1997 (Exhibit 10(a) to the Company's Form 10-Q for the quarter ended December 31, 1997).* 10(c) Amendment to the Amended and Restated Stock Option Plan for Executive and Key Employees of The Sands Regent, dated December 12, 1997 (Exhibit 10(b) to the Company's Form 10-Q for the quarter ended December 31, 1997).* 10(d) Third Amendment to the Amended and Restated Stock Option Plan for Executive and Key Employees of The Sands Regent, dated November 2, 1998 (Exhibit 10(a) to the Company's Form 10-Q for the quarter ended December 31, 1998).* 10(e) Non-Qualified Stock Option Agreement, dated May 11, 1998, by and between Louis J. Phillips and The Sands Regent. (Exhibit 10(d) to the Company's Form 10-K for the fiscal year ended June 30, 1998).* 10(f) 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).* 13 15 10(g) 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(h) Amended and Restated Loan Agreement, dated January 31, 1998, by and between Wells Fargo Bank, National Association, The Sumitomo Bank, Limited and Zante, Inc.; and the related Amended and Restated Term Promissory Note; Amended and Restated Guaranty of Loan (by The Sands Regent); First Amendment to Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents (on the casino/hotel properties); Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents (on non-casino/hotel properties); and Pledge and Assignment (Exhibit 10(g) to the Company's Form 10-K for the fiscal year ended June 30, 1998).* 10(i) 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(j) 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(k) 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(l) 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(m) 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(n) Agreement, dated November 6, 1998, by and between Terry W. Green, Joel R. Carter, Sr., Gulfside Casino Partnership and The Sands Regent (Exhibit 10(a) to the Company's Form 10-Q for the quarter ended September 30, 1998).* 10(o) First Amendment to Agreement, dated December 23, 1998, by and between Terry W. Green, Joel R. Carter, Sr., Gulfside Casino Partnership and The Sands Regent; and the related Promissory Note and Royalty Agreement. ** 10(p) 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(q) 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).* 14 16 10(r) Employment Agreement, dated December 15, 1998, by and between Ferenc B. Szony (as President and Chief Executive Officer) and The Sands Regent (Exhibit 10(a) to the Company's Form 10-Q for the quarter ended March 31, 1999).* 10(s) Employment Agreement, dated January 29, 1998, by and between Patrick Bassney (as Vice President and General Manager) and the Sands Regency (Zante, Inc.). ** 10(t) 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).* 10(u) 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 year ended June 30, 1996).* 10(v) 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(w) 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 1999 Annual Report to Shareholders.** 21 Subsidiaries: Zante, Inc., a Nevada Corporation, which owns and operates the Sands Regency Casino/Hotel. 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 1999. (c) INDEX TO EXHIBITS. (d) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules required by Regulation S-X are excluded from the 1999 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. 15 17 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 24, 1999 By: FERENC B. SZONY ------------------------------------ Ferenc B. Szony, 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 - --------- -------- ---- FERENC B. SZONY President (Chief September 24, 1999 - ---------------------------------- Executive Officer) Ferenc B. Szony and Director KATHERENE LATHAM Chairman of the September 24, 1999 - ---------------------------------- Board of Directors Katherene Latham PETE CLADIANOS, JR. Vice Chairman of the September 24, 1999 - ---------------------------------- Board of Directors Pete Cladianos, Jr. DAVID R. WOOD Executive Vice President, September 24, 1999 - ---------------------------------- Treasurer, Chief Financial and David R. Wood Accounting Officer and Director PETE CLADIANOS III Secretary and Director September 24, 1999 - ---------------------------------- Pete Cladianos III JON N. BENGTSON Director September 24, 1999 - ---------------------------------- Jon N. Bengtson LOUIS J. PHILLIPS Director September 24, 1999 - ---------------------------------- Louis J. Phillips Director September 24, 1999 - ---------------------------------- Larry Tuntland
16 18 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, 1999 and 1998, and for each of the three years in the period ended June 30, 1999, and have issued our report thereon dated August 6, 1999. Such consolidated financial statements and report are included in your 1999 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 6, 1999 17 19 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) Other End of Year ----------- --------- ---------- ------------- ----- ----------- Allowance for Doubtful Accounts Receivable: Year ended June 30, 1999 . . . . . . . . . . . . $ 72 $ 91 $ (76) $ (60)(2) $ 27 Year ended June 30, 1998 . . . . . . . . . . . . 119 143 (190) --- 72 Year ended June 30, 1997 . . . . . . . . . . . . 107 103 (91) --- 119
- --------------- (1) Write-offs of uncollectible accounts receivable, net of recoveries (2) Represents balance for subsidiaries disposed of during the year 18 20 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - ------- ------------ 10(o) First Amendment to Agreement, dated December 23, 1998, by and between Terry W. Green, Joel R. Carter, Sr., Gulfside Casino Partnership and The Sands Regent; and the related Promissory Note and Royalty Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(s) Employment Agreement, dated January 29, 1998, by and between Patrick Bassney (as Vice President and General Manager) and the Sands Regency (Zante, Inc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1999 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.(O) 2 FIRST AMENDMENT TO AGREEMENT 1 EXHIBIT 10(O) FIRST AMENDMENT TO AGREEMENT This First Amendment entered into on December 23, 1998, to that certain Agreement (the "Agreement") made November 6, 1998, by and between The Sands Regent, a Nevada corporation (the "Seller") and Terry W. Green and Joel R. Carter, Sr., (the "Purchasers") and Gulfside Casino Partnership d/b/a Copa Casino ("Gulfside Partnership"). WHEREAS, on November 6, 1998, the parties entered into the Agreement; and now desire to amend certain provisions of said Agreement. NOW, THEREFORE, for and in consideration of the Mutual Covenants contained herein, and other good and valuable consideration the parties AGREE: 1. Paragraph 4 of the Agreement shall be amended to the extent that the existing Ship Mortgages which secure certain debts and obligations owed by Gulfside Partnership to Seller and to Patrician, Inc. shall not be canceled or released but that said Ship Mortgages will be amended to secure the $8,000,000.00 indebtedness described in the Agreement and in the Promissory Note attached thereto; provided that an undivided 50% interest in the Ship Mortgage to The Sands Regent shall be assigned by Seller to Purchasers and the Ship Mortgage to Patrician, Inc. shall be assigned to Seller and to Purchasers. 2. Paragraph 5(a) of the Agreement shall be amended to provide that Seller shall waive the condition that the Order of the Bankruptcy Court shall have become final and not appealed or stayed pending an appeal. 3. Paragraph 5(c) of the Agreement shall be amended to provide that the approval of the Mississippi Slate Port Authority shall be deemed complete upon the approval of a Resolution in the form attached as Exhibit "A". 4. That subsequent to the closing of the sale described in the Agreement the Purchasers shall cooperate with and permit Seller to continue to prepare and update the books and records of Gulfside Partnership, Patrician, Artemis and GCI through December 31, 1998, to include both financial statements and tax basis calculations. 5. Purchasers shall cause Gulfside Partnership to retain Deloitte and Touche to 2 prepare the transition year tax returns for Gulfside Partnership, Patrician, Artemis and GCI. 6. Purchasers shall cooperate and shall cause Gulfside Casino Partnership to cooperate with Seller in allowing Deloitte & Touche to perform certain audit procedures deemed necessary for The Sands Regent's audited financial statements. 7. That closing of the sale shall be deemed effective as of the close of the business day December 23, 1998. 8. Paragraph 7(6) shall be amended to provide that Seller has disclosed to Purchasers additional liens as shown by a UCC Search dated December 11, 1998 and Purchasers agree to close the sale with said liens in place. 9. Paragraph 3(D) shall be amended to provide that the $500,000.00 shall be wire transferred to an attorney's trust account and paid to Escrow Agent. 10. Seller and Purchasers agree and stipulate that additional documents are required to be delivered and executed to close the transaction and the parties hereby agree to execute and deliver such other documents as may be necessary to close the transaction contemplated by the Agreement. IN WITNESS WHEREOF, the parties have duly executed this First Amendment to that certain Agreement dated November 6, 1998. THE SANDS REGENT DATED: 12/23/, 1998 BY: /s/ Ferenc B. Szony ------------------------------------- PRESIDENT GULFSIDE CASINO PARTNERSHIP D/B/A COPA CASINO, a Mississippi General Partnership BY: GULFSIDE CASINO, INC., It's General Partner DATED: 12/23, 1998 BY: /s/ DAVID R. WOOD ------------------------------------- Vice President of Gulfside Casino, Inc. TERRY W. GREEN DATED: 12/23, 1998 /s/ TERRY W. GREEN ----------------------------------------- JOEL R. CARTER, SR. DATED: 12/23, 1998 /s/ JOEL R. CARTER, SR. ----------------------------------------- 3 PROMISSORY NOTE $8,000,000.00 Dec. 23, 1998 Gulfport, Mississippi FOR VALUE RECEIVED, as more particularly set forth in the Agreement and Royalty Agreement of even date herewith, the receipt and sufficiency of all of which is hereby acknowledged, GULFSIDE CASINO PARTNERSHIP D/B/A COPA CASINO, a Mississippi General Partnership, ("Maker") promises to pay to the order of THE SANDS REGENT, a Nevada corporation, ("Payee") or HOLDER, at 345 North Arlington Avenue, Reno, Nevada 89501, or such other place as may be designated in writing, the principal sum of $8,000,000.00 without interest in installments as follows: Beginning on the 10th day of January, 1999 and continuing on the 10th day of each succeeding month thereafter until this Note shall be paid in full, in accordance with the terms of the Agreement and the Royalty Agreement, Maker shall pay to Payee a sum equal to (i) 2% of the monthly Gross Gaming Revenue of the Gulfside Partnership or any successor to Gulfside Partnership or to its interest in the Copa Casino as defined in that certain Agreement and Royalty Agreement of even date herewith by and between The Sands Regent and Gulfside Partnership, or (ii) $15,000.00 in cash, whichever is greater. The Makers, endorsers, sureties, guarantors and all other persons who may become liable for this Note, each severally waive demand, presentment, protest of any kind and notice of non-payment of this Note except as expressly provided below. Maker shall, at its option, have the right to prepay this Note without penalty. This Note is secured by a Security Agreement and UCC Financing Statements of even date herewith. This Note is issued pursuant to the Agreement and the Royalty Agreement of even date. In case an event of default as described in the Agreement shall occur, Payee shall give Maker three (3) days notice by facsimile of said default and if said default shall continue thereafter, then, without further notice or demand, Payee may declare the entire unpaid principal balance at once due and payable and may invoke all remedies permitted by law or the Agreement or Royalty Agreement. In the event of default in repayment of this Note, Maker agrees to pay all costs, including a reasonable attorney's fee, of enforcing payment and collection of this Note. This Promissory Note shall be construed in accordance with the laws of Mississippi. Dated: December 23, 1998. ATTEST: GULFSIDE CASINO PARTNERSHIP D/B/A COPA CASINO, a Mississippi general partnership By: Gulfside Casino, Inc., Its General Partner /s/ FERENC B. SZONY By: /s/ DAVID R. WOOD - --------------------------------- ------------------------------------- Vice-President of Gulfside Casino, Inc. 4 GUARANTEE OF PAYMENT AND COLLECTION The undersigned, Gulfside Casino, Inc., Patrician, Inc., and Artemis, Inc., hereby jointly and severally guarantee payment and collection of the above and foregoing Installment Promissory Note in the principal amount of $8,000,000.00. Dated: December 23, 1998. GULFSIDE CASINO, INC. BY: /s/ DAVID R. WOOD ------------------------------------- PATRICIAN, INC. BY: /s/ DAVID R. WOOD ------------------------------------- ARTEMIS, INC. BY: /s/ DAVID R. WOOD ------------------------------------- 5 ROYALTY AGREEMENT THIS ROYALTY AGREEMENT (the "Royalty Agreement") is entered into as of this the 23 day of December, 1998 (the "Effective Date"), by and among The Sands Regent, a Nevada corporation ("Sands Regent") and Gulfside Casino Partnership d/b/a Copa Casino, a Mississippi General Partnership ("GCP"). RECITALS WHEREAS, on even date herewith, Sands Regent entered into an Agreement (the "Agreement") with Terry W. Green and Joel R. Carter, Sr. (collectively, the "Purchasers") pursuant to which Sands Regent sold its 100% interest in each of the three general partners of GCP to the Purchasers; and WHEREAS, pursuant to the Agreement, the Purchasers agreed to cause GCP to enter into a Royalty Agreement with Sands Regent, and Sands Regent agreed to enter into a Royalty Agreement with GCP, on the terms set forth herein; and WHEREAS, the Royalty Payments hereunder are for purposes of the repayment of certain indebtedness as described in the Agreement and a Promissory Note of even date therewith; NOW, THEREFORE, in consideration of the promises, covenants, agreements and conditions contained in this Royalty Agreement, the Parties AGREE: AGREEMENT 1. Definitions. As used in this Agreement, the following terms will have the respective meanings indicated below: 1.1 "Gross Gaming Revenue" shall mean Gross Revenue Computations as defined in the Regulations of the Mississippi Gaming Commission, as such Regulations may be amended from time to time. 1.2 "Royalty Payments" shall mean those sums that are to be paid to Sands Regent pursuant to Section 2 below. 1.3 "Successor Entity" shall mean any person(s) or legal entity which directly or indirectly by sale, merger, consolidation, operation of law or otherwise, shall acquire or otherwise succeed to a controlling or majority ownership interest in the business and/or assets of the Gulfside Partnership d/b/a Copa Casino whether such casino remains at its current location or is relocated or whether the current facilities are replaced, augmented or otherwise modified. EXHIBIT "B" 6 2. Royalties. 2.1 Royalty Amount. Beginning January 10, 1999 and continuing on or before the tenth (10th) day of each calendar month thereafter, GCP or any Successor Entity, for so long as they are engaged in the gaming business, shall pay to Sands Regent an aggregate Royalty Payment equal to the greater of (i) two percent (2%) of the Gross Gaming Revenue for the immediately preceding calendar month or (ii) $15,000 in cash; provided, however, that the amount of such Royalty Payment with respect to a partial month shall be pro rated as appropriate; and provided further, that the aggregate amount of Royalty Payments paid hereunder shall not exceed $8,000,000 (the "Maximum Royalty Payment). 2.2 Payment of Royalties. All Royalty Payments shall be paid by electronic funds transfer effective on or before the date payment is due to such bank account as from time to time may be specified by Sands Regent. The Royalty Payments are not refundable or subject to offset of any amount due or claimed to be due from The Sands Regent to GCP, any Successor Entity or the Purchasers. Each monthly Royalty Payment shall be accompanied by a statement (a "Royalty Statement") signed by the Chairman, President or Chief Financial Officer of GCP or its Successor Entity attesting to the accuracy of the Gross Gaming Revenue from which each such Royalty Payment was calculated and shall include copies of the related Weekly Reports of Gaming Revenue and Monthly Gaming Reconciliation Return filed with the Mississippi Gaming Commission along with any further detailed reconciliations necessary to reflect Gross Gaming Revenue. 2.3 Failure to Pay. In the event that GCP or any Successor Entity shall fail to pay a required Royalty Payment or fail to deliver the Royalty Statement within ten (10) days after such Royalty Payment is due and payable then such unpaid Royalty Payment shall accrue interest at the rate of twelve percent (12%) per annum until paid. The accrual and payment of such interest shall not effect or constitute a waiver of any other rights or remedies Sands Regent may have as a result of such late payment or nonpayment. 2.4 Security. The Royalty Payments due Sands Regent hereunder are secured under that certain Security Agreement between Sands Regent and GCP of even date herewith. 3. Inspection of Records. Sands Regent or its designee shall have the right upon reasonable notice from time to time, to have its representatives enter the premises of GCP and each Successor Entity or any other location or facility which any of GCP or a Successor Entity may use in connection with the operation of its business for the purpose of inspecting the books and records of account and condition and operation of GCP's or the Successor Entity's business. Sands Regents' representatives shall have the right at all times during normal business hours to inspect and reproduce the records, books, tax returns and reports of GCP and any Successor Entity at the expense of The Sands Regent. All such books, records and tax returns shall be maintained at the premises of GCP or such other place as may be agreed upon by the parties in writing. If any inspection reveals that a Royalty Statement submitted to Sands Regent understates Gross Gaming Revenues, then GCP or the Successor Entity shall 2 7 immediately pay Sands Regent all additional amounts owing by reason of the understatement of Gross Gaming Revenue previously reported, together with interest thereon in accordance with Section 2.3. In the event that any Royalty Statement understates Gross Gaming Revenue by more than five percent (5%), GCP or the Successor Entity, as applicable, shall, in addition to the making the payment provided for above, make an additional Royalty Payment to Sands Regent equal to ten percent (10%) of the understated revenue and shall reimburse Sands Regent for any and all expenses incurred in connection with such inspection, including, but not limited to, Sands Regents' actual accounting and legal fees. Such payment shall be made without prejudice to any other rights or remedies which Sands Regent may have under this Agreement or otherwise. 4. Assignment. GCP shall not (i) sell, assign or transfer its obligations under this Royalty Agreement including, but not limited to, its obligations to make Royalty Payments to Sands Regent hereunder, except in compliance with paragraph 6 "Successors" of that certain Agreement of even date herewith; or (ii) take any action to circumvent or avoid its obligation to make Royalty Payments hereunder. 5. Governing Law and Jurisdiction. This Agreement shall be governed by and interpreted in accordance with the laws of Mississippi. Each of the parties hereto consents to said jurisdiction for enforcement of this Royalty Agreement. 6. Attorneys' Fees. In the event a dispute arises with respect to this Royalty Agreement, the party prevailing in such dispute shall be entitled to recover all expenses, including, without limitation, reasonable attorneys' fees and expenses incurred in ascertaining such party's rights, in preparing to enforce, or in enforcing such party's rights under this Royalty Agreement, whether or not it was necessary for such party to institute suit. 7. Complete Agreement of the Parties. This Royalty Agreement and the Agreement supersede any and all other agreements whether oral or in writing, between the parties with respect to the subject matter hereof and contain all of the covenants and agreements between the parties with respect to such matter in any manner whatsoever. Each party to this Royalty Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone herein, and that no other agreement, statement or promise not contained in this Royalty Agreement shall be valid or binding. This Royalty Agreement may be changed or amended only by an amendment in writing signed by all of the parties or their respective successors-in-interest. 8. Binding. This Royalty Agreement shall be binding upon and inure to the benefit of the successors and assigns of the respective parties. 9. Failure to Object Not a Waiver. The failure of either party to this Royalty Agreement to object to, or to take affirmative action with respect to, any conduct of the other which is in violation of the terms of this Royalty Agreement, shall not be construed as a waiver of the violation or breach or of any future violation, breach or wrongful conduct. 3 8 10. Unenforceable Terms. Any provision hereof prohibited by law or unenforceable under any applicable law of any jurisdiction shall as to such jurisdiction be ineffective without affecting any other provisions of this Royalty Agreement. To the full extent, however, that the provisions of such applicable law may be waived, they are hereby waived to the end that this agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms. 11. Execution in Counterparts. This Royalty Agreement may be executed in several counterparts and, when so executed, shall constitute one agreement binding on all the parties, notwithstanding that all the parties are not signatory to the original and same counterpart. 12. Further Assurance. From time to time, each party will execute and deliver such further instruments and will take such other action as any other party may reasonably request in order to discharge and perform their obligations and agreements hereunder and to give effect to the intentions express in this Royalty Agreement. IN WITNESS WHEREOF, the Parties hereto have duly executed this Royalty Agreement. DATED: 12/23/98 THE SANDS REGENT, a Nevada corporation By: /s/ FERENC B. SZONY ------------------------------------- President DATED: 12/23/98 THE GULFSIDE CASINO PARTNERSHIP D/B/A COPA CASINO, a Mississippi general partnership By: Gulfside Casino, Inc., Its General Partner By: /s/ DAVID R. WOOD ------------------------------------- Vice President of Gulfside Casino, Inc. 4 9 STATE OF Mississippi COUNTY OF Harrison PERSONALLY came and appeared before me, the undersigned authority in and for the aforesaid County and State, the within named Ferenc Szony who acknowledged to me that he is the President of THE SANDS REGENT, a Nevada corporation, and that for and on behalf of said corporation and as its act and deed, he signed, executed and delivered the above and foregoing Agreement on the day and year therein mentioned and for the purposes therein stated, after having first duly read and understood said Agreement and having been duly authorized by said corporation so to do. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 23rd day of December 1998. /s/ LISA L. PARKER ----------------------------------------- NOTARY PUBLIC My Commission Expires: January 5, 2000 STATE 0F Mississippi COUNTY OF Harrison PERSONALLY came and appeared before me, the undersigned authority in and for the aforesaid County and State, the within named Dave Wood who acknowledged to me that he is the Vice President of GULFSIDE CASINO, INC., A Mississippi corporation and a General Partner of GULFSIDE CASINO PARTNERSHIP D/B/A COPA CASINO, a Mississippi general partnership, and that for and on behalf of said corporation and as its act and deed on behalf of said partnership as General Partner, he signed, executed and delivered the above and foregoing Agreement on the day and year therein mentioned and for the purposes therein stated, after having first duly read and understood said Agreement and having been duly authorized by said corporation so to do. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 23rd day of December 1998. /s/ LISA L. PARKER ----------------------------------------- NOTARY PUBLIC My Commission Expires: January 5, 2000 5 EX-10.(S) 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(S) [THE SANDS REGENCY HOTEL CASINO LETTERHEAD] Patrick Bassney Dear Pat: I am pleased to offer you the position of Vice President General Manager at the Sands Regency with the following terms: 1. Weekly salary of $2,019.23 (an annual rate of $105,000). The position will be evaluated in 90 days for performance and annually for salary review. 2. Two weeks vacation granted after the first and second years of employment and three weeks after the third year of employment. 3. All normal benefits including group health, life, dental and vision benefits afforded Executive-level Managers at the Sands with immediate enrollment. 4. All reasonable moving expenses paid by the Company. Two trips to New York and one trip for spouse to come to Reno prior to family moving. 5. Reasonable temporary accommodations in the hotel while finding suitable housing. 6. A stock option grant of 30,000 shares pursuant to the Company's stock option plan. The shares shall be granted at an exercise price equal to the fair market value at date of employment and shall vest 25% upon each anniversary over the first four years of employment. 7. Bonus potential of 30% of salary based on Company performance. 8. This shall constitute a two year agreement. Should you be released during this period, you will be paid six months' severance and should you resign within this two year period, you shall reimburse the Company for all moving expenses. I enjoyed the opportunity discussing this position with you. I hope to hear from you soon. Best wishes, /s/ FERENC B. SZONY - --------------------------- Ferenc Szony, President and Chief Executive Officer Agreed to and Accepted this 29 day of January, 1998. /s/ PATRICK BASSNEY - -------------------------- Patrick Bassney EX-13 4 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 THE SANDS REGENT SELECTED FINANCIAL DATA ................................................................................ FOR THE YEARS ENDED JUNE 30,
1999(1) 1998 1997 1996 1995 ------- ------- ------- ------- -------- (Dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Operating revenues(2)..................... $43,535 $59,211 $57,527 $59,072 $ 60,497 Income (loss) from operations............. (42) 233 245 4,192 (11,748)(3) EBITDA(4)................................. 3,665 4,706 4,486 8,418 10,796 Net income (loss)......................... (1,388) (1,219) (762) 2,042 (11,428)(3) Net income (loss) per share: Basic................................ $ (.31) $ (.27) $ (.17) $ .45 $ (2.54)(3) Diluted.............................. $ (.31) $ (.27) $ (.17) $ .45 $ (2.54)(3) Cash dividends per share.................. -- -- -- $ .15 $ .20 OPERATING DATA: Casino square footage(5).................. 27,000 51,000 51,000 51,000 51,000 Number of slot machines(5)................ 686 1,459 1,409 1,407 1,459 Number of hotel rooms(5).................. 836 938 938 938 938 Average hotel occupancy rate.............. 76.4% 83.3% 84.3% 82.9% 87.1% BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(5)......................... $ 5,550 $ 9,453 $ 7,894 $11,557 $ 12,214 Total assets(5)........................... 43,695 58,901 61,053 64,311 66,253 Long-term debt(5)......................... 491 14,643 4,658 14,816 17,808 Total stockholders' equity(5)............. 29,844 31,235 32,454 33,216 31,849
- --------------- (1) On December 23, 1998, the Company sold its wholly owned subsidiaries Patrician, Inc. ("Patrician"), Artemis, Inc. ("Artemis") and Gulfside Casino, Inc. ("GCI"), and their general partnership Gulfside Casino Partnership ("GCP"), to unrelated third parties. GCP owned and operated the Copa Casino in Gulfport, Mississippi. The Selected Financial Data presented herein includes such subsidiaries through the date of sale. (2) Revenues are net of complimentaries. (3) 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 $17.4 million, $13.9 million and $3.08, respectively. (4) "EBITDA" consists of net income plus interest expense, income taxes, depreciation and amortization, and any loss (gain) on the disposition of property and equipment inclusive of impairment write-offs. (5) Information presented as of the end of the period. 5 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................................................ RESULTS OF OPERATIONS COMPARISON OF 1999 TO 1998 As further described in Note 3 to the Company's Consolidated Financial Statements, the Company sold Patrician, GCI and Artemis, including the Copa Casino, to unrelated third parties on December 23, 1998. The Company's consolidated results of operations include the operating results of such companies through this date. Management's Discussion and Analysis of Financial Condition and Results of Operations will be directed at continuing operations with only general and otherwise pertinent information provided regarding operating results for the companies sold. For the year ended June 30, 1999, revenues decreased to $43.5 million from $59.2 million in the prior year and income from operations decreased from $233,000 to a loss from operations of $42,000. The decrease in revenues is due to the elimination of revenues from the Copa Casino of approximately $12.9 million and a decline in revenues at the Sands Regency from $34.9 million in fiscal 1998 to $32.1 million in fiscal 1999. The decrease in income from operations consists of an increase from the Copa Casino of approximately $84,000 which was offset by a decrease from the Sands Regency of $359,000. For the same comparable fiscal years, the Company had a net loss of $1.4 million, or $.31 per share, in fiscal 1999 compared to a net loss of $1.2 million, or $.27 per share, in fiscal 1998. The Copa Casino had a net loss of approximately $294,000 in the current fiscal year as compared to a net loss in the prior fiscal year of $531,000. The Sands Regency's portion of the net loss was $1.1 million as compared to a net loss of $688,000 in fiscal 1998. The decline in Sands Regency revenues, income from operations and net income is attributable to a decline in hotel occupancy due, in part, to an overall softening in the Reno area market, a reduction in group business at the Sands Regency and the lack of a major city-wide bowling event. Every two out of three years, the City of Reno hosts a major mens' or womens' bowling event which starts in February and ends in July. Fiscal 1999 was the one year out of three in which such a major bowling event was not held in Reno. Revenues were also somewhat negatively impacted in the fourth quarter due to construction on the Company's premises which included the razing of 102 older motel rooms and other older buildings. Nonetheless, this decline in revenue was partially offset by reduced costs and expenses commencing primarily in the second quarter of fiscal 1999. Such decline in costs and expenses is due to improved efficiencies and methods of operations. The decrease in lodging revenue of $315,000 in the year ended June 30, 1999, compared to the year ended June 30, 1998, is due to a decrease in hotel occupancy from 83.3%, or 285,000 room nights to 76.4% or 254,000 room nights. The average daily room rate increased by over 8% to approximately $34 in fiscal 1999 from $31 in fiscal 1998. In early April 1999, the Company discontinued the use of 102 older motel rooms, which were subsequently razed, leaving 836 tower hotel rooms available for use. The decrease in gaming revenue of $14.2 million, in fiscal 1999 versus fiscal 1998, is a result of a decrease in gaming revenue from the Copa Casino of approximately $12.0 million and a decrease from the Sands Regency, primarily slot revenue, of $2.1 million. The decrease in gaming revenue in Reno is primarily due to a decrease in hotel occupancy. For the year ended June 30, 1999, casino gaming revenue per occupied room increased to approximately $75.50 from $72.80 in fiscal 1998. 6 3 ................................................................................ The decrease in food and beverage revenue of $1.2 million, for the year ended June 30, 1999 versus the prior year, consists of a decrease from the Copa Casino of approximately $1.1 million and decrease at the Sands Regency of $111,000. Such decline at the Sands Regency is primarily due to the decline in hotel occupancy. Food revenue per occupied room increased from approximately $19 in fiscal 1998 to $21 in fiscal 1999 which improvement is due, in part, to the updating of food venues and increased menu prices. The decrease in other revenue of $347,000 consists of a decrease from the Sands Regency of approximately $178,000 and a decrease from the Copa Casino of $169,000. The decrease from the Sands Regency is composed of a decline in various ancillary revenues. Approximately $58,000 of the $108,000 decrease in other costs and expenses is due to the decrease in related revenue from the Sands Regency. The remaining decrease in other costs and expenses of $50,000 is attributable to the Copa Casino. The decrease in complimentary lodging, food and beverage, deducted from revenue, of $405,000 is principally attributable to the Copa Casino. The decrease in gaming costs and expenses of $7.1 million in the twelve months ended June 30, 1999, compared to the twelve months ended June 30, 1998, consists of a decline from the Copa Casino of $5.9 million and a decline from the Sands Regency of $1.2 million. The decrease at the Sands Regency consists of decreases due to reduced gaming revenues and as a result of increased efficiencies due to improved operating practices and methods. Such decrease includes a decrease in salaries, wages and benefits of approximately $632,000. The decrease in lodging costs and expenses of $754,000 in fiscal 1999, compared to fiscal 1998, consists of a decrease in salaries, wages and benefits of approximately $579,000 and a decrease in various other costs and expenses of $175,000. Such declines are due to the decline in hotel occupancy and to improved efficiencies at the Sands Regency. The decrease in food and beverage costs and expenses of $1.2 million, in the current year compared to the prior year, consists of a decrease from the Copa Casino of approximately $1.1 million and a decrease at the Sands Regency of approximately $177,000. The decline at the Sands Regency is primarily attributable to a decrease in restaurant operating costs and expenses resulting in an improved restaurants profit margin. The decrease in maintenance and utilities costs and expenses of $1.3 million consists of decreases from the Copa Casino of $925,000 and from the Sands Regency of approximately $339,000. The decrease at the Sands Regency consists of decreases in utility costs, repair costs and various other costs and expenses of $128,000, $111,000 and $100,000, respectively. Such decreases are due, in part, to the decrease in hotel occupancy and improvements in operating efficiencies. The decrease in general and administrative costs and expenses of $4.2 million consists of a decrease from the Copa Casino of approximately $4.4 million and increases from the Sands Regency and The Sands Regent of approximately $58,000 and $132,000, respectively. The slight increase at the Sands Regency is primarily due to an increase in advertising and promotional costs and expenses of $568,000 as offset by decreases in salaries, wages and benefits of approximately $442,000 and in various other costs and expenses. The increase in advertising and promotional costs and expenses is due to the 7 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ................................................................................ implementation of new print, billboard and radio advertising campaigns in the Reno and Northern California market areas and expanded in-house promotional programs. The decreases in salaries, wages and benefits, and in various other costs and expenses, are due, in part, to improved operating methods and practices. The decrease in depreciation and amortization expense of $646,000, in fiscal 1999 versus fiscal 1998, is primarily attributable to the Copa Casino. The decrease in interest and other expense of $685,000 consist of a decline from the Sands Regency of $258,000 and a decrease relative to the Copa Casino operation of $427,000. The decrease from the Sands Regency is due to a lower effective overall interest rate on reduced long-term debt. The loss on razing of buildings and related lease terminations costs in fiscal 1999 includes the write-off of the undepreciated basis of 102 motel rooms in low-rise buildings and other structures primarily rented to third parties, and certain costs related to the early termination of a lease located in the rental structure. Such structures were 30 to 35 years old and are being replaced with a paved open area utilized for parking and special events/promotions. The effective income tax rate for the twelve months ended June 30, 1999 is different from the statutory rate due to certain items, primarily attributable to the Copa Casino, that are not deductible for federal income tax purposes. As is true for other hotel/casinos in the Reno area, demand for the Company's facilities declines in the winter. Due to lower room rates and a lower level of gaming play per occupied room, operating margins and, to a lesser extent, revenues are lower during the second and third fiscal quarters. 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. COMPARISON OF 1998 TO 1997 For the year ended June 30, 1998, revenues increased to $59.2 million from $57.5 million in the prior year and income from operations decreased slightly from $245,000 to $233,000. The increase in revenue is attributable to the Sands Regency where revenue increased from $32.2 million in fiscal 1997 to $34.8 million in fiscal 1998, over an 8% increase. Such increase at the Sands Regency was partially offset by a decrease in revenue at the Copa Casino of $1.0 million to $24.4 million in fiscal 1998. The slight decrease in income from operations consists of an increase in income from operations from the Sands Regency of $2.2 million to $304,000 which was offset by a decline in income from operations from the Copa Casino of approximately $2.2 million to a loss from operations of $71,000. For the same comparable fiscal years, the Company had a net loss of $1.2 million, or loss per share of $.27, in fiscal 1998 compared to a net loss of $762,000, or loss per share of $.17, in fiscal 1997. The Sands Regency had a net loss of approximately $688,000 in fiscal 1998 which compared favorably to a net loss in fiscal 1997 of $1.5 million. Such improvement from the Sands Regency was offset by a decline at the Copa Casino. For the year ended June 30 1998, the Copa Casino incurred a net loss of approximately $532,000 as compared to net income in the prior year of approximately $741,000. 8 5 ................................................................................ The increases at the Sands Regency are due to an increase in gaming, lodging and food and beverage revenue per occupied room. The declines in revenues, income (loss) from operations and net income (loss) at the Copa Casino are due to a decline in customer counts and an increase in costs and expenses. The decline in customers is due, in part, to the construction on Highway 90 which significantly impaired access to the Copa Casino for most of fiscal 1998. The increase in lodging revenue of $416,000 in the year ended June 30, 1998, compared to the year ended June 30, 1997, is primarily due to an increase in the average daily rate from approximately $29 in fiscal 1997 to $31 in fiscal 1998. For the same comparable periods, hotel occupancy declined slightly from 84.3% to 83.3%. The increase in gaming revenue of $487,000 includes a 9% increase in gaming revenue from the Sands Regency of $1.6 million. Such increase was offset by a decline in gaming revenue from the Copa Casino of approximately $1.1 million. The increase in gaming revenue in Reno is primarily due to an increase in gaming revenue from hotel guests and an increase in local patrons. Gaming revenue per occupied room increased from approximately $62 in the year ended June 30, 1997 to $69 in the year ended June 30, 1998. The decline in gaming revenue at the Copa Casino is due to a reduction in the number of customers which the Company attributes, in part, to the curtailment of access to the Copa because of construction on Highway 90. Not until July 1998 had construction progressed to the point where access to the Copa Casino had finally improved to any significance. The increase in food and beverage revenue of $638,000, in fiscal 1998 compared to fiscal 1997, includes an increase in restaurant revenue at the Sands Regency of approximately $472,000 and an increase at the Copa Casino of $174,000. At the Sands Regency, food revenue per occupied room increased from approximately $17 in the fiscal 1997 to $19 in fiscal 1998. This increase is partially attributable to improvements and upgrades to the Sands Regency's restaurant facilities. The increase in restaurant revenue at the Copa Casino, partially offset by a decrease in Copa Casino beverage revenue, is due to the Copa's operation of a buffet restaurant in fiscal 1998. Previously operated by a third party through May 1997, the buffet restaurant was subsequently eliminated in July 1998 due to low customer counts and high operating costs. The increase in other revenue of $142,000 is in ancillary revenue from the Sands Regency. The increase in gaming costs and expense of $247,000, in the year ended June 30, 1998 compared to the year ended June 30, 1997, is comprised of an increase from the Copa Casino of approximately $387,000 and a decrease from the Sands Regency of approximately $140,000. The increase in Copa Casino costs and expenses is primarily attributable to added costs and expenses associated with the slot player's club, which was commenced in April 1997, of $555,000. This increase was partially offset by a reduction in gaming taxes due to reduced gaming revenue. The decrease at the Sands Regency is composed of increases in gaming player's club costs and gaming taxes and licenses related to the increased revenue, respectively, of $154,000 and $140,000 which were more than offset by decreases in various other gaming cost and expense items due, partially, to improved efficiency. The increase in food and beverage costs and expense of $987,000 in the fiscal 1998, compared to fiscal 1997, consists of increases at the Copa Casino and Sands Regency, respectively, of $735,000 and $252,000. The increase at the Copa Casino includes $404,000 in added food costs associated with the buffet restaurant and increased other food operating costs and expenses in the Copa's other food 9 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ................................................................................ operation due to changes in products being offered to the public. The Copa's buffet restaurant was operated by the Copa from May 1997 to July 1998 when it was closed due to low customer counts and high operating costs. The increase at the Sands Regency consists primarily of promotional discounts offered on certain restaurant food products of approximately $308,000 and a decrease in various other food and beverage costs and expenses. The increase in maintenance and utilities costs and expenses of $249,000 is primarily attributable to the Copa Casino. It includes an increase in hurricane evacuation expenses of $202,000 as a result of preparedness actions necessary during Hurricane Danny in July 1997 and increases in other maintenance and repair costs aggregating approximately $103,000. Such increases have been offset by a decrease in costs and expenses associated with maintenance dredging performed under and around the ship during the fourth quarter of fiscal 1997. The increase in general and administrative costs and expenses of $77,000, in the year ended June 30, 1998 compared to the year ended June 30, 1997, consists principally of a decrease from the Copa Casino of approximately $189,000 and an increase from the Sands Regency of approximately $266,000. The decrease from the Copa Casino is attributable to a decrease in advertising and promotional costs of approximately $412,000. This decrease was partially offset by an increase in legal and professional costs of $183,000. The decrease in direct advertising and promotional costs is due, in part, to the implementation of the slot player's club which includes various promotional costs that supercede some prior promotional programs. The increase in legal and professional costs is related to the legal actions with the State Port of Mississippi at Gulfport which culminated in a trial in October 1997. The increase in general and administrative costs and expenses at the Sands Regency includes an increase in performance based compensation for the facility of approximately $287,000, increases due to the implementation of a casino marketing department in mid-fiscal 1998 of approximately $153,000 and increases in various other general and administrative costs and expenses aggregating approximately $103,000. Such increases were offset by a decrease in various promotional costs and expenses due to the refinement of promotional programs in the gaming player's club included in gaming costs and expenses. The increase in depreciation and amortization expense of $247,000 is primarily due to additional depreciation taken on assets placed in service in fiscal 1998 and 1997 at the Copa Casino. During such years, significant property and equipment additions and replacements were undertaken including the acquisition of a new slot player tracking/monitoring and accounting system. The decrease in interest and other income of approximately $75,000, in fiscal 1998 compared to fiscal 1997, includes a decrease from the Sands Regency of approximately $365,000 and an increase from the Copa Casino of approximately $290,000. The decrease from the Sands Regency is primarily due to the non-recurrence of a gain on the sale of a non-casino property in Reno in fiscal 1997. The increase from the Copa Casino is due to the non-recurrence of a prior year loss from the write-off of the undepreciated cost of the slot monitoring/accounting system replaced in the fourth quarter of fiscal 1997 and the write-off of certain capitalized costs for projects no longer deemed viable. The increase in interest expense of $507,000 is primarily attributable to the Sands Regency. It includes the write-off of unamortized loan fees of approximately $138,000, due to the amendment of the Sands Regency's bank debt effective January 31, 1998, and the non-recurrence of approximately 10 7 ................................................................................ $77,000 in interest expense capitalized into property and equipment for projects undertaken in fiscal 1997. It also includes an increase in interest expense due to an increase in the interest rate to a default rate of interest of prime plus three percent in the six months preceeding the January 1998 amendment. The amended loan agreement presently specifies an interest rate of prime plus one and one-half percent. CAPITAL RESOURCES AND LIQUIDITY Cash, cash equivalents and short-term investments decreased from $9.5 million at June 30, 1998 to $5.6 million at June 30, 1999. Approximately $3.3 million of this decrease was due to cash retained by the former subsidiaries. Cash and cash equivalents provided from operating activities for the years ended June 30, 1999, 1998 and 1997 was $2.3 million, $3.0 million and $3.3 million, respectively. In fiscal 1999, cash was generated through the issuance of long-term debt of approximately $239,000. In fiscal 1998, the Company received cash of approximately $1.2 million as a result of the early repayment of a note receivable which was not otherwise due to be paid until fiscal 1999. In fiscal 1997, cash was also generated through the issuance of long-term debt of $498,000 and from the sale of non-hotel/casino properties located in Reno, Nevada of $475,000. The Company's short-term investments, which generally mature in one year or less, represent temporarily invested cash funds which are generally readily convertable to cash. Uses of cash included the Company's payments of long-term debt of $862,000, $731,000 and $4.9 million in fiscal 1999, 1998 and 1997, respectively. Cash was also utilized for the acquisition of property and equipment in the amounts of $1.7 million, $2.0 million and $3.1 million in the years ended June 30, 1999, 1998 and 1997, respectively. The property and equipment acquisition amounts, for the years indicated, represent primarily furniture, fixtures and equipment replacements and additions. In fiscal 1999, $500,000 of cash from the former subsidiaries was deposited into an escrow as security for certain representations and warranties by the Company which was subsequently released to the Company in July 1999. At June 30, 1999, the Company believes that its cash funds and cash generated from operations, coupled with the refinancing of its existing bank debt, will be sufficient to meet its needs for the next fiscal year. The Company generally invests its excess cash in securities which are readily marketable and that are not subject to significant market value fluctuations. The Company's working capital declined to a deficit of approximately $4.2 million at June 30, 1999 primarily as a result of the reclassification to current of approximately $10.4 million of long-term debt due to its bank. Such decrease was partially offset by the sale of Patrician, Inc., Gulfside Casino, Inc. and Artemis, Inc., which included the 100% ownership interest in the Copa Casino ("former subsidiaries") to third parties in December 1998 as further discussed in Note 3 to the Company's Consolidated Financial Statements. Such former subsidiaries had a deficit working capital at the date of sale of approximately $9.6 million. The long-term bank debt is due in full in January 2000 and the Company is presently in discussions to refinance such obligation. Future expansion plans for the Reno facility will be considered based upon future market conditions, available financial resources and the need to add hotel rooms and other major facilities. 11 8 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 lot machine denominations. YEAR 2000 The Year 2000 issue is the result of information technology ("IT") and non-IT (embedded technology such as microcontrollers) hardware and software systems and components utilizing two digits, rather than four digits, to define the year. Date-sensitive hardware and software systems and components may recognize a date using "00" as the year 1900 rather than the year 2000. This is generally referred to as the "Year 2000 Problem" or the "Y2K Problem". This could result in IT and non-IT hardware or software system and component ("Y2K Systems and Components") failures or miscalculations causing disruptions of operations and the ability to engage in normal business activities. The Company has undertaken a study and assessment of its Y2K Systems and Components in order to determine the impact of the Y2K Problem on such Y2K Systems and Components. This study and evaluation includes specifically identifying those Y2K Systems and Components utilized by the Company that may be non-Y2K compliant, evaluating necessary corrective actions and implementing corrective actions, including appropriate testing, so as to minimize the impact of the Y2K Problem on the Company. Corrective actions may include software or hardware modifications or the replacement of Y2K Systems and Components that are non-Y2K compliant. The Company's Y2K study and assessment has also been, and will be, utilized with respect to those Y2K Systems and Components that may be subsequently acquired by the Company with greater reliance given to third party representations. The Company has generally completed the identification, evaluation and corrective actions phases which includes internal reviews and testing as well as inquires to third parties supplying or maintaining Y2K Systems. The implementation phase is also in progress and is anticipated to be significantly completed by October 1999. Certain additional follow-up testing is also anticipated to take place and will continue through the second quarter of fiscal 2000. The Company has also undertaken a more limited study and assessment of the Y2K Problem with respect to third party vendors, suppliers, customers and other business associates. Such study and assessment is directed toward third parties that have a material relationship with the Company or may materially affect the Company's operations such as major customers and suppliers, financial institution and communications providers. The scope of such limited study and assessment has been limited, by necessity, to appropriate inquiries of such third parties. The Company believes, based on the wide attention that the Y2K Problem has received, the relative size and prominence of certain third parties and the preliminary information received, to date, from select third parties, that the impact of the Y2K Problem on such third parties will not have a material affect on the Company's operations. The Company has generally completed the study and assessment of the Y2K Problem relative to its material third party vendors, suppliers, customers and other business associates and will continue to follow up on incomplete and failed responses. The Company has, and will, utilize both internal and external resources to achieve Y2K compliance which will include modifying certain Y2K Systems and Components and replacing others. The Company presently estimates that the remaining costs to assure material Y2K compliance will be less than 12 9 ................................................................................ $100,000, to be incurred over the next 6 months. Such estimate is based upon the Company's study and assessment and is subject to modification as conditions change or more information is obtained. There can be no guarantee that this estimate will be achieved and actual results could materially differ from the estimate. Costs to date have been immaterial. The Company believes that the scope and time table of its study and assessment of Y2K Systems and Components, to achieve Y2K compliance, is adequate and realistic. Further, the Company believes that those Y2K Systems and Components with a greater likelihood of adversely impacting the Company's business and financial performance will be Y2K compliant in a timely manner. Nevertheless, if one or more of the Company's Y2K Systems and Components fail to achieve Y2K compliance, or are overlooked, there could be a material adverse impact on the Company's business operations or financial performance. Additionally, there can be no assurances that the Y2K Systems and Components of third parties, which may materially affect the Company, will be timely converted to assure Y2K compliance. The Company has not formulated a contingency plan in the event one or more of the Company's, or third party's, Y2K Systems and Components fail to achieve Y2K compliance. The Company will continue to review the necessity for a contingency plan as its Y2K study and assessment progresses. The decision to develop a contingency plan will be based upon an evaluation of potential future unavoided or unavoidable risks of Y2K noncompliance and the adverse impact to the Company. 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; 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. 13 10 THE SANDS REGENT CONSOLIDATED BALANCE SHEETS ................................................................................ JUNE 30, 1999 AND 1998
1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents................................. $ 5,540,120 $ 9,203,443 Short-term investments.................................... 10,000 250,000 Accounts receivable, less allowance for possible losses of $27,000 and $72,000.................................... 1,095,966 549,613 Note receivable, sale of subsidiaries -- current.......... 180,000 -- Inventories............................................... 483,086 579,016 Federal income tax refund receivable...................... 300,001 687,269 Prepaid expenses and other assets......................... 1,214,734 1,416,625 ----------- ----------- Total current assets.............................. 8,823,907 12,685,966 ----------- ----------- Property and equipment: Land...................................................... 8,092,923 8,092,923 Buildings, ship and improvements.......................... 35,751,549 45,941,607 Equipment, furniture and fixtures......................... 18,508,036 25,654,167 Construction in progress.................................. 767,816 509,247 ----------- ----------- 63,120,324 80,197,944 Less accumulated depreciation and amortization............ 30,125,978 34,551,822 ----------- ----------- Property and equipment, net.......................... 32,994,346 45,646,122 ----------- ----------- Other assets: Deferred federal income tax asset......................... -- 258,752 Note receivable, sale of subsidiaries, net................ 1,741,473 -- Other..................................................... 135,098 310,473 ----------- ----------- Total other assets................................ 1,876,571 569,225 ----------- ----------- $43,694,824 $58,901,313 =========== ===========
- --------------- See notes to consolidated financial statements. 14 11 ................................................................................
1999 1998 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 814,261 $ 1,927,356 Accrued salaries, wages and benefits...................... 853,676 2,006,096 Other accrued expenses.................................... 270,452 2,049,138 Deferred federal income tax liability..................... 299,404 275,541 Current maturities of long-term debt...................... 10,752,496 6,764,949 ------------ ------------ Total current liabilities......................... 12,990,289 13,023,080 Long-term debt.............................................. 490,980 14,643,172 Deferred federal income tax liability....................... 369,786 -- ------------ ------------ Total liabilities................................. 13,851,055 27,666,252 ------------ ------------ 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......................................... 38,783,492 40,171,157 ------------ ------------ 52,202,231 53,589,896 Treasury stock, at cost; 2,403,000 and 2,400,000 shares... (22,358,462) (22,354,835) ------------ ------------ Total stockholders' equity........................ 29,843,769 31,235,061 ------------ ------------ $ 43,694,824 $ 58,901,313 ============ ============
15 12 THE SANDS REGENT CONSOLIDATED STATEMENTS OF OPERATIONS ................................................................................ FOR THE YEARS ENDED JUNE 30, 1999, 1998, 1997
1999 1998 1997 ----------- ----------- ----------- Operating revenues: Gaming............................................. $28,789,544 $42,971,378 $42,484,575 Lodging............................................ 8,562,860 8,878,096 8,461,714 Food and beverage.................................. 7,309,831 8,547,651 7,910,110 Other.............................................. 1,340,969 1,687,505 1,545,345 ----------- ----------- ----------- 46,003,204 62,084,630 60,401,744 Less complimentary lodging, food and beverage included above......................... 2,468,164 2,873,400 2,874,795 ----------- ----------- ----------- 43,535,040 59,211,230 57,526,949 ----------- ----------- ----------- Operating costs and expenses: Gaming............................................. 14,853,027 22,000,607 21,753,369 Lodging............................................ 4,097,428 4,851,303 4,918,433 Food and beverage.................................. 6,305,549 7,554,325 6,566,859 Other.............................................. 526,099 634,543 678,566 Maintenance and utilities.......................... 4,642,598 5,906,916 5,658,004 General and administrative......................... 9,746,135 13,977,577 13,901,048 Depreciation and amortization...................... 3,406,570 4,052,727 3,805,522 ----------- ----------- ----------- 43,577,406 58,977,998 57,281,801 ----------- ----------- ----------- Income (loss) from operations........................ (42,366) 233,232 245,148 ----------- ----------- ----------- Other income (deductions): Interest and other income.......................... 320,482 345,936 420,490 Interest expense................................... (1,747,990) (2,433,271) (1,926,378) Loss on razing of buildings and related lease termination costs............................... (479,348) -- -- ----------- ----------- ----------- (1,906,856) (2,087,335) (1,505,888) ----------- ----------- ----------- Loss before income taxes............................. (1,949,222) (1,854,103) (1,260,740) Income tax benefit................................... 561,557 634,881 498,928 ----------- ----------- ----------- Net loss............................................. $(1,387,665) $(1,219,222) $ (761,812) =========== =========== =========== Net loss per share: Basic........................................... $ (.31) $ (.27) $ (.17) =========== =========== =========== Diluted......................................... $ (.31) $ (.27) $ (.17) =========== =========== =========== Weighted average shares outstanding.................. 4,497,703 4,498,722 4,498,722 =========== =========== ===========
- --------------- See notes to consolidated financial statements. 16 13 THE SANDS REGENT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ................................................................................ FOR THE YEARS ENDED JUNE 30, 1999, 1998, 1997
COMMON STOCK ADDITIONAL TREASURY STOCK -------------------- PAID-IN RETAINED ------------------------ SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL --------- -------- ----------- ----------- --------- ------------ ----------- Balances, July 1, 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 Net loss............... -- -- -- (1,219,222) -- -- (1,219,222) --------- -------- ----------- ----------- --------- ------------ ----------- Balances, June 30, 1998................. 6,898,722 344,936 13,073,803 40,171,157 2,400,000 (22,354,835) 31,235,061 Net loss............... -- -- -- (1,387,665) -- -- (1,387,665) Purchase of Company Common Stock......... -- -- -- -- 3,000 (3,627) (3,627) --------- -------- ----------- ----------- --------- ------------ ----------- BALANCES, JUNE 30, 1999................. 6,898,722 $344,936 $13,073,803 $38,783,492 2,403,000 $(22,358,462) $29,843,769 ========= ======== =========== =========== ========= ============ ===========
- --------------- See notes to consolidated financial statements. 17 14 THE SANDS REGENT CONSOLIDATED STATEMENTS OF CASH FLOWS ................................................................................ FOR THE YEARS ENDED JUNE 30, 1999, 1998, 1997
1999 1998 1997 ----------- ----------- ---------- Operating activities: Net loss................................................ $(1,387,665) $(1,219,222) $ (761,812) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization...................... 3,406,570 4,052,727 3,805,522 Loss on disposal of property and equipment......... 460,243 73,792 15,341 (Increase) decrease in accounts receivable......... 41,033 (131,595) (18,000) Decrease in inventories............................ 1,942 15,174 149,176 (Increase) in prepaid expenses and other current assets.......................................... (197,335) (73,400) (317,837) Decrease in other assets........................... 80,177 26,400 128,420 Increase (decrease) in accounts payable............ 272,988 (862,089) 207,268 Increase (decrease) in accrued salaries, wages and benefits........................................ (645,142) 190,255 128,909 Increase in other accrued expenses................. 367,255 357,581 315,456 Change in federal income taxes payable/receivable.............................. 387,268 375,388 (921,288) Change in deferred federal income taxes............ (492,780) 199,540 590,688 Decrease in other liability........................ -- -- (18,723) ----------- ----------- ---------- Net cash provided by operating activities................. 2,294,554 3,004,551 3,303,120 ----------- ----------- ---------- Investing activities: Purchase of short-term investments...................... -- -- (50,000) Sale and maturity of short-term investments............. 10,000 -- -- Payments received on note receivable.................... -- 1,237,156 7,107 Down payment on sale of subsidiaries held in escrow and reflected in accounts receivable..................... (500,000) -- -- Payments received on note receivable, sale of subsidiaries, net.................................... 96,343 -- -- Cash retained by former subsidiary companies upon sale................................................. (3,276,839) -- -- Additions to property and equipment..................... (1,683,863) (1,995,750) (3,105,448) Proceeds from sale of property, equipment and other assets............................................... 32,369 44,650 501,490 ----------- ----------- ---------- Net cash used in investing activities..................... (5,321,990) (713,944) (2,646,851) ----------- ----------- ----------
- --------------- See notes to consolidated financial statements. 18 15 ................................................................................
1999 1998 1997 ----------- ---------- ----------- Financing activities: Payment of accounts payable for prior year purchases of property and equipment............................... $ (9,355) $ -- $ -- Issuance of long-term debt.............................. 239,368 -- 497,940 Payments on long-term debt.............................. (862,273) (730,845) (4,867,508) Purchase of Company common stock........................ (3,627) -- -- ----------- ---------- ----------- Net cash used in financing activities..................... (635,887) (730,845) (4,369,568) ----------- ---------- ----------- Increase (decrease) in cash and cash equivalents.......... (3,663,323) 1,559,762 (3,713,299) Cash and cash equivalents, beginning of year.............. 9,203,443 7,643,681 11,356,980 ----------- ---------- ----------- Cash and cash equivalents, end of year.................... $ 5,540,120 $9,203,443 $ 7,643,681 =========== ========== =========== Supplemental cash flow information: Net investment in subsidiaries converted to note receivable upon sale, net............................ $ 2,171,147 $ -- $ -- =========== ========== =========== Payments received on note receivable from sale of subsidiaries held in escrow and reflected in accounts receivable........................................... $ 153,330 $ -- $ -- =========== ========== =========== Property and equipment acquired by accounts payable..... $ -- $ 76,914 $ 223,977 =========== ========== =========== Property and equipment acquired by long-term debt....... $ -- $ -- $ 903,227 =========== ========== =========== Property and equipment acquired by conversion of other assets............................................... $ -- $ -- $ 400,000 =========== ========== =========== Interest paid, net of amount capitalized................ $ 1,534,329 $2,026,378 $ 1,594,085 =========== ========== =========== Federal income taxes paid............................... $ 300,000 $ -- $ -- =========== ========== ===========
19 16 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................ FOR THE YEARS ENDED JUNE 30, 1999, 1998, 1997 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"), and, through December 23, 1998, its wholly owned subsidiaries Patrician, Inc. ("Patrician"), Artemis, Inc. ("Artemis") and Gulfside Casino, Inc. ("GCI"), and their general partnership Gulfside Casino Partnership ("GCP") (together the "Company"). On December 23, 1998, the Company sold Patrician, GCI and Artemis, which are the sole partners in GCP, to unrelated third parties. 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, through December 23, 1998, the Copa Casino in Gulfport, Mississippi which is owned and operated by GCP. The Company also owns and operates a slot route service with various locations in the general Reno area. 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:
1999 1998 1997 ---------- ---------- ---------- Hotel............................................. $ 460,549 $ 442,875 $ 445,572 Food and beverage................................. 1,727,192 2,202,749 2,221,535 Other............................................. 31,204 55,192 51,843 ---------- ---------- ---------- $2,218,945 $2,700,816 $2,718,950 ========== ========== ==========
Other operating revenue is comprised of hotel/casino ancillary services. Related costs and expenses are included in other operating costs and expenses. 20 17 ................................................................................ (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, 1999, 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) Impairment of long-lived assets 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. (i) 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. 21 18 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ................................................................................ (j) Fair value 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. It is estimated that the carrying amounts of the Company's financial instruments approximate fair value at June 30, 1999. (k) 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. (l) Recent Pronouncements of the Financial Accounting Standards Board ("FASB") On June 30, 1998, the FASB issued SFAS No. 133 entitled "Accounting for Derivative Instruments and Hedging Activies". This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for fiscal years beginning after June 15, 2000. Management does not believe this new SFAS will have a material impact on the financial statements of the Company but because of the complexity of SFAS No. 133, the ultimate impact has not yet been determined. (m) 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. (n) Reclassifications Certain reclassifications have been made to the 1998 consolidated financial statements to conform to the 1999 presentation. 22 19 ................................................................................ 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, SALE OF SUBSIDIARIES On December 23, 1998, the Company closed on an agreement selling all of its ownership interest in Patrician, GCI and Artemis, which included a 100% ownership interest in the Copa Casino, to two former GCI shareholders for $8.5 million. The agreement provided for an initial payment of $500,000, which was deposited into escrow, with the balance payable in monthly installment of $15,000 or 2% of the Copa's gross gaming revenues, whichever is greater. The payments held in escrow as security for certain representations and warranties aggregated $653,000 at June 30, 1999 and are included in accounts receivable on the consolidated balance sheet. Such amounts held in escrow, including earned interest, were released to the Company in July 1999. Upon consummation of the sales transaction, the Company's net investment in Patrician, GCI and Artemis was $2.2 million. This net $2.2 million investment was reclassified as a note receivable, net. The difference to the original $8.0 million face value of the note, after the initial $500,000 payment, represents an unrecognized gain of approximately $5.8 million. Such gain will be recognized by the Company as it receives subsequent payments after recovering the $2.2 million net investment. $180,000 of the note receivable, sale of subsidiaries is reflected as a current asset. The combined net assets of Patrician, GCI, Artemis and GCP sold by the Company on December 23, 1998 consisted of the following: Current assets.............................................. $ 4,065,998 Property and Equipment, net................................. 10,439,417 Deferred tax benefit, non-current........................... 1,214,957 Other assets................................................ 92,238 Current liabilities......................................... (13,641,463) ------------ $ 2,171,147 ============
The new owners of Patrician, GCI, Artemis and GCP have made certain claims that GCP had previously made payments for the benefit of the Company and are seeking to recover such payments. Preliminary discussions are in progress. Management believes that the claims are without merit and that the ultimate outcome will not have a material adverse affect on the Company. 23 20 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ................................................................................ NOTE 4 -- LONG-TERM DEBT Long-term debt consists of the following:
June 30, ------------------------- 1999 1998 ----------- ----------- Bank term loan; interest at prime plus 2.5% per annum from February 1, 1999 to maturity in January 2000, subject to a maximum of 14% per annum; at June 30, 1999, the interest rate was 10.25% per annum; monthly principal and interest payments of the greater of $120,000 or the monthly accrued interest from February 1, 1999 to maturity when the remaining balance is due in full; semi-annual principal payments due in the amount of average cash and cash equivalents in excess of $5.5 million for June and December of each year; secured by deeds of trust on all real property and otherwise collateralized by all furniture, fixtures, equipment and all other properties of the Company............................................... $10,532,066 $10,849,143 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 $1,481,000 and accumulated depreciation of approximately $614,000 at June 30, 1999, are included in property and equipment and are being depreciated over their estimated useful lives............. 711,410 980,767 Contract payable by GCP to International Game Technology ("IGT"); 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................................................. -- 3,537,143 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 .006% at June 30, 1998; principal payments past due since 1994; in accordance with a Chancery Court judgement, as further discussed in Note 9, the entire principal balance, is due in full and is included in current maturities at June 30, 1998...................................................... -- 6,000,000 Other....................................................... -- 41,068 ----------- ----------- 11,243,476 21,408,121 Less current maturities..................................... 10,752,496 6,764,949 ----------- ----------- Long-term portion........................................... $ 490,980 $14,643,172 =========== ===========
As discussed in Note 3, The Company closed on an agreement selling all of its ownership interest in Patrician, GCI and Artemis, which included a 100% ownership interest in GCP, on December 23, 1998. The long-term debt obligations due IGT and GCI above were included in such sale. The bank term loan, which was restructured effective January 31, 1998, 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 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 require 24 21 ................................................................................ minimum capital expenditures in each fiscal year, subject to a maximum per fiscal year. The financial covenants additionally require that a minimum EBITDA (earnings before interest expense, taxes, depreciation and amortization, and any loss (gain) on the disposition of property and equipment inclusive of impairment write-offs) be maintained and restrict advances by Zante to the Company. The loan agreement also requires that no shareholder, other than the existing major shareholders, may own 20% or more of the issued and outstanding voting stock of the Company. The Company believes that it is in compliance with these covenants. The Company is also presently in discussions to refinance such obligation which comes due in January 2000. Long-term debt at June 30, 1999 is payable as follows:
YEAR ENDING JUNE 30, AMOUNT ----------- ----------- 2000...................................................... $10,752,496 2001...................................................... 285,346 2002...................................................... 205,634 ----------- $11,243,476 ===========
The Company entered into an interest rate swap agreement, effective April 1, 1994, to fix the variable interest rate due under the original, pre-restructured, 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 5.06%) based on the London Interbank Offer Rate ("LIBOR") on the notional amount. The notional amount of the swap coincides with the original principal reduction schedule of the superceded bank term and revolving line of credit loan (currently $3.2 million) which will be fully amortized in April 2000. 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 $5,000 at June 30, 1999 which was based on estimated termination values. The interest rate swap, which is also secured by a deed of trust and all properties of the Company, is subject to market risk as interest rates fluctuate. Of the total interest expense of $1,926,000 in 1997, $97,000 has been capitalized into construction costs. NOTE 5 -- 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 also provides for the grant of non-qualified stock options to independent (non-employee) directors. With respect to grants of stock options to independent directors, the stock option plan provides for the automatic grant of options to purchase 7,500 shares to an independent director on each annual meeting date that such director continues to service. Further, the Board of Directors may grant an option to purchase up to 25,000 shares upon the appointment of a new independent director. The plan presently permits for the grant of options covering a maximum of 800,000 shares of the Company's common stock. The Company has reserved shares to cover these requirements. The plan will 25 22 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ................................................................................ continue until the year 2007, 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% to 50% each year after grant for employees and vest in full in one year for grants to independent directors. Prior to the approval of an amendment to the Company's Stock Option Plan at the November 1998 annual shareholders' meeting, allowing for the grant of stock options to independent directors, the Board of Directors approved a non-qualified stock option grant in fiscal 1998 to a then newly appointed independent director to purchase 10,000 shares of common stock. Granted at fair market value, the option vested one year from the date of grant and is subject to a separate Non-Qualified Stock Option Agreement. In December 1997, The Board of Directors of the Company authorized the repricing of certain incentive stock options. The effect of the repricing resulted in the cancellation and reissuance of 318,000 options with a price equal to the market value of the common stock at the date of repricing. The options granted to replace the cancelled options that were previously vested will vest on the first anniversary date of the repricing. The options granted to replace the unvested cancelled options will vest 25% each year commencing on the first anniversary date of the repricing. The following table summarizes activity of the Company's stock option plans:
WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Options Outstanding Outstanding, July 1, 1996................................. 334,000 $ 4.71 -------- ------ Outstanding, June 30, 1997................................ 334,000 4.71 Options granted........................................ 404,000 1.83 Options cancelled...................................... (318,000) (4.77) -------- ------ Outstanding, June 30, 1998................................ 420,000 1.90 Options granted........................................ 165,500 0.94 Options cancelled...................................... (38,000) (2.46) -------- ------ OUTSTANDING, JUNE 30, 1999................................ 547,500 $ 1.57 ======== ====== Options Exercisable At June 30, 1997.......................................... 122,000 $ 5.78 ======== ====== At June 30, 1998.......................................... 16,000 $ 3.50 ======== ====== AT JUNE 30, 1999.......................................... 228,000 $ 1.83 ======== ======
At June 30, 1999, options to purchase 108,364 shares were available for grant under the stock option plan. 26 23 ................................................................................ The following table sets forth certain information with respect to incentive stock option grants outstanding at June 30, 1999:
OPTIONS OUTSTANDING ------------------------------------ OPTIONS EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE -------- ----------- ----------- -------- ----------- -------- $ .88 to $1.19....................... 161,500 9.5 years $0.93 -- $-- $1.81 to $2.25....................... 386,000 8.5 years 1.83 228,000 1.83 ------- --------- ----- ------- ----- $1.81 to $3.50....................... 547,500 8.8 years $1.57 228,000 $1.83 ======= ========= ===== ======= =====
The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123-- "Accounting for Awards of Stock-Based Compensation" which 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, -------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Net income (loss): As reported.................................... $(1,387,665) $(1,219,222) $(761,812) Pro forma...................................... (1,537,665) (1,322,397) (888,768) Net income (loss) per share: As reported, Basic and diluted................. $(0.31) $(0.27) $(0.17) Pro forma, Basic and diluted................... (0.34) (0.29) (0.20) Weighted average assumptions: Expected stock price volatility................ 100.0% 100.0% -- Risk-free interest rate........................ 4.6% 6.3% -- Expected option lives.......................... 2.2 YEARS 2.3 years -- Estimated fair value of options granted........ $0.52 $1.06 --
27 24 THE SANDS REGENT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ................................................................................ NOTE 6 -- FEDERAL INCOME TAXES The Company's income tax (provision) benefit consists of the following:
1999 1998 1997 -------- --------- ---------- Current............................................. $ 68,776 $ 834,421 $1,089,616 Deferred............................................ 492,781 (199,540) (590,688) -------- --------- ---------- $561,557 $ 634,881 $ 498,928 ======== ========= ==========
The Company's effective tax rate differs from the federal statutory rate as follows:
1999 1998 1997 ----- ----- ----- Federal statutory tax rate.................................. (35.0)% (35.0)% (35.0)% Surtax exemption............................................ 1.0 1.0 1.0 Tax effect of tax-free interest income...................... (0.1) (0.2) (3.0) General business credits.................................... (1.7) (2.0) (2.3) Other....................................................... 7.0 2.0 (0.3) ----- ----- ----- (28.8)% (34.2)% (39.6)% ===== ===== =====
The components of the Company's net deferred federal income tax asset (liability) are as follows at June 30:
1999 1998 ----------- ----------- Deferred tax assets: License acquisition costs.............................. $ -- $ 1,419,009 Pre-opening costs...................................... -- 43,046 Net operating loss & credit carryforwards.............. 356,463 -- Alternative minimum tax credit......................... 1,620,127 1,670,777 Accrued expenses....................................... 72,930 147,993 Deferred gain.......................................... 410,094 -- Other.................................................. 30,979 38,650 ----------- ----------- 2,490,593 3,319,475 ----------- ----------- Deferred tax liabilities: Property and equipment................................. (2,756,470) (2,859,429) Prepaid expenses....................................... (394,015) (455,725) Other.................................................. (9,298) (21,110) ----------- ----------- (3,159,783) (3,336,264) ----------- ----------- Net deferred federal income tax liability............ $ (669,190) $ (16,789) =========== ===========
The Company has a March 31 tax year-end. The Company has a net operating loss carryforward of $1.1 million and a credit carryforward of $64,937 which can be used to offset future tax liabilities. Such net operating loss and credit carryforwards expire in 2019. 28 25 ................................................................................ NOTE 7 -- EARNINGS PER SHARE Earnings Per Share are calculated in accordance with Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per Share" which was issued by the Financial Accounting Standards Board and became effective for periods ending after December 15, 1997. SFAS 128 provides for the reporting of "basic", or undiluted earnings per share, and "diluted" earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period, while diluted earnings per share reflects the additional dilution for all potentially dilutive securities, such as stock options. For each of the years ended June 30, 1999, 1998 and 1997, there were no outstanding convertible securities that would result in dilution of basic earnings per common share. NOTE 8 -- CONTINGENCIES The Company is party to various 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 and results of operations. NOTE 9 -- CONDENSED QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- 1999 OPERATING REVENUES..................... $14,143,149 $13,208,098 $ 7,366,115 $ 8,817,680 INCOME (LOSS) FROM OPERATIONS.......... (303,288) (314,842) (297,962) 873,726 NET INCOME (LOSS)...................... (482,580) (619,870) (377,510) 92,295 NET INCOME (LOSS) PER SHARE: BASIC............................... $(0.11) $(0.14) $(0.08) $0.02 DILUTED............................. $(0.11) $(0.14) $(0.08) $0.02 1998 Operating revenues..................... $15,341,466 $13,510,048 $14,316,046 $16,043,670 Income (loss) from operations.......... 479,429 (1,436,957) (48,833) 1,239,593 Net income (loss)...................... 28,509 (1,254,550) (378,923) 385,742 Net income (loss) per share: Basic............................... $0.01 $(0.28) $(0.08) $0.09 Diluted............................. $0.01 $(0.28) $(0.08) $0.09
In December 1998, the Company sold its 100% interest in subsidiaries which owned and operated the Copa Casino. The Condensed Quarterly Results included the operating results of the Copa Casino through the fiscal 1999 second quarter. 29 26 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Reno, Nevada August 6, 1999 30 27 ................................................................................ CORPORATE OFFICERS Katherene Latham Chairman of the Board Pete Cladianos, Jr. Vice Chairman of the Board Ferenc B. Szony President and Chief Executive Officer David R. Wood Executive Vice President, Treasurer and Chief Financial Officer Patrick Bassney Vice President/General Manager, Sands Regency Pete Cladianos III Secretary BOARD OF DIRECTORS Katherene Latham(1) Chairman of the Board Pete Cladianos, Jr.(1) Vice Chairman of the Board Ferenc B. Szony President and Chief Executive Officer David R. Wood Executive Vice President, Treasurer and Chief Financial Officer Pete Cladianos III(1) Secretary Jon N. Bengtson Louis J. Phillips Larry Tuntland PUBLIC ACCOUNTANTS Deloitte & Touche LLP Reno, Nevada SECURITIES COUNSEL Latham & Watkins Costa Mesa, California TRANSFER AGENT & REGISTRAR U.S. Stock Transfer Corporation Glendale, California - ------------ (1) Standing for election to the Board of Directors at the November 1, 1999 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. 31 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 6, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of The Sands Regent for the year ended June 30, 1999. Deloitte & Touche LLP Reno, Nevada September 27, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-01-1999 5,540 10 1,303 27 483 8,823 63,120 30,126 43,694 12,990 0 0 0 345 29,499 43,694 7,310 46,003 6,306 25,782 17,795 0 1,748 (1,949) (562) (1,388) 0 0 0 (1,388) (.31) (.31)
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