U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934 for the quarterly period ended September 30, 2001
_______ Transition report pursuant to 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _____________ .
Commission File No. 1-4385
DUNES HOTELS AND CASINOS INC.
(Exact name of business issuer as specified in its charter)
NEW YORK 11-1687244
(State or other jurisdiction or I.R.S. Employer Identification No.
incorporation or organization)
46735 County Road 32B, P.O. Box 130, Davis, California 95617
(Address of principal executive offices)
(530) 753-4890
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 or the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,473,943 shares of common
stock, $.50 par value as of November 1, 2001. Transitional Small Business
Disclosure Format (check one): Yes ____ No X
-1-
DUNES HOTELS AND CASINOS INC.
INDEX
Page
Part 1. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
September 30, 2001 and December 31, 2000
Condensed Consolidated Statements of Loss 5
for the three months ended September 30, 2001
and 2000
Condensed Consolidated Statements of Loss 6
for the nine months ended September 30, 2001
and 2000
Condensed Consolidated Statements of Cash Flows 7
for the nine months ended September 30, 2001
and 2000
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of
------------------------------------------------
Financial Condition and Results of Operations 15
---------------------------------------------
Part II. Other Information
Item 1. Legal Proceedings 22
-------------------------
Item 2. Changes in Securities 22
-------------------------------
Item 3. Defaults Upon Senior Securities 22
---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 22
-----------------------------------------------------------
Item 5. Other Information 22
-------------------------
Item 6. Exhibits and Reports on Form 8-K 22
----------------------------------------
Signatures 23
2
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(Dollars in thousands)
ASSETS
September December
30, 2001 31, 2000
---------- -----------
(Unaudited)
Cash and cash $ 2,992 $ 4,241
equivalents
Marketable 436 422
securities
Receivables
Trade 22 37
Real 769 526
estate sales
Other 487
Inventory of real estate held 186 1,126
for sale
Prepaid 70 56
expenses
Property and less accumulated
equipment, depreciation
and amortization of $951 and $862 in 3,049 3,134
2001 and 2000
Other assets 2 4
---------- -----------
$ 8,013 $ 9,546
========== ===========
See notes to condensed consolidated financial statements
3
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
September December
30, 2001 31, 2000
---------- -----------
(Unaudited)
Accounts payable $ 94 $ 143
Accrued expenses 500 478
Deferred income 57 159
Long-term debt and capital lease 405 589
obligation
Accrued preferred stock dividends in 844 1,389
arrears
---------- -----------
1,900 2,758
---------- -----------
Shareholders'equity
Preferred stock - authorized 10,750,000
shares ($.50 par);issued 10,512 shares
Series B $7.50 cumulative preferred stock,
outstanding 5,620 and 9,610 shares at
September 30, 2001 and December 31, 2000
respectively, aggregate liquidation
value $1,546, including dividends in arrears 5 5
Common stock - authorized 25,000,000 shares
($.50 par); issued 7,799,780 shares,
outstanding 4,473,943 and 5,094,340 shares
at September 30, 2001 and December 31, 2000
respectively 3,900 3,900
Capital in excess of par 25,881 25,881
Deficit (20,895) (20,960)
---------- -----------
8,891 8,826
Treasury stock at cost; Preferred - Series
B, 4,892 shares Common 3,325,837 shares (2,778) (2,038)
---------- -----------
Total shareholders' equity 6,113 6,788
---------- -----------
$ 8,013 $ 9,546
========== ===========
See notes to condensed consolidated financial statements
4
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands, except per share)
UNAUDITED
2001 2000
---------- ---------
Revenues
Sales of real estate $ 55 $ 729
Rental income, agricultural properties 15 14
Drying and storage revenues 88 74
---------- ---------
158 817
---------- ---------
Cost and expenses
Cost of real estate sold 763
Cost and expenses of rental income 1 1
Cost of drying and storage revenues 72 110
Selling, administrative and general
Corporate 193 225
Real estate operations 2 46
Depreciation 33 33
---------- ---------
301 1,178
---------- ---------
Loss before other credits(charges)and
income taxes (143) (361)
Other credits (charges)
Interest and dividend income 39 56
Interest expense (13) (19)
Gain on marketable securities, net 22 28
---------- ---------
48 65
---------- ---------
Loss before income taxes (95) (296)
Income taxes 2
---------- ---------
Net loss $ (93) $ (296)
========== =========
Weighted average number of shares outstanding 4,489,351 5,966,973
Basic and diluted loss per common share $ (0.02) $ (0.05)
========== =========
See notes to condensed consolidated financial statements
5
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands, except per share)
UNAUDITED
2001 2000
--------- --------
Revenues
Sales of real estate $ 1,004 $ 1,807
Rental income, agricultural properties 43 43
Drying and storage revenues 250 110
--------- --------
1,297 1,960
--------- --------
Cost and expenses
Cost of real estate sold 983 1,928
Cost and expenses of rental income 3 3
Cost of drying and storage revenues 208 249
Selling, administrative and general
Corporate 644 692
Real estate operations 29 131
Depreciation 100 98
--------- --------
1,967 3,101
--------- --------
Loss before other credits (charges) and
income taxes (670) (1,141)
Other credits (charges)
Interest and dividend income 114 159
Interest expense (42) (62)
Other income 3 3
Gain on marketable securities, net 117 59
--------- --------
192 159
--------- --------
Loss before income taxes (478) (982)
Income taxes 2 5
--------- --------
Net loss $ (480) $ (987)
========= ========
Weighted average number of shares outstanding 4,660,935 5,966,973
Basic and diluted loss per common share $ (0.11) $ (0.17)
========= ========
See notes to condensed consolidated financial statements
6
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)
UNAUDITED
2001 2000
--------- --------
Cash flows from operating activities
Net cash provided by operating activities $ 169 $ 762
--------- --------
Cash flows from investing activities:
Investment in distressed asset notes (480)
Investment in marketable securities (14) (3,127)
--------- --------
Net cash used in investing activities (494) (3,127)
--------- --------
Cash flows from financing activities
Payments on long-term debt (184) (165)
Purchase of treasury stock (740)
--------- --------
Net cash used in financing activities (924) (165)
--------- --------
Decrease in cash and cash equivalents (1,249) (2,530)
Cash and cash equivalents, beginning
of period 4,241 3,323
--------- --------
Cash and cash equivalents, end of period $ 2,992 $ 793
========= ========
7
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Basis of presentation:
The condensed consolidated financial information included herein is
unaudited, except that the balance sheet at December 31, 2000, was derived
from the audited financial statements included in the Company's 2000 Form
10-KSB. The September 30, 2001 information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows of the Company.
The results of operations for the nine months ended September 30, 2001,
are not necessarily indicative of the results to be expected for the full
year. Further, certain information and note disclosures normally included
in the Company's annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2000 filed with
the Securities and Exchange Commission.
Effective with the third quarter of 2001, we have changed the organization
of our business segments. Prior to the third quarter of 2001, we reported
the rental revenue from the Sam Hamburg Farm under our Farming segment.
Beginning with the third quarter, we are including the rental income from
the Sam Hamburg Farm under our Real Estate segment. In addition, we are
reporting a new business segment, Distressed Assets, which reflects our
intention to pursue the acquisition and work-out of distressed real estate
related assets. For more information on our reportable business segments,
see Note 6 below.
2. Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Continental California
Corporation (Continental), M&R Corporation (MRC), and MRC's subsidiary M&R
Investment Company, Inc. (MRI) and MRI's subsidiaries SHF Acquisition
Corporation (SHF) and South Lake Acquisition Corporation (South Lake),
after elimination of all material inter-company balances and transactions.
3. Legal proceedings:
Injunctive Action regarding Tender Offer
On April 3, 2000, J.B.A. Investments, Inc. ("JBA"), General Financial
Services, Inc. ("GFS") and GFS Acquisition Company, Inc. ("GFS
Acquisition") filed an action against the USI Corp., Barney Kreutzer and
Thomas Honton (collectively the "USI Group") in the U.S. District Court
for the District of Kansas alleging, among other things, violations of
the Williams Act,ss.ss.13(d), 14(d) and 14(e) of the Securities Exchange
Act of 1934, 15 U.S.C. 78a et seq. ("Williams Act"). The case is
captioned J.B.A. Investments, Inc. et al.
8
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
v. USI Corp., et al. Case No. 00127 WEB (D. Kan. 2000). The plaintiffs
allege that the USI Group conducted a tender offer for the Company's
non-convertible Series B preferred stock in violation of the Williams Act.
Upon information believed to be reliable, USI Group was able to purchase
approximately 3,000 shares of the Company's Series B preferred stock. The
plaintiffs further allege that USI Group failed to file any of the
necessary reports required under the Williams Act, failed to make material
disclosures to the former Series B preferred stockholders and engaged in
fraudulent practices in conjunction with the alleged tender offer. The
plaintiffs seek a preliminary and permanent injunction prohibiting the USI
Group from completing the tender offer, recission of the Series B
preferred stock purchases by the USI Group and damages. On August 3, 2000,
the Company was joined as a plaintiff.
The USI Group and the plaintiffs have consented to an order halting any
further purchase of Series B preferred stock by the USI Group, allowing
the Company to instruct its transfer agent to stop the transfer of such
shares to the USI Group and precluding the USI Group from transferring or
otherwise disposing the acquired Series B preferred stock.
On March 9, 2001, the USI Group filed an answer and several counter-claims
against the plaintiffs, including the Company. USI subsequently withdrew
its answer and counter-claims and filed an amended answer denying
plaintiffs' claims without the previously stated counter-claims against
the plaintiffs and the Company.
While management believes in the merits of the action against the USI
Group, there can be no assurance as to the outcome of the action and
ultimate ownership of the contested Series B preferred stock.
Derivative Shareholder Litigation
On October 5, 2001, GFS and GFS Acquisition (collectively, the
"Plaintiffs"), derivatively on behalf of the Company and individually,
filed a lawsuit in the Superior Court of the State of California for the
County of Sacramento (Case No. CIV. S-01-1878 DFL PAN) against certain of
the Company's former officers, directors, attorneys, and their spouses
(collectively, the "Defendants"). The action seeks to remedy alleged
breaches of fiduciary duty, waste of corporate assets, unjust enrichment,
lack of candor, and fraud by the Company's former senior executives and
directors. The lawsuit alleges that during a substantial portion of the
Company's existence, the Defendants abused their control and fiduciary
positions improperly to obtain for themselves and other officers, managers
and employees millions of dollars in benefits, while greatly damaging the
Company and its shareholders. At this time, the ultimate outcome of this
litigation is unknown; however, the Company anticipates that the
Defendants will vigorously defend themselves. Even if the Plaintiffs are
successful in obtaining a judgment against the Defendants, it is unknown
whether any such judgment would be ultimately collectible. However, the
Company is aware that the former directors and officers of the Company
have the benefit of a $3,000,000 directors and officers liability
insurance policy that may be available to help pay any such judgment.
Although the Company is a defendant in the
9
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
litigation, it would be entitled to recover any judgment awarded with
respect to the derivative claims alleged by the Plaintiffs.
4. Contingencies:
(a) At September 30, 2001, the Company has a net operating loss carry
forward (NOL) of approximately $53,248,200. The Board of Directors
believes that this NOL is subject to severe limits under the Internal
Revenue Code and as a result, the Board of Directors believes there is
substantial doubt as to whether the NOL has any value to the Company. If
there has been an ownership change for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended (the Code), then there is a
limitation on the amount of income that can be offset by NOL carryovers.
In general, an ownership change occurs when a major shareholder of a
loss corporation increases their ownership by more than 50%, which is
tested over a three-year period. Depending on the interpretation of the
IRS, an effective change in control may have occurred as early as
January 4, 2000, upon the order vesting voting control with GFS.
(b) SHF was advised in 1991 of possible contamination of 40 acres at Sam
Hamburg Farm of approximately 5,000 cubic yards of soil. The Company,
through its chemical and toxic clean-up consultants, has been working
with the California State Environmental Protection Agency in seeking
alternate means to the disposal in toxic dump sites of the chemical and
toxics-laden soil.
Because of the ongoing testing, the State of California has not imposed
a disposal date upon the Company. The Company has disposed of 1,000
cubic yards of soil to date. Cost of disposal of the remaining soil is
estimated at $125 to $200 per cubic yard or approximately $500,000 to
$800,000, of which $472,000 has been accrued. However, if on-site
remediation can be achieved, it is estimated that the cost will be no
more than $170,000. The Company is unable to predict when the ongoing
testing will be complete or what the outcome of these tests will be.
Accordingly, it is reasonably possible the estimates will change
materially in the near term as the testing and remediation work
continues.
5. Loss per common share:
Loss per common share has been computed using the weighted average number
of shares outstanding during the applicable period. Dividends on the
Series B preferred stock have been deducted from income or added to the
loss applicable to common shares. Dividends on the Company's Series B
preferred stock have not been paid since the first quarter of 1982. The
Company is in arrears on such dividends in the amount of approximately
$843,824 as of September 30, 2001.
During June 2001, the Company completed abandoned property reports to the
various states as required by state law. This resulted from the Company's
efforts to locate the affected Series B preferred and common stockholders
in connection with its tender offer completed during the first quarter of
2001. In general, state law requires the Company to abandon shares of
stock or their value when shareholders are deceased, without adequate
asset transfer arrangements, or change their mailing address without
informing the
10
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Company or without the Company being able to locate them. The states
accepted cash in lieu of the abandoned securities. The amounts paid per
share were the same as those paid in the Company's tender offer ($1.00 per
share of common stock share and $30.00 per share of Series B preferred
stock). By September 30, 2001, the Company abandoned 2,699 shares of
Series B preferred stock and 170,258 shares of common stock. These shares
are currently being held as treasury shares.
As a result of the purchase of Series B preferred shares in the tender
offer and the abandonment of Series B preferred stock, the accumulated
dividends on the Series B preferred stock were decreased by $545,027. The
Company has no present intention to pay dividends on either its common or
preferred shares.
On January 1, 2000, there were 6,375,096 common shares outstanding. On
March 3, 2000, the Company foreclosed on the 1,280,756 common shares that
had been pledged as collateral in favor of a subsidiary of the Company. On
September 30, 2000, there were 5,094,340 common shares outstanding. See
Note 10 to the Company's financial statements included in the Form 10-KSB
for the year ended December 31, 2000.
On January 1, 2001, there were 5,094,340 common shares outstanding. On
February 15, 2001, the Company acquired 427,563 common shares pursuant to
its tender offer for common stock. By September 30, 2001, the Company had
acquired an additional 22,576 shares of common stock as a result of
shareholders who had submitted incomplete or defective letters of
transmittal in connection with the tender offer having cured such defects.
As discussed above, on June 1, 2001, the Company effectively abandoned to
the various states, 170,258 common shares pursuant to the abandoned
property laws of the states. On September 30, 2001, there were 4,473,943
common shares outstanding.
The following data show the amounts used in computing loss per share and
the effect on loss and the weighted average number of shares of dilutive
potential common stock:
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
Loss from operations $(480) $( 987)
Less: preferred dividends ( 32) ( 54)
------ --------
Loss to common stockholders
used in basic EPS $(512) $(1,041)
===== =======
Weighted average number
of common shares used
in basic and diluted EPS 4,660,935 5,966,973
========= =========
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
11
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Loss from Operations $( 93) $(296)
Less: preferred dividends ( 11) ( 18)
------ -----
Loss to common stockholders
used in basic EPS $(104) $(314)
====== =====
Weighted average number
of common shares used
in basic and diluted EPS 4,489,351 5,966,973
========= =========
6. Segment Information:
The Company's operations are classified into three principal reporting
segments that provide different services. Separate management of each
segment is required because each business unit is subject to different
marketing, production, and technology strategies. The following table
shows external revenues, depreciation, loss and assets for the reportable
segments.
12
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Reportable Segments (in thousands)
Grain Drying Distressed
and Storage Real Estate Assets Total
------------ ----------- ---------- -----
Nine Months Ended September 30, 2001
External revenue $250 $1,047 $1,297
$ --
Depreciation 100 -- -- 100
(Loss)/income (58) -- (26)
32
Assets 3,073 962 480 4,515
Nine Months Ended September 30, 2000
External revenue $110 $1,850 $1,960
$ --
Depreciation 98 -- -- 98
(Loss) (237) (212) -- (449)
Assets 3,175 1,652 -- 4,827
Three Months Ended September 30, 2001
External revenue $ 88 $ 70 $158
$ --
Depreciation 33 -- -- 33
(Loss)/income (17) 67 -- 50
Assets 3,073 962 480 4,515
Three Months Ended September 30, 2000
External revenue $74 $743 $817
$ --
Depreciation 33 -- -- 33
(Loss) (69) (67) -- (136)
Assets 3,175 1,652 -- 4,827
13
DUNES HOTELS AND CASINOS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Nine Nine Three Three
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
Revenues
Total for
reportable
Segments $1,297 $1,960 $158 $817
-----------------------------------------------
Total $1,297 $1,960 $158 $817
===============================================
Loss
Total for
reportable
Segments $ (26) $(449) $(136)
$ 50
Corporate expenses (644) (692) (193) (225)
Interest income/
Expense & other 192 159 48 65
-----------------------------------------------
Loss before
income
Taxes $(478) $(982) $ (95) $(296)
===============================================
Assets
Total for
reportable
Segments $4,515 $4,827 $4,515 $4,827
Cash,
securities &
Prepaids 3,498 4,719 3,498 4,719
-----------------------------------------------
Total $8,013 $9,546 $8,013 $9,546
===============================================
7. Common Stock Tender Offer
On October 9, 2001, the Company commenced a tender offer for all of its
common stock at a purchase price of $1.05 per share. The tender offer for the
common stock will expire on November 30, 2001, unless extended.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information included herein contains statements that are
forward-looking, such as anticipated liquidity requirements for the coming
fiscal year and anticipated sources of liquidity for the coming fiscal year.
Such forward-looking information involves important risks and uncertainties that
could significantly affect the Company's financial condition and future results
of operations, and, accordingly, such future financial condition and results of
operation may differ from those expressed in any forward-looking statements made
herein. These risks and uncertainties include, but are not limited to, those
risks relating to actual costs necessary to clean-up certain real property
chemical contamination, real estate market conditions and general economic
conditions, the abilities of certain third parties to obtain financing and
otherwise perform under real estate purchase agreements, and the outcome of
certain litigation and other risks. The Company cautions readers not to place
undue reliance on any such forward-looking statements, and, such statements
speak only as of the date made.
OVERVIEW
REAL ESTATE
The Fairways consist of the remaining portion of approximately 50 acres of
developed residential land in Rancho Murieta, Sacramento County, California.
Rancho Murieta is a 3,500- acre master planned unit development community
located approximately 25 miles from Sacramento, California. The development
consists primarily of single-family homes, town houses, commercial property and
two 18-hole championship golf courses and country club facilities. The 50 acres
are located within the boundaries of one of the golf courses. The property was
subdivided into 110 single-family estate lots. As of September 30, 2001, all of
the lots have been sold. The only remaining activity is the collection of
interest and principal payments on notes resulting from past sales. The Company
currently holds approximately $769,000 of notes receivable, which all mature by
calendar year 2003.
Sam Hamburg Farm consists of approximately 150 acres remaining from an original
4,600 acres of agricultural land. The Company leases 110 acres to one tenant,
who grows various crops. The term of the lease is for two years on a cash rent
basis. The year 2001 is the last year of the two-year lease. It is not known at
this time if the Company will lease the property to the same tenant for the
coming year.
GRAIN DRYING AND STORAGE
The Company operates a grain drying and storage facility. The grain drying and
storage facility has two warehouses (the east warehouse and the west warehouse).
The drying facility is financed by a 5-year lease, which commenced in March
1998. At the end of the lease, the Company will have the option to buy the
drying facility for $1.
As of August 5, 2001, the Company entered into a contract with Pacific
International Rice Mills, Inc. (PIRMI) to store approximately 350,000 cwt. of
dry paddy rice in the west warehouse. This agreement covers the rice currently
in storage, which is a carry-over of rice that was dried during
15
the 2000 drying season. Payment for the storage charges on the paddy rice
currently in storage was made during the 2000 drying season with the storage
period ending August 30, 2001. The new contract period will be from September 1,
2001 to August 31, 2002. Under the new contract, payment for storage was due 50%
upon completion of filling the warehouse, with the remaining 50% due within 30
days after the warehouse is emptied. The Company received the first payment of
approximately $70,000 during the month of September 2001.
The Northern California rice market is currently experiencing an excess supply
of rice. Many of the farmers in the area have taken their land out of production
and are leasing their water rights to down-stream users. In addition, rice
growers in the area are experiencing increasing competition from foreign
sources. Due to the current market conditions for rice in Northern California
and the seasonal nature of the grain drying and storage facility, the Company
was unable to obtain any rice drying or rice storage contracts for the east
warehouse this fall. At this time, management is unable to determine how long
the market for rice in Northern California will remain depressed.
The Company is actively seeking contracts for the storage of grains other than
rice (such as corn). However, contracts for the storage of corn are generally
less profitable than those for the storage of rice due to the fact that (1) more
rice can be stored in the same amount of space, (2) the storage price per
hunderweight of grain is higher for rice than corn and (3) contracts for the
storage of rice usually include related charges for the drying of the rice. A
prolonged depression in the market for rice in Northern California could have a
material adverse effect on the Company's grain drying and storage segment.
The Company contacted a local grain broker, Levine Grain Co., Inc. to store
corn in the east warehouse. As of November 1, 2001, the east warehouse is
full with 259,800 cwt. of corn being stored on behalf of various growers in
the area and the expected storage revenue is approximately $90,000.
DISTRESSED ASSETS
Beginning with the third quarter of 2001, the Company has established a new
business segment: Distressed Assets. The Company's president, Steve K.
Miller, has over thirteen years experience investing in similar types of
assets through General Financial Services, Inc., a wholly-owned corporation.
General Financial Services is the majority shareholder of the Company.
The Company currently intends to acquire distressed real estate for the purpose
of developing or rehabilitating and then selling or operating the property. The
Company is focusing on property that could be developed or converted into single
family or multi-family residences, but may also consider developing commercial.
The Company does not have any current commitments to acquire any such property
and there can be no assurance that the Company will be able to acquire such
property on terms that are favorable to the Company. The Company would seek to
fund the purchase of such property through a combination of debt and the use of
the Company's short term liquid assets.
In addition, the Company will seek to acquire other distressed assets that
management believes can be resolved or worked-out at a profit. The Company has
invested in two distressed non-
16
performing promissory notes owed by debtors in bankruptcy. The notes are secured
by accounts receivables, second mortgages and shares in two limited
partnerships. The notes were purchased for $480,000, which is a discount from
their outstanding principal, interest and payable expenses of approximately
$650,000. To date, the Company has not realized any income from this investment.
There is substantial risk with this type of business and there can be no
assurance that the Company will recover the principal of its investment or make
a profit after additional incurred expenses.
OTHER
The Company has no present intentions to pay dividends on either its common or
preferred stock.
Due to the success of the Company's tender offer for its common stock and Series
B preferred stock which closed in March 2001 and the elimination of certain
shareholders due to the application of state abandoned property laws, the
Company anticipates that as of January 1, 2002, it will be able to terminate its
registration of the Series B preferred stock under Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act") and suspend its obligation
to file periodic reports with the SEC with respect to the Series B preferred
stock.
On October 9, 2001, the Company commenced a second tender offer for the common
stock, that may result in the Company being able to terminate its registration
of the common stock under Section 12(g) of the Exchange Act and suspend its
obligation to file periodic reports with the SEC with respect to the common
stock as of January 1, 2002. However, the second tender offer for the common
stock may not be successful in achieving such result. The Company intends to pay
for any shares acquired in the tender offer with its cash and cash equivalents.
In the event that the Company is able to suspend its filing obligations with
respect to both the Series B preferred stock and the common stock, the Company
will then no longer be considered publicly traded and shareholders will not be
able to trade their shares of common stock on the over-the-counter market. The
Company anticipates that there will be minimal affect on the trading market for
the Series B preferred stock as there in no present market or exchange for such
shares. In addition, the obligation of certain significant shareholders to file
reports under Section 13 of the Exchange Act and the related rules, the insider
short-swing trading rules contained in Section 16 of the Exchange Act and the
related rules, the proxy solicitation rules contained in Section 14 of the
Exchange Act and the related rules and certain of the rules regulating tender
offers for shares of the Company's stock contained in Section 14 of the Exchange
Act and related rules would no longer be applicable to the Company. The Company
expects savings from discontinuing audited financial statements and legal
expenses in preparing periodic reports to the SEC.
The Company is also currently subject to the provisions of the New York
Business Corporation Law which restrict certain transactions between the
Company and General Financial Services, Inc., GFS Acquisition Company, Inc.
and Steve Miller. Those provisions would no longer apply to the Company if it
terminates the registration of its common stock and Series B preferred stock
17
under Section 12 of the Exchange Act. The board of directors anticipates that
if those provisions are no longer applicable to the Company it may authorize
a reverse stock split that would have the effect of cashing out and
eliminating all of the remaining minority common stockholders. At that time,
only General Financial Services, Inc. and GFS Acquisition Company, Inc. would
remain as common stockholders.
OPERATING RESULTS
Three months ended September 30, 2001 vs. the three months ended September
30, 2000.
Real Estate
Revenue from the sale of real estate lots for the three months ended September
30, 2001, decreased by $674,000 over the same period ended September 30, 2000.
During the three months ended September 30, 2001, a "Success Payment" of $55,000
was made on one lot that had previously been sold compared with eight lots sold
during the three months ended September 30, 2000, with gross revenue of
$729,000. The Company currently holds approximately $769,000 of notes receivable
in connection with prior lot sales. Interest income from the notes receivable
associated with the lot sales for the three months ended September 30, 2001
increased by approximately $10,600 compared to the three months ended September
30, 2000 due to an increase in the principal balance of the notes receivables
due to the sale of additional lots. "The Fairways" project is now completed.
There were also decreases in cost of sales of $763,000, and a decrease in
related selling expenses of $44,000 due to the completion of the project.
Net rental income from agricultural properties for the three months ended
September 30, 2001, remained constant compared to the same period in 2000. This
is the second year of a two-year lease at Sam Hamburg Farm.
Grain Drying and Storage
The income from the grain drying and storage facility for the three months ended
September 30, 2001, increased by approximately $14,000 when compared with the
three months ended September 30, 2000. The increase was primarily the result of
an increase in storage revenue. During the fall 1999 season, there was virtually
no drying revenue, which also reduced the storage revenue during 2000, as one of
the warehouses remained empty. During the three month period ended September 30,
2000, there was storage revenue in the amount of approximately $74,000 compared
to revenue of approximately $88,000 for the three months ended September 30,
2001. The increased storage revenue during the period ended September 30, 2001
resulted from the stored paddy rice dried during the fall 2000 season and the
corn that was placed in storage during the third quarter of 2001.
Distressed Assets
The Company has invested in two distressed non-performing promissory notes owed
by debtors in bankruptcy. The notes are secured by accounts receivables, second
mortgages and shares in two limited partnerships. The notes were purchased for
$480,000, which is a discount from their outstanding principal, interest and
payable expenses of approximately $650,000. To date, the Company has not
realized any income from this investment.
18
General
When compared with the three months ended September 30, 2000, corporate
operating expenses decreased by approximately $32,000 for the period ended
September 30, 2001. Major items contributing to the decrease were administrative
and general expenses consisting of officers and directors insurance ($18,000),
officers travel expense ($13,000), and directors expenses ($8,100). Offsetting
this decrease were increases in expenses associated with the tender offer
($4,300) and legal fees ($2,800).
Interest expense decreased $6,000 for the three months ended September 30, 2001
compared with the three month period ended September 30, 2000, due to decreased
debt on the grain drying and storage facility. For the three months ended
September 30, 2001 compared with the three month period ended September 30,
2000, gain on marketable securities decreased by $17,000 along with a decrease
in interest and dividend income of $6,000 due to the movement of short term
assets from money market accounts to short term commercial paper.
Nine months ended September 30, 2001 vs. nine months ended September 30, 2000.
Real Estate
Revenues from the sale of real estate lots at "The Fairways" for the nine months
ended September 30, 2001, decreased by $803,000 compared to the nine month
period ended September 30, 2000. There were 13 lots sold in the first nine
months of 2001, with gross revenues of $1,004,000, compared with gross revenues
of $1,807,000 for the first nine months of 2000, which consisted of the sale of
21 lots. All lots in this development are sold as of September 30, 2001. Along
with the decrease in revenue, the cost of real estate sold and the related
expenses decreased by $1,047,000 due to the decreased sales activity. The
Company currently holds approximately $769,000 of notes receivable in connection
with prior lot sales. Interest income from the notes receivable associated with
the lot sales for the nine months ended September 30, 2001 increased by
approximately $36,000 compared to the nine months ended September 30, 2000 due
to an increase in the principal balance of the notes receivables due to the sale
of additional lots.
Net rental income from the property at Sam Hamburg Farm for the nine months
ended September 30, 2001, remained constant compared to the same period in 2000.
This is the second year of a two-year lease.
Grain Drying and Storage
Storage revenue at the grain drying and storage facility increased by $140,000
in the nine months ended September 30, 2001, compared with the nine months ended
September 30, 2000. The 2001 increase resulted from the operation of the rice
dryer during the 2000 fall harvest season and the resultant storage income.
During 1999 there was no rice drying at the facility and the facility remained
empty during most of 2000. In addition, contributing to the increase was the
storage income from approximately 350,000 cwt. of inventory carry-over of paddy
rice placed into
19
storage during the spring of 2000 in addition to storage income from the corn
harvest which started in September 2001.
Distressed Assets
The Company has invested in two distressed non-performing promissory notes owed
by debtors in bankruptcy. The notes are secured by accounts receivables, second
mortgages and shares in two limited partnerships. The notes were purchased for
$480,000, which is a discount from their outstanding principal, interest and
payable expenses of approximately $650,000. To date, the Company has not
realized any income from this investment.
General
Compared with the nine months ended September 30, 2000, corporate operating
expenses decreased by $48,000 in the nine month period ended September 30, 2001.
The decrease is made up of officers and directors liability insurance ($47,000),
accounting fees ($47,000), legal fees ($35,000), directors expenses ($15,000)
director fees ($8,000), general insurance expense ($5,000), and rent expense
($4.000). This decrease is offset by increases in expenses associated with the
tender offer ($113,000).
Interest expense decreased $20,000 for the nine months ended September 30, 2001
compared with the nine month period ended September 30, 2000, due to decreased
debt on the grain drying and storage facility. For the nine months ended
September 30, 2001 compared with the nine month period ended September 30, 2000,
gain on marketable securities increased by $58,000 partially offset by a
decrease in interest and dividend income of $45,000 due to the movement of short
term assets from money market accounts to short term commercial paper.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, cash, cash equivalents and
marketable securities decreased by $1,235,000 from $4,663,000 at December 31,
2000, to $3,428,000 at September 30, 2001. The most significant uses of cash
during the nine months ended September 30, 2001 consisted of the purchase of
shares of stock in the Company's tender offer, payments to states for shares
abandoned under state abandoned property laws and the payment on long-term debt.
The Company completed its tender offer for shares of the common stock on
February 15, 2001 and for Series B preferred stock on March 16, 2001. As a
result of the tender offers, the Company paid $488,869 to the former holders of
the common stock and Series B preferred stock, which amount was paid from the
Company's cash and cash equivalents. In addition, as of the period ended
September 30, 2001, the Company abandoned to the various states pursuant to the
state abandoned property laws common stock and Series B preferred stock in the
amount of $251,228, which was also paid from the Company's cash and cash
equivalents.
As a result of the tender offer and the abandonment of Series B preferred stock,
the Company's accrued dividends on the Series B preferred stock decreased by
$545,027.
20
On October 9, 2001, the Company commenced a tender offer for all of its common
stock at a purchase price of $1.05 per share. The tender offer for the common
stock will expire on November 30, 2001, unless extended.
The Company believes that its primary requirements for liquidity during the
remainder of 2001 will be to fund the required payments due on the grain dryer
financing, to fund equipment purchases and or modifications at the grain drying
facility; to fund costs that may be incurred relating to the toxic clean-up at
Sam Hamburg Farm; to fund the costs of the second tender offer and to pay for
any shares acquired in the tender offer; and to fund general and administrative
expenses.
The Company anticipates that sources of required liquidity will be cash
generated from the grain drying and storage facilities, collection of notes
receivable, and the cash and cash equivalents available at September 30, 2001.
Based on known commitments, the Company believes that the sources of cash
described and the cash available at September 30, 2001, will be adequate to fund
known liquidity requirements.
In addition, the Company currently intends to acquire undeveloped and/or
distressed real estate for the purpose of developing or rehabilitating and then
selling or operating the property. The Company is focusing on property that
could be developed or converted into single family or multi-family residences,
but may also consider developing commercial properties. The Company does not
have any current commitments to acquire any such property and there can be no
assurance that the Company will be able to acquire such property on terms that
are favorable to the Company. The Company would seek to fund the purchase of
such property through a combination of debt and the use of the Company's short
term liquid assets.
21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None, except for the discussion contained in footnote 3 in Notes to
Consolidated Condensed Financial Statements.
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Default Upon Senior Securities
Dividends in arrears. See Note 5 of Notes to Condensed Consolidated
Financial Statements for the quarter ended September 30, 2001.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Letter Agreement dated September 5, 2001 between SHF Acquisition, a
wholly-owned subsidiary of the Dunes Hotels & Casinos Inc. and Levine
Grain Co., Inc.
(b) Reports on Form 8-K
None
22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSE THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DUNES HOTELS AND CASINOS INC.
-----------------------------
Registrant
Date: November 14, 2001 By: /s/ Steve K. Miller
Steve K. Miller, President
By: /s/ Marvin P. Johnson
Marvin P. Johnson
Chief Accounting Officer
23