DIAMONDHEAD CASINO CORP - Annual Report: 2007 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2007
COMMISSION FILE NO: 0-17529
DIAMONDHEAD CASINO CORPORATION
(Name of issuer in its charter)
| Delaware (State of Incorporation) |
59-2935476 (I.R.S. Employer Identification Number) |
1301 Seminole Boulevard, Suite 142, Largo, Florida 33770
(Address of principal executive offices)
(Address of principal executive offices)
Registrant’s telephone number, including area code:
|
727/674-0055 | |
Securities registered pursuant to Section 12 (b) of the Act:
|
None | |
Securities registered pursuant to Section 12 (g) of the Act:
|
Common Stock, par value $.001 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by references in Part III of
this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the Company
based on the closing price of the common stock on the Over the Counter Bulletin Board at June 30,
2007 was $82,001,553.
As of March 14, 2008, there were 33,483,535 shares of the registrant’s common stock issued and
outstanding.
TABLE OF CONTENTS
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PART I
FORWARD-LOOKING STATEMENTS
This document contains “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, regarding events, conditions, and financial trends that may effect the Company’s future
plans of operation, business strategy, operating results, and financial position. Diamondhead
Casino Corporation is referred to herein as “the Company,” “we,” or “our.” Except for historical
information contained herein, the matters discussed in this document, in particular, statements
that use forward-looking terminology such as “believes,” “intends,” “anticipates,” “may,” “will,”
“should,” or “expects,” or the negative or other variation of these or similar words, are intended
to identify forward-looking statements that are subject to risks and uncertainties including, but
not limited to, increased competition, financing, governmental action, environmental opposition,
legal actions, and other unforeseen factors. The development of the Diamondhead, Mississippi
project, in particular, is subject to additional risks and uncertainties, including, but not
limited to, risks relating to permitting, financing, the availability of capital resources,
licensing, construction and development, litigation, the activities of environmental groups,
delays, and the actions of federal, state, or local governments and agencies. Although the Company
believes the expectations reflected in such forward-looking statements are reasonable, there can be
no assurance that such expectations are reasonable or that they will be correct. Moreover, the
financial results reported herein are not necessarily an indication of future prospects of the
Company. Future results may differ materially.
All subsequent written or oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by the cautionary statements included in this document. The Company
undertakes no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this document might not occur.
ITEM 1. BUSINESS
The Company is a Delaware corporation incorporated on November 15, 1988 under the name “Europa
Cruises Corporation.” The Company became a publicly-held company in 1989. On or about November 22,
2002, the Company changed its name to “Diamondhead Casino Corporation.” Since November 6, 1998, the
Company’s stock has traded on the Over the Counter Bulletin Board (OTCBB). The Company’s stock
currently trades under the symbol “DHCC.” Prior to the corporate name change, the Company’s stock
traded under the symbol “KRUZ.” Prior to trading on the Over the Counter Bulletin Board, the
Company’s stock traded on the NASDAQ Small Cap Market.
The Company currently has three subsidiaries with no current operations. As of December 31, 2007,
the Company had four employees. The Company considers its relationship with its employees to be
satisfactory.
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I. FLORIDA
From inception through approximately August of 2000, the Company operated gaming vessels in
international waters. The vessels sailed from state ports into international waters where gaming
operations were conducted. From approximately 1994 through August of 2000, operations were
conducted primarily out of ports located in Miami Beach, Florida, Ft. Myers Beach, Florida, and
Madeira Beach, Florida. The Company eventually divested itself of its gaming operations to satisfy
financial obligations to its vendors, lenders and taxing authorities and to focus its resources on
the development of a casino resort on its 404.5 acres of waterfront property located in
Diamondhead, Mississippi. The Company has no current operations in Florida. The Company does,
however, lease office space in Largo, Florida, where it maintains its corporate headquarters.
II. MISSISSIPPI
The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation (hereafter
“MGC”), an approximate 404.5 acre tract of unimproved land in Diamondhead, Mississippi. The
property is located at 7051 Interstate 10. The property fronts Interstate 10 for approximately two
miles and fronts the Bay of St. Louis for approximately two miles. The property is owned in fee
simple and there are no liens or debt on the property. The Company intends, in conjunction with
unrelated third parties, to fully develop the site in phases beginning with a casino resort. The
casino resort is expected to include a casino, a hotel and spa, a sports and entertainment center,
a conference center and a state-of-the-art recreational vehicle park.
The Company has had the site appraised on three occasions, subject to certain material assumptions,
by J. Daniel Schroeder Appraisal Company. The appraisals were predicated on the site being fully
permitted and zoned as a legally permissible, water-based casino site under Mississippi law prior
to October 17, 2005, which required that casinos be water-based. The property was appraised in
1996, assuming full permitting for a water-based casino, at approximately $8 million. The property
was reappraised in 1999, again assuming full permitting for a water-based casino, at approximately
$42 million. The property was last appraised in 2003, again assuming full permitting for a
water-based casino, at approximately $109 million. The property has not been appraised since a new
law was passed in Mississippi which permits casinos to be built on land.
The Company maintains an office in Diamondhead, Mississippi and has one employee there. The Company
has no current operations in Mississippi.
NEW LEGISLATION PERMITTING LAND-BASED CASINOS IN MISSISSIPPI
All references in this section to Mississippi law are qualified in their entirety by reference to
the actual text of the law.
On August 29, 2005, Hurricane Katrina struck the Gulf coast of the United States causing extensive
damage to Louisiana and Mississippi, including Biloxi, Gulfport, and Bay St. Louis, Mississippi,
where approximately twelve of Mississippi’s casinos were then located. Hurricane Katrina destroyed
most of the casinos on the Gulf coast. Prior to Hurricane Katrina, Mississippi law required that casinos on
the Gulf
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coast be built in, on, or above the water and be located a minimum of fifty percent below
mean high tide. Hurricane Katrina destroyed most of these water-based casinos and carried some
casino barges from their water-based moorings onto land. In a single day, Hurricane Katrina
destroyed the Gulf coast casino industry and left thousands of casino-related workers without jobs.
The State of Mississippi suffered an immediate and substantial loss of tax revenue due to the loss
of a substantial portion of its casino industry.
On October 17, 2005, in response to the devastation caused by Hurricane Katrina, Mississippi passed
new legislation that allows casinos located in certain statutorily-described areas to be
constructed on land no more than 800 feet from the mean high-water line of certain bodies of water,
including St. Louis Bay. Under Mississippi’s new legislation, the part of the structure in which
licensed gaming activities are conducted must be located entirely in an area which is located no
more than eight hundred (800) feet from the mean high-water line (as defined in Section 29-15-1 of
the Mississippi Code) of the waters within the State of Mississippi, which lie adjacent to the
State of Mississippi south of the three (3) most southern counties in the State of Mississippi,
including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay or, with regard to
Harrison County only, no farther north than the southern boundary of the right-of-way for U.S.
Highway 90, whichever is greater. In the case of a structure that is located in whole or part on
shore, the part of the structure in which licensed gaming activities are conducted must lie
adjacent to state waters south of the three (3) most southern counties in the State of Mississippi,
including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay. When the site upon
which the structure is located consists of a parcel of real property, easements and rights-of-way
for public streets and highways are not construed to interrupt the contiguous nature of the parcel,
nor is the footage contained within the easements and rights-of-way counted in the calculation of
the distances specified above.
The Company believes that its property, which fronts Interstate 10 for approximately two miles and
St. Louis Bay for approximately two miles, is strategically located to take advantage of the new
law. The Company believes that the advent of land-based gaming in Mississippi will have a positive
effect on the entire industry in Mississippi and change the perception of the gaming industry in
Mississippi from that of a riverboat, dockside, or barge-based industry, to that of a Las Vegas
style or Atlantic City style industry. With respect to the Company’s property, management believes
the impact of the new law will also be beneficial. Management believes that the new law will allow
the Company to avoid certain architectural constraints imposed by the design and construction of a
water-based casino located in, on, or above water and a minimum of fifty percent below mean high
tide. The new law will also allow the Company to avoid any permits, authorizations, or tidelands
leases that water-based construction of a casino would have required, but that construction on land
may not require.
Permits/Approvals
The development of the Diamondhead, Mississippi property requires the Company to obtain permits and
approvals from various federal, state, and local agencies, boards and commissions. The regulatory
environment relating to these permits and approvals is uncertain and subject to constant change.
There can be no assurance that all permits and approvals can be obtained, or that if obtained, they
will be renewed. Since Mississippi’s new law was passed, the Company has applied for and received
the requisite zoning required from Hancock County, but has not applied for any other permits or
approvals.
Inasmuch as the Company intends to take advantage of Mississippi’s new law and construct a casino
on land, some of the permits, authorizations, and/or leases previously required may no longer be
required. For example, since the Company intends to build a casino on land, a tidelands lease from
the Mississippi
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Secretary of State, which was previously required to lease State water-bottoms in,
on, or over which the casino would be placed, is no longer required. The extent, to which
previously-required permits, approvals, authorizations, or an environmental impact statement, will
be required for a casino constructed on land on the Company’s property, is not yet known.
A. Hancock County
The Company’s Diamondhead, Mississippi property is located in Hancock County, Mississippi. On
January 16, 1997, the Hancock County Board of Supervisors adopted a Hancock County Zoning
Ordinance. Under the Hancock County Zoning Ordinance, the Company’s 404-acre site was zoned as a
Special Use District-Waterfront District. The Company has obtained an extension of this Special Use
designation each year since that time. Most recently, by letter dated October 1, 2007, the Company
forwarded a request to the Hancock County Planning Commission for an extension of the Special Use
designation. On November 1, 2007, the Hancock County Planning Commission passed a resolution
extending the designation through December 31, 2008. On November 5, 2007, the Hancock County Board
of Supervisors ratified the resolution.
B. Mississippi Gaming Commission
On June 15, 1995, the Mississippi Gaming Commission granted gaming site approval for the original,
water-based, Diamondhead casino site. Inasmuch as the Company intends to construct its casino
resort on land, the Company believes it will be required to obtain gaming site approval for a
land-based casino site (See Mississippi Regulation-Gaming Site Approval/Approval to Proceed with
Development). There can be no assurance that the Company will obtain the approvals required from
the Mississippi Gaming Commission.
C. Annual In-Lieu Tidelands Assessment
The Company intends to take advantage of Mississippi’s new law and construct its casino on land,
therefore, the Company will no longer require a tidelands lease from the Secretary of State. Under
Mississippi’s prior law, which required that the Company’s casino be in, on, or above water and a
minimum of fifty percent at or below mean high tide, the Company would have required a tidelands
lease to lease water-bottoms owned by the State.
On October 17, 2005, when Mississippi passed new legislation permitting casinos to be built on land
in certain locations, Mississippi also passed a companion law that requires any person possessing a
license under the Mississippi Gaming Control Act, who operates a gaming establishment in any of the
three most southern counties of the State (including the county in which the Company’s property is
located), and who does not lease public trust tidelands from the State, to pay an annual in-lieu
tidelands assessment to the Public Trust Tidelands Assessments Fund. For calendar year 2006, the
annual in-lieu tidelands assessment will be between $400,000 and $750,000, based on an escalating
scale which is based on the capital investment in the part of the structure in which the licensed
gaming activities are conducted. For each calendar year thereafter, the Secretary of State shall
review and adjust the value of the capital investment and the annual in-lieu tidelands assessment
due. Such review and adjustment shall
be tied to the Consumer Price Index. This annual in-lieu tidelands assessment will apply to any
casino constructed on land on the Company’s property.
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D. Other Required Permits
In addition to the foregoing, the Company will, at a minimum, be required to obtain various
permits, authorizations, or approvals from the following:
1) Mississippi Commission on Marine Resources
2) Mississippi Commission on Environmental Quality
3) U.S. Army Corps of Engineers
There can be no assurance that the Company will be successful in obtaining these permits.
Uncertain Regulatory and Political Environment/Modifications
Any modification of the Company’s originally-approved site plan or any newly-approved site plan may
require resubmission to, amendment to, and/or re-approval by the Mississippi Gaming Commission, the
Mississippi Department of Marine Resources, the Mississippi Department of Environmental Quality,
the U.S. Army Corps of Engineers, Hancock County, and/or other federal, state or local agencies.
The foregoing federal, state and local agencies regularly pass new rules and regulations which may
affect permits and authorizations required. While there is no pending environmental litigation, the
foregoing permits and approvals remain subject to future litigation and the actions of
environmental groups and various federal, state and local governments and agencies, including, but
not limited to, the foregoing. The regulatory environment relating to these permits, approvals and
leases is uncertain and subject to constant change.
The political environment in which the Company and/or its subsidiaries intend to operate is also
uncertain, dynamic and subject to rapid change. Existing operators often propose and support
legislation and/or litigation designed to make it difficult or impossible for competition to enter
a market. This political and regulatory environment makes it impossible to predict the effects that
the adoption of and changes in gaming laws, rules and regulations and/or competition will have on
proposed gaming operations or development of a gaming resort. Moreover, legislatures in states in
which gaming is legal often consider wide-ranging legislation and regulations which could adversely
affect operations and expected revenues. Likewise, the federal government often considers
legislation which could adversely affect operations and expected revenues. For example, in 1999,
the National Gambling Impact Study Commission, which conducted a two-year study of legal gaming in
the United States, reported its findings and recommendations to Congress. Some of the
recommendations made in its report, if implemented, might result in additional regulation of the
gaming industry and could have an adverse effect on the industry and the Company’s proposed
development.
Anti-Gaming Referenda
On three separate occasions since 1998, certain anti-gaming groups have proposed referenda that, if
adopted, would have banned gaming in Mississippi and required that gaming entities cease operations
within two years after the ban. All three of the proposed referenda were ruled illegal by
Mississippi State
trial courts. If such a referendum were to be approved by the voters, it would have a material
adverse effect on the Company.
MISSISSIPPI REGULATION
The Company has no current operations in Mississippi and does not operate any gaming facility in
Mississippi. The Company intends to develop its Diamondhead property as a destination casino
resort.
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Assuming it is successful in developing its resort, the Company and its subsidiaries and/or
affiliates will be subject to federal, state and local, laws, rules, ordinances and regulations
with respect to the operation of any gaming facility. The following is intended to serve as a
partial description of the Mississippi regulatory environment in which the Company and its
subsidiaries or joint venture partner(s) would seek approvals to construct and operate a gaming
facility and is not intended to be a complete, precise, or up-to-date recitation of all applicable
laws, rules, regulations or ordinances that might affect the Company’s operations or with which the
Company would be required to comply. Additional or more restrictive laws, rules and regulations
could be adopted at any time or gambling could be completely banned.
The location of, ownership of, and operation of gaming facilities in Mississippi are subject to
extensive state and local regulation, primarily through the licensing and control of the
Mississippi Gaming Commission and the Mississippi State Tax Commission. The Company and/or its
subsidiaries must register and be licensed under the Mississippi Gaming Control Act and its gaming
operations will be subject to the regulatory control of the Mississippi Gaming Commission, the
Mississippi State Tax Commission and various local and county regulatory agencies.
The Mississippi Gaming Control Act gives the Mississippi Gaming Commission (the “Commission”)
extensive power to enforce the Act and adopt regulations in furtherance of the Act (the
“Mississippi Regulations”). The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable persons from having any
direct or indirect involvement with gaming at any time or in any capacity; (2) establish and
maintain responsible accounting practices and procedures; (3) maintain effective control over the
financial practices of licensees, including establishing minimum procedures for internal fiscal
affairs and safeguarding of assets and revenues, providing reliable record keeping and making
periodic reports to the Mississippi Gaming Commission; (4) prevent cheating and fraudulent
practices; (5) provide a source of state and local revenues through taxation and licensing fees;
and (6) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The
regulations are subject to amendment and interpretation by the Commission. Changes in Mississippi
law or the regulations or the Commission’s interpretation thereof may limit or otherwise materially
affect the types of gaming that may be conducted and could have a material adverse effect on
Mississippi gaming operations.
The Commission has divided the approval process into two separate phases: (1) gaming site approval;
and (2) approval to proceed with development.
Gaming Site Approval
With respect to gaming site approval, approval constitutes only the Commission’s finding that the
location complies with applicable gaming laws and regulations. Gaming site approval does not
entitle the recipient to proceed with development, nor does it constitute a license to engage in
gaming or a right to a gaming license. Gaming site approval is a revocable privilege, and no
holder acquires any vested right therein. The
Mississippi Gaming Commission reserves the right to revoke any site approval should the
circumstances change that would make the site illegal or unsuitable.
An application for gaming site approval must include evidence satisfactory to the Commission
including: (1) a survey indicating the specific location of the property; (2) the current use of
any adjacent property as well as the location of the nearest residential area, church and school;
(3) evidence that all applicable
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zoning ordinances allow gaming at the proposed site; and (4) a
survey establishing the mean high water line, performed by a qualified surveyor for performance of
tidal surveys.
Gaming establishments in the three most southern counties in the State of Mississippi, including
Hancock County, are permitted to be permanent inland structures. No point in the gaming area may be
more than eight hundred (800) feet from the nineteen (19) year mean high water line. Harrison
County establishments south of Highway 90 may exceed the eight hundred (800) foot measurement up to
the southern boundary of Highway 90. All public easements and rights-of-way for public streets and
highways are excluded from the 800 foot measurement. Any point of reference used to determine the
800 foot distance from the mean high water line must be located on the applicant or licensee’s
premises. The applicant or licensee must own and/or lease the land that is contiguous both to the
parcel used to conduct gaming and the point of reference used to determine the mean high water
line, and this land must be shown to be an integral part of the project. The Commission has final
authority in reviewing and approving each site as it pertains to meeting the requirements of this
regulation.
Approval to Proceed with Development
With respect to obtaining the Commission’s approval to proceed with development, the following
information, together with documentation to support this information, must be submitted to the
Commission:
1) Architectural plans or renderings showing details of all proposed construction and renovation
for the project, together with a footprint of the project and a description of the construction and
type of parking facilities, as well as parking lot capacity.
Commission approval requires that the facility include a 500 car, or larger parking facility in
close proximity to the casino complex and infrastructure facilities which will amount to at least
100% of the higher of the appraised value or construction cost of the casino. Such infrastructure
shall include any of the following: 250 room, or larger hotel of at least a two star rating as
defined by the current edition of the Mobil Travel Guide, a theme park, golf course, marinas,
tennis complex, entertainment facilities, or any other such facility as approved by the Commission
as infrastructure. Infrastructure facilities are not such items as parking facilities, roads,
sewage and water systems, or civic facilities normally provided by cities and/or counties. The
Commission may, in its discretion, reduce the number of rooms required, where it is shown to the
Commission’s satisfaction that sufficient rooms are available to accommodate the anticipated
visitor load. Parking spaces may also be reduced as needed for small casinos, provided that the
100% infrastructure requirement is otherwise met. The qualifying infrastructure must be owned or
leased by (i) the holder of the site approval or (ii) an affiliated company of the holder of the
site approval where both the affiliated company and the holder of the site approval have identical
direct or indirect equity ownership.
In cases where casinos that are not in operation are purchased which do not meet the parking and
infrastructure requirements subsequent to February 20, 1999, the infrastructure requirement will be
calculated on the higher of the appraised value of the casino barge or acquisition cost of the
casino barge. For the purpose of determining compliance with this regulation, the Commission will,
in its discretion, determine a fair and equitable method for calculating the construction cost of
new casinos and acquisition costs for existing casinos. This regulation applies to any new
applicant for a gaming license for a new gaming facility and to the acquisition or purchase of a
licensee for which gaming operations have ceased prior to the time of acquisition or purchase. This
regulation does not apply to any licensee who has been
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licensed by the Commission, or received a
finding of site suitability from the Commission, prior to February 20, 1999 (or to any such
licensee upon any licensing renewal after such date). For purposes of complying with this
regulation, the appraised value of any casino will be determined by an appraisal completed by an
appraiser approved by the Executive Director of the Commission prior to the appraisal. The
Commission may require more than one appraisal and may obtain its own appraisal with the reasonable
cost of same to be paid by the applicant.
Any change to the plan, or placement or design of the establishment, cruise vessel or vessel, shall
be submitted in advance to the Executive Director for a determination of whether such change
constitutes a material change. If the Executive Director determines that a material change has
occurred, Commission approval is required for same.
2) Statements reflecting the total estimated cost of construction or renovation of the
establishment, vessel, or cruise vessel and shore and dock facilities, distinguishing between known
costs and projections, and separately identifying: facility design expense; land acquisition costs;
site preparation costs; construction costs or renovation costs; equipment acquisition costs; costs
of interim financing; organization, administrative and legal expenses; projected permanent
financing costs; qualified infrastructure costs; and non-qualifying infrastructure costs.
3) A construction schedule for completion of the project, including an estimated date of
project completion, indicating whether a performance bond will be required by the applicant to be
furnished by the contractor.
4) Current financial statements, including, at a minimum, a balance sheet and profit and loss
statement for the proposed licensee.
5) A detailed statement of the sources of funds for all construction and renovation proposed by the
site development plans. Any funding, whether equity or debt, to be obtained, must be supported by
firm written commitments satisfactory to the Commission.
6) Evidence that the following agencies (if applicable) were notified of the development and/or do
not oppose the site development: U.S. Corps of Engineers, U.S. Coast Guard, Mississippi Department
of Transportation, Mississippi Department of Environmental Quality, Department of Marine Resources,
Port and Harbor Commission, Levee Board, City and County government, and such other agencies as the
Executive Director deems appropriate.
The application for a Gaming Operator’s License must be filed no later than ninety (90) days after
the Commission grants approval to proceed with development. The gaming site approval will expire
three (3) years from the date approval to proceed with development is granted unless the Commission
grants an extension. Approval to proceed with development is not subject to sale, assignment or
transfer.
Opening of a Casino
Before any gaming facility may open to the public, all infrastructure requirements must be fully
operational. Site development must be completed in accordance with the approved plan and be ready
for operation within the gaming site approval time period. Gaming site approval may be extended
within the discretion of the Commission.
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The Commission requires, as a condition of licensure, that gaming establishments meet strict
hurricane, fire-safety, and construction-related standards and regulations.
Application Information Required
In addition to other information required by law and Commission regulations, an applicant must
provide complete information regarding the proposed operation, including but not limited to, a
certification that any establishment to be used by the proposed operation has been inspected and
approved by all appropriate authorities; fingerprints for each individual applicant; the nature,
source, and amount of any financing; the proposed uses of all available funds; the amount of funds
available after opening for the actual operation of the establishment; and economic projections for
the first three (3) years of operation of the establishment. Each applicant must provide complete
information regarding his or her background for the ten-year period preceding submission of the
application. Every application must include any feasibility studies done on the type of gaming in
the particular locale where the applicant intends to conduct gaming; the actual establishment
blueprints, including a layout of each floor stating the projected use of each area; a description
of the casino size and configuration of slot machines, video games of chance and table games; a
description of the arrangements for food and drink concessions, the names and addresses of the
concessionaires and the terms of the concession contracts; the type of slot machines and video
games of chance to be used and the proposed distributors and manufacturers of this equipment; a
description of the proposed management of the facility, management personnel by function, and tip
distribution policies; and a description of procurement policies that emphasize the utilization of
Mississippi employees, resources, and goods and services in the operation of the gaming
establishment. In cases where the premises used for gaming are not wholly owned by the applicant,
information pertaining to the interest held by any other person is required. Applicants must also
submit a timetable for financing arrangements and commencement and completion of construction
activities, setting forth the date upon which gaming activities will commence. The timetable will
be subject to approval by the Commission and monitored for compliance by the Executive Director.
Gaming Licenses
Neither the Company nor any of its subsidiaries has a license to operate a casino in Mississippi or
in any other jurisdiction. Gaming licenses require the periodic payment of fees and taxes and are
not transferable. Gaming licenses in Mississippi are issued for a maximum term of three years and
must be renewed periodically thereafter. There can be no assurance that the Company or any of its
subsidiaries will be licensed. There can be no assurance that if licensed, new licenses can be
obtained at the end of each three-year licensure period. Moreover, the Commission may, at any time,
and for any cause it deems reasonable, revoke, suspend, condition, limit or restrict a license or
approval to own shares of stock in a company that operates in Mississippi. The Mississippi Act
also requires that a publicly traded company register under the
Act. The Company and/or its subsidiaries will be required to periodically submit detailed
financial, operating and other reports to the Commission and Mississippi State Tax Commission.
Substantial fines for each violation of Mississippi’s gaming laws or regulations may be levied
against a company or its subsidiaries and the persons involved. A violation under a gaming license
held by a subsidiary of a Company operating in Mississippi could be deemed a violation of all other
licenses, if any, then held by the Company. Numerous transactions, including substantially all
loans, leases, sales of securities and similar financing transactions entered into by any
subsidiary of the Company operating a casino in Mississippi must be reported to or approved by the
Commission. In addition, the Commission may, at its
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discretion, require additional information
about the operations of the Company. The Company’s gaming operations outside of Mississippi, if
any, would also be subject to approval of the Commission.
Key Employee Licenses
Any executive, employee, or agent of a gaming licensee having the power to exercise a significant
influence over decisions concerning any part of the operation of a gaming licensee or who is listed
or should be listed in the annual employee report may be required to hold a Key Employee License.
A Key Employee License relates only to the specified involvement for which it was made. If the
nature of the involvement changes from that for which the applicant is granted a Key Employee
License, he may be required to submit himself to a new determination of suitability to hold a Key
Employee License. A Key Employee may be required to submit to a finding of suitability at any time
after issuance of a Key Employee License. A Key Employee license is granted for a period of no
longer than nine years from the date of issue. A Key Employee License may be granted for a period
of less than nine years within the discretion of the Commission. A holder of a Key Employee License
must file with the Investigations Division of the Commission by June 30th of each year,
the “Investigations Division Annual Report,” providing all information requested on forms provided
by the Commission and any other information requested by the Executive Director. Commission
approval is required for certain acts of licensees or transactions directly or indirectly involving
licenses. A holder of a Key Employee License must immediately inform the Commission of any arrest
or conviction.
Deborah Vitale, President and Chairman of the Board of Diamondhead Casino Corporation and President
and a Director of CWI and MGC, was issued a key person license by the Colorado Gaming Commission
during 1994. A Colorado license is ineffective in Mississippi. During 1996, Ms. Vitale’s key person
license in Colorado expired and was not renewed.
Findings of Suitability
The Commission can require that certain persons directly and actively involved in the
administration or supervision of the gaming activities of gaming licensees be found suitable to
hold a gaming license so long as that involvement continues and its regulations require that the
following persons shall apply for a finding of suitability and must be found suitable by the
Commission in order to be involved with a licensee: each person who serves as Chairman of the Board
of Directors of any corporation, public or private, licensed or registered by the Commission; and
each person who has a vote on any issue before the Board of Directors of any corporation, public or
private, licensed or registered by the Commission and who is also an employee of the corporation or
any of its subsidiaries. In addition, each person who serves as Chairman of the audit or
compliance committees of any corporation, public or private, licensed or registered by the
Commission, must apply for a finding of suitability. If the nature of the job changes from that for
which the applicant is found suitable, he may be required to submit himself to a new determination
of his suitability.
A finding of suitability is granted for a period of no longer than ten years from the date of
issue. A finding of suitability may be granted for a period of less than ten years within the
discretion of the Commission. A holder of a finding of suitability must file with the
Investigations Division of the Commission by June 30th of each year, the “Investigations
Division Annual Report,” providing all information requested on forms provided by the Commission
and any other information requested by the Executive Director. A holder of a finding of suitability
must immediately inform the Commission of any arrest or conviction.
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The Commission has full and absolute power and authority, at any time, to deny any application or
limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or
approval, or fine any person licensed, registered, found suitable or approved, for any cause deemed
reasonable by the commission. The Commission has the power, at any time, to investigate and require
the finding of suitability of any record or beneficial stockholder of the Company. The Act requires
that each person who, individually or in association with others, acquires, directly or indirectly,
beneficial ownership of more than 5% of any class of voting securities of a publicly traded
corporation registered with the Mississippi Gaming Commission, must notify the Mississippi Gaming
Commission of this acquisition. The Act also requires that each person who, individually or in
association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of
any class of voting securities of a publicly traded corporation registered with the Commission must
be found suitable by the Mississippi Gaming Commission and pay the costs and fees that the
Commission incurs in conducting the investigation. The Commission has generally exercised its
discretion to require a finding of suitability of any beneficial owner of more than 5% of a
registered publicly traded holding company’s stock. However, the Commission has adopted a policy
that generally permits certain institutional investors to own beneficially up to 15% of a
registered public company’s stock without a finding of suitability. If a stockholder 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 Commission may, at any time,
dissolve, suspend, condition, limit or restrict a finding of suitability to own a registered public
company’s equity interests for any cause it deems reasonable.
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 Commission may be found unsuitable. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company’s
securities beyond such time as the Commission prescribes, may be guilty of a misdemeanor. The
Company could be subject to disciplinary action if, after receiving notice that a person is
unsuitable to be a stockholder or to have any other relationship with the Company or its
subsidiaries operating casinos in Mississippi, the Company pays the unsuitable person any dividend,
interest or other distribution whatsoever; recognizes the exercise, directly or indirectly, of any
voting rights conferred through such securities held by the unsuitable person; pays the unsuitable
person any remuneration in any form for services rendered or otherwise, except in limited and
specific circumstances; makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction; or fails to pursue all lawful efforts to
require the unsuitable person to divest himself or herself of the securities, including, if
necessary, the immediate purchase of the securities for cash at fair market value.
The Company may be required to disclose to the Commission upon request, the identities of holders
of any debt or other securities. Under the Act, the Commission may, in its discretion, (1) require
holders of debt securities of registered corporations to file applications; (2) investigate such
holders; and (3) require the
holders to be found suitable to own such securities. Although the Commission generally does not
require the individual holders of obligations such as notes to be investigated and found suitable,
the Commission retains the discretion to do so for any reason, including but not limited to a
default, or where the holder of the debt instrument exercises a material influence over the gaming
operations of the entity in question. Any holder of debt securities required to apply for a finding
of suitability must pay all investigative fees and costs of the Commission in connection with such
an investigation.
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The finding of suitability is comparable to licensing and both require submission of detailed
personal financial information followed by a thorough investigation. In addition, the Mississippi
Gaming Commission will not issue a license unless it is satisfied that the licensee is adequately
financed or has a reasonable plan to finance its proposed operations from acceptable sources.
The Mississippi regulations provide that a change in control of a Company may not occur without the
prior approval of the Commission. Mississippi law prohibits the Company from making a public
offering of its securities without the approval of the Commission if any part of the proceeds of
the offering is to be used to finance the construction, acquisition or operation of gaming
facilities in Mississippi or to retire or extend obligations incurred for one or more such
purposes. The Commission has the authority to grant a continuous approval of securities offerings
subject to renewal every two years. Regulations of the Commission prohibit certain repurchases of
securities of publicly traded corporations registered with the Commission, including holding
companies, without prior approval of the Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over market price from
certain holders of greater than 3% of the outstanding securities of the registered publicly traded
corporation. The regulations of the Commission also require prior approval for a “plan of
recapitalization” as defined in such regulations.
The Company, once registered, will have to maintain current stock ledgers in the State of
Mississippi, which may be examined by the Mississippi 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 Mississippi Gaming Authorities. A failure to
make such disclosure may be grounds for finding the record holder unsuitable. The Company is
required to render maximum assistance in determining the identity of the beneficial owner.
Mississippi law requires that certificates representing shares of a registered company’s common
stock bear a legend to the general effect that the securities are subject to the Mississippi Gaming
Control Act and regulations of the Mississippi Gaming Commission. The Commission has the authority
to grant a waiver from the legend requirement. (Isle of Capri obtained such a waiver.) The
Commission, through the power to regulate licenses, has the power to impose additional restrictions
on holders of the Company’s securities at any time.
Employees associated with gaming in Mississippi must obtain work permits that are subject to
immediate suspension under certain circumstances. The Commission will refuse to issue a work
permit to a person who has been convicted of a felony, committed certain misdemeanors or knowingly
violated the Mississippi Gaming Control Act, and it may refuse to issue a work permit to a gaming
employee for any other reasonable cause.
License Fees and Taxes
License fees and taxes are payable to the State of Mississippi and to the counties and cities in
which the Mississippi Gaming Subsidiary’s respective operations will be conducted. The license fee
payable to the State of Mississippi is based upon “gaming receipts”, generally defined as gross
receipts less payouts to customers as winnings, and equals 4% of gross revenue of $50,000 or less
per calendar month, plus 6% of gross revenue over $50,000 and less than $134,000 per calendar
month, plus 8% of gross revenue over $134,000 per calendar month. License fees paid in any taxable
year are allowed as a credit against the Mississippi State income tax liability of a licensee for
that taxable year. In addition, a licensee must pay a $5,000 annual license fee and an annual fee
based upon the number of games it operates. In addition to state gaming license fees or taxes, a
municipality or county may impose a gross revenue fee upon a
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licensee based on all gaming receipts
derived from the establishment equal to approximately 4%. Certain local and private laws of the
State of Mississippi may impose fees or taxes in addition to the fees described above.
Beer, Wine and Liquor Licensing
The sale of food or alcoholic beverages, including beer and wine, is subject to licensing, and
regulation and control by the applicable state and local authorities. The Miscellaneous Tax
Division of the Mississippi State Tax Commission regulates the sale of beer and light wine. The
Alcoholic Beverage Control Division of the Mississippi State Tax Commission (the “ABC”), regulates
the sale of alcoholic beverages containing more than 5% alcohol. The ABC requires that all equity
owners and managers file personal record forms and fingerprint cards for licensing. In addition,
owners of more than 5% of a company’s equity, as well as officers and managers, must submit
detailed financial information to the ABC for licensing. All such licenses are revocable and
non-transferable. The Mississippi State Tax Commission has full power to limit, condition, suspend
or revoke any such license, and any such disciplinary action could, and revocation would, have a
material adverse impact upon the operations of an affected casino.
Extensive Non-Gaming Laws and Regulations
In addition to the foregoing, the Company and/or its subsidiaries will be subject to additional
federal, state and local safety, health, employment, and other laws, regulations and ordinances
that apply to non-gaming businesses generally. For example, Regulations adopted by the Financial
Crimes Enforcement Network of the U.S. Treasury Department require currency transactions in excess
of $10,000 occurring within a gaming day to be reported, including identification of the patron by
name and social security number. Substantial penalties can be imposed for failure to comply with
these regulations. The foregoing is just one example of the pervasiveness of the non-gaming laws,
rules, regulations and ordinances that would apply to a casino operator.
COMPETITION
There is intense competition in the Mississippi market in which the Company intends to operate and
in surrounding markets. The Company will compete directly with other existing gaming facilities
located in Mississippi and in bordering states, including Louisiana. The Company will also be
competing directly and indirectly, with gaming facilities throughout the United States and
throughout the world as well as with Native American gaming operations which enjoy certain tax
advantages. The Company expects this competition to increase as new gaming operators enter these
markets, existing competitors expand their operations, gaming activities expand in existing
jurisdictions, and gaming is legalized in new jurisdictions and/or on the internet. Assuming it is
successful in developing a destination casino resort, the Company will also be competing with other
forms of gaming and entertainment, including but not limited to, bingo,
online computer gambling, pull tab games, card parlors, sports-book operations, pari-mutuel
betting, dog racing, lotteries, jai-alai, video lottery terminals, and video poker terminals.
MANAGEMENT AGREEMENT
On June 19, 1993, CWI and MGC entered into a Management Agreement with Casinos Austria Maritime
Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would
operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State
of Mississippi. If the Company enters into a joint venture arrangement pursuant to which the joint
venture partner acquires a controlling interest, the agreement with CAMC will terminate. Unless
earlier terminated
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pursuant to the provisions of the Agreement, the Agreement terminates five years
from the first day of actual Mississippi gaming operations and provides for the payment of an
annual operational term management fee of 1.2% of all gross gaming revenues between zero and one
hundred million dollars ($100,000,000); plus 0.75% of gross gaming revenue between $100,000,000 and
$140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net
gaming revenue between zero and twenty-five million dollars ($25,000,000); plus three percent of
the net gaming revenue above twenty-five million dollars ($25,000,000).
ITEM 1A. RISK FACTORS
The Company’s property in Diamondhead, Mississippi is the only asset of material value held by the
Company. The Company is entirely dependent on the successful development of and/or sale or lease of
part or all of this property to generate future cash flow. The successful development of the
property will require substantial financial resources. The Company does not have the financial
resources to develop the property or any portion thereof. To date, the Company has not found a
partner(s) with whom to develop the property on terms that are acceptable to the Company.
The ultimate development of the property is subject to risks and uncertainties which include, but
are not limited to, those relating to permitting, financing, and the actions of federal, state, or
local governments and agencies. In addition, the State of Mississippi could vote to prohibit
gambling which would have an enormous, adverse effect on the value of the Company’s Diamondhead
property, the development of the property, and any gaming operation that might be in operation at
the time any such prohibition was instituted.
The design, construction, and on-time opening of a casino resort are subject to risks and
uncertainties associated with cost overruns, contract-related contingencies, developer, contractor
or subcontractor failures to perform, costs increases and availability of materials, supplies and
equipment, labor shortages, strikes, walkouts and weather-related and other construction delays.
The occurrence of a natural disaster could disrupt operations on the property for elongated periods
of time. Any such occurrence could also alter the market for the project temporarily or
permanently and have an adverse effect on the value of the property and the business of the
Company.
The gaming industry is characterized by intense competition. Many companies, with which the Company
will compete, are substantially larger and have significantly greater resources than the Company.
Furthermore, it is likely that other competitors will emerge in the future. Assuming the Company is
successful in constructing a casino resort, the success of the project will be subject to risks and
uncertainties, including but not limited to those relating to local, national, and worldwide
competition, including competition with Native American casinos which enjoy significant tax
advantages. The Company will also be subject to operational risks, including but not limited to
those relating to operations in general, insurance coverage problems unique to the area in which
the property is located, weather-related problems including hurricanes and floods and labor-related
problems unique to the area. The operation will also be subject to risks relating to security,
licensing and suitability findings unique to the gaming industry. In addition, the market in which
the Company will operate is evolving and uncertain due to Hurricane Katrina. Moreover, while the
Company previously operated gambling ships, the Company has never operated a hotel or land-based
casino. The Company’s proposed
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operations are subject to all of the risks inherent in the
establishment of a new business enterprise, including the absence of an operating history.
The Company incurs ongoing expenses but has no current revenue and no revenue stream with which to
pay ongoing expenses. The Company will not have any revenue stream unless the Company is able to
successfully develop its Diamondhead property or generate cash prior to development of the property
or the sale of parts or all of the property. The Company’s inability to raise cash to pay its
expenses in the future could adversely affect its ability to continue in the future. It also could
give rise to disclosures in the Company’s financial reporting which the investing public would
consider adverse and, therefore, have a negative impact on the stock price of the Company. The
market price of the Company’s common stock may be highly volatile. Announcements by the Company
and its competitors may lead to wide swings in the market price of the common stock.
While the Company is not currently engaged in litigation, the Company is always subject to risk
associated with contract-related, employee-related, environmental-related and other litigation.
Any such litigation would likely be expensive and time-consuming.
The foregoing are not intended to encompass and do not encompass every risk or uncertainty
associated with investment in the Company. The Company may be affected by some or all of the
foregoing and other risks and uncertainties, many of which are beyond the Company’s control.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
DIAMONDHEAD, MISSISSIPPI PROPERTY
On June 19, 1993, the Company, through its subsidiary, MGC, exercised an option to purchase 404.5
acres of land in Diamondhead, Mississippi for $4,000,000. MGC obtained a $2,000,000 loan from
Casinos Austria Maritime Corporation (“CAMC”) to complete the purchase of the property. The loan
was secured by a first mortgage on the property. The first mortgage loan was payable interest only
at 8% per annum for fifteen months. The full principal balance on the first mortgage loan was due
and payable on June 30, 1995. Prior to its due date, the first mortgage was paid in full from the
proceeds of a loan obtained by the
Company in May of 1995 from First Union National Bank of Florida. The loan due First Union National
Bank of Florida was subsequently paid in full and the property is now debt-free and lien-free.
On June 19, 1993, MGC also entered into an Option Agreement to purchase approximately 80 acres of
land included within the 404 acre site for a purchase price of ten dollars ($10.00). The option was
originally purchased so as to avoid certain limitations that attached to the underlying parcels.
It was in the interest of the Company and its Diamondhead project that certain litigation
instituted by the seller of the property be completed before MGC exercised this option. The
litigation was finalized in 2002 and MGC exercised its option in December of 2002. The property was
transferred to MGC by Warranty Deed on December 18, 2002. The exercise of this option gave MGC
full title to the entire 404 acre tract.
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MGC now owns the entire 404 acre tract in fee simple. There is no debt and there are no liens on
the property. The Company believes the property is adequately insured.
OFFICES
Location
|
Lease Terms | |
Florida |
||
1301 Seminole Blvd., Suite 142
|
One year commencing August 1, 2007. | |
Largo, Florida 33770 |
||
Mississippi |
||
5403 Indian Hill Blvd. Diamondhead, Mississippi 39525 |
Two years commencing June 1, 1998 and continuing month-to-month thereafter |
STORAGE FACILITIES
The Company leased storage facilities at the following location in 2007:
Florida
|
Lease Terms | |
4319 Duhme Rd. Madeira Beach, Florida 33708. |
Month-to-month leases on various storage units. |
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of shareholders of the Company was held on October 1, 2007 in Alexandria,
Virginia. Shareholders of record as of August 15, 2007 were asked to vote on two proposals. A total
of 31,800,659 shares were voted. The results of the vote were as follows:
| (1) | To elect six Directors to hold office until the next annual meeting of stockholders. |
| Nominee | For | Withheld | ||||||
Benjamin J. Harrell |
27,905,353 | 3,895,306 | ||||||
Gregory A. Harrison |
27,833,874 | 3,966,785 | ||||||
Deborah A. Vitale |
27,692,375 | 4,108,284 | ||||||
Carl D. Stevens |
26,880,606 | 4,920,053 | ||||||
H. Steven Norton |
26,592,348 | 5,208,311 | ||||||
Frank E. Williams, Jr. |
26,036,884 | 5,763,775 | ||||||
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| (2) | To ratify the appointment of the firm of Friedman LLP as the Company’s independent registered public accounting firm. |
| For | Against | Abstain | |||||||
29,570,800
|
2,136,545 | 93,314 | |||||||
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Since November 22, 2002, shares of the Company’s Common Stock, $.001 par value (the “Common Stock”)
have traded on the over-the-counter market under the symbol “DHCC.” The following table sets forth
the high and low closing price quotations of the Common Stock in each full quarter during the
periods set forth. The over-the-counter quotations reflect inter-dealer prices without retail
markup, markdown, or commission and may not represent actual transactions.
| 2007 | 2006 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter |
$ | 3.15 | $ | 2.22 | $ | 2.76 | $ | 1.55 | ||||||||
Second Quarter |
2.96 | 2.40 | 3.12 | 2.57 | ||||||||||||
Third Quarter |
2.95 | 2.60 | 3.13 | 2.50 | ||||||||||||
Fourth Quarter |
2.89 | 2.20 | 3.38 | 2.55 | ||||||||||||
On February 27, 2008, there were 877 registered holders of record of the Common Stock of the
Company.
The Company has never paid a cash dividend on its Common Stock. Reference is made to Part III, Item
11 of this report which describes in full all compensation involving equity securities related to
Directors and Officers of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The Company has had no operations since the sale of its gaming vessels, which occurred between 1999
and 2000. Since that time, the Company has concentrated on development of its Diamondhead,
Mississippi property. The table below depicts the key items which have contributed to the Company’s
financial results over the last five years:
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| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Dock Lease Income |
$ | — | $ | — | $ | 130,841 | $ | 157,009 | $ | 343,602 | ||||||||||
Operating Expenses |
1,182,092 | 1,655,473 | 786,841 | 798,513 | 1,088,853 | |||||||||||||||
Stock-Based Compensation |
— | 1,238,348 | — | — | — | |||||||||||||||
Interest Expense |
— | — | — | 87,032 | 89,762 | |||||||||||||||
Net (Loss) |
(1,757,192 | ) | (1,757,195 | ) | (749,308 | ) | (640,239 | ) | (421,160 | ) | ||||||||||
Loss per Share — Basic
And Fully Diluted |
$ | (.038 | ) | $ | (.055 | ) | $ | (.025 | ) | $ | (.025 | ) | $ | (.018 | ) | |||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND FINANCIAL RESULTS
Liquidity, Capital Resources, and Financial Results
The Company’s current priority is the development of a destination casino resort in Diamondhead,
Mississippi. In the opinion of management, this project holds the greatest potential for increasing
shareholder value. The Company’s management, financial resources and assets will be devoted towards
the development of this goal. There can be no assurance that the casino resort can be developed
and, if developed, that the Diamondhead casino resort would be successful.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. The
Company incurred a net loss applicable to common shareholders of $1,262,847 for the year ended
December 31, 2007, $1,757,192 for the year ended December 31, 2006 and $749,308 for the year ended
December 31, 2005. Costs and expenses amounted to $1,182,092 for the year ended December 31, 2007,
$2,893,821 for the year ended December 31, 2006 and $786,841 for the year ended December 31, 2005.
Costs and expenses for the year ending December 31, 2006 were impacted by an award of additional
compensation in the amount of $450,000 to the Company President in the first quarter and the award
of stock-based compensation valued at $1,238,348 for stock options granted to directors, officers, and
key personnel in April 2006. Both 2007 and 2006 costs and expenses increased over 2005 levels due
to an increase in CEO base compensation and higher ESOP expenses associated with the higher average
market price of the Company’s common stock. The higher costs incurred in 2006 were partially offset
by the recognition of gain due to the reversal of a previously recorded sales tax liability.
During 2006 and 2005, the Company was able to sustain its cash position and continue to satisfy its
ongoing expenses through the sale of common stock formerly held in treasury and receipt of cash
from the exercise of options and warrants to purchase common stock. In 2007, the Company received a
total of $321,650 from the exercise of options and warrants to purchase 241,000 shares of common
stock. Management of the Company analyzed the historical and planned future spending patterns of
the Company and as of December 31, 2007, the Company may not have had sufficient cash on hand to
meet expected on-going expenses to be incurred in the future twelve month period. However, in March
2008, the Company received a total of $261,250. The Company received $56,250 from a Director of the
Company who
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exercised options to purchase common stock. In addition, to meet short term liquidity
needs, the Vice President of the Company, who is also a Director of the Company, loaned the Company
$150,000 and another Director of the Company loaned the Company $55,000. The loans were made
pursuant to two Promissory Notes, the terms of which are more fully discussed in Note 10 to the
attached financial statements. As of the date of this report, management believes that the Company
has sufficient cash on hand to meet expected on-going expenses to be incurred for the year ending
December 31, 2008.
The Company is currently in discussions with various parties interested in funding and/or
developing all or part of the Diamondhead property. The Company is currently exploring additional
opportunities for financing to meet its liquidity needs.
There can be no assurance that the Company will be able to reach an agreement with any party
regarding the development of the Diamondhead property. The ultimate development of this project is
subject to risks and uncertainties which include, but are not limited to, those relating to
permitting, financing, and the actions of federal, state, or local governments and agencies. The
Company may be affected by some or all of these factors and other risks and uncertainties, many of
which are beyond the Company’s control.
Off Balance Sheet Arrangements
Permits
On October 17, 2005, Mississippi passed new legislation which allows casinos in certain
statutorily-described-areas to be built on land up to 800 feet from the mean high water mark of
certain bodies of water, including Bay St. Louis. Given the fact that the Company intends to take
advantage of the new law and construct its casino resort on land rather than in, on, or above the
water, the extent to which various permits, authorizations, and approvals, as well as studies and
assessments in support thereof, will be required is unknown at this point. The Company believes
that permitting for the project and plans for ultimate development will require significant capital
expenditures for engineering, architectural, accounting, and legal services. The amount ultimately
required is unknown at this time, but the Company does not have sufficient funds required for this
purpose.
Other Arrangements
The Company has agreements with various persons and entities that would be entitled to substantial
commissions if the Company enters into an agreement relating to the development of its Diamondhead
property as a result of their efforts.
Critical Accounting Policies
Impairment of Long-Lived Assets
In accordance with generally accepted accounting principles, the Company currently carries the
Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has
tested this carrying value for impairment. In the opinion of management, the carrying value is not
in excess of the estimated market value of the property or the anticipated cash flows to be
generated from the property.
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The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel
Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material
assumptions and was predicated on the site being fully permitted and zoned as a legally
permissible, water-based casino site. In addition, the Company rejected an offer to purchase the
entire 404 acre site for $100 million in July 2007.
The property is one that meets the Mississippi Gaming Commission’s requirements for a legal gaming
site. Accordingly, management believes that use of the property as a gaming site represents the
highest and best use of the property and provides for the greatest potential for shareholder value.
In the event the Company was unable to obtain all of the permits required to develop a casino
resort, the property could be used for other commercial or residential purposes.
Stock Based Compensation Expense
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting
under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB
25”) for periods beginning in fiscal 2006.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires
the application of the accounting standard as of January 1, 2006. In accordance with the modified
prospective transition method, the Company’s condensed consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under FASB 123(R) for the year ended December 31, 2006
was $1,238,348 which consisted of stock-based compensation expense related to non-qualified stock
option awards. There was no stock-based compensation expense related to employee equity awards and
employee stock purchases recognized during the year ended December 31, 2007 or 2005.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service period in the Company’s
condensed consolidated statement of loss. Prior to the adoption of SFAS 123(R), the Company
accounted for employee equity awards and employee stock purchases using the intrinsic value method
in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company’s condensed consolidated
statement of loss because the exercise price of the Company’s stock options granted to employees
and directors was equal to or less than the fair market value of the underlying stock at the date
of grant.
Stock-based compensation expense recognized during a period is based on the value of the portion of
share-based payment awards that is ultimately expected to vest during the period. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual
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forfeitures differ from those estimates. In the Company’s pro forma information
required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures
as they occurred.
The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes
option valuation model. The Company’s determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of highly complex and subjective variables. These variables include,
but are not limited to, the Company’s expected stock price volatility over the term of the awards
and actual and projected employee stock option exercise history.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not subject to any risk of loss from market rates and prices including
interest rates, foreign exchange rates, commodity prices or equity prices.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements and notes thereto are included herein beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management is responsible for the integrity and accuracy of the financial statements.
Management believes that the financial statements for the year ended December 31, 2007 have been
prepared in conformity with U.S. generally accepted accounting principles appropriate in the
circumstance. The Company’s disclosure controls and procedures ensure that material information
required to be disclosed is recorded, processed, summarized and communicated to management and
reported within the required time period.
In meeting its responsibility for the reliability of the financial statements, management relies on
a system of internal accounting control. The system is designed to provide reasonable assurance
that assets are safeguarded and transactions are executed in accordance with U.S. generally
accepted accounting principles. The design of this system recognizes that errors or irregularities
may occur and that estimates and judgments are required to assess the relative cost and expected
benefits of the controls. Management believes that the controls provide reasonable assurance that
errors or irregularities that could be material to the financial statements are prevented or would
be detected within a timely period.
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Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting for the Company. The Chief Executive Officer and the Chief Financial
Officer conducted an evaluation of the effectiveness of internal control over financial reporting
based on the framework in “Internal Control—Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, conducted under the
framework described above, the Chief Executive Officer and the Chief Financial Officer concluded
that our internal control over financial reporting was effective as of December 31, 2007 to
provide reasonable assurance regarding the reliability of financial reporting and preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles.
The Audit Committee of the Board of Directors is chaired by an Independent Director who is an Audit
Committee Financial Expert as that term is defined in rules or regulations issued pursuant to the
Sarbanes-Oxley Act of 2002. The Chairman periodically meets with management to review their work
and monitor their responsibilities. The Audit Committee Chairman also periodically communicates
with the independent auditors who have free access to the Audit Committee and the Board of
Directors to review the quality and acceptability of the Company’s financial reporting, internal
controls, and non-audit related services.
Friedman LLP, an independent registered public accounting firm, has issued an attestation report on
the Company’s internal control over financial reporting as of December 31, 2007. This report is
included in the consolidated financial statements accompanying this Form 10-K.
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute assurance, that the objectives of the internal control system are met. Because of the
inherent limitations of any internal control system, no evaluation of controls can provide absolute
assurance that all control issues, if any, within a company, have been detected.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A. Directors and Officers:
The current directors and officers of the Company and their titles are as follows:
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| Name | Age | Title | ||||
Deborah A. Vitale
|
57 | Chairman of the Board, President, Chief Executive Officer, Treasurer | ||||
Gregory A. Harrison
|
63 | Director, Vice President, Secretary | ||||
Frank E. Williams, Jr.
|
73 | Director | ||||
Benjamin J. Harrell
|
54 | Director | ||||
H. Steven Norton
|
74 | Director | ||||
Carl D. Stevens
|
61 | Director | ||||
Robert Zimmerman
|
58 | Chief Financial Officer | ||||
Directors elected to office have terms which extend to the next annual meeting.
DEBORAH A. VITALE has served as President, Chief Executive Officer and Treasurer of the Company
since February 1998 and has served as Chairman of the Board of the Company since March 1995. As
President and CEO, Ms. Vitale was responsible for all phases of the day-to-day operations of four
casino ships sailing out of three Florida ports into international waters and for the management
and supervision of hundreds of ship-based and land-based employees. Ms. Vitale served as Secretary
of the Company from November 1994 until July 2002. She has been a Director of the Company since
December 1992. On February 14, 1997, Ms. Vitale was appointed Chairman of the Board of Directors of
Casino World, Inc. and Chairman of the Board of Directors of Mississippi Gaming Corporation, each a
subsidiary of the Company. On September 2, 1997, Ms. Vitale was appointed President of Casino
World, Inc. and Mississippi Gaming Corporation. Ms. Vitale is a trial attorney with over twenty
years of experience handling complex civil litigation. Ms. Vitale is licensed to practice law in
Maryland, Virginia and Washington, D.C.
GREGORY A. HARRISON, Ph.D., P.E., was elected a Director of the Company on February 20, 1998. Dr.
Harrison was appointed Vice-President of the Company on July 18, 2002 and was appointed Secretary
of the Company on July 25, 2002. Dr. Harrison is a consulting forensic engineer with forty years
of diversified fire protection/safety/project engineering experience with NASA, DOD, NBS, NRC,
ARAMCO, and Tenera, L.P. Effective August 27, 2004, Dr. Harrison became a Professional Engineer
licensed to practice in the state of Mississippi. Dr. Harrison has qualified as an expert witness
in various courts in ten states. Dr. Harrison is a partner of Master Jin Kim of Champion Martial
Arts, Inc., in the
development of an internet martial arts school. Dr. Harrison received a B.S. degree in Fire
Protection Engineering from the University of Maryland in 1966, an M.S. degree in Civil Engineering
from the University of Maryland in 1970, an M.S. degree in Engineering Administration from George
Washington University in 1979 and a Ph.D. in Safety Engineering from Kennedy-Western University in
1994. Dr. Harrison has held a top secret security clearance with the U.S. Department of Energy,
the U.S. Nuclear Regulatory Commission, and the Department of Defense. Dr. Harrison has served on
the Board of Directors of Data Measurement Corporation and was an Advisory Board member of United
Bank and First Patriot National Bank.
FRANK E. WILLIAMS, JR. was elected a Director of the Company on July 3, 2002. Since 1969, Mr.
Williams has served as Chairman of the Board of Williams Enterprises of Georgia, Inc., a holding
company controlling six subsidiaries active in various facets of the steel industry. Since 1995,
Mr. Williams has also served as Chairman, CEO, and a fifty percent owner of Bosworth Steel
Erectors, Inc. of Dallas, Texas, an erector of steel products in the southwestern United States and
as Chairman and a major shareholder of Wilfab, Inc., a structural steel fabricator located in
Cherokee County, Georgia.
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Mr. Williams is the Managing Partner and principal owner of Structural
Concrete Products, LLC of Richmond, Virginia, a manufacturer of pre-stressed concrete building
systems for customers in the mid-Atlantic region and of Industrial Alloy Fabricators, LLC of
Richmond, Virginia, a fabricator of alloy plate products for the energy and chemical industries.
Mr. Williams continues to serve on the Board of Williams Industries, Inc., a public company
(NASDAQ), which owns five subsidiaries active in the steel industry including Williams Bridge
Company, one of the largest fabricators of steel plate for bridge structures in the mid-Atlantic
region. The company was founded by Mr. Williams, who served as its President, CEO, and Chairman through 1994. Mr. Williams is currently Chairman of the Board of Directors
of Kaiser Group Holdings, Inc., a public company (NYSE: KGH). Mr. Williams is a former Chairman and
a current Director of Capital Bank, N.A. Mr. Williams has been appointed by bankruptcy courts as an
official representative serving in a pro bono capacity on behalf of investors and debt holders in
public companies in bankruptcy. Mr. Williams holds a Bachelor of Civil Engineering degree from the
Georgia Institute of Technology.
BENJAMIN J. HARRELL was elected a Director of the Company on July 18, 2002. Mr. Harrell was the
founder and served as President and CEO of Pete Fountain Productions, Inc. from 1979 until it was
acquired in 1999 by Production Group International, Inc. (“PGI”), a global event communications
company, and subsequently acquired from “PGI” by TBA Global Events, LLC in 2005. Mr. Harrell
currently manages the acquiring company’s business in the New Orleans area. Mr. Harrell also
currently serves as Vice President of Pete Fountain Entertainment, LLC, which until March 2003,
operated one of the largest jazz clubs in New Orleans. Since 1975, Mr. Harrell has served as
personal manager for the internationally noted jazz artist, Pete Fountain. Mr. Harrell handles all
aspects of Mr. Fountain’s career, including promotion, concerts, personal appearances and
commercial endorsements. From 1985 through 2003, Mr. Harrell served as President of Cresent Sound &
Light, Inc, a professional sound, lighting, video and staging company for the convention and
entertainment industry. Mr. Harrell served as a Director of the New Orleans Metropolitan Convention
and Visitors Bureau from 1997 through 1999. On January 15, 2004, Mr. Harrell was elected to the
Board of Directors of Mississippi Gaming Corporation, a wholly owned subsidiary of the Company.
H. STEVEN NORTON was elected a Director of the Company on August 6, 2002. Since 1998, Mr. Norton
has served as President and CEO of Norton Management, Inc., a consulting company in Alton, Illinois
and Las Vegas, Nevada. Mr. Norton also currently serves as a Director of Centaur, Inc., a privately
held company which owns a casino in Central City, Colorado and owns Hossier Park, an Indiana race
track, located in Anderson, Indiana. Mr. Norton is also a Director of Colorado Casino Resorts, Inc.
in Cripple Creek, Colorado and North East Resorts, Inc., a privately held company pursuing gaming
in the state of Massachusetts. Mr. Norton is also a major creditor and has provided consulting
services to Onnam Entertainment, Inc., a privately held Las Vegas based company, with contracts to
develop and operate Native American casinos in various U.S. locations. Prior to Hurricane Katrina,
Onnam received permission from the Mississippi Gaming Commission to develop a casino site in
Biloxi, Mississippi. The casino, if constructed, would compete with any casino resort subsequently
developed by the Company.
From 1993 to 1998, Mr. Norton served as President and Chief Operating Officer of Argosy Gaming
Corporation, a public company and operator of riverboat casinos. Mr. Norton also previously served
as President and Chief Operating Officer of the Sands Hotel & Casino in Las Vegas, Nevada; as
President and Chief Executive Officer of the Gold River Gambling Hall & Resort in Laughlin, Nevada;
as
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Executive Vice-President of Resorts International, Inc. and Resorts International Casino Hotel
in Atlantic City, New Jersey; and as Vice-President, Treasurer and Comptroller of Paradise Island,
Ltd/Paradise Island Casino.
Mr. Norton has also previously served as a founder and a Director of the American Gaming
Association; as a founder, a Director and Vice-Chairman of the New Jersey Casino Association; as
Chairman of the Indiana Gaming Association; as a Director and Vice-President of the Missouri Gaming
Association; as a Director of the Illinois River Boat Association and as Chairman of the Casino
Commission of the American Hotel Association. Mr. Norton has also served on the Board of Directors
and Executive Committee of the American Hotel Association; as Chairman of the Board and President
of the New Jersey Hotel Motel Association; as Director and Vice-President of the Bahamas Hotel
Association; as Chairman of the Bahamas Hotel Employers Association; as Director and Treasurer of
the Bahamas Employers Confederation; as a Board Member of the Nevada Hotel Motel Association; as
Chairman of the Atlantic City Convention & Visitors Bureau; as Chairman of the Nassau Paradise
Island Promotion Board; and as a member of the Advisory Board of the Governors Office of Travel and
Tourism in New Jersey.
CARL D. STEVENS was elected a Director of the Company on January 10, 2006. Mr. Stevens spent 26
years with the IBM Corporation in various sales and management positions, including Branch Manager,
Atlanta, Georgia. Mr. Stevens was responsible for the southeast United States and served as Program
Director for Public Sector Sales for the United States. In 1997, Mr. Stevens became President and
CEO of ITC Corporation which was headquartered in Herndon, Virginia. ITC, a NASDAQ listed company,
was a publisher and distributor of multimedia training materials with worldwide sales. In 1999, Mr.
Stevens was named Division President of InfoCast Corporation Inc., which was headquartered in
Toronto, Canada. Mr. Stevens headed the Company’s efforts in the e-Learning and Virtual Contact
Center divisions. In June of 2001, Mr. Stevens was named CEO and President of Cogient Corporation,
a medical software and services provider headquartered in Toronto, Canada. Mr. Stevens resigned as
CEO of Cogient Corporation in January of 2005 to return to the U.S. to actively manage his
investments. Mr. Stevens attended Indiana University where he majored in business administration. Mr. Stevens is a
veteran of the United States Air Force.
ROBERT ZIMMERMAN was appointed Chief Financial Officer of the Company on July 27, 1998. From May of
1994 until joining the Company, Mr. Zimmerman served as Controller for the North and Central
American operations of Casinos Austria International, Ltd. From 1980 through 1993, Mr. Zimmerman
served as Vice President of Finance for the Industrial Controls subsidiary of Emerson Electric
Company (NYSE: EMR). Prior to 1980, Mr. Zimmerman was employed with the public accounting firm of
Fiddler and Co. for seven years.
B. Committees of the Board of Directors
The Audit Committee of the Board of Directors is comprised of Frank E. Williams, Jr. (Audit
Committee Chairman), Benjamin J. Harrell, and Gregory A. Harrison (ex-officio member). The Board of
Directors has determined that both Mr. Williams and Mr. Harrell are independent members, as that
term is defined under the enhanced independence standards for audit committee members in the
Securities and Exchange Act of 1934. Mr. Harrison does not meet the independence standards. The
Board of Directors has also determined
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that Frank E. Williams, Jr. is an Audit Committee Financial
Expert as that term is defined in rules issued pursuant to the Sarbanes-Oxley Act of 2002.
The Compensation Committee is composed of three Directors: Benjamin J. Harrell (Chairman), Carl D.
Stevens, and Gregory A. Harrison (ex-officio member). Both Mr. Harrell and Mr. Stevens have been
determined to be independent Directors by the Board of Directors based on the general independence
standards adopted by the Board. Mr. Harrison, who serves only in an ex-officio capacity, by virtue
of his status as a compensated Officer of the Company, is not independent.
The Compensation Committee has no written charter and convenes at regularly scheduled meetings of
the Board of Directors. The Compensation Committee advises and makes recommendations to the Board
of Directors as to the compensation to be paid to Executive Officers of the Company. In addition,
the Compensation Committee advises and makes recommendations to the Board of Directors as to
options to purchase common stock, if any, to be awarded.
The Board of Directors has not formed a Nominating Committee, however, the Board acts as a group in
considering nominations. The Board considers and reviews, from time to time, the appropriate size
and composition of the Board and anticipates future vacancies and needs of the Board. In evaluating
possible nominees, the Board considers, among other things, the background, experience, education
and knowledge of a candidate, his familiarity with the gaming industry and related industries, his
experience with publicly-traded entities, and his integrity and judgment. The Board considers the
potential contribution a candidate will bring to the backgrounds, experience, and skills of the
existing Board of Directors. The Board also considers a candidate’s ability to devote sufficient
time and effort to his duties as a Director. After evaluation and review of candidates who meet the
Board’s criteria, the Board considers its then-current needs and selects the nominees that best
suit those needs.
The Board will consider candidates recommended by stockholders, provided the names of such
nominees, accompanied by relevant biographical information, are properly submitted in writing to
the Secretary of the Company in accordance with the manner described in the Company’s last-filed
definitive Proxy Statement. The nominees will be submitted to the Board of Directors and receive
the same consideration as those nominees identified by members of the Board of Directors.
C. Code of Ethics
The Company adopted a Code of Ethics in 2004 that applies to the principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing
similar functions. A copy of the Code was attached as an exhibit in a prior year’s annual report. A
copy of the Code of Ethics will be made available to any shareholder, free of charge, upon written
request to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon its review of Forms 3, 4 and 5 and any amendments thereto furnished to the
Company pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, all purchases
and sales of stock and all required forms were filed timely by reporting persons during 2007.
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ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Company compensates four employees, two of which, the CEO and Vice President, are executive
officers of the Company. The Compensation Committee and the Board of Directors monitor and approve
compensation paid to executive officers. The CEO determines compensation paid to the remaining two
key personnel.
Base salary rates paid to all employees, exclusive of the CEO, have remained unchanged since the
year ended December 31, 2000. From time to time, additional compensation has been awarded to
employees based on merit and affordability. Often an award is based on consideration of merited
service over several years when no additional compensation award was paid due to economic
constraints. In addition, from time to time, the Board of Directors awards options to purchase
common stock of the Company to the employees.
CEO Compensation
In 2006, the Compensation Committee recommended to the Board of Directors that Ms. Vitale’s salary
be increased from $125,000 per annum, where it has been since she became President in February of
1998, to $300,000 per annum. The pay increase was recommended to reflect her myriad corporate roles
and responsibilities more accurately and to fairly compensate her based upon industry peer review.
The Compensation Committee also noted that Ms. Vitale manages the Company’s business without the
benefit of administrative staff normally associated with the management of a publicly-traded
company at significant savings to the Company.
In addition, in 2006, the Compensation Committee recommended to the Board of Directors of the
Company that Deborah A. Vitale be awarded additional compensation in recognition of her significant
and material contributions to the Company. The additional compensation award amounted to $450,000
to reflect Ms. Vitale’s significant contributions to the Company arising from her negotiation and
settlement of significant tax liabilities with the Florida Department of Revenue arising from two
separate tax audits of the Company’s former operating subsidiaries. As a result of Ms. Vitale’s
efforts, the Company ultimately paid approximately $917,000 of a $7.4 million assessment with the
Florida Department of Revenue and ultimately paid $1.6 million in settlement of a second tax
assessment of approximately $3.2 million. As a result of Ms. Vitale’s efforts, the State of Florida
did not foreclose on the Company’s assets, the Company was not forced into bankruptcy, and the
Company was able to remain in operation so as to sell its vessels and leases, pay its lenders,
including First Union National Bank of Florida in full, and avoid the loss of its Mississippi
property which was pledged as collateral for its bank loans. The award was also in recognition of
Ms. Vitale’s efforts in settling various EEOC related complaints and lawsuits as well as settlement
of certain Department of Labor matters.
No other additional cash compensation has been paid to Ms. Vitale during her tenure as CEO.
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The following table provides information concerning the compensation of the Chief Executive Officer
and Chief Financial Officer of the Company. No other executive officer of the Company received cash
compensation in excess of $100,000 during any of the last three fiscal years.
SUMMARY COMPENSATION TABLE
| Nonqualified | ||||||||||||||||||||||||||||||||||||
| Non Equity | Deferred | All | ||||||||||||||||||||||||||||||||||
| Incentive | Compensa- | Other | ||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Plan | tion | Compen- | |||||||||||||||||||||||||||||||
| Occupation | Year | Salary | Bonus | Awards | Awards (2) | Compensation | Earnings | sation | Total | |||||||||||||||||||||||||||
Deborah A. Vitale |
2007 | $ | 300,000 | None | None | None | None | None | (3 | ) | $ | 300,000 | ||||||||||||||||||||||||
President |
2006 | $ | 300,000 | $ | 450,000 | None | $ | 190,515 | None | None | (3 | ) | $ | 940,515 | ||||||||||||||||||||||
| 2005 | $ | 133,654 | (1) | None | None | $ | 437,171 | None | None | (3 | ) | $ | 570,825 | |||||||||||||||||||||||
Robert L. Zimmerman |
2007 | $ | 61,974 | None | None | None | None | None | (3 | ) | $ | 61,974 | ||||||||||||||||||||||||
CFO |
2006 | $ | 61,974 | $ | 25,000 | None | $ | 47,629 | None | None | (3 | ) | $ | 109,603 | ||||||||||||||||||||||
| 2005 | $ | 61,974 | $ | 5,000 | None | $ | 28,052 | None | None | (3 | ) | $ | 95,026 | |||||||||||||||||||||||
| (1) | In 2005, Ms. Vitale received $125,000 of her annual salary and the remainder was paid to her in 2006. | |
| (2) | On February 10, 2005, Ms. Vitale was awarded an option to purchase 75,000 shares of common stock, exercisable at $.80 per share. On October 24, 2005, an option to purchase 450,000 shares of common stock, exercisable at $.50 per share, expired. On October 27, 2005, Ms. Vitale was awarded an option to purchase 450,000 shares of common stock, exercisable at $1.25 per share. On April 13, 2006, Ms. Vitale was awarded an option to purchase 100,000 shares of common stock, exercisable at $2.70 per share. | |
| On February 10, 2005, Mr. Zimmerman was awarded an option to purchase 50,000 shares of common stock, exercisable at $.80 per share. On April 13, 2006, Mr. Zimmerman was awarded an option to purchase 25,000 shares of common stock, exercisable at $2.70 per share. | ||
| Reference is hereby made to Note 3, “Summary of Significant Accounting Policies — Stock Based Compensation” in the attached 2008 financial statements, for a determination of the variables used in computing the value of option awards. | ||
| (3) | The Europa Cruises Corporation Employee Stock Ownership Plan (“the Plan”) is a defined contribution pension plan funded with common stock of the Company. Ms. Vitale and Mr. Zimmerman are both participants in the Plan. Common shares contributed by the Plan to Ms. Vitale’s participant account were 26,515 shares in 2006 and 26,511 shares in 2005. Common shares contributed by the Plan to Mr. Zimmerman’s participant account were 18,057 shares in 2006 and 16,045 shares in 2005. The number of shares to be contributed to Plan participants for the year ended December 31, 2007 will be determined following the Trust accounting for that year. |
The following tables provide a summary of the outstanding equity awards of the Chief Executive
Officer and Chief Financial Officer and option exercises in 2007.
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SUMMARY OF OUTSANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
| Equity | ||||||||||||||||||||
| Incentive | ||||||||||||||||||||
| Plan | ||||||||||||||||||||
| Awards | ||||||||||||||||||||
| Number of | Number of | Number of | ||||||||||||||||||
| Securities | Securities | Securities | ||||||||||||||||||
| Underlying | Underlying | Underlying | ||||||||||||||||||
| Unexercised | Unexercised | Unexpired | Option | Option | ||||||||||||||||
| Options | Options | Unexercised | Exercise | Expiration | ||||||||||||||||
| Name | Exercisable | Unexercisable | Options | Price | Date | |||||||||||||||
Deborah A. Vitale |
750,000 | None | None | $ | .30 | 3/11/08 | ||||||||||||||
| 75,000 | None | None | .75 | 7/23/08 | ||||||||||||||||
| 75,000 | None | None | .80 | 2/10/10 | ||||||||||||||||
| 450,000 | None | None | 1.25 | 10/27/10 | ||||||||||||||||
| 100,000 | None | None | 2.70 | 4/13/11 | ||||||||||||||||
Robert L. Zimmerman |
15,000 | None | None | $ | .75 | 8/12/08 | ||||||||||||||
| 50,000 | None | None | .72 | 7/13/09 | ||||||||||||||||
| 50,000 | None | None | .80 | 2/10/10 | ||||||||||||||||
| 25,000 | None | None | 2.70 | 4/13/11 | ||||||||||||||||
Stock Awards
| Equity | ||||||||||||||||
| Equity | Incentive | |||||||||||||||
| Incentive | Plan Awards | |||||||||||||||
| Plan Awards | Market or | |||||||||||||||
| Number of | Payout Value | |||||||||||||||
| Number of | Market Value of | Unearned | of Unearned | |||||||||||||
| Shares or Units | Shares or Units | Shares, Units or | Shares, Units or | |||||||||||||
| Of Stock That | Of Stock That | Other Rights That | Other Rights That | |||||||||||||
| Have Not | Have Not | Have Not | Have Not | |||||||||||||
| Name | Vested | Vested | Vested | Vested | ||||||||||||
Deborah A. Vitale |
None | None | None | None | ||||||||||||
Robert L. Zimmerman |
None | None | None | None | ||||||||||||
OPTION EXERCISES AND STOCK VESTED IN 2007
| Option Awards | Stock Awards | |||||||||||||||
| Number of | Number of | |||||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Acquired | Realized | Acquired | Realized | |||||||||||||
| On | On | On | On | |||||||||||||
| Name | Exercise | Exercise | Vesting | Vesting | ||||||||||||
Deborah A. Vitale |
None | None | None | None | ||||||||||||
Robert L. Zimmerman |
35,000 | $ | 83,104 | None | None | |||||||||||
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Directors’ Compensation
The current members of the Board of Directors are not paid fees for their services as a Director.
Directors are reimbursed for certain approved expenses incurred in connection with Company business
and for certain approved expenses incurred in connection with attendance at non-telephonic Board
meetings and non-telephonic committee meetings. Directors are, from time to time, awarded
non-qualified options to purchase common stock of the Company. No compensation was awarded to any
Director for their services as a Director in 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF FEBRUARY 26,
2008.
The following table sets forth, to the Company’s knowledge, as of February 26, 2008, based on
filings with the Securities and Exchange Commission by certain beneficial owners, the beneficial
ownership of the outstanding Voting Stock held by (i) each person or entity beneficially owning
more than 5% of the shares of any class of Voting Stock, (ii) each director, nominee, and certain
executive officers, individually, and (iii) all directors and executive officers as a group.
| Amount & | ||||||||||||||
| Nature of | ||||||||||||||
| Name and Address of | Beneficial | Title of | % | % | ||||||||||
| Beneficial Owner | Ownership | Class | of Class | Voting (1) | ||||||||||
Europa Cruises Corporation Employee Stock Ownership Plan Trust (2) 1301 Seminole Boulevard., Suite 142 Largo, Florida 33770 |
3,022,730 | Common | 7.60 | % | 7.27 | % | ||||||||
Deborah A. Vitale (2) (3) Chairman, President, CEO, and Treasurer Chairman, President, and Treasurer of Casino World, Inc. and Mississippi Gaming Corp. 1013 Princess Street Alexandria, Virginia 22314 |
5,580,944 | Common | 14.04 | % | 13.42 | % | ||||||||
Gregory Harrison (4) Director, Secretary, and Vice President 16209 Kimberly Grove Gaithersburg, Maryland 20878 |
1,444,948 | Common | 3.63 | % | 3.47 | % | ||||||||
Benjamin J. Harrell (5) Director 237 N. Peters Street, Fourth Floor New Orleans, Louisiana 70130 |
650,000 | Common | 1.63 | % | 1.56 | % | ||||||||
Frank E. Williams, Jr. (6) Director 2789b Hartland Road Falls Church, Virginia 22043 |
447,150 | Common | 1.12 | % | 1.08 | % | ||||||||
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| Amount & | ||||||||||||||
| Nature of | ||||||||||||||
| Name and Address of | Beneficial | Title of | % | % | ||||||||||
| Beneficial Owner | Ownership | Class | of Class | Voting (1) | ||||||||||
Carl D. Stevens (7) Director 1753 Highway 42 South Forsyth, Georgia 31029 |
602,324 | Common | 1.51 | % | 1.45 | % | ||||||||
H. Steven Norton (8) Director 700 Rozier Street Alton, Illinois 62002 |
250,000 | Common | .63 | % | .60 | % | ||||||||
Serco International Limited (9) P.O. Box 15, A-9010 Klagenfurt, Austria |
1,251,831 900,000 926,000 |
Common S-NR Preferred S- Preferred |
3.15 100.00 100.00 |
% % % |
7.40 | % | ||||||||
Austroinvest International Limited (9) P.O. Box 15, A-9010 Klagenfurt, Austria |
1,251,831 900,000 926,000 |
Common S-NR Preferred S- Preferred |
3.15 100.00 100.00 |
% % % |
7.40 | % | ||||||||
Ernst G. Walter (9) 14700 Gulf Blvd., Apt.401 Madeira Beach, Florida 33708 |
1,251,833 900,000 926,000 |
Common S-NR Preferred S- Preferred |
3.15 100.00 100.00 |
% % % |
7.40 | % | ||||||||
All Directors and Executive Officers
as a Group (6 persons)
|
8,975,366 | 22.57 | % | 21.58 | % | |||||||||
| (1) | Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages. | |
| (2) | The Europa Cruises Corporation Employee Stock Ownership Plan (“ESOP”) was established on August 18, 1994. The Trustee of the ESOP is Deborah A. Vitale, President, CEO, and Chairman of the Board. As of December 31, 2007, 2,056,815 ESOP shares had been released and 1,977,270 ESOP shares had been allocated to participants in the ESOP. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 3,022,730 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries. | |
| (3) | Includes 3,022,730 unallocated common shares of the ESOP Trust; 767,000 shares of Common Stock owned directly by Ms. Vitale; options to purchase 1,450,000 shares of Common Stock; and 341,214 shares of Common Stock, which represent shares of stock held in Ms. Vitale’s fully vested ESOP participant account. | |
| (4) | Includes 807,951 shares of Common Stock owned directly by Mr. Harrison; 70,000 shares owned by the Harry and Marie Harrison Trust of which Mr. Harrison is a Co-Trustee; options to purchase |
31
Table of Contents
| 425,000 shares of Common Stock; and 141,997 shares of Common Stock held in Mr. Harrison’s partially vested ESOP participant account. | ||
| (5) | Includes 400,000 shares of Common Stock owned directly by Mr. Harrell and options to purchase 250,000 shares of Common Stock. | |
| (6) | Includes 143,500 shares of Common Stock owned directly by Mr. Williams; 53,650 shares of Common Stock owned by the Williams Family Limited Partnership of which Mr. Williams is President of the General Partner, the Williams Family Corporation; and options to purchase 250,000 shares of Common Stock. | |
| (7) | Includes 502,324 shares of Common Stock owned directly by Mr. Stevens and options to purchase 100,000 shares of Common Stock. | |
| (8) | Includes 75,000 shares of Common Stock owned directly by Mr. Norton and options to purchase 175,000 shares of Common Stock. | |
| (9) | Serco International Limited (f/k/a Serco International Financial Advisory Services, Ltd.) and Austroinvest International Limited are affiliated entities. The Company understands that Dr. Ernst Walter is the sole director of each company. The total beneficial ownership of securities of the Company held by the foregoing and Dr. Walter includes: 1,251,831 shares of Common Stock owned by Serco International Limited; 900,000 shares of Series S-NR Preferred Stock owned by Serco International Limited; and 926,000 shares of Series S Preferred Stock owned by Austroinvest International Limited. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 18, 1994, the Company established the Europa Cruises Corporation Employee Stock Ownership
Plan (the “ESOP”). The ESOP, which is a qualified retirement plan under the provisions of Section
401(a) of the Internal Revenue Code and an employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Internal Revenue Code, was established primarily to invest in stock of
the Company. All employees as of December 31, 1994, and subsequent new employees having completed
1,000 hours of service, are eligible to participate in the ESOP. The Company also established a
trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve
as the funding vehicle for the ESOP. Deborah A. Vitale, CEO, President and Treasurer of the
registrant, is the sole Trustee of the Trust. As of December 31, 2007, 2,056,815 shares of Common
Stock had been released and 1,977,270 shares of Common Stock had been allocated to participants in
the ESOP. Unallocated shares are voted by the Trustee. The Trustee is required to vote the
unallocated ESOP shares in the best interests of the ESOP beneficiaries.
On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory
note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000
shares of the Company’s Common Stock with the proceeds of the loan. On August 25, 1994 the Company
loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note
bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional
2,120,000 shares of the Company’s Common Stock with the proceeds of the loan. The shares of Common
Stock were pledged to
32
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the Company as security for the loans. The promissory notes will be repaid
with the proceeds of annual contributions made by the Company to the ESOP. In April of 1995, the
Company agreed to extend the maturity of the loans to twenty years. Effective for the Plan year
beginning January 1, 2001, the Company amended the plan and related loans for the purpose of
limiting excise tax liability for plan contributions in excess of IRS Code 415 limitations. To
accomplish this, the Company agreed to extend the maturity of the loans to fifty years.
In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity
needs pursuant to the terms of two promissory notes. The first note provides for the repayment of
$150,000 to the Vice-President of the Company, who is also a Director of the Company. The second
note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and
payable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans
are unsecured.
Meetings of the Board of Directors
The Board of Directors held 12 meetings during 2007 and all directors, with the exception of Frank
E. Williams, Jr., attended at least 75% of the meetings.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee approved all services provided by the Company’s independent registered public
accounting firm, Friedman LLP, for the years ended December 31, 2007, 2006 and 2005. The following
fees were paid to Friedman LLP for services in those years:
| 2007 | 2006 | 2005 | ||||||||||
Audit Fees |
$ | 61,275 | $ | 57,603 | $ | 50,529 | ||||||
Audit-Related Fees |
8,755 | 7,745 | 7,745 | |||||||||
Tax Fees |
0 | 0 | 0 | |||||||||
All Other Fees |
0 | 0 | 1,500 | |||||||||
Total Fees Paid to Friedman LLP |
$ | 70,030 | $ | 65,348 | $ | 59,774 | ||||||
Audit fees are comprised of fees for professional services rendered in conjunction with the audit
of the Company’s annual financial statements, review of the Company’s annual report filed with the
Securities and Exchange Commission, and review of the information contained in the Company’s
quarterly filings with the Securities and Exchange Commission.
Audit-related fees are comprised of the fees for professional services rendered in connection with
the audit of the Company’s Employee Stock Ownership Plan.
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Table of Contents
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a)
|
3(a)(i) | Certificate of Incorporation of the Company. (ii) Amendment to Certificate of Incorporation of the Company | ||||
(a)
|
3(b) | By-laws of the Company. | ||||
(g)
|
4.1 | Subscription and Investment Agreement between Europa Cruises Corporation and Lagoon Cruise Line, Inc. dated August 26, 1994. | ||||
(g)
|
4.2 | Warrant Agreement between Europa Cruises Corporation and FLC Holding Corp dated July 8, 1992. | ||||
(g)
|
4.2.1 | Consent and Amendment of Credit Agreement Note and Warrant by and among FLC Holding Corp. (“FLC”), EuropaSky Corporation (“EuropaSky”), Europa Cruises Corporation and Casino World, Inc. (“Casino”), dated May 27, 1993 without Exhibits. | ||||
(g)
|
4.3 | Warrant Agreement between Europa Cruises Corporation and The Stuart-James Company Incorporated dated June 29, 1989. | ||||
(g)
|
4.3.1 | Warrant Certificates and Assignments for 125,520 shares and 17,000 shares registered in the name of Marc N. Geman dated June 22, 1994. | ||||
(g)
|
4.3.2 | Motion to Approve Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc. dated October 8, 1993 with Settlement Agreement dated October 6, 1993 attached. | ||||
(g)
|
4.3.4 | Order Approving Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc. | ||||
(g)
|
4.3.5 | Agreement between Marc N. Geman and Europa Cruises Corporation dated June 15, 1993. | ||||
(g)
|
4.4 | Convertible Promissory Note between Europa Cruises Corporation and Serco International Ltd. dated November 11, 1993: Transfer by Serco International Ltd. to Gaming Invest Corp. and election to convert Promissory Note by Gaming-Invest Corp. | ||||
| 5.1 | Qualified plan determination letter from the Internal Revenue Service dated April 4, 1996, issued to the Europa Cruises Corporation Employee Stock Ownership Plan. |
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(g)
|
10.1 | Consulting Agreement between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated September 16, 1994. | ||||
(g)
|
10.1.1 | Equipment Lease between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated October 13, 1994. | ||||
(g)
|
10.1.2 | Promissory Note payable to Casinos Austria Maritime Corporation dated December 30,1994, and Second Naval Mortgage on the M/V Stardancer. | ||||
(g)
|
10.1.3 | Subordination Agreement between Lagoon Cruise Line, Inc., Europa Stardancer Incorporation and Casinos Austria Maritime Corporation. | ||||
(a)
|
10(d) | The Company’s 1988 Stock Option Plan. | ||||
(b)
|
10(e) | Standard Bareboat Charter Agreement, dated August, 1989, between Sea Lanes Bahamas Limited and Europa Cruise Lines, Ltd. | ||||
(c)
|
10(f) | Service Agreement, dated April 12, 1991, between Service America Corporation and Europa Cruise Lines. | ||||
(c)
|
10(g) | Lease Agreement, dated June 30, 1991, between Palm Grove Marina, Inc., and Europa Cruises of Florida 1, Inc. | ||||
(c)
|
10(h) | Memorandum of Agreement for lease, dated March 29, 1992, between Durwood Dunn and Mississippi Gaming Corporation. | ||||
(c)
|
10(i) | Lease Agreement, dated January 29, 1992, between Claiborne County, Mississippi Port Commission and Mississippi Gaming Corporation. | ||||
(c)
|
10(j) | Contract of Sale, dated February 21, 1992, between Ferry Binghamton, Inc., and Mississippi Gaming Corporation. | ||||
(b)
|
10(k) | Lease Agreement, dated November 30, 1990, between Europa Cruises of Florida 2, Inc., and Hubbard Enterprises, Inc. | ||||
(b)
|
10(l) | Reciprocal Relationship Agreement, dated December 28, 1990, amongst Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., the Company and Cordis, A.G. | ||||
(b)
|
10(m) | Promissory Note, dated December 31, 1990, and Addendum thereto, dated May 2, 1991, from the Company to Charles S. Liberis, P.A., Profit Sharing Plan. | ||||
(b)
|
10(n) | Promissory Note, dated December 31, 1990, and Addenda thereto, dated April 18 and May 2, 1991, from the Company to Harlan G. Allen, Jr. |
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(b)
|
10(o) | Stock Option and Agreement, dated December 31, 1990, between the Company and Charles S. Liberis, P.A., Profit Sharing Plan. | ||||
(b)
|
10(p) | Stock Option and Agreement, dated December 31, 1990, between the Company and Harlan G. Allen, Jr. | ||||
(b)
|
10(q) | Promissory Note, dated January 25, 1992, from Europa Cruises of Florida 1, Inc., and Europa Cruises of Florida 2, Inc., to Cordis, A.G. | ||||
(b)
|
10(r) | Release, dated January 25, 1991, by Europa Cruise Lines, Ltd. in favor of the St. Paul Fire & Marine Insurance Co. Lloyds and certain London companies, through Bain Clarkson, Ltd. | ||||
(b)
|
10(s) | Promissory Note, dated February 15, 1991, from Europa Cruises of Florida 1, Inc., to Midlantic. | ||||
(b)
|
10(t) | Assumption Modification and Security Agreement, dated February 15, 1992, amongst Europa Cruises of Florida 2, Inc., the Company and Midlantic. | ||||
(b)
|
10(u) | Mortgage Modification Agreement, dated February 15, 1992, between Europa Cruises of Florida 2, Inc., and Midlantic. | ||||
(b)
|
10(v) | Guarantee Agreement, dated February 15, 1991, between Europa Cruises of Florida 2, Inc., and Midlantic, Re: | ||||
| Europa Cruises of Florida 2, Inc. | ||||||
(b)
|
10(w) | Coordination Agreement, dated February 20, 1991, between Midlantic and Cordis, A.G. | ||||
(b)
|
10(aa) | Assignment of Note Receivable, Account Receivable and Common Stock from Harlan G. Allen, Jr. to the Company. | ||||
(b)
|
10(bb) | Stock Purchase Agreement, dated March 31, 1991, between the Company and Freeport Cruise Line, Ltd. | ||||
(b)
|
10(cc) | Pledge Agreement and Addendum thereto, dated April 18, 1991, between the Company and Harlan G. Allen, Jr. | ||||
(b)
|
10(dd) | Franchise and Development Agreements between LoneStar Hospitality Corporation and Miami Subs U.S.A., Inc., dated July 1, 1992. | ||||
(d)
|
10(ee) | Vessel Purchase Agreement dated July 8, 1992 between the Company and FLC, Re: Purchase of the EuropaSky. | ||||
(d)
|
10(ff) | Contract of Sale dated July 21, 1992, between the Company and Ferry Binghamton, Inc. Re: the Purchase of Miss New York. |
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(d)
|
10(gg) | Agreement to Lease and Option to Purchase dated July 7, 1992, between the Company and A&M Developers, Inc. Re: | ||||
| Bossier City site. | ||||||
(d)
|
10(hh) | Vessel Completion Contract by and between Eastern Shipyards, Inc., and FLC Holding Corporation Re: EuropaSky. | ||||
(e)
|
10(ii) | Stock Purchase Agreement dated December 21, 1992 between Europa Cruises Corporation and Jeffrey L. Beck, Trustee. | ||||
(e)
|
10(jj) | Copy of the Complaint filed by Charles S. Liberis vs. the Company and others. | ||||
| 10(kk) | Settlement agreement between the Company and Sea Lane Bahamas, Ltd. dated February 4, 1994. | |||||
(f)
|
10(ll) | Gaming Concession Agreement between the Company and Casinos Austria Maritime Corporation dated February 18, 1993. | ||||
(f)
|
10(mm) | Management Agreement between the Company and Casinos Austria Maritime Corporation dated June 19, 1993. | ||||
(f)
|
10(nn) | Diamondhead, Mississippi Loan Agreement, Continuing Guaranty, Promissory Note, and extension of Promissory Note between the Company and Casinos Austria Maritime Corporation mortgage to September 17, 1994. | ||||
(f)
|
10(oo) | Convertible Promissory Note dated November 11, 1993 issued by the Company to Serco International Ltd. | ||||
(f)
|
10(pp) | Lease Agreement between the Company and Serco International Ltd dated November 15, 1993. | ||||
(f)
|
10(qq) | Casino World, Inc. 1993 Stock Option Plan dated March 25, 1993. | ||||
(f)
|
10(rr) | Form of Stock Option Agreement dated as of August 31, 1994 issued to Deborah A. Vitale, Stephen M. Turner, Ernst G. Walter and Lester E. Bullock. | ||||
(f)
|
10(ss) | Easement dated December 22, 1994 granted to Mississippi Gaming Corporation adjacent to proposed Diamondhead gaming site. | ||||
(f)
|
10(tt) | Miami Beach Marina Lease dated February 10, 1995 as amended between Europa Cruises of Florida, 2 and Tallahassee Building Corp. | ||||
(f)
|
10(uu) | Settlement Agreement dated May 9, 1994 between Europa Cruises Corporation and Harlan G. Allen, Jr. | ||||
(f)
|
10(vv) | First Union National Bank Credit and Security Agreement and Promissory Note dated May 23, 1995 between Europa Cruises Corporation, Europa Cruises of Florida |
37
Table of Contents
| 1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation. | ||||||
(f)
|
10(ww) | First Union National Bank Credit and Security Agreement and Promissory Note dated August 25, 1995 between Europa Cruises Corporation, Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation. | ||||
(f)
|
10(xx) | Snug Harbor Group, Inc. Lease dated September 20, 1996 between Snug Harbor Group, Inc. and Europa Cruises of Florida 1, Inc. | ||||
(f)
|
10(yy) | Tidelands Lease and Land Lease dated February 1, 1996, between Hancock County Port and Harbor Commission and Mississippi Gaming Corporation. | ||||
| 10.2 | Warrant Agreement Between First Union National Bank of Florida and Europa Cruises Corporation dated October 30, 1996 and February 4, 1997. | |||||
| 10.2.1 | Second Modification of Credit and Security Agreement and other Loan Documents and Renewal Promissory Note between First Union National Bank of Florida and Europa Cruises Corporation dated October 31, 1996. | |||||
| 10.2.2 | Promissory Note between Europa Cruises of Florida 2, Inc. and dEBIS Financial Services, Inc. dated October 30, 1996. | |||||
| 10.2.3 | Form of Stock Option Agreements for options granted April 18, 1996 to Lester Bullock, Deborah Vitale, Piers Hedley, Debra Gladstone, Andy Rufo, Michael Reeves, and Jim Monninger. | |||||
| 10.2.4 | Lease Agreement between Tierra Verde Marina Development Corporation and Europa Stardancer Corporation dated October 1, 1996. | |||||
| 10.2.5 | Agreement between the Company and McDonald & Company Securities, Inc. dated April 2, 1998. | |||||
(h)
|
10.3 | Charter Agreement between Europa Stardancer Corporation and Seven Star Charters, Inc. dated December 28,1998. | ||||
(h)
|
10.3.1 | Agreement for Purchase and Sale of a Vessel between Europa Stardancer Corporation and Seven Star Charters, Inc. dated October 30, 1999. | ||||
(h)
|
10.3.2 | Agreement for Purchase and Sale of a Vessel and Business Assets between Europa Cruises of Florida 2, Inc. and Stardancer Casino, Inc. dated December 30, 1999. | ||||
(h)
|
10.3.3 | Agreement for the Purchase and Sale of a Vessel and Certain Assets between Europasky Corporation and Stardancer Casino, Inc, dated August 2, 2000. |
38
Table of Contents
(h)
|
10.3.4 | Agreement for the Purchase and Sale of a Vessel between Europa Cruises of Florida 1, Inc. and Stardancer Casino, Inc. dated August 2, 2000. | ||||
(i)
|
10.4 | Code of Ethics applicable to the Chief Executive Officer, Chief Financial Officer and Vice President of the Company. | ||||
(j)
|
10.5 | Promissory Note between Diamondhead Casino Corporation and Gregory Harrison dated March 20, 2008. | ||||
(j)
|
10.5.1 | Promissory Note between Diamondhead Casino Corporation and Benjamin Harrell dated March 20, 2008. | ||||
(f)
|
18 | Letter from BDO Seidman, LLP regarding 1995 change in accounting principle. |
Index to Exhibits
| (a) | Previously filed as an exhibit to the Company’s Registration Statement No. 33-26256-A and incorporated by reference. | |
| (b) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated by reference. | |
| (c) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference. | |
| (d) | Previously filed as an exhibit to the Company’s Form S-2 Registration Statement dated August 26, 1992 and incorporated by reference. | |
| (e) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1992 and incorporated by reference. | |
| (f) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 1993 and 1994 and incorporated by reference. | |
| (g) | Previously filed as an exhibit to the Company’s S-2 Registration Statement (No. 33-89014) filed January 31, 1995 and incorporated by reference. | |
| (h) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 2000 and 1999 and incorporated by reference. | |
| (i) | Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference. | |
| (j) | Attached as an Exhibit to this Annual Report |
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Table of Contents
Subsidiaries of the Registrant:
Mississippi Gaming Corporation (Delaware)
Casino World, Inc. (Delaware)
Europasky Corporation (Delaware)
Casino World, Inc. (Delaware)
Europasky Corporation (Delaware)
Exhibits 31.1 and 31.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief
Financial Officer of the Company pursuant to Rule 13A–14 of the Securities and Exchange Commission
Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
Exhibits 32.1 and 32.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief
Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 10.5
Promissory Note between Diamondhead Casino Corporation and Gregory Harrison dated March 20, 2008.
Exhibit 10.5.1
Promissory Note between Diamondhead Casino Corporation and Benjamin Harrell dated March 20, 2008.
40
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
| DIAMONDHEAD CASINO CORPORATION |
||||
| DATE: March 28, 2008 | By: | /s/ Deborah A. Vitale | ||
| Deborah A. Vitale, President | ||||
| By: | /s/ Robert Zimmerman | |||
| Robert Zimmerman, Chief Financial Officer | ||||
Pursuant to the requirements of the Securities and 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 and Title | Date | |
/s/ Deborah A. Vitale,
|
March 28, 2008 | |
/s/ Gregory A. Harrison
|
March 28, 2008 | |
/s/ Frank E. Williams, Jr.
|
March 28, 2008 | |
/s/ Benjamin J. Harrell
|
March 28, 2008 | |
/s/ Carl D. Stevens
|
March 28, 2008 | |
/s/ H. Steve Norton
|
March 28, 2008 |
41
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
TABLE
OF CONTENTS
| Page | ||
| F-2 | ||
| F-4 | ||
| F-5 | ||
| F-6 | ||
| F-7 | ||
| F-8 to F-19 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Diamondhead Casino Corporation and Subsidiaries
Diamondhead Casino Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Diamondhead Casino Corporation and
Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of loss,
changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2007. We also have audited the Company’s internal control over financial
reporting as of December 31, 2007, based on criteria established in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying “Report on Internal Control Over
Financial Reporting”. Our responsibility is to express an
opinion on these consolidated financial statements and
an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
F-2
Table of Contents
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Diamondhead Casino Corporation and Subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Diamondhead Casino
Corporation and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in “Internal Control —
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
/s/ Friedman LLP
New York, New York
March 26, 2008
New York, New York
March 26, 2008
F-3
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
| 2007 | 2006 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash |
$ | 739,831 | $ | 1,419,955 | ||||
Prepaid insurance and other current assets |
17,050 | 16,288 | ||||||
Total current assets |
756,881 | 1,436,243 | ||||||
Property and equipment, less accumulated depreciation
of $14,980 in 2007 and $14,015 in 2006 |
225 | 1,190 | ||||||
Land held for development (Note 3) |
5,409,913 | 5,409,913 | ||||||
Other assets |
26,514 | 26,514 | ||||||
| $ | 6,193,533 | $ | 6,873,860 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable and accrued expenses |
$ | 201,034 | $ | 199,909 | ||||
Total current liabilities |
201,034 | 199,909 | ||||||
Commitments and contingencies (Notes 3 and 7) |
— | — | ||||||
Stockholders’ equity (Note 4) |
||||||||
Preferred stock, $.01 par value; shares authorized 5,000,000,
outstanding 2,122,000 ($2,591,080 aggregate liquidation
preference)
in 2007 and 2006 |
21,220 | 21,220 | ||||||
Common stock, $.001 par value; shares authorized 50,000,000,
Issued: 36,477,066 in 2007, 36,217,053 in 2006, outstanding:
33,483,535 in 2007, 33,143,977 in 2006. |
36,477 | 36,217 | ||||||
Additional paid-in capital |
31,171,566 | 30,709,032 | ||||||
Unearned ESOP shares |
( 4,388,289 | ) | (4,506,890 | ) | ||||
Accumulated Deficit |
(20,840,816 | ) | (19,577,969 | ) | ||||
Treasury stock, at cost, 50,346 shares |
(7,659 | ) | (7,659 | ) | ||||
Total stockholders’ equity |
5,992,499 | 6,673,951 | ||||||
| $ | 6,193,533 | $ | 6,876,860 | |||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
| 2007 | 2006 | 2005 | ||||||||||
COSTS AND EXPENSES |
||||||||||||
Administrative and General |
$ | 925,240 | $ | 1,378,067 | $ | 648,518 | ||||||
Stock-based Compensation |
— | 1,238,348 | — | |||||||||
Depreciation and Amortization (Note 3) |
965 | 1,671 | 12,365 | |||||||||
Other |
255,887 | 275,735 | 125,958 | |||||||||
| 1,182,092 | 2,893,821 | 786,841 | ||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||
Dock Lease Income |
— | — | 130,841 | |||||||||
Interest Earned on Invested Cash |
25,941 | 21,742 | 2,670 | |||||||||
Reversal of Sales Tax Liability |
— | 1,125,752 | — | |||||||||
Interest Expense |
— | — | (41,347 | ) | ||||||||
Other |
664 | 96,495 | 52,729 | |||||||||
| 26,605 | 1,243,989 | 144,893 | ||||||||||
NET LOSS |
(1,155,487 | ) | (1,649,832 | ) | (641,948 | ) | ||||||
PREFERRED STOCK DIVIDENDS |
(107,360 | ) | (107,360 | ) | (107,360 | ) | ||||||
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS |
$ | (1,262,847 | ) | $ | (1,757,192 | ) | $ | (749,308 | ) | |||
Net loss per common share, basic and diluted |
$ | (.038 | ) | $ | (.055 | ) | $ | (.025 | ) | |||
Weighted average number of common shares outstanding |
33,376,421 | 32,125,425 | 29,892,404 | |||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
| Addit’l | ||||||||||||||||||||||||||||
| Preferred | Common | Paid-In | Unearned | Accumulated | Treasury | |||||||||||||||||||||||
| Stock | Stock | Capital | ESOP Shares | (Deficit) | Stock | Total | ||||||||||||||||||||||
Balance, January 1, 2005 |
$ | 21,220 | $ | 34,166 | $ | 26,474,833 | $ | (4,744,094 | ) | $ | (17,071,469 | ) | $ | (190,156 | ) | $ | 4,524,500 | |||||||||||
ESOP compensation |
(41,842 | ) | 118,602 | 76,760 | ||||||||||||||||||||||||
Issuance of common stock
for: |
||||||||||||||||||||||||||||
Exercise of stock options
and warrants |
350 | 174,650 | 175,000 | |||||||||||||||||||||||||
Sale of shares held in
treasury |
473,938 | 76,062 | 550,000 | |||||||||||||||||||||||||
Services |
||||||||||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||||||
Preferred stock dividends |
58 | 47,302 | (107,360 | ) | (60,000 | ) | ||||||||||||||||||||||
Net loss for the year |
— | — | — | — | (641,948 | ) | — | (641,948 | ) | |||||||||||||||||||
Balance, December 31, 2005 |
21,220 | 34,574 | 27,128,881 | (4,625,492 | ) | (17,820,777 | ) | (114,094 | ) | 4,624,312 | ||||||||||||||||||
ESOP compensation |
105,316 | 118,602 | 223,918 | |||||||||||||||||||||||||
Issuance of common stock
for: |
||||||||||||||||||||||||||||
Exercise of stock options
and warrants |
1,614 | 1,042,141 | 1,043,755 | |||||||||||||||||||||||||
Sale of shares held in
treasury |
1,111,415 | 106,435 | 1,217,850 | |||||||||||||||||||||||||
Services |
13 | 35,587 | 35,600 | |||||||||||||||||||||||||
Stock-based compensation |
1,238,348 | 1,238,348 | ||||||||||||||||||||||||||
Preferred stock dividends |
16 | 47,344 | (107,360 | ) | (60,000 | ) | ||||||||||||||||||||||
Net loss for the year |
— | — | — | — | (1,649,832 | ) | — | (1,649,832 | ) | |||||||||||||||||||
Balance, December 31, 2006 |
21,220 | 36,217 | 30,709,032 | (4,506,890 | ) | (19,577,969 | ) | (7,659 | ) | 6,673,951 | ||||||||||||||||||
ESOP compensation |
93,784 | 118,601 | 212,385 | |||||||||||||||||||||||||
Issuance of common stock
for: |
||||||||||||||||||||||||||||
Exercise of stock options
and warrants |
241 | 321,409 | 321,650 | |||||||||||||||||||||||||
Sale of shares held in
treasury |
||||||||||||||||||||||||||||
Services |
||||||||||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||||||
Preferred stock dividends |
19 | 47,341 | (107,360 | ) | (60,000 | ) | ||||||||||||||||||||||
Net loss for the year |
— | — | — | — | (1,155,487 | ) | — | (1,155,487 | ) | |||||||||||||||||||
Balance, December 31, 2007 |
$ | 21,220 | $ | 36,477 | $ | 31,171,566 | $ | (4,388,289 | ) | $ | (20,840,816 | ) | $ | (7,659 | ) | $ | 5,992,499 | |||||||||||
See accompanying notes to consolidated financial statements
F-6
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)
(NOTE 10)
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
| 2007 | 2006 | 2005 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net loss |
$ | (1,155,487 | ) | $ | (1,649,832 | ) | $ | (641,948 | ) | |||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||
Depreciation and amortization |
965 | 1,671 | 12,365 | |||||||||
ESOP provision |
212,385 | 223,918 | 76,760 | |||||||||
Issuance of common shares for services |
— | 35,600 | — | |||||||||
Issuance of stock-based compensation |
— | 1,238,348 | — | |||||||||
(Increase) decrease in: |
||||||||||||
Accounts receivable |
— | 16,956 | (10,645 | ) | ||||||||
Prepaid insurance and other |
(762 | ) | 3,473 | 13,884 | ||||||||
(Decrease) increase in: |
||||||||||||
Accounts payable and accrued expenses |
1,125 | (19,708 | ) | (41,020 | ) | |||||||
Deferred Dock Lease Income |
— | — | (28,000 | ) | ||||||||
Sales tax settlement liability |
— | (1,125,752 | ) | 36,515 | ||||||||
Net cash used in operating activities |
(941,774 | ) | (1,275,326 | ) | (582,089 | ) | ||||||
INVESTING ACTIVITIES |
||||||||||||
Land development |
— | (7,333 | ) | (31,625 | ) | |||||||
Net cash used in investing activities |
— | (7,333 | ) | (31,625 | ) | |||||||
FINANCING ACTIVITIES |
||||||||||||
Proceeds from sale of common shares held in treasury |
— | 1,217,850 | 550,000 | |||||||||
Proceeds from exercise of options and warrants to purchase
common stock |
321,650 | 1,043,755 | 175,000 | |||||||||
Payment of preferred stock dividends |
(60,000 | ) | (60,000 | ) | (60,000 | ) | ||||||
Net cash provided by financing activities |
261,650 | 2,201,605 | 665,000 | |||||||||
Net increase (decrease) in cash |
(680,124 | ) | 918,946 | 51,286 | ||||||||
Cash beginning of year |
1,419,955 | 501,009 | 449,723 | |||||||||
Cash end of year |
$ | 739,831 | $ | 1,419,955 | $ | 501,009 | ||||||
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Diamondhead Casino Corporation (the “Company”) owns a total of approximately 404.5 acres of
unimproved land in Diamondhead, Mississippi on which it plans, in conjunction with one or more
partners, to construct a casino resort and hotel and associated amenities. The Company officially
changed its name from Europa Cruises Corporation to Diamondhead Casino Corporation in November of
2002. The Company was originally formed to principally own, operate and promote gaming vessels
offering day and evening cruises in international waters.
2. Liquidity
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since
that time, the Company has concentrated its efforts on the development of its Diamondhead,
Mississippi property. That development is dependent upon the Company obtaining the necessary
capital, whether through equity and/or debt financing, to master plan, obtain permits for, and
construct a casino resort.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. The
Company incurred a net loss applicable to common shareholders of $1,262,847, $1,757,192 and
$749,308 for the years ending December 31, 2007, 2006 and 2005 respectively. During 2006 and 2005,
the Company was able to sustain its cash position and continue to satisfy its ongoing expenses
through the sale of common stock formerly held in treasury and receipt of cash from the exercise of
options and warrants to purchase common stock. In 2007, the Company received a total of $321,650
from the exercise of options and warrants to purchase 241,000 shares of common stock.
Management of the Company analyzed the historical and planned future spending patterns of the
Company and as of December 31, 2007, the Company may not have had sufficient cash on hand to meet
budgeted on-going expenses to be incurred in the future twelve month period. However, in March
2008, the Company received a total of $261,250. The Company received $56,250 from a Director of
the Company who exercised options to purchase common stock. In addition, to meet short term
liquidity needs, the Vice President of the Company, who is also a Director of the Company, loaned
the Company $150,000 and another Director of the Company loaned the Company $55,000. The loans were
made pursuant to two Promissory Notes, the terms of which are more
fully discussed in Note 10 to
these financial statements. As of the date of this report, management believes that the Company has
sufficient cash on hand to meet expected on-going expenses to be incurred for the year ending
December 31, 2008.
The Company is currently in discussions with various parties interested in funding and/or
developing all or part of the Diamondhead property. The Company is currently exploring additional
opportunities for financing to meet its liquidity needs.
At December 31, 2007, the Company does not have the financial resources to develop its proposed
casino resort. There can be no assurance that the Company can successfully develop its Diamondhead,
Mississippi property, and in the event that the Company is unsuccessful in raising sufficient cash
or finding alternative means to meet its future obligations beyond December 31, 2008, it would have
a significant adverse impact on the Company’s ability to ultimately develop the property.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Diamondhead Casino Corporation and
its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
F-8
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the 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.
Cash
The Company’s cash balances are maintained primarily in two banks and are insured up to $100,000 by
the Federal Deposit Insurance Corporation for each bank.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as
licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following:
Land under development |
$ | 4,868,139 | ||
Licenses |
77,000 | |||
Engineering and costs associated with permitting |
464,774 | |||
| $ | 5,409,913 | |||
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable, and accrued expenses approximate fair value due to
short term nature of the instruments.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured
by comparing the carrying amount of the assets to the estimated undiscounted future cash flows
generated by the assets. If such assets are considered impaired, the impairment to be recognized is
measured by the amount the carrying value exceeds the fair value of such assets. No impairment
existed as of December 31, 2007.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using
the straight-line method.
F-9
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with
one or more years of service, financed by employer loans. Compensation expense is measured at the
current market price of shares committed for release and such shares constitute outstanding shares
for earnings per share computations. As the loans are repaid, shares are released from the ESOP and
allocated to qualified employees based upon the proportion of payments made during the year to the
remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as
follows:
(1) stock dividends on shares allocated to participant accounts shall be credited to the
participant account when paid (2) cash dividends on shares allocated to participant accounts shall,
at the discretion of the Administrator, be credited to the participants’ Other Investment Account
or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value
to the cash dividend would be allocated to participant accounts. The Company has not paid any
dividends on its common stock.
Taxes on Income
Under the asset and liability method of SFAS No. 109 “Accounting for Income Taxes,” deferred tax
liabilities and assets are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts and the tax bases of assets and liabilities. A
valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
Net Loss per Common Share
Basic earnings/(loss) per share is computed by dividing net income/(loss) available to common
stockholders by the weighted average number of common shares outstanding. Diluted earnings/ (loss)
per share is calculated by using the weighted average number of common shares outstanding, plus
other potentially dilutive securities. Common shares outstanding consist of issued shares,
including allocated and committed shares held by the ESOP trust, less shares held in treasury.
Dilutive securities included stock purchase options and convertible preferred stock which totaled
3,336,000 for the year ended December 31, 2007, 3,577,000 for the year ended December 31, 2006 and
4,540,500 for the year ended December 31, 2005. The foregoing is excluded from diluted net loss per
share as their effect would be antidilutive.
Segment Information
Operating segments are components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Company currently operates solely in one segment, development of land, which relates to planned
future operations.
Stock Based Compensation
On January 1, 2006, the Company adopted SFAS 123(R) “Share-Based Payments,” which requires the
measurement and recognition of compensation expense for all share-based payment awards either
modified or granted to employees and directors based upon estimated fair values. As a result of
adopting SFAS 123(R), net loss applicable to common stockholders for the year ended December 31,
2006 was $1,238,348 higher than if the Company had continued to account for stock-based
compensation under APB No. 25. The impact on basic and diluted earnings per share for the year
ended December 31, 2006 was a reduction of $.039 per share. There was no stock-based compensation
expense recognized for the years ended December 31, 2007 and 2005.
F-10
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Stock Based Compensation (continued)
In determining the fair value of each option, the Black-Scholes option-pricing model, consistent
with the provisions of SFAS 123(R) and SAB No.107, was used with the following weighted-average
assumptions: dividend yield of zero, expected volatility of 86.45%, an average expected option life
of 5 years, and an average risk-free interest rate of 4.86%. All awards were fully vested at
December 31, 2006. The weighted average estimated value of employee stock options granted during
the year ended December 31, 2006 was $1.91 per share.
Prior to January 1, 2006, the Company accounted for stock compensation plans under the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for
Stock Issued to Employees,” and related Interpretations, as permitted by Financial Accounting
Standards Board (FASB) Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” No
stock-based employee compensation cost was recognized for stock option awards for periods prior to
January 1, 2006, as all options granted under those plans had an exercise price equal to or less
than the market value of the underlying common stock on the date of grant.
Consistent with the disclosure provisions of SFAS 148 “Accounting for Stock-Based
Compensation-Transition and Disclosure–an amendment to SFAS No. 123,” the Company’s net income and
basic and diluted net income per share for the year ended December 31, 2005, would have been
adjusted to the pro forma amounts indicated below:
Net loss applicable to common shareholders |
$ | (749,308 | ) | |
Deduct: Total stock-based compensation expense
determined under fair value based method |
951,213 | |||
Pro forma net loss applicable to common
Shareholders |
$ | (1,700,521 | ) | |
Per share, as reported |
$ | (.025 | ) | |
Per share, pro forma |
$ | (.057 | ) | |
In determining the fair value of each option granted in 2005, the Black-Scholes option-pricing
model, as prescribed by SFAS No. 123, was used with the following weighted-average assumptions:
dividend yield of zero, expected volatility of 87.49%, an average expected option life of 5 years,
and an average risk-free interest rate of 3.65%.
Option valuation models require the input of highly subjective assumptions, including the expected
stock price volatility. The Company uses projected volatility rates, which are based upon
historical volatility rates, trended into future years. Because the Company’s employee stock
options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in
management’s opinion, the existing models do not necessarily provide a reliable single measure of
the fair value of the Company’s options.
New Accounting Pronouncements
In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin
No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (SAB 108). The intent of SAB 108 is to reduce diversity in
practice for the method companies use to quantify financial statement misstatements, including the
effect of prior year uncorrected errors. SAB 108 establishes an approach that requires
quantification of financial statement errors using both an income statement and a cumulative
balance sheet approach. SAB
F-11
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
108 is effective for fiscal years ending after November 15, 2006. The adoption of this statement
did not have any effect on the Company’s consolidated financial position, results of operations, or
cash flows.
In October 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position
(“FSP”) Financial Accounting Standard (“FAS”) 123(R)-5, Amendment of FSP FAS 123(R)-1, (“FSP FAS
123(R)-5”) to address whether a change to an equity instrument in connection with an equity
restructuring should be considered a modification for the purpose of applying FSP No. FAS 123(R)-1,
“Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange
for Employee Services” under FAS Statement No.123(R) (“FSP FAS 123(R)-1”). FSP FAS 123(R)-1 states
that financial instruments issued to employees in exchange for past or future services are subject
to the provisions of SFAS 123(R) unless the terms of the award are modified when the holder is no
longer an employee. In FSP FAS 123(R)-5, the FASB staff concluded that changes to the terms of an
award that are made solely due to an equity restructuring are not considered modifications as
described in FSP FAS 123(R)-1 unless the fair value of the award increases, anti-dilution
provisions are added, or holders of the same class of equity instruments are treated unequally. FSP
FAS 123(R)-5 is effective for the first reporting period beginning after October 10, 2006. The
adoption of FSP FAS 123(R)-5 did not have a material impact on the Company’s consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and
Financial liabilities”. SFAS No. 159 provides companies with an option to report selected financial
assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS no. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide
additional information that will help investors and other users of financial statements to more
easily understand the effect of the Company’s choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for which the Company
has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is
permitted as of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the provisions of
Statement No. 157. The Company did not adopt early implementation and is currently assessing the
impact of SFAS No. 159. However, the Company does not believe the adoption of this standard will
have a material effect on our consolidated financial statements.
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) — an interpretation of FASB Statement
No. 109, “Accounting for Income Taxes.”
The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2007, the Company does not have a liability for unrecognized tax benefits.
The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2007, the Company does not have a liability for unrecognized tax benefits.
F-12
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
The Company files federal and various state income tax returns. The Company is subject to U.S.
federal or state income tax examinations by tax authorities for years after 2003. During the
periods open to examination, the Company has net operating loss (“NOL”) carry forwards for U.S.
federal and state tax purposes that have attributes from closed periods. Since these NOL’s carry
forwards may be utilized in future periods, they remain subject to examination until they expire.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax
expense. As of December 31, 2007, the Company has no accrued interest or penalties related to
uncertain tax positions.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement 141(R)(“SFAS
141(R)”)- Business Combinations,-revision to SFAS 141. SFAS 141(R) improves the reporting by
creating greater consistency in the accounting and reporting of business combinations. The new
standard requires the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair
value as the measurement objective for all assets acquired and liabilities assumed; and requires
the acquirer to disclose to investors and other users all the information they need to evaluate and
understand the nature and financial effect of the business combination. The statement does not
apply to the formation of a joint venture. The Statement is effective for fiscal years beginning
after December 15, 2008 and earlier application is prohibited. The Company expects no immediate
impact from the implementation of the Statement.
In December 2007, the FASB also issued SFAS 160, Non-Controlling Interests in Consolidated
Financial Statements, an amendment to Accounting Research Bulletin No. 51 (“ARB 51”). SFAS 160
improves the relevance, comparability and transparency of financial information provided to
investors by requiring all entities to report non-controlling (minority) interests in subsidiaries
in the same way as equity in the consolidated financial statements. SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an entity and a
non-controlling interest by requiring that those transactions also be treated as equity
transactions. The Statement is effective for fiscal years beginning after December 15, 2008 and
earlier application is prohibited. The Company expects no immediate impact from the implementation
of the Statement.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No.110
(SAB 110). SAB 110 expresses views regarding the use of a “simplified” method in developing an
estimate of the expected term of “plain vanilla” share options in accordance with FASB 123-R,
Share-Based Payment. The Staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. The Company has not used this method in the past and
does not believe SAB 110 will have a significant affect on its financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB 133, Accounting for Derivative Instruments and Hedging Activities.
This statement requires enhanced disclosures about an entity’s derivative and hedging activities
and thereby improves the transparency of financial reporting. The Statement is effective for
financial statements for fiscal years and interim periods beginning after November 15, 2008 and is
not expected to have an impact on the Company’s financial statements.
F-13
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity
At December 31, 2007 and 2006, the Company had a stock option plan and non-plan options, which are
described below.
Non-Plan Stock Options
In February 2007, a key employee of the Company exercised an option to purchase 106,000 shares of
common stock at an exercise price of $.90 per share and an officer of the Company exercised an
option to purchase 35,000 shares of common stock at an exercise price of $.75 per share.
In February 2006, the President and Vice President of the Company each exercised options to
purchase 100,000 shares of common stock at an exercise price of $.50 per share. In March 2006, a
former Director of the Company exercised options to purchase 150,000 shares of common stock at an
average exercise price of $.775 per share. Also in March 2006, another former Director of the
Company exercised an option to purchase 150,000 shares of common stock at an exercise price of $.50
per share.
In April 2006, the President of the Company exercised an option to purchase 800,000 shares of
common stock at an exercise price of $.50 per share and the Vice President of the Company exercised
an option to purchase 75,000 shares of common stock at an exercise price of $.75 per share. In June
2006, a key employee of the Company exercised an option to purchase 63,500 shares of common stock
at $.63 per share. In July 2006, a Director of the Company exercised an option to purchase 75,000
shares of common stock at $.75 per share.
In April, 2006, the Company awarded options to purchase 100,000 shares of common stock at an
exercise price of $2.70 per share to each of the six Directors of the Company. On the same date,
the Board of Directors awarded an option to purchase 50,000 shares of common stock at an exercise
price of $2.70 per share to a key employee of the Company and awarded an option to purchase 25,000
shares of common stock at an exercise price of $2.70 per share to an Officer of the Company. For
the year ended December 31, 2006, the Company recorded stock-based compensation expense of
$1,238,348.
In February 2005, the Company awarded options to purchase 75,000 shares of common stock at an
exercise price of $.80 per share to each of the six Directors of the Company. On the same date, the
Board of Directors awarded an option to purchase 75,000 shares of common stock at an exercise price
of $.80 per share to a key employee of the Company, awarded an option to purchase 50,000 shares of
common stock at an exercise price of $.80 per share to an Officer of the Company and awarded an
option to purchase 25,000 shares of common stock at an exercise price of $.80 per share to a
Director of a subsidiary of the Company.
In October 2005, a key employee of the Company exercised an option to purchase 50,000 shares of
common stock at $.50 per share, and an Officer of the Company exercised an option to purchase
25,000 shares of common stock at $.50 per share. Also, in October 2005, a former Director
of the Company exercised an option to purchase 250,000 shares of common stock at $.50 per share,
and a Director of a subsidiary of the Company exercised an option to purchase 25,000 shares of
common stock at $.50 per share. In October 2005, an option to purchase 450,000 shares of common
stock issued to the President of the Company and an option to purchase 250,000 shares of common
stock issued to the Vice President of the Company, expired.
In October 2005, the Board of Directors awarded an option to purchase 450,000 shares of common
stock at an exercise price of $1.25 per share to the President of the Company, and an option to
purchase 250,000 shares of common stock at an exercise price of $1.25 per share to the Vice
President of the Company.
F-14
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity (continued)
Stock Option Plan
On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and
management personnel under which options could be granted to purchase up to 1,000,000 shares of the
Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the
Plan. The option price may not be less than 100% of the market value of the shares on the date of
the grant. The options expire within ten years from the date of grant. At December 31, 2007, no
options from this plan were issued or exercised.
Accounting for Stock Options
A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2007,
2006 and 2005, and changes during the years ended on December 31, 2007, 2006 and 2005 is presented
below:
| December 31, 2007 | December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding at beginning of year |
3,181,000 | $ | 1.17 | 4,044,500 | $ | .69 | 3,794,500 | $ | .52 | |||||||||||||||
Granted |
— | — | 650,000 | 2.70 | 1,300,000 | 1.04 | ||||||||||||||||||
Exercised |
(141,000 | ) | (.86 | ) | (1,513,500 | ) | (.56 | ) | (350,000 | ) | (.50 | ) | ||||||||||||
Expired |
— | — | — | — | (700,000 | ) | .50 | |||||||||||||||||
Outstanding at end of year |
3,040,000 | $ | 1.18 | 3,181,000 | $ | 1.17 | 4,044,500 | $ | .69 | |||||||||||||||
Options exercisable at year-end |
3,040,000 | — | 3,181,000 | — | 4,044,500 | — | ||||||||||||||||||
Weighted-average fair value of
options granted during the year |
$ | — | $ | 2.70 | $ | 1.04 | ||||||||||||||||||
The following tables, summarizes information about stock options outstanding and exercisable at
December 31, 2007 and 2006:
| December 31, 2007 | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| Number | Average | Weighted | Number | Weighted- | ||||||||||||||||
| Range of | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
| Exercise | At | Contractual | Exercise | At | Exercise | |||||||||||||||
| Prices | 12/31/07 | Life | Price | 12/31/07 | Price | |||||||||||||||
$.30 |
750,000 | .19 | $ | .30 | 750,000 | $ | .30 | |||||||||||||
$.72
— $.80 |
940,000 | 1.51 | .78 | 940,000 | .78 | |||||||||||||||
$1.25 |
700,000 | 2.82 | 1.25 | 700,000 | 1.25 | |||||||||||||||
$2.70 |
650,000 | 3.28 | 2.70 | 650,000 | 2.70 | |||||||||||||||
| 3,040,000 | 3,040,000 | |||||||||||||||||||
F-15
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity (continued)
Accounting for Stock Options (continued)
| December 31, 2006 | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| Number | Average | Weighted | Number | Weighted- | ||||||||||||||||
| Range of | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
| Exercise | At | Contractual | Exercise | At | Exercise | |||||||||||||||
| Prices | 12/31/06 | Life | Price | 12/31/06 | Price | |||||||||||||||
$.30 |
750,000 | 1.19 | $ | .30 | 750,000 | $ | .30 | |||||||||||||
$.72
— $.90 |
1,081,000 | 2.34 | .79 | 1,081,000 | .79 | |||||||||||||||
$1.25 |
700,000 | 3.82 | 1.25 | 700,000 | 1.25 | |||||||||||||||
$2.70 |
650,000 | 4.28 | 2.70 | 650,000 | 2.70 | |||||||||||||||
| 3,181,000 | 3,181,000 | |||||||||||||||||||
Warrants
In connection with a refinancing in 1996, the Company granted Wachovia Bank (formerly First Union
National Bank of Florida) ten-year warrants to purchase an aggregate of 200,000 shares of the
Company’s common stock at $2.00 per share. In February 2007, a warrant to purchase 100,000 shares
of common stock was exercised. Previously, a warrant to purchase 100,000 shares of common stock was
exercised in 2006.
Preferred Stock
On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting,
Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of
$1,000,080. The Company pays quarterly cumulative dividends of three percent per annum on these
shares.
These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share
for each quarter that such shares are outstanding. The shares also have a $1.08 per share
preference in involuntary liquidation of the Company. At December 31, 2007 and 2006, outstanding
Series S preferred stock totaled 926,000 shares. No cumulative dividends were in arrears at
December 31, 2007 and 2006.
On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting,
Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned
subsidiary of Austroinvest International, Inc.), in exchange for proceeds of $999,000. The Company
pays quarterly, non-cumulative dividends of three percent per annum on these shares. Upon
involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At
December 31, 2007, outstanding Series S-NR preferred stock totaled 900,000 shares.
F-16
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders’ Equity (continued)
Preferred Stock (continued)
In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit,
each unit consisting of one share of the Company’s $.001 par value common stock and two shares of
the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par
value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of
the Company’s common voting stock at any time after February 15, 1995. No shares were converted
during 2007 or 2006. The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR
preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of
the Company
Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of
$2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK
preferred stock. At December 31, 2007, outstanding Series S-PIK preferred stock totaled 296,000
shares.
During 2007, the Company paid $47,360 of the total preferred dividends of $107,360 with 19,013
shares of its common stock. During 2006, the Company paid $47,360 of the total preferred dividends
of $107,360 with 16,746 shares of its common stock. During 2005, the Company paid $47,360 of the
total preferred dividends of $107,360 with 57,560 shares of its common stock. No dividends were in
arrears at December 31, 2007 or 2006.
5. Employee Stock Ownership
The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan
and an employee stock ownership plan. All employees having one year of service are eligible to
participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The
shares of common stock are pledged to the Company as security for the loans. The promissory notes
are payable from the proceeds of annual contributions made by the Company to the ESOP. In January
2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current
employment structure, by extending the note repayment terms through 2044.
Shares are allocated to the participants’ accounts in relation to repayments of the loans from the
Company and 79,545 shares were released in each year of the three year period ending December 31,
2007. At December 31, 2007, 2,943,185 shares with a fair market value of $7,505,122 are unearned.
At December 31, 2006, 3,022,730 shares with a fair market value of $8,554,326 are unearned.
The Company recognized net compensation expense equal to the shares allocated multiplied by the
current market value of each share less any dividends received by the ESOP on unallocated shares.
Compensation expense related to the ESOP amounted to $212,385 in 2007, $223,918 in 2006 and $76,760
in 2005. The unearned ESOP shares in stockholders’ equity represented deferred compensation expense
to be recognized by the Company in future years as additional shares are allocated to participants.
6. Income Taxes
At December 31, 2007, the Company had net operating loss carryforwards for income taxes of
approximately $18.3 million, which expire during various periods through 2027. Realization of
deferred income taxes as of December 31, 2007 is not considered likely. Therefore, a valuation
allowance of approximately $6 million at December 31, 2007, $6 million at December 31, 2006, and
$5.2 million at December 31, 2005, was established for the entire amount of deferred tax assets
relative to the net operating losses.
F-17
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Commitments and Contingencies
Leases
The Company leases office space in Largo, Florida pursuant to a lease with Wyndham Office
Properties, Inc. which expires July 31, 2008. The Company also leases storage facilities in Madeira
Beach, Florida and offices in Diamondhead, Mississippi on a month-to month basis. Rental expenses
for all facilities totaled $26,735 in 2007, $24,680 in 2006 and $17,012 in 2005.
The Company is liable for future minimum lease payments of $5,019 through July 2008.
Management Agreement
On June 19, 1994, the Company entered into a Management Agreement with Casinos Austria Maritime
Corporation (“CAMC”) to operate, on an exclusive basis, all of its proposed dockside gaming casinos
in the State of Mississippi. If the Company enters into a joint venture arrangement pursuant to
which the joint venture partner acquires a controlling interest, the agreement with CAMC will
terminate. The Management Agreement is for a term of five years beginning when the casino resort
becomes operational and provides for the payment of an operational term management fee based on a
percentage of gross gaming revenues, as defined therein.
Sales Tax Settlement
On November 28, 1994, the Florida Department of Revenue issued a Notice of Intent to make Sales and
Use Tax Audit Changes to five subsidiaries of the Company for the period February 1, 1989 through
June 30, 1994. The total proposed assessments, including estimated penalties and interest, through
June 15, 1997, totaled approximately $7.4 million. In May 1997, the five subsidiaries settled this
liability by entering into fifteen separate Closing Agreements with the Florida Department of
Revenue. The settlements, which included all audits for the covered period, totaled approximately
$1.76 million. The settlements included a payment schedule of approximately $21,000 per month
which, in March 1998, was reduced, by agreement of the parties, to $10,476 per month. The
settlements provided for no interest for the first 3 years and interest accruing at a rate of 6%
per year for the last 4 years. A balloon payment in the amount of $964,093 was due under the
agreements after the final installment was to be made on May 5, 2005. The total amount, including
accrued interest, due the Florida Department of Revenue at that time amounted to $1,125,752.
The five subsidiaries which entered into the fifteen Closing Agreements are no longer operating,
have no assets, and are unable to make further payments pursuant to their respective Closing
Agreements. The parent corporation did not guarantee the payments under these settlement
agreements. On May 18, 2006, the Company received correspondence from the Florida Department of
Revenue stating that the Department had filed tax warrants with respect to the amounts owed by the
subsidiaries in question and had placed these warrants as uncollectible and no further collection
efforts would be pursued by the Florida Department of Revenue.
Therefore, as of June 30, 2006, the Company has ceased to recognize the liability due the
Department of Revenue in the amount of $1,125,752 and has recorded income in the same amount for
the year ended December 31, 2006.
Other Arrangements
The Company has agreements with various persons and entities that would be entitled to substantial
commissions if the Company enters into an agreement relating to the development of its Diamondhead
property as a result of their efforts.
F-18
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 8. | Supplemental Cash Flow |
Supplemental schedules are as follows:
| 2007 | 2006 | 2005 | ||||||||||
Interest paid: |
||||||||||||
Cash paid for interest |
$ | — | $ | — | $ | 1,892 | ||||||
Non-cash transactions: |
||||||||||||
Preferred stock dividends paid with
shares of common stock |
$ | 47,360 | $ | 47,360 | $ | 47,360 | ||||||
9. Quarterly Financial Data (Unaudited)
| 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total | ||||||||||||||||
2007 |
||||||||||||||||||||
Costs and Expenses |
$ | 321,634 | $ | 318,405 | $ | 279,840 | $ | 262,213 | $ | 1,182,092 | ||||||||||
Other Income and
(Expense), Net |
8,123 | 7,391 | 6,033 | 5,058 | 26,605 | |||||||||||||||
Net (Loss) |
(313,511 | ) | (311,014 | ) | (273,807 | ) | (257,155 | ) | (1,155,487 | ) | ||||||||||
Loss per Share |
(.010 | ) | (.010 | ) | (.009 | ) | (.009 | ) | (.038 | ) | ||||||||||
2006 |
||||||||||||||||||||
Costs and Expenses |
$ | 727,705 | $ | 1,580,499 | $ | 295,741 | $ | 289,876 | $ | 2,893,821 | ||||||||||
Other Income and
(Expense), Net |
4,127 | 1,131,358 | 100,875 | 7,629 | 1,243,989 | |||||||||||||||
Net (Loss) |
(723,578 | ) | (449,141 | ) | (194,866 | ) | (282,247 | ) | (1,649,832 | ) | ||||||||||
Loss per Share |
(.024 | ) | (.015 | ) | (.007 | ) | (.009 | ) | (.055 | ) | ||||||||||
2005 |
||||||||||||||||||||
Costs and Expenses |
$ | 186,484 | $ | 182,613 | $ | 180,661 | $ | 237,083 | $ | 786,841 | ||||||||||
Other Income and
(Expense), Net |
70,752 | 25,446 | 34,787 | 13,908 | 144,893 | |||||||||||||||
Net (Loss) |
(115,732 | ) | (157,167 | ) | (145,874 | ) | (223,175 | ) | (641,948 | ) | ||||||||||
Loss per Share |
(.005 | ) | (.006 | ) | (.006 | ) | (.008 | ) | (.025 | ) | ||||||||||
10. Subsequent Events
In March 2008, a Director of the Company exercised an option to purchase 75,000 shares of common
stock at an exercise price of $.75 per share by tendering $56,250 to the Company.
In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity
needs pursuant to the terms of two promissory notes. The first note provides for the repayment of
$150,000 to the Vice-President of the Company, who is also a Director of the Company. The second
note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and
payable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans
are unsecured.
F-19