DIAMONDHEAD CASINO CORP - Annual Report: 2008 (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, 2008
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 (Do not check if a smaller reporting company) |
Smaller reporting company o |
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,
2008 was $55,067,069.
As of March 16, 2009, there were 33,830,701 shares of the registrant’s common stock issued and
outstanding.
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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, 2008, the Company had four employees.
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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 on October 17, 2005 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.
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 coast be built in, on, or above the water and be located a minimum of fifty
percent below mean high tide.
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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 Secretary of State, which was previously required to lease State water-bottoms in,
on, or over which the
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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, as originally adopted, 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
9, 2008, the Company forwarded a request to the Hancock County Planning Commission for an extension
of the Special Use designation. On November 6, 2008, the Hancock County Planning Commission passed
a resolution extending the designation through December 31, 2009. On December 1, 2008, 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 was between $400,000 and $750,000, based on an escalating scale
which is measured by 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.
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:
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| 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 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.
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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 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
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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.
The Commission requires, as a condition of licensure, that gaming establishments meet strict
hurricane, fire-safety, and construction-related standards and regulations.
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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 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.
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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. H. Steven Norton, a Director of the Company, is a
current holder of a key person license in both Colorado and Indiana. However, neither license
constitutes a license to conduct gaming activities in Mississippi.
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
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.
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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
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partner acquires a controlling interest, CAMC may terminate the agreement. Unless earlier
terminated 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 $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
$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
operations are also subject to all of the risks inherent in the
establishment of a new business enterprise, including the absence of an operating history.
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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. Current
economic conditions in the casino industry, as well as tight credit markets in general, could
adversely affect the Company’s ability to obtain reasonable financing for development of the
Diamondhead property. As of the date of this report, in lieu of any additional source of capital,
management believes that the Company will essentially exhaust all cash resources currently
available to it by December 31, 2009. In addition, our auditors have expressed substantial doubt
about the Company’s ability to continue as a going concern in their audit report of our attached
consolidated financial statements for the year ended December 31, 2008.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
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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.
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, 2008. | |
Largo, Florida 33770 |
||
Mississippi |
||
5403 Indian Hill Blvd.
|
Month-to-month lease. | |
Diamondhead, Mississippi 39525 |
STORAGE FACILITIES
The Company leased storage facilities at the following location in 2008:
Florida
|
Lease Terms | |
4319 Duhme Rd.
|
Month-to-month leases on various storage units. | |
Madeira Beach, Florida 33708. |
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
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| 2008 | 2007 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter |
$ | 2.62 | $ | 1.56 | $ | 3.15 | $ | 2.22 | ||||||||
Second Quarter |
2.15 | 1.30 | 2.96 | 2.40 | ||||||||||||
Third Quarter |
1.95 | 1.41 | 2.95 | 2.60 | ||||||||||||
Fourth Quarter |
1.70 | .55 | 2.89 | 2.20 | ||||||||||||
On March 1, 2009, there were 870 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.
During the year ended December 31, 2006 the registrant sold unregistered securities pursuant to a
private placement to raise funds for general working capital as follows:
In January 2006, the Company sold 421,654 shares of common stock, formerly held in treasury, in a
private placement to unrelated accredited investors for $522,850. In October 2006, the Company sold
278,000 shares of common stock, formerly held in treasury, in a private placement to unrelated
accredited investors for $278,000.
In each case, common shares issued bore a restrictive legend.
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:
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Dock Lease Income |
$ | — | $ | — | $ | — | $ | 130,841 | $ | 157,009 | ||||||||||
Operating Expenses |
1,049,561 | 1,182,092 | 1,655,473 | 786,841 | 798,513 | |||||||||||||||
Stock-Based Compensation |
2,072,927 | — | 1,238,348 | — | — | |||||||||||||||
Interest Expense |
6,460 | — | — | — | 87,032 | |||||||||||||||
Net (Loss) |
(3,124,574 | ) | (1,155,487 | ) | (1,649,832 | ) | (641,948 | ) | (640,239 | ) | ||||||||||
Loss per Share — Basic
and Fully Diluted |
$ | (.096 | ) | $ | (.038 | ) | $ | (.055 | ) | $ | (.025 | ) | $ | (.025 | ) | |||||
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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 $3,227,614 for the year ended
December 31, 2008, $1,262,847 for the year ended December 31, 2007, and $1,757,192 for the year
ended December 31, 2006. Costs and expenses amounted to $3,122,488 for the year ended December 31,
2008, $1,182,092 for the year ended December 31, 2007 and $2,893,821 for the year ended December
31, 2006. Costs and expenses for the year ending December 31, 2008 included a charge in the amount
of $2,072,927 for stock based compensation associated with the modification of option grants
originally issued in 2003. Costs and expenses for the year ended 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.
During 2007 and 2006, 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 2008, the Company entered
into two promissory notes with two Directors of the Company yielding proceeds of $205,000; received
$75,000 from the exercise of options to purchase 100,000 shares of common stock; and obtained a
Line of Credit from an unrelated third party in the total amount of $1,000,000, of which the
Company has drawn $300,000 as of December 31, 2008.
On March
9, 2009, the Company requested a second draw on the Line of Credit in
the amount of $300,000 and received the funds on or about March 17,
2009. Therefore, the total indebtedness under the Line of Credit is
$600,000 with a remaining $400,000 available for future draws.
As of the date of this report, in lieu of any additional source of capital, management believes
that the Company will essentially exhaust all cash resources currently available by December 31,
2009. In addition, our auditors have expressed substantial doubt about the Company’s ability to
continue as a going concern in their audit report on our 2008 consolidated financial statements.
The Company is currently discussing possible development of all or part of the Diamondhead property
with interested parties and is exploring opportunities for financing required to develop the
property and meet the Company’s current liquidity needs.
There can be no assurance that the Company will be able to reach an agreement with any party
regarding the development or financing 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.
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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.
Related Parties
The Company has agreements with various current Officers and Directors which is providing or would
give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds realized on
borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr.
Harrison as the Company receives proceeds from the Lender. In the event that this loan facility
should require security in the future, the fee payable under the agreement is reduced to 3% of the
proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to
the terms of this agreement.
The Company has agreements with Directors Harrell, Harrison and Norton in the event they are
successful in obtaining funding for the Company and/or its Diamondhead project. The Company has
agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained
and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of
any equity investment obtained in connection with the development of the Diamondhead property as a
result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of
the gross sales price for property sold or for any loan or line of credit that does not require
that the property be pledged as security for a loan. In the event a loan or line of credit requires
that the property be pledged as security, the commission would be reduced to three percent (3%).
Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales
agreement, and/or joint venture agreement acceptable to the Company and payment of the loan
proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The
commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds
are received periodically, the commission due will be paid periodically upon receipt of said funds
by the Company.
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Other
The Company has agreements with unrelated persons and entities who would be entitled to substantial
commissions if the Company enters into a financial 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 fair value of the property.
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 either modified or granted
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.
Stock-based compensation expense recognized under FASB 123(R) for the year ended December 31, 2008
was $2,072,927, which consisted of a modification to all outstanding stock option awards originally
granted in 2003. 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.
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SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant or modification 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. Forfeitures are estimated at the time of the
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
The fair value of share-based payment awards or modifications to prior awards, are estimated at the
grant date using the Black-Scholes option valuation model. The Company’s determination of fair
value of share-based payment awards or modifications thereto, is measured on the date of grant
using an option-pricing model and 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
In connection with the preparation of this Annual Report on Form 10-K, our management, with the
participation of our Chief Executive Officer and our Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2008. Disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed
to ensure that the information that we are required to disclose in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s Rules and Forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. Based on the results of
this evaluation and the material weaknesses in our internal control over financial reporting
discussed below, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective at the reasonable assurance level as
of December 31, 2008.
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Management’s Report on Internal Control Over Financial Reporting
The management, under the supervision of our Chief Executive Officer and Chief Financial Officer,
is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP. 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 existing
policies or procedures may deteriorate.
Under the supervision of the Chief Executive Officer and the Chief Financial Officer, management
conducted an assessment of the Company’s internal control over financial reporting as of December
31, 2008, based on the framework and criteria established in Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the company’s annual or interim financial statements will not be prevented or detected on a timely
basis. In connection with management’s assessment of our internal control over financial
reporting, we identified the following material weaknesses in our internal control over financial
reporting as of December 31, 2008.
(1) The Company, in conjunction with its Board of Directors, did not maintain an effective
control environment based on the criteria established in Internal Control — Integrated Framework,
issued by the COSO because of the following weaknesses:
(a) The Company did not effectively communicate the importance of controls throughout the
organization or set an adequate tone around control consciousness.
(b) The Company did not maintain an adequate level of control consciousness as it relates to
the establishment and update of appropriate policies and procedures.
(2) The Company did not maintain effective internal controls over financial reporting to ensure
disclosures in the Company’s annual or interim financial statements or regulatory filings were
complete, because of the following weaknesses:
(a) The Company did not maintain effective internal controls to ensure that the books and
records accurately and timely reflect the terms and conditions of all contracts, agreements
and arrangements.
(b) The Company did not maintain effective internal controls to ensure that all significant
contracts, agreements and arrangements were in writing, approved by the Board of Directors before
they were executed, and communicated to all members of management.
(c) The Company did not maintain effective internal controls to ensure that all related party
transactions were in writing, approved by the Board of Directors before they were executed and
communicated to all members of management.
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These material weaknesses in our control environment contributed to the existence of inadequate
disclosures in our 8-K filed October 23, 2008 in our 2008 third quarter 10-Q with respect to the
following:
The Company incurred finders’ fees in obtaining a line of credit, including a fee paid to an
unrelated party in January 2009 by issuing 20,000 shares of common stock then valued at $13,100.
A Director and Vice president of the Company is entitled to 6% of the amount of funds borrowed
under the above line of credit for his efforts in securing the facility, $20,000 of which was paid
to him in the fourth quarter 2008.
As a result of the material weaknesses described above, our management concluded that, as of
December 31, 2008, we did not maintain effective internal control over financial reporting based on
the criteria established in Internal Control — Integrated Framework, issued by the COSO.
Interim Measures to Ensure the Accuracy of Financial Reporting
In response to the material weaknesses identified as a result of management’s assessment of
internal control over financial reporting, our management, with oversight from the Audit Committee
and the Board of Directors, has implemented interim measures to help ensure the accuracy of our
financial reporting. Such measures included, among other things:
Review of all written contracts, agreements and arrangements by all members of management to ensure
that the books and records accurately and timely reflect the terms and conditions.
Enhance communications among all members of management and the Board of Directors to capture oral
agreements that did not exist in writing.
As a result of these procedures, management has concluded that the consolidated financial
statements included in this Annual Report on Form 10-K present fairly, in all material respects,
our financial position, results of operations and cash flows for the periods presented in
conformity with GAAP.
The certifications of our Chief Executive Officer and Chief Financial Officer required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this
Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information
concerning the evaluation of our disclosure controls and procedures and our internal control over
financial reporting, referred to in the
certifications. Those certifications should be read in conjunction with this Item 9A for a complete
understanding of the matters covered by the certifications.
Changes in Internal Control Over Financial Reporting
During the first quarter of 2009, we designed new control policies and procedures relating to
contracts, agreements and arrangements and the related recording of the transaction and financial
reporting disclosures.
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While we believe these efforts have improved our internal control over financial reporting, we have
not had sufficient time to test the process. Accordingly, we will continue to perform the interim
measures described above and monitor the effectiveness of our internal control over financial
reporting in the areas impacted by the material weaknesses discussed above. We expect to report
that our internal control over financial and our disclosure controls and procedures will be
effective as of December 31, 2009.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Diamondhead Casino Corporation:
We have audited the internal control over financial reporting of Diamondhead Casino Corporation and
subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Corporation’s management is responsible 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 Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. 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 audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit
provides 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
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 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.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the Company’s annual or interim financial statements will not be prevented or detected on a timely
basis. The following material weaknesses have been identified and included in management’s
assessment as of December 31, 2008:
(1) The Company, in conjunction with its Board of Directors, did not maintain an effective control
environment based on the criteria established in Internal Control — Integrated Framework, issued
by the COSO because of the following weaknesses:
(a) The Company did not effectively communicate the importance of controls throughout the
organization or set an adequate tone around control consciousness.
(b) The Company did not maintain an adequate level of control consciousness as it relates to
the establishment and update of appropriate policies and procedures.
(2) The Company did not maintain effective internal controls over financial reporting to ensure
disclosures in the Company’s annual or interim financial statements or regulatory filings were
complete, because of the following weaknesses:
(a) The Company did not maintain effective internal controls to ensure that the books and
records accurately and timely reflect the terms and conditions of all contracts, agreements
and arrangements.
(b) The Company did not maintain effective internal controls to ensure that all significant
contracts, agreements and arrangements were in writing, approved by the Board of Directors before
they were executed, and communicated to all members of management.
(c) The Company did not maintain effective internal controls to ensure that all related party
transactions were in writing, approved by the Board of Directors before they were executed and
communicated to all members of management.
These material weaknesses in our control environment contributed to the existence of inadequate
disclosures in our 8-K filed October 23, 2008 in our 2008 third quarter 10-Q with respect to the
following:
The Company incurred finders’ fees in obtaining a line of credit, including a fee paid to an
unrelated party in January 2009 by issuing 20,000 shares of common stick then valued at $13,100.
A Director and Vice president of the Company is entitled to 6% of the amount of funds borrowed
under the above line of credit for his efforts in securing the facility, $20,000 of which was paid
to him in the fourth quarter 2008.
These material weaknesses were considered in determining the nature, timing and extent of audit
tests applied in our audit of the 2008 consolidated financial statements, and this report does not
affect our report dated March 31, 2009 on those consolidated financial statements.
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In our opinion, because of the effect of the material weaknesses described above on the achievement
of the objectives of the control criteria, Diamondhead Casino Corporation has not maintained
effective internal control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Diamondhead Casino Corporation. and
subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of
operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the
three years in the period ended December 31, 2008 and our report dated March 31, 2009 expressed an
unqualified opinion thereon with an explanatory paragraph regarding the ability of the Company to
continue as a going concern.
/s/ Friedman LLP
New York, New York
March 31, 2009
New York, New York
March 31, 2009
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:
| Name | Age | Title | ||||
Deborah A. Vitale
|
58 | Chairman of the Board, President, Chief Executive Officer, Treasurer | ||||
Gregory A. Harrison
|
64 | Director, Vice President, Secretary | ||||
Frank E. Williams, Jr.
|
74 | Director | ||||
Benjamin J. Harrell
|
55 | Director | ||||
H. Steven Norton
|
75 | Director | ||||
Carl D. Stevens
|
62 | Director | ||||
Thomas G. Wood
|
55 | Director (Resigned from the Board on February 27, 2009) | ||||
Robert Zimmerman
|
59 | Chief Financial Officer | ||||
Directors elected to office have terms which extend to the next annual meeting.
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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. 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 also
currently chairman of Facility Group, a consulting, program management, architecture, engineering,
design and construction firm based in Smyrna, Georgia. Mr. Williams is a former Chairman and a
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current Director of Capital Bank, N.A. Mr. Williams has been appointed by bankruptcy courts as an
official representative servicing 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 recently became a Director of 8th Wonder
International, Ltd., an entity formed in Jersey, in the Channel Islands, which is involved in the
concept design and development of casino resorts. Mr. Norton is also a major creditor of 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 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
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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.
THOMAS G. WOOD was elected a Director of the Company on July 8, 2008. Mr. Wood is the founder and
sole shareholder of Wood Enterprises, LLC, a Louisiana company, which was established in the mid
1980’s to mange his holdings. Mr. Wood is the President and sole owner of five clubs and a diner
in Louisiana. Mr. Wood also maintains a partial ownership interest in a hardware store in Louisiana
and is engaged in the purchase, renovation and development of real property, including a former
Texaco station which is located in close proximity to the Company’s Diamondhead property. Mr. Wood
holds three liquor licenses and three video poker licenses in the State of Louisiana. Mr. Wood
resigned from the Board on February 27, 2009.
ROBERT L. 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
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1934. Mr. Harrison does not meet the independence standards. The
Board of Directors has also determined 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 2008.
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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.
From time to time, additional compensation has been awarded to employees based on merit and
affordability. Often an award is based on consideration of 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. Ms. Vitale’s base salary remained at that rate for both 2008 and 2007.
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.
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.
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SUMMARY COMPENSATION TABLE
| Nonqualified | ||||||||||||||||||||||||||||||||||||
| Non Equity | Deferred | All | ||||||||||||||||||||||||||||||||||
| Incentive | Compensa- | Other | ||||||||||||||||||||||||||||||||||
| Name and | Stock | Option | Plan | tion | Compen- | |||||||||||||||||||||||||||||||
| Occupation | Year | Salary | Bonus | Awards | Awards (1) | Compensation | Earnings | sation | Total | |||||||||||||||||||||||||||
Deborah A. Vitale |
2008 | $ | 300,000 | None | None | $ | 1,654,559 | None | None | (2 | ) | $ | 1,954,559 | |||||||||||||||||||||||
President |
2007 | $ | 300,000 | None | None | None | None | None | (2 | ) | $ | 300,000 | ||||||||||||||||||||||||
| 2006 | $ | 300,000 | $ | 450,000 | None | $ | 190,515 | None | None | (2 | ) | $ | 940,515 | |||||||||||||||||||||||
Robert L. Zimmerman
|
2008 | $ | 65,000 | $ | 5,000 | None | $ | 24,840 | None | None | (2 | ) | $ | 94,860 | ||||||||||||||||||||||
CFO |
2007 | $ | 61,974 | None | None | None | None | None | (2 | ) | $ | 61,974 | ||||||||||||||||||||||||
| 2006 | $ | 61,974 | $ | 25,000 | None | $ | 47,629 | None | None | (2 | ) | $ | 109,603 | |||||||||||||||||||||||
| (1) | On April 13, 2006, Ms. Vitale was awarded an option to purchase 100,000 shares of common stock, exercisable at $2.70 per share and Mr. Zimmerman was awarded an option to purchase 25,000 shares of common stock, exercisable at $2.70 per share. On February 12, 2008, the Board of Directors modified all unexercised option awards originally granted in 2003 by extending the date of expiry an additional five years from the original date of expiry. Option awards to purchase a total of 825,000 shares awarded to Ms. Vitale in 2003, and an option award to purchase a remaining 15,000 shares awarded to Mr. Zimmerman in 2003, had expiry dates extended through 2013. | |
| 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. | ||
| (2) | 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 and 26,515 shares in 2006 and 26,514 shares in 2007. Common shares contributed by the Plan to Mr. Zimmerman’s participant account were and 18,057 shares in 2006 and 18,057 shares in 2007. The number of shares to be contributed to Plan participants for the year ended December 31, 2008 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 2008.
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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 |
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 | ||||||||||||||||
| 750,000 | None | None | .30 | 3/11/13 | ||||||||||||||||
| 75,000 | None | None | .75 | 7/23/13 | ||||||||||||||||
Robert L. Zimmerman |
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 | ||||||||||||||||
| 15,000 | None | None | .75 | 8/12/13 | ||||||||||||||||
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 2008
| 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 |
None | None | None | None | ||||||||||||
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 cash compensation was awarded to
any Director for their services as a Director in 2008.
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The following table summarizes compensation awarded to Directors in 2008.
DIRECTOR COMPENSATION
| Change in | ||||||||||||||||||||||||||||
| Pension | ||||||||||||||||||||||||||||
| Fees | Value and | |||||||||||||||||||||||||||
| Earned | Nonqualified | |||||||||||||||||||||||||||
| Or | (2) | Non-Equity | Deferred | |||||||||||||||||||||||||
| Paid in | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
| Name | Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||
Gregory A Harrison
(1) |
None | None | None | None | None | None | None | |||||||||||||||||||||
Frank E. Williams,
Jr. |
None | None | $ | 97,009 | None | None | None | $ | 97,009 | |||||||||||||||||||
Benjamin J. Harrell |
None | None | 130,913 | None | None | None | 130,913 | |||||||||||||||||||||
H. Steven Norton |
None | None | None | None | None | None | None | |||||||||||||||||||||
Carl D. Stevens |
None | None | None | None | None | None | None | |||||||||||||||||||||
Thomas G. Wood (3) |
None | None | None | None | None | None | None | |||||||||||||||||||||
| 1) | Mr. Harrison is also a Vice President of the Company. As Vice President, he did not receive cash compensation in excess of $100,000 in 2008. Mr. Harrison, by virtue of his employee status with the Company, is a participant receiving contributions to his account in the Europa Cruises Corporation Employee Stock Ownership Plan. | |
| 2) | On February 12, 2008, the Board of Directors modified all unexercised option awards originally granted in 2003 by extending the date of expiration for an additional five years from the original date of expiration. Option awards to purchase a total of 75,000 shares of common stock awarded to Mr. Williams in 2003, and an option award to purchase 75,000 shares of common stock awarded to Mr. Harrell in 2003, had expiration dates extended through 2013. | |
| 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) | Mr. Wood resigned from the Board on February 27, 2009. |
Other Compensation Arrangements
The Company has agreements with various current Officers and Directors which is providing or would
give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds received on
borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr.
Harrison as the Company receives proceeds from the Lender. In the event that this loan facility
should require security in the future, the fee payable under the agreement is reduced to 3% of the
proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to
the terms of this agreement.
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The Company has agreements with Directors Harrell, Harrison and Norton in the event they are
successful in obtaining funding for the Company and/or its Diamondhead project. The Company has
agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained
and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of
any equity investment obtained in connection with the development of the Diamondhead property as a
result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of
the gross sales price for property sold or for any loan or line of credit that does not require
that the property be pledged as security for a loan. In the event a loan or line of credit requires
that the property be pledged as security, the commission would be reduced to three percent (3%).
Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales
agreement, and/or joint venture agreement acceptable to the Company and payment of the loan
proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The
commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds
are received periodically, the commission due will be paid periodically upon receipt of said funds
by the Company.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF FEBRUARY 2, 2009. |
The following table sets forth, to the Company’s knowledge, as of February 2, 2009, 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 | ||||||||||||||||
| Beneficial | Title of | % | % | |||||||||||||
| Name and Address of Beneficial Owner | Ownership | Class | Of Class | Voting (1) | ||||||||||||
Europa Cruises Corporation |
2,943,185 | Common | 7.38 | % | 7.05 | % | ||||||||||
Employee Stock Ownership Plan Trust (2) 1301 Seminole Boulevard., Suite 142 Largo, Florida 33770 |
||||||||||||||||
Deborah A. Vitale (2) (3) |
5,527,914 | Common | 13.85 | % | 13.25 | % | ||||||||||
Chairman, President, CEO, and Treasurer Chairman, President, and Treasurer of Casino World, Inc. and Mississippi Gaming Corp. 1013 Princess Street Alexandria, Virginia 22314 |
||||||||||||||||
Gregory Harrison (4) |
1,465,343 | Common | 3.67 | % | 3.51 | % | ||||||||||
Director, Secretary, and Vice President 16209 Kimberly Grove Gaithersburg, Maryland 20878 |
||||||||||||||||
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| Amount & | ||||||||||||||||
| Nature of | ||||||||||||||||
| Beneficial | Title of | % | % | |||||||||||||
| Name and Address of Beneficial Owner | Ownership | Class | Of Class | Voting (1) | ||||||||||||
Benjamin J. Harrell (5) |
650,000 | Common | 1.63 | % | 1.56 | % | ||||||||||
Director 237 N. Peters Street, Fourth Floor New Orleans, Louisiana 70130 |
||||||||||||||||
Frank E. Williams, Jr. (6) |
447,150 | Common | 1.12 | % | 1.07 | % | ||||||||||
Director 2789b Hartland Road Falls Church, Virginia 22043 |
||||||||||||||||
Carl D. Stevens (7) |
602,324 | Common | 1.51 | % | 1.44 | % | ||||||||||
Director 1753 Highway 42 South Forsyth, Georgia 31029 |
||||||||||||||||
H. Steven Norton (8) |
250,000 | Common | .63 | % | .60 | % | ||||||||||
Director 700 Rozier Street Alton, Illinois 62002 |
||||||||||||||||
Thomas G. Wood (9) |
1,300,000 | Common | 3.26 | % | 3.12 | % | ||||||||||
Director One Hughes Center Drive Las Vegas, Nevada 89169 |
||||||||||||||||
Lewis Asset Management Corp. (10) |
3,935,980 | Common | 9.89 | % | 9.43 | % | ||||||||||
45 Rockerfeller Plaza New York, New York 10111 |
||||||||||||||||
Serco International Limited (11) |
1,251,831 | Common | 3.14 | % | 7.38 | % | ||||||||||
P.O. Box 15, A-9010 |
900,000 | S-NR Preferred | 100.00 | % | ||||||||||||
Klagenfurt, Austria |
926,000 | S- Preferred | 100.00 | % | ||||||||||||
Austroinvest International Limited (11) |
1,251,831 | Common | 3.14 | % | 7.38 | % | ||||||||||
P.O. Box 15, A-9010 |
900,000 | S-NR Preferred | 100.00 | % | ||||||||||||
Klagenfurt, Austria |
926,000 | S- Preferred | 100.00 | % | ||||||||||||
Ernst G. Walter (11) |
1,251,833 | Common | 3.14 | % | 7.38 | % | ||||||||||
14700 Gulf Blvd., Apt.401 |
900,000 | S-NR Preferred | 100.00 | % | ||||||||||||
Madeira Beach, Florida 33708 |
926,000 | S- Preferred | 100.00 | % | ||||||||||||
All Directors and Executive Officers as a Group
(7 persons) |
11,542,731 | 28.92 | % | 27.66 | % | |||||||||||
| (1) | Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages. |
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| (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, 2008, 2,136,360 ESOP shares had been released and 2,056,815 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 2,943,185 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 2,943,185 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 367,729 shares of Common Stock, which represent shares of stock held in Ms. Vitale’s fully vested ESOP participant account. | |
| (4) | Includes 907,951 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 325,000 shares of Common Stock; and 162,392 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 218,500 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 175,000 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) | Includes 1,300,000 shares of Common Stock owned directly by Mr. Wood who resigned from the Board on February 27, 2009. | |
| (10) | Lewis Asset Management Corp. is a Delaware corporation that manages investment funds. It is the General Partner of Lewis Opportunity Fund, LP, a Delaware limited partnership which beneficially owns 3,121,896 shares of Common Stock. It is also the General Partner of LAM Opportunity Fund, LTD., a Bermuda partnership, which beneficially owns 814,084 shares of Common Stock. | |
| (11) | 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 |
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Table of Contents
| 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, 2008, 2,136,360 shares of Common
Stock had been released and 2,056,815 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 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 thirteen meetings during 2008 and all Directors, with the exception of
Mr. Wood, attended at least 75% of the meetings. Mr. Wood, who was named to the Board of Directors
on July 8, 2008, attended two of the four meetings held following his election to the Board and
subsequently resigned from the Board on February 27, 2009.
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Table of Contents
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, 2008, 2007 and 2006. The following
fees were paid to Friedman LLP for services in those years:
| 2008 | 2007 | 2006 | ||||||||||
Audit Fees |
$ | 84,268 | $ | 61,275 | $ | 57,603 | ||||||
Audit-Related Fees |
9,785 | 8,755 | 7,745 | |||||||||
Tax Fees |
0 | 0 | 0 | |||||||||
All Other Fees |
0 | 0 | 0 | |||||||||
Total Fees Paid to Friedman LLP |
$ | 94,053 | $ | 70,030 | $ | 65,348 | ||||||
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.
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. | ||||
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Table of Contents
| Exhibits | ||||||
(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. | |||||
(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. | ||||
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Table of Contents
| Exhibits | ||||||
(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. | ||||
(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. | ||||||
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| Exhibits | ||||||
(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. | ||||
(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. | ||||
42
Table of Contents
| Exhibits | ||||||
(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 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. | |||||
43
Table of Contents
| Exhibits | ||||||
| 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. | ||||
(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. |
44
Table of Contents
| (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 |
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.
45
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 31, 2009 | 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 31, 2009 | |||
/s/ Gregory A. Harrison
|
March 31, 2009 | |||
/s/ Frank E. Williams, Jr.
|
March 31, 2009 | |||
/s/ Benjamin J. Harrell
|
March 31, 2009 | |||
/s/ Carl D. Stevens
|
March 31, 2009 | |||
/s/ H. Steve Norton
|
March 31, 2009 |
46
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONTENTS
| Page | ||
| F-2 | ||
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 | ||
| F-20 |
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, 2008 and 2007, 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, 2008. The Company’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these 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. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Diamondhead Casino Corporation as of December 31, 2008
and 2007, and financial results and its cash flows for each of the years in the three-year period
ended December 31, 2008 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 2 to the consolidated financial
statements, the Company has incurred significant recurring net losses over the past few years. In
addition, the Company has discontinued all significant operations, except for its efforts to
develop the Diamondhead, Mississippi property. Such efforts may not contribute to the Company’s
cash flows in the foreseeable future. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The Company’s continued existence is dependent upon its
ability to raise the necessary capital with which to satisfy liabilities, fund future operations
and develop the Diamondhead, Mississippi property. Management’s plans in regard to these matters
are described in Note 2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Diamondhead Casino Corporation’s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 31, 2009 expressed an adverse opinion.
/s/ Friedman LLP
New York, New York
March 31, 2009
New York, New York
March 31, 2009
F-2
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
| 2008 | 2007 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash |
$ | 295,968 | $ | 739,831 | ||||
Prepaid insurance and other current assets |
22,468 | 17,050 | ||||||
Total current assets |
318,436 | 756,881 | ||||||
Property and equipment, less accumulated depreciation
of $15,205 in 2008 and $14,980 in 2007 |
— | 225 | ||||||
Land held for development (Note 3) |
5,409,913 | 5,409,913 | ||||||
Deferred Financing Costs net of Amortization of $1,836 |
37,258 | — | ||||||
Other assets |
26,514 | 26,514 | ||||||
| $ | 5,792,121 | $ | 6,193,533 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities |
||||||||
Note Payable to Director |
$ | 55,000 | $ | — | ||||
Accounts payable and accrued expenses |
203,884 | 201,034 | ||||||
Total current liabilities |
258,884 | 201,034 | ||||||
Long-Term Debt (net of unamortized discount of $23,095) |
276,905 | — | ||||||
Commitments and contingencies (Notes 3 and 7) |
— | — | ||||||
Stockholders’ equity (Note 4) |
||||||||
Preferred stock, $.01 par value; shares authorized 5,000,000,
outstanding 2,086,000 in 2008 and 2,122,000 in 2007
(aggregate
liquidation preference of $2,519,080 in 2008 and
$2,591,080 in 2007. |
20,860 | 21,220 | ||||||
Common stock, $.001 par value; shares authorized 50,000,000,
Issued: 36,731,687 in 2008, 36,477,066 in 2007, outstanding:
33,817,701 in 2008, 33,483,535 in 2007. |
36,732 | 36,477 | ||||||
Additional paid-in capital |
33,544,516 | 31,171,566 | ||||||
Unearned ESOP shares |
( 4,269,687 | ) | ( 4,388,289 | ) | ||||
Accumulated Deficit |
(24,068,430 | ) | (20,840,816 | ) | ||||
Treasury stock, at cost, 50,346 shares |
(7,659 | ) | (7,659 | ) | ||||
Total stockholders’ equity |
5,256,332 | 5,992,499 | ||||||
| $ | 5,792,121 | $ | 6,193,533 | |||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
| 2008 | 2007 | 2006 | ||||||||||
COSTS AND EXPENSES |
||||||||||||
Administrative and General |
$ | 877,781 | $ | 925,240 | $ | 1,378,067 | ||||||
Stock-based Compensation |
2,072,927 | — | 1,238,348 | |||||||||
Depreciation and Amortization (Note 3) |
2,061 | 965 | 1,671 | |||||||||
Other |
169,719 | 255,887 | 275,735 | |||||||||
| 3,122,488 | 1,182,092 | 2,893,821 | ||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||
Reversal of Sales Tax Liability |
— | — | 1,125,752 | |||||||||
Interest Earned on Invested Cash |
4,374 | 25,941 | 21,742 | |||||||||
Interest Expense |
(6,460 | ) | — | — | ||||||||
Other |
— | 664 | 96,495 | |||||||||
| (2,086 | ) | 26,605 | 1,243,989 | |||||||||
NET LOSS |
(3,124,574 | ) | (1,155,487 | ) | (1,649,832 | ) | ||||||
PREFERRED STOCK DIVIDENDS |
(103,040 | ) | (107,360 | ) | (107,360 | ) | ||||||
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS |
$ | (3,227,614 | ) | $ | (1,262,847 | ) | $ | (1,757,192 | ) | |||
Net loss per common share, basic and diluted |
$ | (.096 | ) | $ | (.038 | ) | $ | (.055 | ) | |||
Weighted average number of common shares outstanding |
33,689,181 | 33,376,421 | 32,125,425 | |||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
| 2008 | 2007 | 2006 | ||||||||||
Preferred Stock |
||||||||||||
Balance January 1 |
$ | 21,220 | $ | 21,220 | $ | 21,220 | ||||||
Conversion of shares to
Common |
(360 | ) | — | — | ||||||||
Balance December 31 |
$ | 20,860 | $ | 21,220 | $ | 21,220 | ||||||
Common Stock |
||||||||||||
Balance January 1 |
$ | 36,477 | $ | 36,217 | $ | 34,574 | ||||||
Exercise of Stock Options |
200 | 241 | 1,614 | |||||||||
Issued for Services |
— | — | 13 | |||||||||
Preferred Stock Dividends |
19 | 19 | 16 | |||||||||
Conversion of Preferred |
36 | — | — | |||||||||
Balance December 31 |
$ | 36,732 | $ | 36,477 | $ | 36,217 | ||||||
Additional Paid-In
Capital |
||||||||||||
Balance January 1 |
$ | 31,171,566 | $ | 30,709,032 | $ | 27,128,881 | ||||||
ESOP Compensation |
4,693 | 93,784 | 105,316 | |||||||||
Exercise of Stock Options |
199,800 | 321,409 | 1,042,141 | |||||||||
Shares Issued for Services |
— | — | 35,587 | |||||||||
Stock-based Awards |
2,135,512 | — | 1,238,348 | |||||||||
Conversion Preferred to
Common |
324 | — | — | |||||||||
Sale of Treasury Shares |
— | — | 1,111,415 | |||||||||
Preferred Stock Dividends |
32,621 | 47,341 | 47,344 | |||||||||
Balance December 31 |
$ | 33,544,516 | $ | 31,171,566 | $ | 30,709,032 | ||||||
Unearned ESOP Shares |
||||||||||||
Balance January 1 |
$ | (4,388,289 | ) | $ | (4,506,890 | ) | $ | (4,625,492 | ) | |||
ESOP Compensation |
118,602 | 118,601 | 118.602 | |||||||||
Balance December 31 |
$ | (4,269,687 | ) | $ | (4,388,289 | ) | $ | (4,506,890 | ) | |||
Accumulated (Deficit) |
||||||||||||
Balance January 1 |
$ | (20,840,816 | ) | $ | (19,577,969 | ) | $ | (17,820,777 | ) | |||
Preferred Stock Dividends |
(103,040 | ) | (107,360 | ) | (107,360 | ) | ||||||
Net Loss for Year |
(3,124,574 | ) | (1,155,487 | ) | (1,649,832 | ) | ||||||
Balance December 31 |
$ | (24,068,430 | ) | $ | (20,840,816 | ) | $ | (19,577,969 | ) | |||
Treasury Stock |
||||||||||||
Balance January 1 |
$ | (7,659 | ) | $ | (7,659 | ) | $ | (114,094 | ) | |||
Sale of Treasury Shares |
106,435 | |||||||||||
Balance December 31 |
$ | (7,659 | ) | $ | (7,659 | ) | $ | (7,659 | ) | |||
Total Stockholders Equity |
$ | 5,256,322 | $ | 5,992,499 | $ | 6,673,951 | ||||||
See accompanying notes to consolidated financial statements
F-5
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
(NOTE 9)
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
| 2008 | 2007 | 2006 | ||||||||||
OPERATING ACTIVITIES
|
||||||||||||
Net loss |
$ | (3,124,574 | ) | $ | (1,155,487 | ) | $ | (1,649,832 | ) | |||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||
Depreciation and amortization |
2,061 | 965 | 1,671 | |||||||||
ESOP provision |
123,295 | 212,385 | 223,918 | |||||||||
Issuance of common shares for services |
— | — | 35,600 | |||||||||
Issuance of stock options |
2,072,927 | — | 1,238,348 | |||||||||
Amortization of loan discount |
396 | — | — | |||||||||
(Increase) decrease in: |
||||||||||||
Accounts receivable |
— | — | 16,956 | |||||||||
Prepaid insurance and other |
(5,418 | ) | (762 | ) | 3,473 | |||||||
(Decrease) increase in: |
||||||||||||
Accounts payable and accrued expenses |
(7,550 | ) | 1,125 | (19,708 | ) | |||||||
Sales tax settlement liability |
— | — | (1,275,752 | ) | ||||||||
Net cash used in operating activities |
(938,863 | ) | (941,774 | ) | (1,275,326 | ) | ||||||
INVESTING ACTIVITIES
|
||||||||||||
Land development |
— | — | (7,333 | ) | ||||||||
Net cash used in investing activities |
— | — | (7,333 | ) | ||||||||
FINANCING ACTIVITIES |
||||||||||||
Proceeds from sale of common shares held in treasury |
— | — | 1,217,850 | |||||||||
Proceeds form issuance of Notes payable to Directors |
205,000 | — | — | |||||||||
Payment of Note payable to Director |
(25,000 | ) | — | — | ||||||||
Proceeds from exercise of options and warrants to purchase |
— | — | — | |||||||||
common stock |
75,000 | 321,650 | 1,043,755 | |||||||||
Proceeds from Line of Credit |
300,000 | — | — | |||||||||
Payment of preferred stock dividends |
(60,000 | ) | (60,000 | ) | (60,000 | ) | ||||||
Net cash provided by financing activities |
495,000 | 261,650 | 2,201,605 | |||||||||
Net increase (decrease) in cash |
(443,863 | ) | (680,124 | ) | 918,946 | |||||||
Cash beginning of year |
739,831 | 1,419,955 | 501,009 | |||||||||
Cash end of year |
$ | 295,968 | $ | 739,831 | $ | 1,419,955 | ||||||
See accompanying notes to consolidated financial statements.
F-6
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 and Going Concern
The consolidated financial statements have been prepared on the basis that the Company is a going
concern, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred losses over the past several years, and as of
December 31, 2008, has an accumulated deficit of $24,068,430. Certain conditions raise substantial
doubt about the Company’s ability to continue as a going concern. As reflected in the accompanying
consolidated financial statements, the Company incurred a loss applicable to common shareholders of
$3,227,614, $1,262,847 and $1,757,192 for the years ending December 31, 2008, 2007 and 2006
respectively and expects continued losses for the foreseeable future.
The Company has generated no operating revenues since it ended its gambling cruise ship operations
in 2000 and has had to rely on alternative means to raise capital to meet its financial
obligations. During 2007 and 2006, 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 2008, the
Company entered into two promissory notes with two Directors of the Company yielding proceeds of
$205,000, received $75,000 from the exercise of options to purchase 100,000 shares of common stock,
and obtained a Line of Credit from an unrelated third party investor in the total amount of
$1,000,000 of which the company has drawn $300,000 as of December 31, 2008.
At December 31, 2008, the Company had cash on hand totaling $295,968. Management of the Company
examined the historical and planned future spending of the Company and as of December 31, 2008
believes that the Company will essentially exhaust all cash resources currently available by
December 31, 2009.
At December 31, 2008, 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, it could have a significant adverse
impact on the Company’s ability to continue as a going concern and 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.
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.
F-7
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Cash
The Company’s cash balances are maintained primarily in one bank and are currently insured by the
Federal Deposit Insurance Corporation subject to certain limitations.
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 Measurements
In the first quarter of 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for
financial assets and liabilities. This standard defines fair value, provides guidance for measuring
fair value and requires certain disclosures. This standard does not require any new fair value
measurements. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash flow), and the cost
approach (cost to replace the service capacity of an asset or replacement cost). The statement
utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either
directly or indirectly. These include quoted prices for similar assets or liabilities in active
markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
Level 3: Unobservable input that reflects our own assumptions.
F-8
Table of Contents
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Fair Value Measurements (continued)
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, delaying the effective
date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value on a recurring basis.
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. The adoption of this
standard did not have a material effect on the consolidated financial statements as the Company did
not elect to report its financial instruments at fair value.
In September 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position
(“FSP”) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active.” This staff position clarifies the application of SFAS No. 157 “Fair Value
Measurements” in a market that is not active and provides examples to illustrate key considerations
in determining the fair value of a financial asset when the market for that financial asset is not
active. The Company adopted the provisions of SFAS No. 157 in the first quarter of 2008 and the
provisions of SFAS No.
157-3 became effective upon issuance for financial statements, including prior periods, which have
yet to be issued. The Company does not expect either the statement or the FSP to have a material
effect on its consolidated financial statements.
The carrying amounts of cash, a note payable to a Director, accounts payable and accrued expenses,
approximate fair value due to the short term nature of the instruments. The carrying amount of the
fixed interest loan payable approximates the fair value based on level 2 observations as described
in SFAS 157. The transaction was entered into in the fourth quarter of 2008 at borrowing rates and
terms currently available to the Company.
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
projected to be 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
determined by appraisal, discounted cash flow projections, or other means. No impairment existed as
of December 31, 2008.
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:
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
Employee Stock Ownership Plan (continued)
(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.
Income Taxes
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 basis of assets and liabilities. A
valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.
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, 2008, the Company does not have a liability for unrecognized tax benefits.
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, 2008, the Company has no accrued interest or penalties related to
uncertain tax positions.
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
3,225,000 for the year ended December 31, 2008, 3,336,000 for the year ended December 31, 2007 and
3,577,000 for the year ended December 31, 2006. The foregoing is excluded from diluted net loss per
share as their effect would be antidilutive.
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
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 was $2,072,927 for the year ended
December 31, 2008 and $1,238,348 for the year ended December 31, 2006, 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 was a reduction of $.062 and $.039 per share for the years ended
December 31, 2008 and 2006 respectively. There was no stock-based compensation expense recognized
for the years ended December 31, 2007.
In determining the fair value of each option granted in 2006 and those modified in 2008, 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:
| 2008 | 2006 | |||||||
Dividend Yield |
0 | % | 0 | % | ||||
Expected Volatility |
49.25% - 96.10 | % | 86.45 | % | ||||
Expected Option Life (years) |
5 | 5 | ||||||
Average Risk-Free Interest Rate |
2.31% to 2.82% | 4.86 | % | |||||
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 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
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
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 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 as no business combinations are currently pending.
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 May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of
Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are prepared in conformity with generally
accepted accounting principles (“GAAP”) in the United States. The statement highlights the fact
that the entity, as opposed to its’ auditors, are responsible for selecting accounting principles
for financial statements that are presented in conformity with GAAP. The statement becomes
effective 60 days following the Securities and Exchange Commission’s approval by the Public Company
Accounting Oversight Board approval of amendments
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”
Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable
dividends (whether paid or unpaid) are participating securities and should be included in the
two-class method of computing EPS. The FSP is effective for fiscal years beginning after December
15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP
EITF No. 03-6-1 to have a material effect on its consolidated financial statements.
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued)
In October 2008, the FASB issued FSP No. FAS 133-1, “Disclosures about Credit Derivatives and
Certain Guarantees,” an amendment to FASB Statement 133, “Accounting for Derivative Instruments and
Hedging Activities.” The staff position
requires that sellers of credit derivatives disclose information about credit derivatives and
hybrid instruments that have embedded credit derivatives to enable users of financial statements to
assess their potential effect on its financial position, financial performance, and cash flows. The
FSP also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees of Indebtedness of Others,” to require additional disclosure about the current status of
the payment/performance risk of a guarantee. The statements became effective for annual and interim
reporting periods ending after November 15, 2008. The Company does not expect these statements will
have a material effect on its consolidated financial statements.
4. Note Payable to Director
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 provided 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.
On March 28, 2008, the Vice President of the Company, who had previously loaned the Company
$150,000 pursuant to the aforementioned promissory note, exercised an option to purchase 100,000
shares of common stock at an exercise price of $1.25 per share by applying $125,000 of the $150,000
which the Company owed him to exercise the option. The remaining balance on this note was retired
in the second quarter of 2008 leaving a note in the amount of $55,000 outstanding at December 31,
2008.
5. Long-Term Debt
On October 23, 2008, the Company entered into an agreement with an unrelated third party for an
unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provides for funds to be
drawn from time to time and carries an interest rate of 9% per annum payable quarterly based on the
number of days any portion of the advances are outstanding. All funds advanced under the facility
will be due and payable by November 1, 2012. As an inducement to provide the facility, the lender
was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75
per share. In addition, the lender has an option to purchase a maximum of 250,000 additional shares
of common stock of the Company at $1.75 per share based on the proportion any amount borrowed bears
to the $1,000,000 Line of Credit. The options expire following repayment in full by the Company of
the amount borrowed. The Company incurred finders’ fees in obtaining the facility, including a fee
paid to an unrelated party in January 2009 by issuing 20,000 shares of common stock then-valued at
$13,100. In addition, under the terms of an agreement with the Company, a Director and Vice
President of the Company is entitled to 6% of the amount of funds borrowed under the facility for
his efforts in securing the Line of Credit, $20,000 of which was paid to him in 2008.
Upon signing of the Line of Credit, the lender was entitled to an option to purchase 50,000 shares
of common stock at $1.75 per share. The Company valued the option in the amount of $39,094 using
the Black-Scholes option pricing model with the following weighted-average assumptions: dividend
yield of zero, expected volatility of 69.88%, expected life of 4.02 years
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long-Term Debt (continued)
and average risk-free interest rate of 1.76%. The value of the option is recorded as deferred loan
cost and will be amortized over the expected life of the loan. Deferred loan amortization amounted
to $1,836 for the year ended December 31, 2008.
On December 8, 2008, the Company requested and received an initial draw on the Line of Credit in
the amount of $300,000 entitling the lender to an option to purchase 75,000 shares of common stock
at $1.75 per share. The Company valued the option in the amount of $23,491 using the Black-Scholes
option pricing model with the following weighted-average
assumptions: dividend yield of zero, expected volatility of 64.99%, expected life of 3.9 years and
average risk-free interest rate of 1.357%. The value of the option is recorded as debt discount and
will be amortized to interest expense over the expected life of the loan. Unamortized debt discount at December
31, 2008 amounted to $23,095.
On March 9, 2009, the Company requested a second draw on the Line of Credit in the amount of
$300,000 and received the funds on or about March 17, 2009. Therefore, the total indebtedness under
the Line of Credit is $600,000 with a remaining $400,000 available for future draws.
6. Stockholders’ Equity
At December 31, 2008, 2007 and 2006, the Company had a stock option plan and non-plan options,
which are described below.
Non-Plan Stock Options
On February 12, 2008, the Company modified all unexercised options originally issued in 2003 by
extending the expiration date five years from the original expiration date. A total of 990,000
options to purchase common shares were affected by the modification.
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. Also in March 2008, a Director and Vice President of
the Company exercised and option to purchase 100,000 shares of common stock at $1.25 per share.
In July 2008, a key employee of the Company exercised an option to purchase 25,000 shares of common
stock at an exercise price of $.75 per share.
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
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders’ Equity (continued)
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.
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, 2008, no options from this plan were issued or exercised.
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, 2008, 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, 2008,
2007 and 2006, and changes during the years ended on December 31, 2008, 2007 and 2006 is presented
below:
| December 31, 2008 | December 31, 2007 | December 31, 2006 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding at beginning of year |
3,040,000 | $ | 1.18 | 3,181,000 | $ | 1.17 | 4,044,500 | $ | .69 | |||||||||||||||
Granted |
125,000 | 1.75 | — | — | 650,000 | 2.70 | ||||||||||||||||||
Exercised |
(200,000 | ) | (1.00 | ) | (141,000 | ) | (.86 | ) | (1,513,500 | ) | (.56 | ) | ||||||||||||
Expired |
— | — | — | — | — | — | ||||||||||||||||||
Outstanding at end of year |
2,965,000 | $ | 1.22 | 3,040,000 | $ | 1.18 | 3,181,000 | $ | 1.17 | |||||||||||||||
Options exercisable at year-end |
2,965,000 | — | 3,040,000 | — | 3,181,000 | — | ||||||||||||||||||
Weighted-average fair value of
options granted during the year |
$ | 1.75 | $ | — | $ | 2.70 | ||||||||||||||||||
The following tables, summarizes information about stock options outstanding and exercisable at
December 31, 2008 and 2007:
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders’ Equity (continued)
Accounting for Stock Options (continued)
December 31, 2008
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| Number | Average | Weighted | Number | Weighted- | ||||||||||||||||
| Range of | Outstanding | Remaining | Average | Exercisable | Average | |||||||||||||||
| Exercise | At | Contractual | Exercise | At | Exercise | |||||||||||||||
| Prices | 12/31/08 | Life | Price | 12/31/08 | Price | |||||||||||||||
$.30
|
750,000 | 4.19 | $ | .30 | 750,000 | $ | .30 | |||||||||||||
$.72 - $.80
|
840,000 | 2.05 | .78 | 840,000 | .78 | |||||||||||||||
$1.25
|
600,000 | 1.82 | 1.25 | 600,000 | 1.25 | |||||||||||||||
$1.75
|
125,000 | 3.84 | 1.75 | 125,000 | 1.75 | |||||||||||||||
$2.70
|
650,000 | 2.28 | 2.70 | 650,000 | 2.70 | |||||||||||||||
| 2,965,000 | 2,965,000 | |||||||||||||||||||
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 | |||||||||||||||||||
Other
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
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders’ Equity (continued)
Preferred Stock (continued)
December 31, 2008 and 2007, outstanding Series S preferred stock totaled 926,000 shares. No
cumulative dividends were in arrears at December 31, 2008 and 2007.
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, 2008 and 2007, outstanding Series S-NR preferred stock totaled 900,000 shares.
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. A total of 36,000 shares
were converted during 2008 and no shares were converted during 2007. 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, 2008 and 2007, outstanding Series S-PIK preferred stock totaled 260,000 and 296,000
shares respectively.
During 2008, the Company paid $32,640 of the total preferred dividends of $103,040 with 18,621
shares of its common stock. The Company paid $10,400 of preferred dividends due for the fourth
quarter of 2008 with 12,235 shares of its common stock in January of 2009.
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. No dividends were in arrears at December 31,
2007.
7. 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,
2008. At December 31, 2008, 2,863,640 shares with a fair market value of $1,718,184 are unearned.
At December 31, 2007, 2,943,185 shares with a fair market value of $7,505,122 were 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 $123,295 in 2008, $212,385 in 2007 and
$223,918 in 2006. The unearned ESOP shares in
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DIAMONHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Employee Stock Ownership (continued)
stockholders’ equity represented deferred compensation expense to be recognized by the Company in
future years as additional shares are allocated to participants.
8. Income Taxes
At December 31, 2008, the Company had net operating loss carryforwards for income taxes of
approximately $15.7 million, which expire during various periods through 2028. Realization of
deferred income taxes as of December 31, 2008 is not considered likely. Therefore, a valuation
allowance of approximately $5 million has been established for the entire amount of deferred tax
assets relative to the net operating loss.
9.Commitments and Contingencies
Leases
The Company leases office space in Largo, Florida pursuant to a lease with The Gentile Group LLC
which expires July 31, 2009. 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 $28,149 in 2008, $26,735 in 2007 and $24,680 in 2006.
The Company is liable for future minimum lease payments of $5,150 through July 2009.
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 may terminate at the
option of CAMC. 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. As of May 2005, the subsidiaries ceased all
payments regarding the assessments and the total amount, including accrued interest, due the
Florida Department of Revenue amounted to $1,125,752.
The five subsidiaries which were the subjects of the assessment 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
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (continued)
Sales Tax Settlement (continued)
subsidiaries in question and had placed these warrants as uncollectible and no further collection
efforts would be pursued by the Florida Department of Revenue.
Related Parties
The Company has agreements with various current Officers and Directors which is providing or would
give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds realized on
borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr.
Harrison as the Company receives proceeds from the Lender. In the event that this loan facility
should require security in the future, the fee payable under the agreement is
reduced to 3% of the proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison
in 2008 pursuant to the terms of this agreement.
The Company has agreements with Directors Harrell, Harrison and Norton in the event they are
successful in obtaining funding for the Company and/or its Diamondhead project. The Company has
agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained
and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of
any equity investment obtained in connection with the development of the Diamondhead property as a
result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of
the gross sales price for property sold or for any loan or line of credit that does not require
that the property be pledged as security for a loan. In the event a loan or line of credit requires
that the property be pledged as security, the commission would be reduced to three percent (3%).
Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales
agreement, and/or joint venture agreement acceptable to the Company and payment of the loan
proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The
commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds
are received periodically, the commission due will be paid periodically upon receipt of said funds
by the Company.
Other
The Company has agreements with various unrelated 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.
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DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Supplemental Cash Flow
Supplemental schedules are as follows:
| 2008 | 2007 | 2006 | ||||||||||
Interest paid: |
||||||||||||
Cash paid for interest |
$ | 3,041 | $ | — | $ | — | ||||||
Stock issued to satisfy Note
payable to
Director |
$ | 125,000 | $ | — | $ | — | ||||||
Conversion of 36,000 shares of
Preferred Stock to Common |
$ | — | $ | — | $ | — | ||||||
Preferred stock dividends paid with
shares of common stock |
$ | 32,640 | $ | 47,360 | $ | 47,360 | ||||||
11. Quarterly Financial Data (Unaudited)
| 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | Total | ||||||||||||||||
2008 |
||||||||||||||||||||
Costs and Expenses |
$ | 2,330,504 | $ | 282,636 | $ | 239,236 | $ | 270,112 | $ | 3,122,488 | ||||||||||
Other Income and
(Expense), Net |
1,933 | (339 | ) | (903 | ) | (2,777 | ) | (2,086 | ) | |||||||||||
Net (Loss) |
(2,328,571 | ) | (282,975 | ) | (240,139 | ) | (272,889 | ) | (3,124,574 | ) | ||||||||||
Loss per Share |
(.070 | ) | (.009 | ) | (.008 | ) | (.009 | ) | (.096 | ) | ||||||||||
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 | ) | ||||||||||
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