<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Passenger Fares, Gaming, Beverage, Meal and Subcharter Revenues
- ---------------------------------------------------------------
The Company operated 2,267 cruises in 1995, as compared to 1,934 in 1994,
an increase of 17%. The Company carried 323,270 passengers in 1995 as compared
to 310,309 passengers in 1994, an increase of 4%. Per passenger revenue from
operations in 1995 was $59.53 compared to $56.83 in 1994, an increase of 5%.
In 1994, management concluded that the trend in the industry was to lower
and or eliminate passenger fares to increase on-board revenues. In comparing the
1994 to 1995 operating results of the cruise division (excluding the non-
operating gain on sale of land in 1994 of $2.2 million), the Company realized an
overall increase of $1,608,653 in total cruise division revenue, even though the
Company has decreases in fare revenues of approximately $1,842,000 which fare
reductions were necessary to remain competitive and maintain market share. In
1995, the Company concentrated on decreasing operating expenses throughout the
Company. Decreases came in Administrative and General, Advertising and Promotion
and Other Operating Expenses. When comparing the results of the Cruise Division,
revenues were up approximately 9% and the operating costs, excluding the cost of
capital and unrelated expenses, were up 10%. The major increase in vessel
operating expenses was due to the first full year of internalized casino
operations. The cost cutting measures, seen in Administration and General, and
Advertising and Promotion that were instituted during the last half of 1995 are
projected to continue throughout 1996. A significant cost cutting measure was
the Company internalizing its food operations in September 1995. Although there
can be no assurances, management believes that these cost cutting measures will
improve 1996 operating results. However, unforeseen factors, such as
unanticipated labor costs increases or unanticipated litigation could cause
actual results to differ from those projected.
In March, 1995, the Company commenced operations from a new port in Miami
Beach. To date operating results in Miami Beach have been disappointing.
Historically, a new port takes between 18 months and two years to fully develop
to its potential. The extremely poor results from the Miami Beach port are being
carefully analyzed to determine the best course of action for the Company to
take in 1996.
Revenue from gaming operations increased by approximately $2.7 million or
31% in 1995 over 1994 due to the 4% increase in passengers carried and the 26%
increase in per passenger casino revenues because of the Company's
internalization of its casino operations.
Revenue from passenger fares, meals and beverage sales decreased by $2.3
million or 28% in 1995 compared to 1994. The decrease is attributable to
increased competition and the trend toward "no fares" amongst competitors.
On August 26, 1994, the Company purchased a fourth day cruise vessel, the
M/V Stardancer (See Item 1. Business). On November 2, 1994, the Company
chartered the Stardancer through April 30, 1995. During 1994, the Company
received $236,000 in charter fees and approximately $100,000 in management fees.
From May to December 1995, the M/V Stardancer was chartered under bareboat
charter agreements to unrelated third parties
<PAGE>
and is currently under charter through June 1996. During 1995, the Company
received $1,015,174 in charter fees and $111,684 in net management fees.
Prior to October 15, 1994, the casinos on board all of the Company's day
cruises vessels were operated by Casinos Austria Maritime Corporation (CAMC),
pursuant to a Gaming Concession Agreement. The Company terminated the Gaming
Concession Agreement and entered into a Consulting Agreement with CAMC. Under
the Consulting Agreement, the Company manages and operates all casinos on board
the Company's vessels and CAMC's role is limited to providing consulting
services through December 31, 1997. The Company pays Casinos Austria the greater
of $37,500 per month or 3.5% of gross gaming revenues plus $140 per cruise for a
purser. In 1994, the per passenger gross casino revenue was $43.83 compared to
$38.77 in 1995, a 12% decrease.
Gain on Sale of Land
- --------------------
On May 27, 1994, the Company sold its Backbay Biloxi, Mississippi gaming
site to the owners of the Imperial Palace Hotel & Casino, Las Vegas, Nevada. The
Company realized a net profit of $2,253,124 from this transaction.
Vessel Operating Expenses
- -------------------------
Prior to 1995, drydocking costs were expensed evenly over the period to the
next scheduled drydocking. Due to uncertainty in estimating the amount of future
drydock costs, the Company believes that the deferral method is preferable and
changed its method of accounting for drydocking costs during the fourth quarter
of 1995. When incurred, drydock costs are deferred and amortized over the two to
three year period to the next drydock. This change had the effect of reducing
the 1995 net loss approximately $175,000 and of reducing the 1995 loss before
cumulative effect of the change in accounting principle by approximately
$40,000. The next scheduled drydock is set for August 1996. See note 1 to the
financial statements.
Vessel operating expenses increased by $2.4 million from a $3.0 million
increase in casino expenses as a result of the internalization of casino
operations and a decrease of $584,000 in operating costs for all other
departments. The Company had vessel operating expenses, per cruise, of $6,111 in
1995 as compared to $5,909 in 1994, an increase of 3%.
Meal Costs
- ----------
Beginning in September 1995, the Company internalized the meal service on
all vessels. Meal costs were internalized because the Company believes it can
provide meals on the vessel at a lower unit cost and allows the Company the
flexibility to consider alternative meal prices in its marketing efforts to find
the best complement of passenger fares to casino revenues.
The 1995 meal costs per passenger were $8.45 compared to $9.31 for 1994, a
decrease of 9%. The meal costs per passenger for the fourth quarter of 1995 was
$6.93, as compared to $8.90, in 1994, a 22% decrease. This decrease is directly
attributable to the Company internalizing the food service in September 1995.
Although there can be no
<PAGE>
assurance, the Company anticipates continued reductions in the future. However,
unforeseen factors, such as unanticipated labor costs, could cause actual
results to differ from those projected.
Administrative and General Expenses
- -----------------------------------
Administrative and general expenses decreased by approximately $373,000
primarily due to a decrease at the corporate level related to reductions in
personnel and other operating costs.
ESOP Adjustment
- ---------------
The 1995 loss includes a nonrecurring ESOP adjustment which decreased the
net loss by $279,000. See notes 1 and 7 to the financial statements.
Advertising and Promotion
- -------------------------
Advertising and promotion decreased by $183,000 reflecting decreased
marketing costs principally in Miami to reduce Miami's overall operating costs
as compared to the 1994 operating costs in Key West.
Depreciation
- ------------
Depreciation and amortization increased approximately $472,000 in 1995 when
compared to 1994. This increase results substantially from the Company operating
four vessels for a full year in 1995 as compared to three vessels in 1994.
Fourth Quarter Results - 1994
- -----------------------------
The Company reported a 1994 fourth quarter loss of approximately
$1,622,000. Included in this fourth quarter loss was the effect of year end
adjustments that reduced net income by approximately $1,600,000. These
adjustments related principally to the carrying amount of certain assets,
expense accruals and common stock transactions associated with prior quarters of
1994. Fourth quarter results excluding the $1,600,000 adjustments would have
been a loss of $22,000.
The fourth quarter adjustments were primarily related to normal and
recurring adjustments that were omitted in the prior quarter as a result of a
change in financial personnel. The Company has taken steps to prevent the
omission of these types of adjusting items in future quarterly results.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital deficiency is $1.6 million compared to a
deficiency of $2.5 million on December 31, 1994.
From August to October 1996, the Company will be required to drydock
certain of its vessels. The minimum cost of drydock is estimated to be between
$100,000 and $300,000. These capital costs are not expected to be funded from
operations and the Company is currently seeking financing to cover this cost.
<PAGE>
During 1995, the Company's operating activities used cash of approximately
$625,000, compared to $778,000 for 1994. The $153,000 decrease was principally
attributable to the increased operating loss of approximately $613,000
(exclusive of the 1994 gain on sale of land of approximately $2.3 million and
the cumulative effect of the 1995 change in drydock accounting), cash used by
increases in accounts receivable, decreases in accounts payable and accrued
expenses, and a decrease in unearned cruise revenues, partially offset by
decreases in prepaids and other and by increased depreciation and amortization.
Investing activities (principally vessel and lease hold improvements and
dockside gaming developments costs) required cash of $1.1 million in 1995.
On May 23, 1995, the Company received a 11.35 % term loan of $6,446,332
from First Union National Bank of Florida. Proceeds from the loan were used to
pay off substantially all of the Company's debt except the capital equipment
lease with Casinos Austria. The term loan agreement requires monthly payments of
approximately $102,000, including interest, through 2003. The loan is
collateralized by vessel mortgages and security interest in accounts receivable,
inventories, equipment and intangibles. The Company entered into an interest
rate swap agreement with First Union to cap the rate on this loan at 11.35%.
In August 1995, Service America, Inc., the Company's then food vendor
demanded payment of all payables then due in the approximate amount of $1.2
million and seized three of the Company's vessels to secure payment of same. On
August 21, 1995, the Company borrowed $1.2 million from First Union National
Bank of Florida and used the proceeds to pay the outstanding payable. The $1.2
million initially matured September 1, 1996 and has been extended to January 31,
1997.
As of December 31, 1995, the Company was not in compliance with its
tangible net worth and cash flow covenants as required under the loan with First
Union National Bank of Florida. First Union waived the Company's default by
waiving compliance with the cash flow convenant requirement for 1995
and reducing the tangible net worth requirement. The Company will not be
required to comply with the cash flow covenant until April 30, 1997. The
reduction in net worth covenant also runs to April 30, 1997.
Management's plan for improved 1996 results include cost reductions, debt
repayments and or restructuring and close scrutiny of monthly operating results
to ensure that performance criteria are met.
COSTS REDUCTIONS
- ----------------
Professional service costs, primarily legal fees, were approximately $1
million. The majority of the litigation that caused these costs have been
resolved. Management believes that the resolution of certain litigation coupled
with the Chairman of the Boards containment of attorneys' time due to her review
and supervision of their work, is expected to result in significantly reduced
professional fees in 1996. Annual savings are estimated to be approximately
$600,000.
Operating results in Miami Beach are negative. Miami Beach lost $198,000 in
the first two months of 1996. The Company recently deployed marketing and sales
representatives from its other ports to Miami Beach for the express purpose of
quickly increasing, to the extent possible, passenger loads in Miami Beach. The
Company believes that this effort was successful and will repeat the approach
again in Miami Beach in the near future.
<PAGE>
DEBT REPAYMENT AND RESTRUCTURING
- --------------------------------
Significant efforts are being made to fund the $1.2 million due First
Union on January 31, 1997:
- --------------------------
An unrelated third-party has issued to the Company a non-binding letter of
intent to purchase the vessel, the Europa Sun for $3 million subject to
successful completion of a marine survey. The survey is complete and the parties
are in final negotiation of terms. To the extent final terms cannot be
successfully negotiated, the Company has been contacted by another potential
unrelated third-party purchaser for the vessel.
In November 1995 a third party defaulted under a letter of intent to
purchase the Europa Sun forfeiting a $25,000 non-refundable deposit to the
Company.
The Company is in contact with several investment banking firms interested
in pursuing financing for the Diamondhead casino resort and in funding short-
term cash needs for the Company up to $2 million. Terms are currently being
discussed - however no due diligence has been made. Therefore, there can be no
assurance these funds will be made available.
Management believes that close scrutiny of operating costs coupled with
outside funding and asset sales will provide the cash flow neccessary to meet
its cash flow needs and comply with the First Union loan covenants in 1996.
In March 1996, the Company subscribed for $500,000 net of offering costs,
in a Regulation S offering.
On August 26, 1994, the Company purchased a fourth cruise vessel for a
$3,500,000 purchase price consisting of $982,548 in cash, mortgages payable of
$1,017,452 and 1,200,000 shares of common stock valued at $1,500,000. The
1,200,000 shares are to be sold pursuant to a Registration Statement initially
filed on January 31, 1995 with the U.S. Securities and Exchange Commission on
Form S-2. As of the date of this Report the S-2 Registration Statement is not
effective. The value attributed to such shares by the Company and Lagoon Cruise
Line, Inc. ("Lagoon") at the time the vessel Stardancer was purchased was $1.25
per share. Europa has guaranteed to Lagoon that the gross selling price received
by Lagoon in the aggregate for all sales of Stock (as "Stock" is defined below)
during a period of nine (9) months from the effective date of the registration
statement (the "Selling Period"), plus the value of the Stock not sold by Lagoon
upon expiration of the Selling Period, ("Remaining Stock") shall not be less
than One Million Five Hundred Thousand Dollars ($1,500,000). For this purpose,
the term "Stock" includes the 1,200,000 Shares of Common Stock in Europa offered
by Lagoon and all shares of Common Stock of Casino World, Inc. when and if
distributed to shareholders of Europa. At the end of the Selling Period, the
Remaining Stock shall be valued at an amount equal to the average price as
reported in the Wall Street Journal at which such shares were traded on the
-------------------
NASDAQ Market System or as reported by any other stock quotation system for the
immediately preceding five business days. If the value of said Remaining Stock
plus the gross selling price for all Stock sold by Lagoon during the Selling
Period is less than $1,500,000, then, within thirty (30) days after the
expiration of the Selling Period, Europa is obligated to pay to Lagoon, the
difference, if any, between $1,500,000 and the combined amount of the gross
selling price of Stock sold plus the value of the Remaining Stock. If the value
of said Remaining Stock plus the gross selling price for all Stock sold by
Lagoon during the Selling
<PAGE>
Period is equal to or greater than $1,500,000, no further amounts are due from
Europa to Lagoon under the Guaranty. As of December 31, 1995, the fair market
value of the 1,200,000 shares of Europa Common Stock held by Lagoon was
approximately $825,000. As of March 29, 1996, the fair market value of the
1,200,000 shares of Europa Common Stock held by Lagoon was approximately
$900,000. The Company may be required to pay a significant amount of cash to
Lagoon in satisfaction of the Guaranty.
On November 28, 1994, the Florida Department of Revenue (DOR) issued to the
Company a Notice of Intent to make Sales and Use Tax Audit Changes for the
period February 1, 1989 through June 30, 1994. The proposed audit changes,
including penalties and interest total approximately $6.6 million. The DOR seeks
to assess sales tax on gaming revenue, passenger fares, the purchase and sale of
leased fixed assets, repairs and other items. The Company strongly disagrees
with the proposed audit changes and intends to vigorously contest the factual,
statutory, and regulatory issues that form the basis for the proposed audit
changes. However, if the Company is not successful in challenging the proposed
audit changes, the additional tax, the Company would be required to pay, would
have a major substantial adverse impact on the Company's financial condition.
FUTURE ACCOUNTING CHANGES
- -------------------------
The Company is required to adopt the provisions of FASB No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
in 1996. Management does not expect that the adoption of FASB No. 121 will have
a material effect on the carrying value of the Company's long lived assets.
The Company does not presently intend to adopt in 1996 the fair value based
method as encouraged by FASB No. 123 "Accounting for Stock-Based Compensation".
Accordingly, there will be no effect to the financial statements.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements and notes thereto are included herein
beginning at page F-1.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONTENTS
================================================================================
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified
Public Accountants........................................... F-2
Consolidated Balance Sheet as of
December 31, 1995..................................... F-3 to F-4
Consolidated Statements of Operations
for the Years Ended
December 31, 1995 and 1994............................ F-5 to F-6
Consolidated Statements of Stockholders' Equity
for the Years Ended
December 31, 1995 and 1994................................... F-7
Consolidated Statements of Cash Flows
for the Years Ended
December 31, 1995 and 1994............................ F-8 to F-9
Notes to Consolidated Financial
Statements.......................................... F-10 to F-32
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
of Europa Cruises Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Europa Cruises
Corporation and Subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. 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 Europa Cruises
Corporation and Subsidiaries at December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Company changed its method of accounting for drydock costs.
Miami, Florida BDO Seidman, LLP
March 22, 1996, except for Note 5(b)
which is as of April 12, 1996
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
==========================================================================
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 552,061
Accounts receivable 310,767
Prepaid insurance and other 1,208,496
- --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,071,324
VESSELS, EQUIPMENT AND FIXTURES, less accumulated
depreciation (Note 2) 13,845,567
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATE
(Note 3) 271,022
LAND UNDER DEVELOPMENT FOR DOCKSIDE GAMING
(Note 4) 4,542,678
DOCKSIDE GAMING DEVELOPMENT COSTS (Note 4) 188,278
DEFERRED DRYDOCK COSTS (Note 1) 177,712
OTHER ASSETS 242,274
- --------------------------------------------------------------------------
$ 21,338,855
==========================================================================
</TABLE>
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,784,173
Current maturities of long-term debt (Note 5) 1,819,035
Unearned cruise revenues 72,039
- ---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,675,247
LONG-TERM DEBT, less current maturities (Note 5) 7,807,633
OTHER LIABILITIES 150,000
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,632,880
- ---------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 3, 9 and 12)
- ---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTES 6 AND 7):
Preferred stock, $.01 par value; shares authorized
5,000,000; outstanding 2,959,800 ($4,266,680 aggregate
liquidation preference) 29,598
Common stock, $.001 par value - shares authorized
50,000,000; issued 24,133,607; outstanding 18,033,307 24,133
COMMON STOCK SUBSCRIBED 200,000
Additional paid-in capital 23,685,534
Unearned ESOP shares (7,082,188)
Deficit (6,960,946)
Treasury stock, at cost, 1,250,000 shares (190,156)
- ---------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,705,975
- ---------------------------------------------------------------------------------------
$ 21,338,855
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Gaming revenue (Note 9(b)) $11,577,974 $ 8,839,194
Passenger fares 4,635,650 6,478,055
Food and beverage 1,352,986 1,806,588
Subcharter fees 1,015,174 235,990
Other 662,046 275,350
Gain on sale of land (Note 4) -- 2,253,124
- --------------------------------------------------------------------------------------------------------
19,243,830 19,888,301
- --------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Vessel operating 13,852,562 11,428,953
Administrative and general 2,632,150 3,004,900
Advertising and promotion 1,859,306 2,042,215
Depreciation and amortization (Note 2) 1,345,437 873,393
Interest, net (Note 5) 851,383 724,240
Other operating (Note 11) 490,192 735,160
- --------------------------------------------------------------------------------------------------------
21,031,030 18,808,861
- --------------------------------------------------------------------------------------------------------
(Loss) income before cumulative effect of change
in accounting for drydock costs (1,787,200) 1,079,440
- --------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting for
drydock costs (Note 1) 215,098 --
- --------------------------------------------------------------------------------------------------------
Net (Loss) Income (1,572,104) 1,079,440
PREFERRED STOCK DIVIDENDS (283,124) (198,972)
- --------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME APPLICABLE TO COMMON STOCK $ (1,855,228) $ 880,468
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE AMOUNTS
Net (loss) income applicable to common stock before
cumulative effect of change in accounting for drydock
costs $ (.12) $ .05
Cumulative effect of change in accounting for
drydock costs .01 --
- ----------------------------------------------------------------------------------------------
Net (loss) income per common and common
equivalent share - primary and fully-diluted $ (.11) $ .05
==============================================================================================
PRO FORMA AMOUNTS
(Assuming the new method of accounting for drydock costs was applied retroactively.)
Net (loss) income applicable to common stock $ (2,070,324) $ 654,468
Net (loss) income per common share $ (.12) $ .04
==============================================================================================
Weighted average number of common and common
equivalent shares outstanding - primary
and fully diluted 17,571,692 16,076,858
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NOTES 6 AND 7)
================================================================================
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Unearned
Stock Stock Capital ESOP Shares
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 18,260 $ 14,485 $ 8,867,671 $ -
Issuance of units 13,900 695 3,384,702 -
Issuances of common stock - 8,323 11,132,365 (7,455,000)
Acquisition of treasury stock - - - -
ESOP compensation - - - 279,452
Preferred stock dividends - 14 138,986 -
Net income for the year - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 32,160 23,517 23,523,724 (7,175,548)
Issuances of common stock - 55 48,345 -
ESOP compensation - - (110,937) 93,360
Preferred stock dividends - 305 222,096 -
Common stock subscription - - - -
Stock subscription receivable - - - -
Conversion of preferred to common (2,562) 256 2,306 -
Net loss for the year - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 29,598 $ 24,133 $ 23,685,534 $ (7,082,188)
================================================================================================================
<CAPTION>
Common Stock Treasury
Subscribed (Deficit) Stock Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ - $ (5,986,186) $ (148,750) $ 2,765,480
Issuance of units - - - 3,399,297
Issuances of common stock - - - 3,685,688
Acquisition of treasury stock - - (41,406) (41,406)
ESOP compensation - - - 279,452
Preferred stock dividends - (198,972) - (59,972)
Net income for the year - 1,079,440 - 1,079,440
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 - (5,105,718) (190,156) 11,107,979
Issuances of common stock - - - 48,400
ESOP compensation - - - (17,577)
Preferred stock dividends - (283,124) - (60,723)
Common stock subscription 500,000 - - 500,000
Stock subscription receivable (300,000) - - (300,000)
Conversion of preferred to common - - - -
Net loss for the year - (1,572,104) - (1,572,104)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 200,000 $ (6,960,946) $ (190,156) $ 9,705,975
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (1,572,104) $ 1,079,440
- --------------------------------------------------------------------------------------------------
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 1,345,437 873,393
ESOP (benefit) provision (17,577) 279,452
Bad debt expense -- 115,395
Gain on sale of dockside gaming property -- (2,253,124)
Expenses paid in shares of common stock -- 158,904
Cumulative effect of change in accounting principle (215,096) --
(Increase) decrease in:
Accounts receivable (227,046) 452,075
Prepaids and other 553,897 (194,956)
Vessel lease deposit -- 252,000
(Decrease) increase in:
Accounts payable, accrued expenses and other liabilities (372,421) (1,650,923)
Unearned cruise revenues (120,582) 110,824
- --------------------------------------------------------------------------------------------------
Total adjustments 946,612 (1,856,960)
- --------------------------------------------------------------------------------------------------
Cash (used in) operating activities (625,492) (777,520)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (980,619) (1,550,403)
Development costs for dockside gaming (127,101) (26,068)
Deposit on sale of gaming equipment -- (300,000)
Proceeds from sale of gaming equipment -- 1,100,326
Proceeds from sale of dockside gaming property -- 2,487,781
- --------------------------------------------------------------------------------------------------
Cash (used in) provided by investing activities (1,107,720) 1,711,636
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES:
Proceeds from:
Stock subscription payments $ 200,000 $ --
Issuance of common stock -- 1,711,389
Long-term debt 8,285,896 771,624
Issuance of units -- 3,399,297
Repayment of:
Long-term debt (9,261,694) (3,822,169)
Preferred stock dividends (60,723) (59,972)
Purchase of treasury stock -- (41,406)
- ---------------------------------------------------------------------------------------------
Cash (used in) provided by financing activities (836,521) 1,958,763
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,569,733) 2,892,879
Cash and cash equivalents, beginning of year 3,121,794 228,915
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 552,061 $ 3,121,794
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Organization and Business
SIGNIFICANT -------------------------
ACCOUNTING
POLICIES Europa Cruises Corporation and Subsidiaries (the Company)
principally owns, operates and promotes four cruise vessels
offering day and evening cruises. The Company's cruises
include a variety of shipboard activities such as dining,
casino operations, sightseeing, live music and other
entertainment.
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
It is at least reasonably possible that the Company's
estimate of the ultimate outcome of contingencies could
change in the near term.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts
of Europa Cruises Corporation and all of its subsidiaries.
All material intercompany balances and transactions have
been eliminated.
Cash Equivalents
----------------
The Company considers all liquid debt instruments with
original maturities of three months or less to be cash
equivalents. Cash equivalents include investments in money
market accounts and overnight repurchase agreements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Vessels, Equipment and Fixtures
-------------------------------
Vessels are depreciated over 20 years using the straight-
line method. Vessel improvements, furniture, fixtures and
equipment are recorded at cost and are depreciated over
their estimated useful lives (which range from two to twenty
years) using the straight-line method. Expenditures for
repairs and maintenance are expensed as incurred.
Renovations and improvements which extend estimated useful
lives are capitalized and depreciated over the period of
their estimated useful life.
Casino Revenue and Promotional Allowances
-----------------------------------------
Casino revenue is the net win from gaming activities, which
is the difference between gaming wins and losses. Revenue
does not include the retail amount of fares, food, and
beverage provided gratuitously to customers, which was
$1,063,340 in 1995 and $967,562 in 1994.
Passenger Fare Revenue and Unearned Cruise Revenues
---------------------------------------------------
Unearned cruise revenues, which represent customer cruise
deposits, are included in the balance sheet when received
and are recognized as passenger fare revenue upon completion
of the voyage.
Land Held for Development
-------------------------
Land held for development of a dockside casino is carried at
lower of cost or market, which at December 31, 1995 was at
cost. Costs directly related to site development such as
licensing and permits, engineering and other costs are
capitalized to the land.
Dockside Gaming Development Costs
---------------------------------
Preopening expenses, which consist principally of payroll
and marketing costs are expensed as incurred. Expenditures
which result in acquisition of assets which benefit future
periods are deferred and amortized over the period of
expected future benefit.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Employee Stock Ownership Plan
-----------------------------
In August 1994, the Company established a leveraged Employee
Stock Ownership Plan (ESOP). Compensation expense is
measured at the fair market value of shares committed-to-be-
released. Shares are committed-to-be-released ratably over
the period of employees service. Dividends, if any; (1) on
un-allocated shares used to pay debt service are reported as
a reduction of the indebtedness to the Company; (2) on un-
allocated shares paid to participants are reported as
compensation cost and; (3) on allocated shares are charged
to retained earnings. The Company has not paid any
dividends.
Taxes on Income
---------------
The Company accounts for income taxes pursuant to the
provisions of FASB No. 109, "Accounting for Income Taxes,"
which requires, among other things, a liability approach to
calculating deferred income taxes. The asset and liability
approach requires the recognition of deferred tax
liabilities and assets for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Net (Loss) Income Per Share
---------------------------
Net (loss) income per share is based on net (loss) income
after preferred stock dividend requirements and the weighted
average number of common shares outstanding during each year
after giving effect to stock options and warrants considered
to be dilutive (none in 1995) common stock equivalents. It
is assumed that all dilutive stock options and warrants are
exercised at the beginning of each year and that the
proceeds are used to purchase up to twenty percent of the
outstanding shares of the Company's common stock with any
remaining proceeds utilized to repay indebtedness.
Common shares outstanding includes issued shares less shares
held in treasury and un-allocated and uncommitted shares
held by the ESOP trust. Fully diluted net (loss) income per
common and common
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
equivalent share is not materially different from primary
net (loss) income per share.
Drydock Costs
-------------
Prior to 1995, the Company used the accrual method to
account for major repairs and maintenance in drydock,
accruing these costs over the two to three year period to
the next drydock. Due to the uncertainty in estimating
future drydock costs, the Company changed its method of
accounting to the deferral method, which the Company
believes is preferable under the circumstances, whereby
major repairs and maintenance are capitalized as incurred
and amortized over the period to the next drydock. This
change in accounting principle had the effect of decreasing
the 1995 loss before cumulative effect of change in
accounting principle by $40,000 or $.00 per share.
The pro forma amounts shown on the consolidated statement of
operations have been adjusted for the effect of retroactive
capitalization of the drydock costs incurred in the previous
(1992) drydock of the Company's vessels, depreciation
thereof, and elimination of the 1994 drydock accrual.
Reclassification
----------------
Certain 1994 amounts have been reclassified to conform to
the classifications for 1995.
Future Accounting Changes
-------------------------
The Company is required to adopt the provisions of FASB No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. Management
does not expect that the adoption of FASB No. 121 will have
a material effect on the carrying value of the Company's
long lived assets.
The Company does not presently intend to adopt in 1996 the
fair value based method as encouraged by FASB No. 123
"Accounting for Stock-Based Compensation". Accordingly,
there will be no effect to the financial statements.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
2. VESSELS, Vessels, equipment and fixtures consist of the following:
EQUIPMENT 1995
AND FIXTURES ------------------------------------------------------------
<S> <C> <C>
Vessels $ 13,136,901
Vessel improvements 1,351,709
Gaming equipment under capital lease 1,649,900
Office and vessel equipment 873,089
Furniture, fixtures and other 511,468
Leasehold improvements 554,063
------------------------------------------------------------
18,077,130
Less accumulated depreciation and
amortization 4,231,563
------------------------------------------------------------
$ 13,845,567
============================================================
</TABLE>
In connection with the 1994 purchase of a vessel, the
Company issued 1,200,000 shares of common stock to the
seller as a portion of the purchase price. The shares were
valued at $1.25 per share ($1,500,000) which approximated
fair market value. The Company has filed a Registration
Statement for the shares. If the fair market value of the
shares at the end of nine months from the effective date of
the Registration Statement is less than $1.25 per share, the
Company is obligated to pay the difference between the fair
market value of the shares and $1.25 per share. The Company
will receive credit for the fair market value of any shares
of Casino World, Inc. distributed to the seller pursuant to
the planned spin-off of Casino World, Inc. shares to the
Company's shareholders. The fair market value of the Europa
shares at December 31, 1995 approximated $825,000.
3. INVESTMENT IN On December 31, 1990, the Company rescinded a transaction in
AND which it had previously sold its twenty percent ownership
ADVANCES TO interest in Marne (Delaware), Inc. (Marne) by reacquiring
UNCONSOLIDAT- its investment and a $340,000 note receivable in exchange
ED AFFILIATE for $541,620 of promissory notes payable to a principal
stockholder and a former officer. The Company has not
received delivery of title in its name reflecting its equity
interest in Marne, has ceased payments on the notes payable
and is seeking to have the transaction rescinded. It is the
Company's position that title cannot be properly transferred
since Marne (an S-Corporation) is not permitted to have C-
Corporation shareholders. In connection with the 1994
settlement of a lawsuit against a former officer of the
Company, the Company transferred its ownership interest in
ten percent of Marne to the former officer and recorded an
expense of $115,395. The Company has discontinued recording
its equity share of earnings in Marne due to the title
uncertainties noted above and believes its investment in and
advances to Marne at December 31, 1995 of $271,022 will be
recovered through offsets against $140,948 of notes payable
to principal stockholders and cash payments from Marne and
such stockholders for the remainder. In February 1996, a
Delaware Court issued a memorandum opinion on a related
matter which is expected to result in the resolution of the
above assets and liabilities with no material adverse effect
to the Company. (Note 12)
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4.Land Under The Company through its two
Development wholly-owned subsidiaries, Casino
for Dockside World, Inc. (CWI) and Mississippi
Gaming and Gaming Corporation (MGC) plans to
Dockside develop and operate a casino and
Gaming hotel at Diamondhead, Mississippi.
Development The proposed gaming operations in
Costs Mississippi are subject to numerous
risks and uncertainties including but
not limited to the availability of
financing, licensing, and the receipt
of environmental permits from the
Mississippi Department of Marine
Resources and the U.S. Army Corps of
Engineers. Litigation brought by
environmental groups opposed to
further development of gaming in
Mississippi may delay regulatory
approvals and the issuance of permits
necessary for the construction of a
casino at the Company's proposed
gaming operations in Mississippi. In
June 1995, the Company was granted
site approval by the Mississippi
Gaming Commission. This site
approval is land specific, and
therefore, the cost associated with
obtaining this site approval has been
capitalized to the land cost. On
February 1, 1996 MGC entered into a
lease agreement with the Hancock
County Port and Harbor Commission to
lease the tidelands under which the
casino barges will be moored and the
area under the pier from the hotel to
the casinos. The lease term is five
years commencing 30 days after
construction of the project begins.
There are four five (5) year renewal
option periods. The cost of the
lease is $2,250,000 for the first
five years of which $25,000 was paid
on signing, and $95,000 is payable
upon commencement of construction.
Both payments are to be applied
toward the lease payments which are
$10,000
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
per month during construction and the remainder of the
$2,250,000 will be paid over the remainder of the lease
after operation of the casino commences. There are no
assurances that the necessary regulatory approvals can be
obtained or that financing will be available. The Company
does not have the financial resources to develop its
proposed Mississippi dockside gaming facility. Accordingly,
there are no assurances that the development will be
successfully completed.
In view of the foregoing, the Company is proceeding forward
at the same time minimizing its efforts until such time as
these uncertainties are mitigated. The Company capitalized
an aggregate $156,090 of interest on the land in 1992 and
1993, at which time the land was undergoing activities
necessary to develop the gaming site. The Company
discontinued capitalizing interest on the land effective for
1994.
During the year ended December 31, 1994, the Company
exercised its option to acquire a parcel of land intended
for dockside gaming and simultaneously sold the property to
an unrelated third party at a gain of $2,253,124. Upon
closing of the transaction, the purchaser paid the
$6,150,000 sales price in cash and the Company has no
further involvement with the property.
Dockside gaming development costs consist of the following:
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
<S> <C>
Licenses $ 77,000
Other development costs 111,278
------------------------------------------------------------
$ 188,278
============================================================
</TABLE>
The political and regulatory environment in which the
Company is and will be operated with respect to gaming
activities is dynamic and rapidly changing. Existing
operators often support legislation and litigation designed
to make it more difficult or impossible for competition to
develop and operate gaming facilities. This environment
makes it impossible to predict the effects, including costs,
that the adoption of and changes in gaming laws, rules and
regulations and/or competition will have on proposed
dockside gaming operations.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
5. LONG-TERM Long-term debt consists of:
DEBT 1995
------------------------------------------------------------------------------------------
Bank term loan, principal and interest payable $102,000
monthly through May 2003, floating rate of interest at
Libor plus 325 basis points (9% at December 31, 1995)
capped at 11.35% with an interest rate swap agreement,
collateralized by accounts receivable, inventory,
intangible assets and substantially all vessels,equipment
and fixtures. (a) $ 6,161,642
Capital lease obligation on gaming equipment, payable
$46,398 monthly to February 1998, including interest
at nine percent 1,092,310
Bank term loan payable $25,000 monthly at interest
rate of 11% to September 1996, collateralized by
property with a net book value of approximately
$4,500,000. (b) 1,187,000
9% note payable, principal and interest payable
$4,827 monthly through November 2000,
collateralized by 400,000 shares of Europa common stock. 294,827
Notes payable to former officer/director, principal
and interest at 10% payable monthly, collateralized
by stock and note receivable of unconsolidated affiliate,
with a book value of $271,022. 140,948
6.99% insurance financing arrangement,
payable $75,601 per month 682,360
Other 67,581
------------------------------------------------------------------------------------------
Total 9,626,668
Less current maturities (1,819,055)
------------------------------------------------------------------------------------------
$ 7,807,633
==========================================================================================
</TABLE>
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(a) As of December 31, 1995, the Company was not in
compliance with its tangible net worth and cash flow
covenants required under the terms of its bank loan
agreement. The bank has waived the Company's default
by waiving beyond December 31, 1996, compliance with the
cash flow covenant requirement and reducing the tangible
net worth requirement. Accordingly, the Company is in
compliance with the loan requirements.
(b) The Bank term loan of $1,187,000 was scheduled to
mature on September 1, 1996. On April 12, 1996, the Bank
extended the maturity to January 31, 1997, with monthly
principal payments of $13,000, plus interest, during the
extension period. Accordingly, the portion due in 1997 is
classified as a long-term liability in the accompanying
consolidated balance sheet.
Annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996 $ 1,819,035
1997 2,276,437
1998 829,448
1999 820,652
2000 911,839
Thereafter 2,969,257
------------------------------------------------------------
$ 9,626,668
============================================================
</TABLE>
Interest expense consists of:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------------------------
<S> <C> <C>
Interest cost incurred $952,046 $809,644
Less:
Interest income (100,663) (85,404)
------------------------------------------------------------
Interest expense (net) $851,383 $724,240
============================================================
</TABLE>
6. STOCKHOLDERS'
EQUITY
In June 1989, the Company issued, in connection with the
initial public offering, and the underwriter purchased, for
$100, five-year warrants to purchase 400,000 shares of
common stock at a price of $1.20 per share. During the year
ended December 31, 1994, the Company redeemed the then
outstanding 142,250 warrants in exchange for 57,008
unregistered shares of common stock. In connection with the
redemption, the
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Company recorded an expense of $40,704 representing the
estimated fair market value of the shares issued.
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 for issuance 1,000,000 shares 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 and
expire within ten years from the date of grant; 1,430,000
options have been granted since the adoption of the Plan,
105,556 have been exercised, and 440,000 have lapsed.
In connection with a 1992 settlement agreement between the
Company's former Chairman of the Board and a major
stockholder, the exercise price of the remaining options
that had been issued to the Company's former Chairman were
repriced during 1992 to $1.50 per share (fair market value).
As of December 31, 1995, 1,417,500 of such options had not
been exercised and are expected to be rescinded by a pending
court order (Note 12).
In December 1993, the Company granted immediately
exercisable options to acquire an aggregate 600,000 shares
of common stock to members of the Company's Board of
Directors, and an attorney. The options expire in December
1998 and are exercisable at an exercise price of $1.0625
(fair market value at date of grant) per share. No options
have been exercised.
In August 1994, the Company granted immediately exercisable
options to acquire an aggregate 400,000 shares of common
stock to members of the Company's Board of Directors, and
the President. The options expire in August 1999 and are
exercisable at an exercise price of $1.50 (fair market value
at date of grant) per share. No options have been exercised.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Outstanding stock options are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ---------------------------
NUMBERS OF PRICE PER Number Of Price Per
SHARES SHARE Shares Share
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, January 1 2,726,250 $ .16 - 4.00 2,326,250 $.16 - 4.00
Options issued 400,000 1.50
Options exercised - - - -
Options cancelled 1,546,250 .16 - 4.00
- ----------------------------------------------------------------------------------------------
Outstanding, December 31 1,180,000 $1.06 - 2.25 2,726,250 $.16 - 4.00
==============================================================================================
</TABLE>
On June 14, 1993 the Company issued to AustroInvest
International Inc. 926,000 shares of $.01 par value Series S
Voting, Non-Convertible, Redeemable Preferred Stock in
exchange for proceeds of $1,000,080. Cumulative three
percent per annum dividends are payable quarterly. These
shares may be redeemed at the option of the Company at $1.08
per share plus $1.08 cents per share for each quarter that
such shares are outstanding and have a $1.08 per share
preference in involuntary liquidation.
On September 13, 1993, the Company issued to Serco
International Limited (SERCO) (a wholly-owned subsidiary of
AustroInvest International Inc. and a stockholder of the
Company) 900,000 shares of its $.01 par value Series S-NR
Voting, Non-Convertible, Non-Redeemable, Preferred Stock, in
exchange for proceeds of $999,000. Non-cumulative three
percent per annum dividends are payable quarterly. Upon
involuntary liquidation of the Company, the liquidation
preference of each share is $1.11.
In January 1994, the Company issued, in a Regulation S
offering 1,100,000 shares of its $0.01 par value common
stock at $1 per share to various foreign investors in
exchange for net proceeds of approximately $990,000. Other
subsequent private placements of 365,000 shares of the
Company's common stock at $1 per share generated net
proceeds to the company of approximately $328,500 in 1994.
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-
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
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 voting common stock, at any time
after February 15, 1995. During 1995, 256,200 shares of
these shares were converted to 256,200 common shares. 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 the Series S-PIK preferred stock. At the
option of the Company, for a period of three years,
dividends may be paid by issuing shares of the Company's
common stock. In connection with this offering, the Company
sold 695 units aggregating 695,000 shares of common stock
and 1,390,000 shares of preferred stock and collected
approximately $3,399,297, net of costs of approximately
$423,203. During 1995, the Company elected to pay all the
dividends in common stock, of which 305,093 shares valued at
$222,401 were issued in 1995 including accrued dividends
from 1994.
In June 1994, 300,000 shares of the Company's common stock
were offered pursuant to a Regulation S offering at a price
of $1.50 net of commissions. All of these shares were sold
and the Company collected $450,000.
In connection with the Regulation S offerings during 1994,
the Company agreed to grant an underwriter warrants to
purchase 145,000 shares of the Company's common stock at
$1.50 per share, expiring February 28, 1997 and warrants to
purchase 208,500 shares of the Company's common stock at
$1.933 per share, expiring June 30, 1997. No warrants have
been exercised.
During 1994, the Company issued 100,000 shares of common
stock to an attorney in consideration for services rendered
and recorded an expense of $90,000.
In October 1995, the Company received a stock subscription
for $500,000 in connection with a Regulation S offering. At
December 31, 1995, $200,000 had been received. No shares
have been issued at December 31, 1995.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL SUBSIDIARIES
===============================================================================
7. EMPLOYEE On August 18, 1994, the Company established the Europa
STOCK Cruises Corporation Employee Stock Ownership Plan (ESOP).
OWNERSHIP The ESOP, which is intended to be a qualified retirement
PLAN plan under provisions of Section 401(a) of the Internal
Revenue Code and an employee stock ownership plan pursuant
to Section 4975(3)(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 one year of service are eligible
to participate in the ESOP. The Company also established a
trust called Europa Cruises Corporation Employee Stock
Ownership Plan Trust Agreement to serve as the funding
vehicle for the ESOP. 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 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 1995 the Company extended the
maturity of the loans to twenty years.
Shares are allocated to the participants' accounts in
relation to repayments of the loans from the Company. Cash
dividends paid by the Company, are used to repay the loans
from the Company or allocated to the participants' accounts
at the discretion of the plan administrator and stock
dividends are allocated to the participants' accounts. No
dividends have been paid by the Company.
The Company recorded an expense of $279,452 in 1994 for ESOP
benefits. In 1995, as permitted by the Plan, the Company
decided to permanently forgo allocation of shares to
participants for services rendered during 1994. Accordingly,
the Company reduced its $261,875 ESOP compensation expense
for 1995 by the amount of forgone benefits ($279,452),
resulting in a net $17,577 benefit in the accompanying
consolidated statement of operations for 1995.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
As of December 31, 1995, 250,000 shares have been legally
released and will be allocated to participants' accounts. At
December 31, 1995, 4,750,000 shares with a fair market value
of $3,705,000 are unearned.
8. INCOME At December 31, 1995, the Company had net operating loss
TAXES carrying forwards for income taxes of approximately $10.5
million which expire through 2010. Changes in ownership of
greater than fifty percent which occurred as a result of the
Company's issuances of common and preferred stock may result
in a substantial annual limitation of approximately
$1,500,000 being imposed upon the future utilization of
approximately $7.9 million of the net operating losses for
tax purposes.
The 1994 provision for income taxes of approximately
$406,000 has been offset by utilization of approximately
$1,080,000 of book net operating loss carryforwards.
Deferred income taxes are comprised of the following at
December 31, 1995:
[CAPTION]
<TABLE>
1995
-----------------------------------------------------------
<S> <C>
Depreciation $ 1,498,000
Income from unconsolidated affiliate 72,000
-----------------------------------------------------------
Gross deferred tax liability 1,570,000
-----------------------------------------------------------
Loss Carry forwards (3,950,000)
Other (10,000)
------------------------------------------------------------
Gross deferred tax asset (3,960,000)
Deferred tax asset valuation allowance 2,390,000
------------------------------------------------------------
Net deferred tax asset $ --
============================================================
</TABLE>
Realization of any portion of the Company's deferred tax
asset at December 31, 1995 is not considered to be more
likely than not and accordingly a $2,390,000 valuation
allowance has been provided.
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
9. COMMITMENTS (a) Leases
------
AND
CONTINGENCIES The Company leases certain port facilities, sales and office
space and office equipment under lease agreements which
expire through 2001. The leases generally contain renewal
options and require that the Company pay for utilities,
insurance, property taxes, rental expense and maintenance.
The Company currently leases office space and dockage in
Florida at Madeira Beach, Ft. Myers, Miami Beach and in
Diamondhead, Mississippi. Rental expense, which is primarily
based on a per passenger basis, aggregated approximately
$724,000 and $583,000 in 1995 and 1994, respectively.
Minimum rental obligations under all noncancelable operating
leases with terms of one year or more as of December 31,
1995, are as follows:
<TABLE>
<S> <C>
1996 $ 618,000
1997 618,000
1998 536,000
1999 536,000
2000 536,000
Thereafter 210,000
-------
$ 3,054,000
===========
</TABLE>
Through December 31, 1993, the Company leased a vessel (the
EuropaJet) under a bareboat charterparty agreement with Sea
Lane Bahamas (Marne), an entity in which the Company
previously owned a twenty percent interest. As a result of
continued unprofitable operations of the EuropaJet during
the first quarter of 1993, the Company negotiated a lease
settlement with Marne, whereby, the lease was terminated as
of December 31, 1993 in exchange for payment of outstanding
lease charges of $888,000, paid as of December 31, 1995.
The Company's liability, for alleged damages arising out of
the condition of the EuropaJet upon its redelivery is in
dispute. The lessor claims the liability for damages to the
EuropaJet under the charterparty agreement is in excess of
$1 million. The Company and the lessor were unable to settle
this dispute with respect to the condition of the EuropaJet
when it was redelivered, and the amount of the Company's
remaining obligation will be determined in arbitration.
During 1995, the EuropaJet sank off the
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
the coast of Florida in a hurricane. What, if any, effect
this will have on the lessors' claim is unknown. The Company
has accrued approximately $150,000 in anticipated
settlement. Based upon the report of an independent
surveyor, the Company believes that its ultimate liability,
with respect to this matter will be immaterial to its
consolidated financial condition.
(b) Gaming Concession Agreements
----------------------------
On September 16, 1994, the Company terminated a Gaming
Concession Agreement and entered into a consulting agreement
with CAMC. Under the consulting agreement, Europa manages
and operates all casinos on board its vessels and CAMC
provides consulting services through December 31, 1997. As a
consultant to the Company, CAMC receives $37,500 per month
or 3.5% of gross gaming revenue, whichever is greater, CAMC
also receives $140 per cruise for the services of a Purser
on board each vessel. Prior to termination of the agreement,
CAMC managed and operated the Casinos in exchange for
thirty-five percent of gross gaming revenue. CAMC waived a
termination fee of approximately $1,400,000 which the
Company would have been required to pay for early
termination.
On June 19, 1994, CWI and a Company's wholly-owned
subsidiary, Mississippi Gaming Corporation (MGC) entered
into a Management Agreement with CAMC. Under the Management
Agreement, CAMC will operate on an exclusive basis all of
the proposed dockside gaming casinos in the State of
Mississippi. The Management Agreement is for a term of five
(5) years and provides for the payment of an operational
term management fee of 1.2% of all gross gaming revenues
between zero and one hundred million dollars ($100,000,000);
plus 0.75% of gross gaming revenue between $100,000,000 and
$140,000,000; plus 0.5% of gross gaming revenue above
$140,000,000; plus two percent of the net gaming revenue
between zero and twenty-five million dollars ($25,000,000);
plus three percent of the net gaming revenue above twenty-
five million dollars ($25,000,000).
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(c) Litigation
----------
On May 5, 1993, Charles S. Liberis, the Founder of the
Company and Former Chairperson of the Board of Directors,
filed a civil action in Florida seeking unspecified damages
against Europa, Charles H. Reddien, Sharon E. Petty, Ernst
G. Walter, Deborah A. Vitale, Stephen M. Turner, William A.
Herold, Victor B. Gersh, CAMC, Serco, AustroInvest
International Ltd., and others challenging the settlement
agreements between Mr. Liberis and Serco entered into on
December 12, and 14, 1992. No trial date has been set.
The litigation brought by Mr. Liberis may have an adverse
impact on the Company's ability to secure financing for its
planned Mississippi expansion and on the licensing by the
Mississippi Gaming Commission. The ultimate outcome of these
matters cannot presently be determined. Accordingly, the
financial statements do not include any adjustments that
might result from this uncertainty.
(d) Sales and Use Taxes
-------------------
On November 28, 1994, the Florida Department of Revenue
issued to the Company, a Notice of Intent to make Sales and
Use Tax Audit Changes for the period February 1, 1989
through June 30, 1994. The proposed audit Changes, including
penalties and interest total $6,515,681. The Florida
Department of Revenue seeks to assess sales tax on gaming
revenue, passenger fares, the purchase, sale and lease of
fixed assets, repairs, and other items.
On June 28, 1989, the Department of Revenue issued Technical
Assistance Advisement (TAA 89 (A) - 034) to Europa Cruise
Line, Ltd. (the entity which is now known as Europa Cruises
Corporation). This TAA appeared to resolve the admissions
tax issue and the tax on purchases issued in favor of
Europa. The Department revised this TAA in 1990, purporting
to "clarify" that it had actually intended to conclude that
the admissions tax was applicable. The revision did not
revisit the tax on purchases. On April 21, 1995, the
Assistant General Counsel for the Florida Department of
Revenue issued a recommendation to the auditor responsible
for the Europa sales tax assessments that the TAA issued on
June 28, 1989, should be honored. Therefore, the Assistant
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
General Counsel recommended that the assessment for Europa
Cruise Line, Ltd., be eliminated for the period from June
28, 1989 to May 2, 1990. For the period following May 2,
1990, the Company relies on Florida statutes that provide
that vessels are not establishments subject to admission
sales tax. The Assistant General Counsel further recommends
that the TAA be honored for all purchases made by Europa
Cruise Line, Ltd., if such purchases were for supplies
appropriate to carry out the purposes for which the Vessel
was designed. The recommendation is limited to assessments
for Europa Cruise Line, Ltd. However, the Company intends to
pursue the argument that the successor entities are entitled
to the benefits of the TAA. The recommendation of General
Counsel for the Department of Revenue regarding the TAA will
reduce the sales tax assessment by the Department of
Revenue. However, it is not possible for the Company to
estimate the amount of the reduction in the sales tax
assessment at this time. The Company strongly disagrees with
the proposed Audit Changes and intends to vigorously contest
the factual, statutory, and regulatory issues which form the
basis for the proposed Audit Changes. The Company believes
many of the proposed Audit Changes will be resolved in the
Company's favor. However, the outcome of this matter is
uncertain and if the Company is not successful in
challenging the proposed Audit Changes by the Florida
Department of Revenue, the additional Sales and Use Tax the
Company will be required to pay would have a major
substantial adverse impact on the Company's financial
condition.
(e) Government Regulation - Day Cruise Gaming Vessels
-------------------------------------------------
Federal legislation enacted in 1948, (the "Gambling Act"),
prohibits any person within the jurisdiction of the United
States from establishing, operating or owning an interest in
a gambling ship on the high seas or otherwise within the
jurisdiction of the United States. There are no formal or
informal regulations or legal or administrative opinions as
to the application of the Gambling Act to business
operations such as those conducted by the Company. Federal
Legislation enacted in 1992 specifically authorized U.S.
registered vessels to carry gambling equipment to and from
U.S. ports for use in international waters. The 1992 Federal
Legislation would appear to conflict in certain respects
with the Gambling Act. However, there are no reported
judicial decisions or
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
administrative opinions reconciling any potential conflicts
between the Gambling Act and the 1992 Federal Legislation.
Though no litigation is presently contemplated, if the
Company's operations were ever found by a court of law in a
litigation commenced by a United States Attorney's Office to
violate the Gambling Act, the vessels owned and operated by
the Company could be forfeited to the United States
Government without compensation to owners or the Company or
the Company could be required to change its operations. A
material change in the Company's operation, such as the
removal of casinos from the vessels, would have a material
adverse impact on the Company's financial condition.
(f) Casino Industry Litigation
--- --------------------------
On or about November 29, 1994, William Poulos filed a class
action lawsuit on behalf of himself and all others similarly
situated against approximately thirty-three defendants,
including Europa Cruises of Florida 1, Inc. and Europa
Cruises of Florida 2, Inc. in the United States District
Court, Middle District of Florida, Orlando Division (Case
No. 94-1259-CIV-ORL-22). Europa Cruises of Florida 1, Inc.
and Europa Cruises of Florida 2, Inc. were served with the
Complaint on or about March 15, 1995. The suit was filed
against the owners, operators and distributors of cruise
ship casinos which utilized casino video poker machines and
electronic slot machines. The Plaintiff alleges violation of
the Federal Civil RICO statute, common law fraud and deceit,
unjust enrichment and negligent misrepresentation. The
plaintiff had filed a similar action against most major,
land-based casino operators in the United States. The
earlier action, which did not name the Company or any of its
subsidiaries as defendants, was transferred from the U.S.
District Court in Orlando, Florida to the U.S. District
Court in Las Vegas, Nevada. The plaintiff contends in both
actions that the defendant owners and operators of casinos,
including cruise ship casinos, along with the distributors
and manufacturers of video poker machines and electronic
slot machines have engaged in a course of fraudulent and
misleading conduct intended to induce people to play their
machines based on a false understanding that the machines
operate in a truly random fashion. The plaintiff alleges
that these machines actually follow fixed, preordained
sequences that are not random, but rather are both
predictable and subject
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
to manipulation by defendants and others. The plaintiff
seeks damages in excess of $1 billion dollars against all
defendants.
On September 13, 1995, the United States District Court for
the Middle District of Florida, Orlando Division,
transferred the case pending in that Court against Europa
Cruises of Florida 1, Inc. and Europa Cruises of Florida 2,
Inc. and other defendants to the United States District
Court for the District of Nevada, Southern Division.
Accordingly, the case against Europa and the other
defendants in the cruise ship industry will be litigated and
perhaps tried together with those cases now pending against
the land-based casino operators and the manufacturers,
assemblers and distributors of gaming equipment previously
sued in federal court in Nevada. Management believes the
Nevada forum provides a more favorable forum in which to
litigate the issues raised in the Complaint. The Company is
sharing the cost of litigation in this matter with other
defendants. Although this action is in the very early stages
of litigation, management believes there is no support for
plaintiff's factual claims and the Company intends to
vigorously defend this lawsuit.
(g) Proposed Florida Law to Ban Business
--- ------------------------------------
On or about March 6, 1996, a bill was introduced into the
Florida State House of Representatives by Representative
King from the Jacksonville, Florida area to ban all cruises
to nowhere originating from the State of Florida. This bill,
if passed by both the House of Representatives and the
Senate and signed by the Governor, would in fact bar the
Company from continuing its core business of day and evening
cruises to nowhere, in the State of Florida. The Company is
actively engaged in lobbying efforts through the Florida Day
Cruise Association to defeat this bill in committee. The
Company feels that this bill will not become a new law,
however, there can be no assurances that this bill will be
defeated.
The Governor of the State of Florida has proposed a bill
that would provide the State of Florida with a $5.00 per
passenger tax on all cruises to nowhere originating from the
State of Florida. The Florida Day Cruise Association is
working closely with the Governor's budget office
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
to develop a fair tax that would not be burdensome to the
passengers, or those companies engaged in the cruise to
nowhere business.
<TABLE>
<CAPTION>
10. SUPPLEMENTAL Supplemental schedules of interest paid are as follows:
CASH FLOW
INFORMATION 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 998,000 $ 897,000
Non-cash transactions are as follows:
1995 1994
-----------------------------------------------------------------------
Gaming equipment financed by seller $ - $1,600,000
Vessel financed by seller - 1,017,452
Common stock issued to seller in
connection with vessel purchase - 1,500,000
Expenditures paid in shares of
common stock 48,400 158,904
Contribution of note payable to
additional paid-in capital - 115,395
Unearned ESOP shares - 7,455,000
Exercise of option to purchase land - 3,000,000
Conversion of promissory note into
200,000 shares of Company's common
stock 200,000
Financed insurance premiums 682,360 594,048
Preferred stock dividends 222,401 27,800
</TABLE>
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
<TABLE>
<CAPTION>
11. OTHER Other operating costs consist of the following:
OPERATING 1995 1994
COSTS ------------------------------------------------------------
<S> <C> <C> <C>
ESOP (benefit) provision $ (17,577) $ 279,000
Shareholder litigation 393,366 161,000
Write off Mexico
development costs 24,288
Other 90,115 295,160
------------------------------------------------------------
$ 490,192 $ 735,160
============================================================
</TABLE>
12. SUBSEQUENT Liberis Litigation - Delaware
EVENTS -----------------------------
In a memorandum opinion issued February 8, 1996 by the Court
of Chancery of the State of Delaware in and for New Castle
County, the Court ruled that Liberis who had filed suit
against the Company to enforce a stock option agreement to
purchase 1,417,500 shares of stock "has no right to enforce
the alleged stock option agreement." Under the decision,
Liberis is also required to return 250,000 shares of common
stock to the Company to rescind a transaction in December
1990 in which Liberis attempted to convey back to the
Company certain assets Liberis had previously acquired from
the Company. (See Note 3, Investment In and Advances to
Unconsolidated Affiliate)
A final order is expected to be entered soon. Mr. Liberis
has the right to appeal the decision.
In March 1996, the Company subscribed approximately
1,089,000 shares of common stock in a Regulation S offering
which will net proceeds of $500,000 after offering costs.
13. FOURTH Year end adjustments made in the fourth quarter of 1994 had
QUARTER the effect of decreasing net income for the quarter by
ADJUSTMENTS approximately $1,600,000. The adjustments related
(UNAUDITED) principally to the carrying amount of certain assets,
expense accruals and common stock transactions associated
with prior quarters of 1994.
14. FAIR VALUE The Financial Accounting Standards Board ("FASB") has
OF FINANCIAL issued Statement of Financial Accounting Standards ("SFAS")
INSTRUMENTS No. 107 which requires the estimated fair value amounts to
be determined by the
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
Company's management using available market information and
other valuation methods. However, considerable judgement is
required to interpret market data in developing the
estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the
amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methods mayhave a material effect on the
estimated fair value amounts. Furthermore, the Company does
not intend to dispose of a significant portion of its
financial instruments and, thus, any aggregate unrealized
gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
SFAS No. 107 excludes certain financial instruments from its
disclosure requirements, such as leases. In addition,
disclosure of fair value estimates are not required for non
financial assets and liabilities, such as fixed assets,
intangibles and anticipated future business. As a result,
the following fair values are not comprehensive and
therefore do not reflect the underlying value of the
Company.
The following methods and assumptions were used in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents - the carrying amounts reported in
-------------------------
the consolidated balance sheet approximate those assets'
fair value.
Accounts receivable - the carrying amounts reported in the
-------------------
consolidated balance sheet approximate those assets' fair
value.
Investment in and advances to unconsolidated affiliate - the
------------------------------------------------------
carrying amounts reported in the consolidated balance sheet
approximates those assets' fair value.
Long-term debt - the carrying amount approximates fair
--------------
value. The approximate carrying amounts and estimated fair
values of the Company's financial instruments at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-----------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 552,061 $ 552,061
Accounts receivable 31,767 310,767
</TABLE>
<PAGE>
EUROPA CRUISES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
Investment in and advances to
unconsolidated affiliate 271,022 271,022
FINANCIAL LIABILITIES:
Long-term debt $ 9,626,668 $9,626,668
========================================================
</TABLE>
