SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1997
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COMMISSION FILE NO: 0-17529
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EUROPA CRUISES CORPORATION
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(name of small business issuer in its charter)
DELAWARE 59-2935476
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(State of Incorporation) (I.R.S. Employer
Identification Number)
150-153rd Avenue East, Suite 200, Madeira Beach, Florida 33708
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(Address of principal executive offices)
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Registrant's telephone number, including area code: 813/393-2885 (Ext.326)
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.001
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $20,847,788.
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The aggregate market value of the voting stock held by non-affiliates of the
Company is $18,695,517 based on the last reported sales price of $.875 per share
on April 9, 1998, multiplied by 21,366,305 shares of Common Stock outstanding
and held by non-affiliates of the Company on April 9, 1998.
As of the close of business April 9, 1998, there were 27,345,349 shares of the
Registrant's Common Stock outstanding (which includes 5,000,000 shares in the
Europa Cruises Corporation Employee Stock Ownership Plan).
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TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . .3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . 21
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS. COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT . . . . . . . . . . . . . . . . . . 26
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . 32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS . . . . . . . . . . . . . . . . . . 34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . 35
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PART I
ITEM 1. BUSINESS
Europa Cruises Corporation is a Delaware corporation which was founded in 1988.
The Company became a publicly held company in 1989. The Company trades on NASDAQ
under the symbol "KRUZ." The Company has twelve subsidiaries and conducts its
current business through six of them. These are:
1. CASINO WORLD, INC.
2. MISSISSIPPI GAMING CORPORATION
3. EUROPA CRUISES OF FLORIDA 1, INC.
4. EUROPA CRUISES OF FLORIDA 2, INC.
5. EUROPASKY CORPORATION
6. EUROPA STARDANCER CORPORATION
I. FLORIDA OPERATIONS
Europa Cruises Corporation is one of the largest day cruise operators in the
United States. It currently employs approximately 412 employees and owns and
operates four gaming ships, the EuropaSun, the EuropaStar, the EuropaSky, and
the M/V Stardancer. The four ships are operated through four of the above-named
subsidiaries. The Company operates day and evening gaming cruises out of three
ports located in Miami Beach, Ft. Myers Beach, and Madeira Beach, Florida. The
fourth boat is time chartered to an unrelated third party. In addition to
blackjack, poker, slot machines, craps, and sports betting, the cruises offer
fine dining, dancing and entertainment. The Company has approximately 822 gaming
positions fleet wide, including 447 slot machines. All gambling is conducted in
international waters only. The Company operated 2,236 cruises in 1997 and
carried 330,814 passengers in 1997. The Company earned total revenues of
$20,847,788 in 1997.
EMPLOYEES
The Company presently employs 412 persons. Of these, 6 are executive and
management personnel, 9 are engaged primarily in marketing and sales activities
and 14 are engaged in administrative and clerical positions. The remaining
employees are ship officers, crew, casino, reservations, food service and other
staff employed by the Company who work on the Company's four vessels. None of
the Company's employees is a party to a collective bargaining agreement. The
Company considers its employee relations to be generally satisfactory.
VESSELS
The EuropaSun and the EuropaStar were built in 1977, are registered in Panama
and were renovated in January 1987. Both vessels are approximately 100 gross
registered tons in size, 167 feet in length and 38 feet in width. Each vessel
has a capacity for 350 passengers. The EuropaSun has 213 gaming positions,
including 108 slot machines. The EuropaStar has 256 gaming positions, including
139 slot machines. Each vessel has a dining area, entertainment stage, dance
floor, main lounge, bars and a fully equipped galley. The EuropaStar has a gift
shop. During 1996, the Company committed approximately 1,000 square feet of
additional gaming space to these two vessels. The EuropaSun and the EuropaStar,
which are currently registered in Panama, were previously registered in the
United States and at that time received Certificates of Inspection from the
United States Coast Guard. Both vessels currently hold valid control
verifications from the United States Coast Guard.
The EuropaSky, was acquired in 1992, renovated by a U.S. shipyard and placed in
operation in November of 1993. The vessel is 498 tons, 160 feet in length and 36
feet in width. The vessel has a capacity for 440 passengers. The EuropaSky has
254 gaming positions, including 130 slot machines. The EuropaSky has two dining
areas, including one for VIP's, a gift shop, entertainment stage, dance floor,
several lounges,
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a small conference and television room, and a sun deck with seating for up to
100 persons. The EuropaSky was built to U.S. safety standards in order to
receive a United States Coast Guard Certificate of Inspection. The EuropaSky's
United States registry was made possible by 1992 legislation that, for the first
time, allowed U.S. registered vessels to carry gambling equipment to and from
U.S. ports for use in international waters.
The M/V Stardancer was purchased in August 1994 and is a U.S. registry vessel
built in 1984. The vessel has a gross registered tonnage of 97 tons, is 150 feet
in length, and 36 feet in width, and has a capacity for 499 passengers. The
vessel is, generally, time chartered during periods when not being used as the
"replacement" vessel in each of the Company's existing operatings ports when the
Company's other three vessels are in drydock. The M/V Stardancer has 99 gaming
positions including 70 slot machines. The Stardancer has a dining area, several
bars, a gift shop, and a sun deck with seating for up to 100 persons.
CRUISE OPERATIONS
Competition in the day cruise industry is fierce. The Company must adjust its
passenger fares to remain competitive. The current prices for the Company's
cruises range from "FREE" to $35.00 depending on the port, the market, the
competition in that market, the day of the week, the time of day, the time of
year, and whether or not it is a holiday season. The Company offers various
discount passenger rates to groups, charterers of an entire vessel, and others
and offers various special fares and complimentary fare programs for its rated
casino patrons. The Company offers its vessels for charter cruises if such
charters do not interfere with the scheduled cruises offered to the general
public. The Company's vessels have been used for convention meetings, continuing
education programs, weddings and various other group gatherings. The Company
provides bus services and special arrangements for certain groups.
In addition to its regular cruises, the Company offers various "theme" cruises,
including those which feature different types of music, such as jazz, country,
50's, oldies, concert, and special holiday cruises for Easter, Mother's Day, the
4th of July, Halloween, Christmas and New Year's Eve. The theme cruises are
aimed at specific customer groups. In addition to theme cruises, the Company
offers specialty cruises for blackjack, slot and other gaming tournaments.
WEATHER AND SEASONAL FLUCTUATIONS
The business of the Company suffers as a direct result of inclement weather.
Inclement weather has a direct effect on the number of cruises conducted and on
passenger counts. In addition, passenger counts are reduced immediately before
and immediately after inclement weather conditions. The business of the Company
is also subject to seasonal fluctuations. In 1998, the Company has already
suffered an inordinate amount of lost cruises due to adverse weather conditions.
SALES AND MARKETING
The Company focuses its sales and marketing efforts in markets concentrated
within a one hundred mile radius of its ports. The Company must attract
passengers from both the local population and the tourist population to survive
the seasonal fluctuations that are known to occur in the Florida tourist
industry. The Company focuses its efforts on local markets and on tourists
visiting the local markets on vacation. The Company markets its cruises through
general advertising, direct mailings, travel agents and the Company's own sales
force.
TERMINATION OF GAMING CONCESSION AGREEMENT AND CONSULTING AGREEMENT
WITH CASINO AUSTRIA MARITIME CORPORATION
Through October 15, 1994, the casinos on the Company's vessels were operated by
Casinos Austria Maritime Corporation ("CAMC") as concessionaire, pursuant to a
Gaming Concession Agreement entered into on February 18, 1993. On September 16,
1994, the Company terminated the Gaming Concession
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Agreement and entered into a Consulting Agreement with CAMC. Under the
Consulting Agreement, the Company managed and operated all casinos on board the
Company's vessels and CAMC's role was limited to providing consulting services
through December 31, 1997. Under the Consulting Agreement, CAMC received $37,500
per month or 3.5% of gross Gaming Revenue, whichever was greater. CAMC also
received $140 per cruise for the services of a Purser on board each vessel. In
return for the Consulting Agreement, CAMC waived a termination fee of
approximately $1,400,000 that the Company would have otherwise been required to
pay for early termination of the Gaming Concession Agreement.
On October 15, 1996, CAMC and the Company amended the Consulting Agreement with
CAMC to terminate the $140 per cruise Purser Fee. This Addendum became effective
as of October 15, 1996. On February 4, 1997, the Company entered into a
Termination Agreement with CAMC under the terms of which the parties agreed to
terminate the September 16, 1994 Consulting Agreement between the Company and
CAMC. Under the terms of the Termination Agreement, the Company paid CAMC
$361,644 to terminate the Agreement.
On October 13, 1994, the Company entered into an Equipment Lease Agreement with
CAMC pursuant to which the Company leased all gaming equipment on the Company's
four vessels for a period of forty months at $46,398 per month. The Company has
the option to purchase the equipment for the sum of one dollar at the conclusion
of the lease. In February, 1997, the Equipment Lease was extended for an
additional five months and the lease payment was increased to $49,025.39 to
provide for previous lease payments not made. On April 1, 1998, the Equipment
Lease was amended so as to reduce the monthly payments of $49,025 to $25,000 per
month. The lease is now scheduled to end in May, 1999. The Company intends to
exercise its option to purchase the equipment.
STATE REGULATION - FLORIDA
On or about March 6, 1996, Representative King from the Jacksonville, Florida
area, introduced a bill in the Florida State House of Representatives to ban all
cruises-to-nowhere originating from the State of Florida. This bill was
defeated.
In January, 1997, two bills were introduced to place a $1.00 per passenger
surcharge on cruises of less than 24 hours and a $5.00 per passenger surcharge
on cruises of 24 hours or longer. This surcharge was intended to fund a Trust
Fund to be used for statewide beach restoration and management. The Bills were
subsequently amended so that the cruise-to-nowhere industry would not be taxed
and as such became law.
On or about March 23, 1998, an amendment to a prefiled Bill was introduced
which, in part, prohibited the advertisement of any form of gambling in any
newspaper, circular, poster, pamphlet, radio, telegraph, telephone or otherwise.
The Committee to which the amendment was sent adjourned without taking action on
the amendment. There can be no assurance that the amendment will not be
reintroduced at a later time.
There can be no assurance that further legislation will not be introduced which
could adversely affect the business of the Company or the ability of the Company
to continue operating cruises-to-nowhere out of Florida ports.
STATE OF FLORIDA LITIGATION RELATING TO THE FLORIDA DAY CRUISE INDUSTRY
On July 2, 1997, Robert A. Butterworth, the Attorney General for the State of
Florida, and Neil Perry, Sheriff of St. Johns County, Florida ("Plaintiffs")
filed a Complaint for Injunctive Relief Against the Illegal Possession of Slot
Machines and the Continuance of a Public Nuisance against Chances Casino
Cruises, Inc. and Mark Morrow, ("Defendants") operators of the Royal Princess,
in the Circuit Court of the Seventh Judicial Circuit In and For St. Johns
County, Florida (Case No. CIV-97-1088). The Plaintiffs sought a temporary and
permanent injunction restraining the Defendants from continuing to possess slot
machines in the State of Florida. On July 2, 1997, the Plaintiffs filed a Motion
for a Temporary Injunction. The Court heard argument on the Motion for a
Temporary Injunction on July 18, 1997. The Florida Day
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Cruise Association of Florida, Inc., of which Europa Cruises Corporation is a
member, filed a Motion to Appear as Amicus Curiae and a Memorandum in Opposition
to the Motion for Temporary Injunction. On July 22, 1997, the Court denied the
Plaintiffs' Motion for Temporary Injunction, without prejudice to a final
adjudication on the merits. The Court also granted the Defendants' Motion to
stay enforcement by Plaintiffs and subordinate agencies through criminal process
of the "slot machine" issue raised. On November 26, 1997, as a result of the
cessation of the business which was the subject of this suit, the Court entered
an Order for Dismissal Without Prejudice granting the Defendants' Motion to
Dismiss for Mootness and dismissed all counterclaims without prejudice to
Plaintiffs.
There can be no assurance that further litigation will not be instituted in the
State of Florida or elsewhere which could adversely affect the business of the
Company or the ability of the Company to continue operating cruises-to-nowhere
out of Florida ports.
COMPETITION
When the Company began its Florida operations in 1988, there were approximately
four other vessels operating gambling day cruises from the State. Today, there
are approximately 26 vessels offering such cruises, many of which compete
directly with the Company's vessels. Many of the competing firms offer free day
cruises. Although the Company's standard prices for its cruises currently range
from "Free" to $35.00 per person, the Company may, in the future, be forced to
adjust these rates due to competitive pressures. The influx of operators into
Florida has also placed a premium on new port locations which makes expansion
more difficult. Further, these competitors could reposition their vessels to any
area in which the Company's vessels are currently positioned. Any such increase
in competition could have an adverse impact on the Company's financial position
or results of operations.
In 1996, the Florida legislature enacted a law intended to promote economic
development for the Florida para-mutual industry by increasing full card
simulcasting and intertrack wagering and permitting low-stakes (the maximum
allowable pot is $10.00) card rooms at pari-mutual facilities. The pari-mutuals
must choose between operating card rooms or carrying simulcasts on the days they
operate. Card rooms are operating in Miami and Tampa where the Company operates
vessels.
In addition, the Company competes with a variety of other vacation activities in
the areas where it operates its vessels. These include, but are not limited to,
short-term cruises, resort attractions, various sporting activities and numerous
other recreational activities.
In November of 1994, Florida voters rejected an Amendment to the Florida
Constitution that would have authorized casinos throughout the State of Florida
at existing and operating parimutuel facilities, including race tracks and
Jai-Alai frontons and at up to seven other casinos in the state (but not more
than one per county) as authorized by the Florida Legislature. It is likely that
the gaming industry will continue to pursue the legalization of land-based
gaming in Florida. The Company believes that the legalization of land-based or
dockside gaming in Florida would have a material adverse impact on the Company's
operations.
FUTURE FLORIDA PORTS
The Company has no present intent to open any additional ports in Florida. The
Company would consider joint venture or other arrangements or opportunities to
expand it's day cruise operations in Florida. However, the Company does not
presently have sufficient funds with which to do so by itself. In the event the
Company elected to expand it's ship-based operations in Florida, in selecting a
new site for expansion, it would consider the following factors: site
accessibility, a suitable population base, an established vacation market,
docking facilities, water depth, availability of U.S. Customs clearance, an
ability to comply with state and local laws, favorable year-round weather and
sea conditions, close proximity to international waters, and limited
competition. Due to the expenses associated with the repositioning of a
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vessel from one port to another, the Company tries to position its vessels in
markets that can support a vessel at a profitable level year round.
NEW YORK
The Company has no operations in New York, but would like to enter the New York
Market. The Company has been approached by several parties with respect to
opening a cruise-to-nowhere operation in New York. However, the Company does not
presently have sufficient funds with which to enter the New York market and,
unless the Company can negotiate a joint venture agreement with a partner which
has sufficient funds to open and maintain a port in New York, the Company cannot
do so. The New York market is substantial and, even assuming competition, the
Company believes it is sufficient to support multiple gaming vessels. Moreover,
the per capita drop per New Yorker is expected to be heavier than that in
Florida inasmuch as Florida has a significant retirement-based, fixed-income
population. Therefore, the Company will continue to explore any opportunity it
may get to enter the New York market.
II. MISSISSIPPI
Europa Cruises Corporation owns, through Mississippi Gaming Corporation,
(hereafter "MGC") (or has options to purchase for ten dollars), a total of
404.5 acres of unimproved land in Diamondhead, on the Bay St. Louis, in Hancock
County, Mississippi. The Company intends to construct a destination casino
resort and hotel at the 404 acre site. The site, which is located immediately
off Interstate 10, is adjacent to a site on which Circus Circus Enterprises,
Inc., also intends to develop a destination casino resort and hotel. The
Company's destination resort is expected to include a luxury hotel and spa, a
sports and entertainment center, approximately 120,000 square feet of casino
space, a state-of-the-art recreational vehicle park, a business conference
center and an executive golf course. The site was appraised as of March 26,
1996, at $8,000,000 by J. Daniel Schroeder Appraisal Company. The appraisal was
predicated on the site being zoned as a legally permissible water-based casino
site. Europa Cruises Corporation is also the sole shareholder of Casino World,
Inc. (hereafter "CWI"). The Company maintains an office in Mississippi for
Casino World, Inc., but has no current operations in Mississippi.
On January 31, 1997, the Company entered into an agreement with Hilton Gaming
Corporation (hereafter "Hilton"), the world's largest gaming company, which gave
Hilton the exclusive right to negotiate a joint venture agreement with Europa
for a 180 day period of time with respect to the development of Europa's
Diamondhead, Mississippi property. In exchange for the exclusive right to
negotiate, Hilton paid Europa a nonrefundable fee of $400,000. The exclusive
option period expired on or about July 31, 1997 and Hilton has taken no further
action.
INVESTMENT BANKER/ADVISOR
On April 2, 1998, the Company signed an Agreement with McDonald & Company
Securities, Inc. ("McDonald"), retaining McDonald as the Company's exclusive
investment banker and advisor. McDonald will spearhead Europa's efforts to
engage a joint venture partner and/or to obtain the necessary financing required
to develop a casino resort on the Company's 404 acre tract located on the Bay of
St. Louis in Diamondhead, Mississippi. Under the Agreement signed with McDonald,
which is for a term of six months, the Company is required to pay no up-front
fees or monthly fees or expenses. The Agreement is contingency-fee based and all
fees are contingent on the consummation of a Transaction. For so long as the
Agreement remains in effect, McDonald will also act as a market maker for Europa
Cruises Corporation.
MISSISSIPPI PERMITS/APPROVALS
(See also Item 3. Legal Proceedings.)
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A. MISSISSIPPI GAMING COMMISSION
On June 15, 1995, the Mississippi Gaming Commission granted site approval for
the Diamondhead casino resort plan.
B. MISSISSIPPI COMMISSION ON MARINE RESOURCES
On July 16, 1996., the Mississippi Commission on Marine Resources granted
approval to Casino World, Inc. and the Hancock County Port and Harbor Commission
for a change in the Coastal use Plan and an associated Permit to develop the
Mississippi Gaming Commission approved site plan. On September 18, 1996, several
associations opposed to the change and the Permit filed an appeal to the
Chancery Court of Hancock County, Mississippi. On October 16, 1996, Casino
World, Inc. and the Hancock County Port and Harbor Commission filed a Joint
Motion to Dismiss for Untimely Appeal in which they alleged that the appellants
had failed to file their Notice of Appeal and Complaint within the proper time
period. The Joint Motion to Dismiss was granted on December 31, 1996. On January
15, 1997, the dismissed parties appealed the decision of the Chancery Court to
the Supreme Court of Mississippi. Oral argument is set for May 12, 1998.
C. MISSISSIPPI DEPARTMENT/COMMISSION ON ENVIRONMENTAL QUALITY
On January 22, 1997, the Mississippi Department of Environmental Quality issued
a Construction Storm Water General (National Pollution Discharge Elimination
System (NPDES) Permit to Casino World. Inc. On January 9, 1997, the Mississippi
Commission on Environmental Quality ("MCEQ") approved the issuance of the Water
Quality Certification granted by the Mississippi Department of Environmental
Quality, Office of Pollution Control, to Casino World, Inc. and Hancock County
Port and Harbor Commission. Certain associations opposed to the granting of this
Certification requested an evidentiary hearing which was held in April, 1997. On
June 26, 1997, the MCEQ issued an Order affirming the Water Quality
Certification issued to Casino World, Inc. on January 9, 1997, as modified and
clarified on May 22, 1997. The same associations appealed the decision to the
Chancery Court of Hancock County, Mississippi. On February 27, 1998, the
Chancery Court filed a Memorandum Opinion and Order denying the appeal and
entering judgment in favor of the Appellees, including Casino World, Inc. No
appeal from the decision of the lower court was filed. The time period for
appealing has expired.
D. U.S. ARMY CORPS OF ENGINEERS
On March 26, 1998, the U.S. Army Corps of Engineers issued a Permit to the
Hancock County Port and Harbor Commission, which was then immediately
transferred to Casino World, Inc. and Mississippi Gaming Corporation, to, among
other things, construct a casino mooring facility in the Bay of St. Louis, at
the Company's Diamondhead, Mississippi site. The time limit for completing the
work authorized under the Permit is March 26, 2001. Unless there are
circumstances requiring either a prompt completion of the authorized activity or
a reevaluation of the public interest decision, the Corps, as stated in the
Permit, will normally give favorable consideration to a request for an extension
of this time limit.
On March 26, 1998, after receiving its Permit and in anticipation of being sued
by the groups opposed to casino development or to the Diamondhead casino
project, Casino World, Inc. and Mississippi Gaming Corporation filed suit
against certain parties to, inter alia, declare the Permit issued by the U.S.
Army Corps of Engineers on March 26, 1998, to be valid under Section 10 of the
Rivers and Harbors Act and to enjoin the defendant groups from delaying,
interfering or infringing on protected rights the Companies have under the
Permit.
E. HANCOCK COUNTY BOARD OF SUPERVISORS
On January 16, 1997, the Hancock County Board of Supervisors adopted a
county-wide zoning plan. The Company's 404-acre site was zoned as a Special Use
District Waterfront Gaming District. The zoning
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designation comports with the Diamondhead Casino Resort site plan approved by
the Mississippi Gaming Commission, the Mississippi Commission on Marine
Resources, the Hancock County Planning Commission and the Hancock County Board
of Supervisors.
Any modification of the approved site plan may require resubmission to and
reapproval by the Mississippi Gaming Commission, the Mississippi Department of
Marine Resources, the Mississippi Department of Environmental Quality and/or the
U.S. Army Corps of Engineers. Therefore, the conditions of these permits are
material and must be factored into any negotiation with any potential joint
venture partner. The foregoing permits and approvals remain subject to the
outcome of certain litigation and the actions of environmental groups and
various federal, state and local governments and agencies, including the
foregoing.
MISSISSIPPI LICENSES
The ownership and operation of a gaming business in Mississippi is subject to
extensive laws and regulations, including the Mississippi Gaming Control Act
(the "Mississippi Act") and the regulations (the "Mississippi Regulations")
promulgated thereunder by the Mississippi Gaming Commission which is empowered
to oversee and enforce the Mississippi Act. Gaming in Mississippi can be legally
conducted only on vessels of a certain minimum size in navigable waters of the
Mississippi River or in waters of the State of Mississippi (so called dockside
gaming) which lie adjacent and to the south (principally in the Gulf of Mexico)
of the Counties of Hancock, Harrison and Jackson, and only in counties in
Mississippi in which the registered voters have not voted to prohibit such
activities.
Neither the Company nor any of its subsidiaries has a license to operate a
casino in Mississippi or in any other jurisdiction. The Mississippi Act requires
that a person (including any corporation or other entity) must be licensed by
Mississippi to conduct gaming activities in Mississippi. A license will be
issued only for a specified location that has been approved as a gaming site by
the Mississippi Commission prior to issuing a license. The Mississippi Act also
requires that each officer or director of a gaming licensee, or other person who
exercises a material degree of control over the licensee, must be found suitable
by the Mississippi Gaming Commission. Any person who, directly or indirectly, or
in association with others, acquires beneficial ownership of more than 5% of the
common stock of any gaming enterprise must notify the Mississippi Gaming
Commission of this acquisition and must be found suitable by the Mississippi
Gaming Commission. 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.
Ms. Vitale, President and Chairman of the Board of Europa Cruises Corporation
and President and a Director of Casino World, Inc. and Mississippi Gaming
Corporation, was issued a key person license by the Colorado Gaming Commission
during 1994. Neither Casino World, Inc. or Mississippi Gaming Corporation
presently intend to seek a gaming license in Colorado and a Colorado license is
ineffective in Mississippi. During 1996, Ms. Vitale's key person license in
Colorado expired and was not renewed.
On June 19, 1994, Casino World, Inc. and Mississippi Gaming Corporation (MGC)
entered into a Management Agreement with Casinos Austria Maritime Corporation
(CAMC). Subject to certain conditions, under the Management Agreement, CAMC will
operate, on an exclusive basis, all of the proposed dockside gaming casinos in
the State of Mississippi. If the Company enters into a joint venture arrangement
pursuant to which the joint venture partner acquires a controlling interest, the
agreement with CAMC will terminate. The Management Agreement is for a term of
five (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).
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The political and regulatory environment in which the Company is and will be
operated with respect to gaming activities, is uncertain, dynamic and subject to
rapid change. 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 gaming operations.
Except for historical information contained herein, the matters discussed in
this Item 1, in particular, statements that use the words "believes," "expects,"
"intends," or "anticipates," are intended to identify forward looking statements
that are subject to risks and uncertainties including, but not limited to,
inclement weather, mechanical failures, 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 activities of
environmental groups, the outcome of litigation and the actions of federal,
state, or local governments or agencies.
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ITEM 2. PROPERTIES
OFFICES/OPERATING PORTS
The Company owns an office condominium which it uses at 150 - 153rd Ave., Suite
202, in Madeira Beach, Florida. The condominium is adjacent to office space
leased by the Company. The Company paid approximately $104,000 for the
condominium.
The Company leases office space at the following locations:
FLORIDA:
LOCATION LEASE TERMS
- -------- -----------
150 - 153rd Ave., Suite 200, Twelve months with an option to renew for
Madeira Beach, Florida 33708 two additional one year periods.
150 - 153rd Ave., Suite 204 Twelve months with automatic renewal for
Madeira Beach, Florida 33708 additional two years.
150 - 153rd Ave., Suite 205 Twelve month, renewable on a 5 year basis.
Madeira Beach, Florida 33708
645 San Carlos Blvd. Five years commencing December 1, 1995
Ft. Myers Beach, Florida 33931 with option to renew for three years.
1280 5th Street Five years commencing March 1, 1995
Miami Beach, Florida 33139 with option to renew for two years. The
Company exercised its option to renew in
January, 1997.
The Company leases dockage space at the following locations:
LOCATION LEASE TERMS
- -------- -----------
150 - 129th Ave. Three years commencing October, 1996
Madeira Beach, Florida 33708 with option to renew for two additional
three year periods.
645 San Carlos Blvd. Five years commencing December 1, 1995
Ft. Myers Beach, Florida 33931 with option to renew for three years.
1280 5th Street Five years commencing March 1, 1995
Miami Beach, Florida 33139 with option to renew for two years. The
Company exercised its option to renew in
January, 1997.
MISSISSIPPI:
5403 Indian Hill Blvd. Three years commencing June 1, 1995
Diamondhead, MS 39525
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Diamondhead, Mississippi Property
On June 19, 1993, the Company, through Mississippi Gaming Corporation ("MGC"),
exercised its option to purchase 404.5 acres of property at Diamondhead,
Mississippi for $4,000,000. To complete the purchase of the Diamondhead
property, MGC obtained a $2,000,000 loan from Casinos Austria Maritime
Corporation ("CAMC") that was secured by a first mortgage on the Diamondhead,
Mississippi 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 proceeds of a loan obtained by the Company in May
1995 from First Union National Bank of Florida.
On June 19, 1993, MGC entered into an option agreement to purchase approximately
100 acres included within, but separated, from the total 404 acres of property
which is the site. This option expires in June 2003.
In order to insure that MGC has adequate access to the proposed gaming site at
Diamondhead, Mississippi, MGC acquired a 100-foot wide perpetual easement from
an adjoining property owner on December 22, 1994. The cost of the easement was
$60,000. MGC has the right to construct an asphalt roadway at its expense on the
easement property. If construction of the roadway does not commence in seven
years of the easement grant, the easement terminates and reverts to the
Grantors.
On February 1, 1996, MGC entered into a lease with the Hancock County Port and
Harbor Commission to lease 10.15 acres of tidelands (bottomlands) and .1 acre of
uplands. The bottomlands lease covers the area where the casino barges and the
pier between the hotel and the casinos will be moored. The term of the lease is
for five (5) years beginning 30 days after construction on the project
commences. There are four five (5) year option renewal periods. The cost of the
lease is $2,250,000 for the first five years of which $25,000 was paid on
signing, and of which $95,000 is payable upon commencement of construction. Both
payments are to be applied toward the lease payments which are $10,000 per month
during construction. The remainder of the $2,250,000 will be amortized over the
remainder of the lease after operation of the casino commences. Renewal options
will be at a fair market value as defined under Mississippi Code Ann. Section
29-1-107(2)(b)(Supp. 1994) or as amended by subsequent legislation and adopted
and published rules of the Secretary of State for the administration, control
and leasing of public trust tidelands, as amended and revised. The lease is
contingent on the project receiving all necessary approvals for construction and
compliance with the Memorandum of Understanding which transferred management and
control of the subject tidelands from the Mississippi Secretary of State to the
Hancock County Port and Harbor Commission. This memorandum required the Hancock
County Port and Harbor Commission to enter into a tenant lease for the tidelands
within one year of signing of the transfer, November 19, 1995, and commencement
of casino operations within three years of signing of the transfer.
On March 24, 1998, MGC entered into a supplemental Agreement with the Hancock
County Port and Harbor Commission, which required the Company, inter alia, to
indemnify and hold the Hancock County Port and Harbor Commission harmless from
certain damages, claims and suits; to refrain from violating environmental laws;
to provide certain liability insurance; and to name the Hancock County Port and
Harbor Commission as a co-insured under certain circumstances.
ITEM 3. LEGAL PROCEEDINGS.
FLORIDA DEPARTMENT OF REVENUE TAX AUDIT
SETTLED
On November 28, 1994, the Florida Department of Revenue issued a Notice of
Intent to make Sales and Use Tax Audit Changes to the Company for the period
February 1, 1989 through June 30, 1994. The total proposed assessment, including
estimated penalties and interest, through June 15, 1997, totaled approximately
$7.4 million.
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In June, 1997, the Company settled this liability by entering into Closing
Agreements with the Florida Department of Revenue. The settlement, which
includes all audits for the covered period, is approximately $1.8 million
including imputed interest of approximately $500,000. The settlement includes a
payment schedule of approximately $21,000 per month for seven years. The
settlement provides for no interest for the first 3 years and interest accruing
at a rate of 6% per year for the last 4 years.
GALVESTON INDEPENDENT SCHOOL DISTRICT, ET AL. V. EUROPA CRUISE LINES OF TEXAS,
INC. ET AL. (In the District Court of Galveston County, Texas (Case No.
95TX0051)
On or about January 31, 1995, the Galveston Independent School District filed a
Petition in the District Court of Galveston County, Texas for ad valorem taxes
allegedly due for the year 1990 in the principal amount of $211,470 and for
interest and penalties in the amount of $177,634. The Company maintains that it
is not liable for this alleged tax. The Company believes the tax is a tangible
property tax which cannot be levied on a foreign flag vessel.
GAMING-RELATED LITIGATION
WILLIAM POULOS, ET AL. V. AMBASSADOR CRUISE LINES, INC., ET AL. (United States
District Court, District of Nevada) (Case No. CV-S-95-936-LDG (RLH))
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 to
manipulation by defendants and others. The plaintiff seeks damages in excess of
$1 billion dollars against all defendants. Management believes there is no
support for plaintiff's factual claims and the Company intends to vigorously
defend this lawsuit.
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.
On November 3, 1997, the Court heard various motions in the case, including a
Motion to Dismiss filed by the cruise ship defendants. The motion was denied.
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ROBERT M. BAER, ET AL V. AMBASSADOR CRUISE LINES, INC. ET AL. (In the Circuit
Court of the Seventeenth Judicial Circuit In and For Broward County, Florida)
Case No. 96-6177 (21)
CASE DISMISSED WITHOUT PREJUDICE
On May 7, 1995, Robert M. Baer, on Behalf of Himself and All Others Similarly
Situated, filed a class action lawsuit against approximately thirty-eight
defendants, including Europa Cruises of Florida I and Europa Cruises of Florida
II in the Circuit Court of the Seventeenth Judicial Circuit In and For Broward
County, Florida. (Case No. 96-6177 (21) Europa Cruises of Florida 1, Inc. and
Europa Cruises of Florida 2, Inc. were served with the Complaint on or about
July 11, 1996. The suit was filed against the manufacturers, distributors and
promoters of video poker and electronic slot machines and the owners, operators
and promoters of cruise ship casinos which utilized casino video poker machines
and electronic slot machines. The plaintiff alleged fraud in connection with the
labeling, design, promotion and operation of casino video poker machines and
electronic slot machines, violation of the Florida Racketeer Influenced and
Corrupt Organizations Act ("RICO"), common law fraud and deceit, unjust
enrichment, and negligent misrepresentation. The plaintiff contended that the
defendant owners, operators and promoters of cruise ship casinos, along with the
manufacturers, distributors, and promoters 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 random fashion and are
unpredictable. The plaintiff alleged that these machines actually follow fixed,
preordained sequences that are not random, but rather are both predictable and
subject to manipulation by defendants and others. The plaintiff sought damages
in excess of one billion dollars, including treble their general and special
compensatory damages, punitive damages, consequential and incidental damages,
interest, costs, attorneys' fees and a preliminary and permanent injunction
requiring defendants to accurately and properly describe their video poker
machines and electronic slot machines. The Company shared the cost of this
litigation with certain other defendants who retained the same law firm to
represent them.
On March 6, 1998, the Plaintiffs filed a Notice of Voluntary Dismissal Without
Prejudice.
OTHER LITIGATION
SEA LANE BAHAMAS LIMITED V. EUROPA CRUISES CORPORATION (United States District
Court for the Southern District of Florida)(Case No. 94-10004)
In February, 1994, following attachment of one of the Company's vessels by Sea
Lane Bahamas Limited, the Company entered into a partial settlement agreement
with Sea Lane with respect to the Company's obligations under a Bareboat Charter
Agreement. With respect to unpaid charterhire, the Company paid the sum of
$250,000 to Sea Lane plus an additional $386,000 in monthly payments of $30,000
per month plus interest at the rate of six percent (6%) per annum fully paid as
of December 31, 1995. However, the Company's liability, if any, for damages
arising out of the condition of the EuropaJet upon its redelivery to Sea Lane
remains in dispute. The Settlement Agreement provided that if the Company and
Sea Lane were unable to settle this dispute with respect to the condition of the
EuropaJet when it was redelivered to Sea Lane, the amount of the Company's
remaining obligation to Sea Lane would be determined in binding arbitration. Sea
Lane contends that substantial expenses, in excess of one million dollars, were
incurred to make repairs for which Europa is responsible. On or about April 10,
1995, the United States District Court entered an Order granting Sea Lane's
Petition to Compel Arbitration. Arbitrators have been selected, discovery has
been taken and the matter is expected to proceed to arbitration in the near
future. The parties are engaged in settlement discussions. The Company has
accrued approximately $400,000 in connection with this litigation.
LONNIE AVANT, ET AL. V. EUROPA CRUISES CORPORATION (In the United States
District Court for the Middle District of Florida (Case No. 96-217-CIV-FTM-24D)
CASE SETTLED AND DISMISSED
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On June 13, 1996, Lonnie Avant, on behalf of herself and all others similarly
situated, filed a class action lawsuit against Europa Cruises Corporation, d/b/a
Europa Seakruz, Lester Bullock and John Does 1-10 (Europa's other directors,
officers and managers) in the United States District Court for the Middle
District of Florida, Fort Myers Division, (Case No. 96-217-CIV-FTM-24D). The
Company was served with the Complaint on or about June 19, 1996. The suit was
filed against the Company and its directors, officers and managers. The
Plaintiff alleged that the Company and its directors, officers and managers
intentionally charged fictitious "port charges" and thereby overcharged numerous
customers and that this practice violated the federal Racketeer Influenced and
Corrupt Organizations Act (RICO). The plaintiff sought treble damages, attorneys
fees, litigation expenses, costs and restitution. This was one of a number of
class action lawsuits relating to "port charges" filed against cruise ship
companies. The Company denied the allegations. On August 13, 1996, the Plaintiff
filed a Motion for Class Certification and for Evidentiary Hearing Relating
Thereto seeking to certify a class consisting of all passengers who were
assessed and paid a port charge from June 14, 1992 to June 13, 1996. On April
28, 1997, a hearing was held on Plaintiff's Motion for Class Certification. On
May 8, 1997 the Court entered an Order denying Plaintiff's Motion for Class
Certification. On or about September 18, 1997, the parties entered into a
Settlement Agreement and General Release. Under the terms of the Agreement, the
Company paid Five Thousand Dollars ($5,000.00) in full settlement of the matter.
On October 1, 1997, the Court entered an Order dismissing this case with
prejudice.
TURNER V. EUROPA CRUISES CORPORATION, ET AL. (In the Chancery Court of the State
of Delaware In and For New Castle County (Civil Action No. 14482)
CASE SETTLED AND DISMISSED.
On or about August 15, 1995, Stephen M. Turner, former Chairman of the Board of
Europa Cruises Corporation, filed suit in the Chancery Court of the State of
Delaware in and for New Castle County, against Europa Cruises Corporation and
its then-three Directors, Deborah A. Vitale, Ernst Walter and Lester Bullock. On
or about September 1, 1995, Mr. Turner withdrew his claims against the
individual Directors. Mr. Turner was seeking a declaratory judgment from the
Court declaring him to be a member of the Board of Directors of Europa Cruises
Corporation. The Board of Directors maintained that Mr. Turner unequivocally
resigned on March 20, 1995 in the presence of four witnesses and that his
actions immediately following his resignation confirmed same. The Board of
Directors maintained that Mr. Turner's attempt to unilaterally resurrect himself
as a Director of the Company after having resigned was of no force and effect.
Depositions were taken on or about September 26, 1995. Trial in the matter was
scheduled for October 3, 1995. However, the parties agreed to a settlement under
the terms of which Mr. Turner would receive $17, 500. Settlement documents were
signed on January 19, 1997. These contained a written confirmation of the
resignation of Mr. Turner from the Company and its subsidiaries effective March
20, 1995. A Stipulation of Dismissal was filed on February 18, 1997.
IN RE BURTON SECURITIES, S.A., DEBTOR/HARRELL Z. BROWNING, LIQUIDATING TRUSTEE
OF BURTON SECURITIES, S.A. V. EUROPA CRUISES CORPORATION (In the United States
Bankruptcy Court for the Southern District of Texas, Corpus Christi Division
(Case No. 94-2199-C).
CASE DECIDED
On June 17, 1994, Harrell Z. Browning, Liquidating Trustee under the Chapter 11
plan of Burton Securities, S.A., Debtor, entered into a Memorandum of Agreement
with Europa Cruises Corporation providing for the purchase by Europa of the
Panamanian-flag vessel M/V LE MISTRAL. Paragraph 4 of the Agreement gave Europa
the right to terminate the Agreement in the event closing did not occur within
sixty days from the date of the Agreement in which event, Europa would be
entitled to receive a refund of its full escrow deposit in the amount of
$85,000. The Trustee was notified on August 15, 1994, that Europa had determined
to exercise its right to terminate the Agreement. Europa attempted to obtain the
return of its deposit from the Trustee who refused to return same. On December
15, 1994, the Trustee
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filed an action against Europa for breach of contract seeking damages in excess
of $750,000. The case was tried on June 13 and 14, 1996. The Court entered an
Order in favor of the Trustee which allowed the Trustee to keep Europa's deposit
and for attorneys fees and costs in the amount of $31,683.59. The $31,683.59 was
paid, by agreement, by the insurance carrier for the lawyer who represented
Europa in the litigation.
DANA V. CATALANO V. EUROPA CRUISES CORPORATION (In the Chancery Court of the
State of Delaware, New Castle County, Civil Action No. 15455)
CASE RESOLVED
On January 8, 1997, Dana V. Catalano filed an action against the Company in the
Court of Chancery of the State of Delaware, New Castle County, Civil Action No.
15455 seeking an order pursuant to 8 Del. C. S211(c) scheduling an annual
meeting for the election of Directors of the Company. The Board had previously
voted on December 11, 1996, to hold the next annual meeting at which an election
of directors would take place on June 4, 1997. The Company advanced the date of
the annual meeting to April 18, 1997 and set the record date as March 14, 1997.
A Stipulation and Order was entered to that effect.
MISSISSIPPI-RELATED LITIGATION
BAY ST. LOUIS COMMUNITY ASSOCIATION, PRESERVE DIAMONDHEAD QUALITY, INC., GULF
ISLANDS CONSERVANCY, INC. AND CONCERNED CITIZENS TO PROTECT THE ISLES AND POINT,
INC. V. THE COMMISSION ON MARINE RESOURCES, HANCOCK COUNTY PORT AND HARBOR
COMMISSION AND CASINO WORLD, INC.(Chancery Court of Hancock County,
Mississippi)(Case No. 960707)
CASINO WORLD, INC. PREVAILED IN LOWER COURT
CASE ON APPEAL TO SUPREME COURT OF MISSISSIPPI
On September 18, 1996, Bay St. Louis Community Association, Preserve Diamondhead
Quality, Inc., Gulf Islands Conservancy, Inc. and Concerned Citizens to Protect
the Isles and Point, Inc. filed a Notice of Appeal and Complaint against the
Commission on Marine Resources, Hancock County Port and Harbor Commission and
Casino World, Inc., in the Chancery Court of Hancock County, Mississippi (Case
No. 960707), appealing the administrative decision of the Commission on Marine
Resources in granting Permit No. DMR-M 9612281-W and COE No. MS96-01566-U. On
October 17, 1996, the Mississippi Commission on Marine Resources filed a
Response to Notice of Appeal and Answer in which it maintained, in pertinent
part, that it had complied with all procedural requirements relevant to grants
of permits and use adjustments at issue, that its decision to grant the permit
and use adjustment was grounded upon legally sufficient evidentiary grounds and
that there was no proper ground at law warranting reversal of its decision. On
October 16, 1996, Casino World, Inc. and the Hancock County Port and Harbor
Commission filed a Joint Motion to Dismiss for Untimely Appeal in which they
alleged that the appellants had failed to file their Notice of Appeal and
Complaint within the proper time period. The Joint Motion to Dismiss was granted
on December 31, 1996.
On January 15, 1997, the Bay St. Louis Community Association, Preserve
Diamondhead Quality, Inc., Gulf Islands Conservancy, Inc. and Concerned Citizens
to Protect the Isles and Point, Inc. filed a Notice of Appeal appealing the
decision of the Chancery Court to the Supreme Court of Mississippi. All
appellate briefs have been filed in the case. Oral argument is set for May 12,
1998.
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BAY ST. LOUIS COMMUNITY ASSOCIATION, INC., PROTECT DIAMONDHEAD QUALITY, INC.,
CONCERNED CITIZENS TO PROTECT THE POINT AND ISLES, INC. AND GULF ISLANDS
CONSERVANCY, INC. V. THE COMMISSION ON ENVIRONMENTAL QUALITY, HANCOCK COUNTY
PORT AND HARBOR AUTHORITY, AND CASINO WORLD, INC. (Chancery Court of Hancock
County, Mississippi)(Case No. 97-0386)
CASE DECIDED
On June 6, 1997, Bay St. Louis Community Association, Inc., Protect Diamondhead
Quality, Inc., Concerned Citizens to Protect the Point and Isles and Gulf
Islands Conservancy, Inc. filed a Notice of Appeal against the Commission on
Environmental Quality, Hancock County Port and Harbor Authority, and Casino
World, Inc., in the Chancery Court of Hancock County, Mississippi (Case No.
97-0386) appealing that Order of the Mississippi Commission on Environmental
Quality dated June 26, 1997, affirming the water quality certification issued to
Casino World, Inc. on January 9, 1997, as modified and clarified on May 22,
1997. On July 11, 1997, Appellants filed an Amended Notice of Appeal. On or
about August 19, 1997, the Administrative Record in the case was filed with the
Court. All briefs were filed in the case on or before October 31, 1997. On
February 27, 1998, the Chancery Court filed a Memorandum Opinion and Order
denying the appeal and entering judgment in favor of the Appellees, including
Casino World, Inc. No appeal from the decision of the lower court was filed. The
time period for appealing has expired.
CASINO WORLD, INC. AND MISSISSIPPI GAMING CORPORATION V. GULF ISLANDS
CONSERVANCY, INC.; CONCERNED CITIZENS TO PROTECT THE ISLES AND POINT, INC.;
PRESERVE DIAMONDHEAD'S QUALITY, INC.; BAY ST. LOUIS COMMUNITY ASSOCIATION; AND
THE SIERRA CLUB, INCORPORATED AND UNITED STATES ARMY CORPS OF ENGINEERS AND
UNITED STATES OF AMERICA (In the United States District Court of the Southern
District of Mississippi (Biloxi Division (Case No. 1:98CV147BrR).
On March 26, 1998, Casino World, Inc. and Mississippi Gaming Corporation filed
suit against the above-named parties, inter alia, to declare a Permit issued by
the U.S. Army Corps of Engineers to the Hancock County Port and Harbor
Commission on March 26, 1998, which was transferred to Casino World, Inc. and
Mississippi Gaming Corporation, to be valid under Section 10 of the Rivers and
Harbors Act and to enjoin the defendants from delaying, interfering or
infringing on protected rights the Plaintiffs have under the Permit.
FRIENDS OF THE EARTH, INC. AND GULF ISLANDS CONSERVANCY, INC. V. UNITED STATES
ARMY CORPS OF ENGINEERS (In the United States District Court for the District of
Columbia) (Case No. 1:98CV00801)
On March 27, 1998, Friends of the Earth, Inc. and Gulf Islands Conservancy, Inc.
filed a Complaint for Declaratory and Injunctive Relief against the United
States Army Corps of Engineers to, inter alia, declare the Corps' approval of
the Casino World, Inc. Permit without prior preparation of an environmental
impact statement, to be arbitrary, capricious, an abuse of discretion and in
violation of the National Environmental Policy Act, applicable Council on
Environmental Quality regulations and applicable U.S. Army Corps of Engineers
regulations and to enjoin the U.S. Army Corps of Engineers from permitting
Casino World, Inc. or its successors-in-interest and all other casino developers
from proceeding with future development of any dockside gambling facilities or
related infrastructure in certain areas, including the Company's site on the Bay
of St. Louis, in Mississippi, until the Corps prepares an environmental impact
statement. No Answer has been filed to date.
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LIBERIS-RELATED LITIGATION
The following litigation relates to Charles S. Liberis, the founder of the
Company, a former Chairman of the Board of Directors, President, Director and
Chief Operating Officer of the Company.
LIBERIS V. EUROPA CRUISES CORPORATION (Court of Chancery of the State of
Delaware in and for New Castle County, C.A. 13103)
CASE DECIDED
On July 30, 1993, Charles S. Liberis attempted to exercise 1,417,500 Europa
Common Stock options at $ .15625 per share. The Company refused Liberis' attempt
to exercise these alleged options. On August 30, 1993, Liberis filed a Complaint
for Specific Performance of Stock Options against the Company in the Court of
Chancery of the State of Delaware in and for New Castle County. On or about
October 7, 1993, the Company filed an Answer denying the substantive allegations
of the Complaint and asserting counterclaims against Liberis for breach of
fiduciary duties and mismanagement of corporate assets in connection with the
purchase and sale of Europa's interest in Sea Lane Bahamas/Marne Delaware. On or
about October 27, 1993, Liberis filed his reply to the counterclaims denying the
substantive allegations of the counterclaims. On or about May 2, 1995, Liberis
amended his Complaint seeking damages in the amount of $1,282,948.00 for
Europa's refusal to allow Liberis to exercise his stock options.
The case was tried from May 22, 1995 to May 25, 1995. On February 8, 1996, the
trial Court entered a Memorandum Opinion in which it ruled, in pertinent part,
that Liberis, who had filed suit to enforce an alleged stock option agreement to
purchase 1,417,500 shares of stock at $.15625 per share, "ha[d] no right to
enforce the alleged stock option agreement." The decision further required
Liberis to return 250,000 shares of common stock to the Company. On October 9,
1996, the trial Court entered an Order and Judgment. On November 7, 1996,
Liberis filed a Notice of Appeal from the Final Order to the Supreme Court of
Delaware.
Oral argument was heard in the Supreme Court of Delaware on or about July 22,
1997. On July 24, 1997, the Delaware Supreme Court issued an Order remanding the
case to the trial court for further supplemental findings in explanation of its
decision of February 8, 1996 and its Order and Judgment of October 9, 1996. On
September 2, 1997, the trial court filed a Supplemental Opinion. On September
10, 1997, the Supreme Court issued an Order requesting additional supplemental
briefs from the parties. On November 10, 1997, the Supreme Court issued an Order
affirming the judgment of the lower court.
LIBERIS V. EUROPA CRUISES CORPORATION (In the Court of Chancery of the State of
Delaware In and For New Castle County) (Civil Action No. 14889)
CASE DISMISSED
On March 12, 1996, Charles S. Liberis filed a Complaint Under 8 Delaware Code
Section 220, to inspect and/or copy the Company's shareholders' list and other
materials, books and records of the Company and for attorneys fees incident to
the action. On April 8, 1996, the Company filed an Answer denying that Mr.
Liberis was entitled to inspect and/or copy the Company's shareholders' list
and/or other materials, books and records of the Company. The Company maintained
that Mr. Liberis was not entitled to the inspection sought inasmuch as he was
not a shareholder of record, as required under the statute, at the time the
request to inspect was made. Mr. Liberis agreed to dismiss the case. A
Stipulation and Order of Dismissal was signed on March 24, 1998.
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LIBERIS V. EUROPA CRUISES CORPORATION, CASINO WORLD, INC., CASINOS AUSTRIA
MARITIME CORPORATION (CAMC), SERCO INTERNATIONAL LIMITED, CHARLES H. REDDIEN,
STEPHEN M. TURNER, DEBORAH A. VITALE, WILLIAM A. HEROLD and SHARON E. PETTY (In
the Court of Chancery of the State of Delaware in and for New Castle County)
(Case No. 12955)
CASE DISMISSED
On April 22, 1993, Charles S. Liberis filed an action in the Court of Chancery
of the State of Delaware in and for New Castle County against Europa and its
subsidiary, Casino World, Inc. (CWI) and the above-named entities and directors
of Europa. In the action, Liberis alleged a scheme on the part of CAMC and Serco
acting with Petty, Reddien and others to seize control of Europa by changing the
membership of the Board and transferring power to the directors nominated by
Serco, an alleged entrenchment by that Board by means of a proposed issuance of
Preferred Stock of Europa and an alleged scheme by that Board to entrench itself
in Casino World, Inc. by spinning off CWI to the stockholders of Europa and
selling 60% of CWI to outside investors and improper actions relating to the
retention of the services of CAMC. Count I of the Complaint sought the removal
of allegedly wrongfully elected directors and two officers and the reinstatement
of Liberis as CEO. Counts II and III sought relief against the issuance of the
Europa Preferred Stock. Count IV sought injunctive relief as to the proposed
spinoff of CWI. Count V sought relief against CAMC and Serco for civil
conspiracy. Liberis sought a preliminary injunction to enjoin three directors
elected at Europa's Board meeting on December 12, 1992 from acting on behalf of
Europa and CWI and to enjoin Reddien, the then Chief Executive Officer of both
Europa and CWI from taking any action on behalf of those entities. On May 17,
1993, the Court denied Liberis' application for a preliminary injunction finding
that Liberis had failed to establish a likelihood of success on the merits as
well as irreparable harm that would result in the event an injunction were not
entered. On March 25, 1996, an Order was entered dismissing this case as moot.
CHARLES S. LIBERIS, AS TRUSTEE OF THE CHARLES S. LIBERIS, P.A., PROFIT SHARING
PLAN V. EUROPA CRUISES CORPORATION (In the Circuit Court in and for Escambia
County, Florida) (Case No. 93-1187-CA-01-J)
CASE DISMISSED
In or about March, 1993, Charles S. Liberis, as Trustee of the Charles S.
Liberis, P.A. Profit Sharing Plan, filed suit against Europa for amounts
allegedly due from Europa in connection with a promissory note Liberis received
from Europa in conjunction with a purported December 1990 transfer to Europa of
Liberis' interest in Sea Lane. The Complaint alleged that a principal balance of
approximately $141,000.00 was owed on the note. On or about April 9, 1996, the
parties filed a Stipulation of Dismissal dismissing this case without prejudice
on grounds that the action was moot.
EUROPA CRUISES CORPORATION V. LIBERIS, et al. (In the United States District
Court for the Northern District of Florida (Case No. 93-30158)
CASE DISMISSED
On or about May 11, 1993, the Company filed an action in the United States
District Court for the Northern District of Florida against Charles S. Liberis
and one of the Company's former Chief Financial Officers, seeking compensatory
and punitive damages. The Company and the former Chief Financial Officer
involved have settled this and other disputes between them. The Company was
seeking damages from Liberis for substantially the same events and transactions
alleged in Europa's counterclaim in Delaware Case No. 13103. Liberis also filed
a counterclaim requesting the same relief sought in Delaware Case No. 13103.
Most of Europa's claims against Liberis and all of Liberis' pending claims
against Europa in this case were the subject of Delaware Case No. 13103. Europa
also made a claim for securities fraud against Liberis in this Florida case
which was not made in the Delaware case. On or about April 9, 1996, the parties
filed a Stipulation of Dismissal of all claims and counterclaims as moot.
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LIBERIS V. STEVE TURNER, DEBORAH A. VITALE, WILLIAM A. HEROLD, ERNST G. WALTER,
SHARON E. PETTY, CHARLES H. REDDIEN, VICTOR B. GERSH, SERCO INTERNATIONAL
LIMITED, CASINOS AUSTRIA MARITIME CORPORATION (CAMC), AUSTROINVEST INTERNATIONAL
LIMITED, PETER MUELLER AND EUROPA CRUISES CORPORATION (Circuit Court in and for
Pinellas County, Florida)(Civil Action No. 93-001626-CI-008)
CASE PENDING
On or about May 5, 1993, Liberis filed suit in the Circuit Court in and for
Pinellas County, Florida (Case No. 93-001626-CI-008) for rescission, fraud and
conspiracy. On or about August 4, 1993, Liberis filed an Amended Complaint,
naming additional defendants and adding a count for defamation. Liberis alleges
that the defendants conspired to defraud, coerce and trick Liberis into
resigning his position as Chief Executive Officer and Chairman of the Board of
Europa Cruises Corporation and defamed him. Liberis seeks compensatory,
punitive, treble damages and attorneys' fees from the above-named defendants.
The case was stayed pending the outcome of certain other cases involving several
of the parties. On or about August 7, 1995, the defendants agreed to lift the
stay for discovery purposes and for the purpose of finalizing the pleadings. On
or about April 22, 1996, Liberis filed a Motion for Leave to Amend, a Second
Amended Complaint and a Motion for Substitution of Parties. On or about October
20, 1997, Liberis filed a Motion for Leave to File a Third Amended Complaint and
to Join Additional Party Plaintiff which motion was granted. In the Third
Amended Complaint, Liberis, inter alia, adds an additional co-Plaintiff, Ginger
Liberis, his former wife; names new defendants, including Europa Cruises
Corporation and Peter Mueller, Senior Vice President of Casinos Austria Maritime
Corporation, and John Does A-Z; and adds several new theories and claims for
relief, including fraud, breach of fiduciary duties, defamation, slander per se,
intentional infliction of emotional distress, a RICO (Racketeer Influenced and
Corrupt Organizations Act) claim, and claims for other tortuous conduct. On or
about October 30, 1997, Liberis filed a Notice of Appeal from the Order of the
Court granting the motion of Defendant Victor Gersh/Estate of Victor Gersh to
dismiss the Complaint against them. On or about December 31, 1997, the case was
removed to the United States District Court for the Middle District of Florida,
Tampa Division (Case No. 97-3062-CIV-T-24-E). Discovery has started.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of the Company's Common Stock, $.001 par value (the "Common Stock")
are traded on the over-the-counter market under the NASDAQ symbol KRUZ. The
following table sets forth the high and low bid 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.
1997 Quarters 1996 Quarters
----------------- ------------------
High Low High Low
------ ----- ------ -----
First Quarter ................ 1 5/8 5/8 1 7/16
Second Quarter ............... 1 3/16 25/32 1 5/16 19/32
Third Quarter ................ 7/8 5/8 1 7/32 5/8
Fourth Quarter ............... 1 19/32 7/8 19/32
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On December 31, 1997, there were 827 registered holders of record of the Common
Stock of the Company. On April 9, 1998, there were 825 registered holders of
record of the Common Stock of the Company.
The Company has never paid a cash dividend on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
The Company operated 2,236 cruises in 1997, as compared to 2,172 in 1996, a
increase of 2.9% or 64 cruises. The Company carried 330,814 passengers in 1997
as compared to 332,156 passengers in 1996, a decrease of 1,342 passengers. The
average revenue per passenger was approximately $63.02 in 1997 as compared to
$57.96 in 1996, an increase of $5.06 or 8.7%. The Company carried an average of
148 passengers per cruise in 1997.
TOTAL REVENUES/GAMING REVENUES
The Company earned total revenues of $20,847,788 in 1997 as compared to total
revenues of $19,252,778 in 1996, an increase of $1,595,010 or 8.3%. The Company
increased its gaming revenues from $13,258,289 in 1996 to $15,208,517 in 1997,
an increase of $1,950,228 or 14.7%. The Company attributes the substantial
increase in gaming revenues in 1996 and 1997 to the relocation of the Europa
Star to Snug Harbor in Ft. Myers Beach, an increase in passenger counts in Miami
Beach and an increase in the number of gaming positions available on the
Company's vessels.
PASSENGER FARES
Passenger fares continue to constitute a challenge to the Company's gross
revenues. Passenger fares fell from $3,888,395 in 1996 to $3,353,016 in 1997, a
decrease of $535,379 or 13.8%. The decrease in passenger fare revenue is a
direct result of increased and intense competition in the day cruise industry
and the fare wars that now characterize the industry. Passenger fares in the
industry range from "FREE" to whatever a particular port can command. The
Company must stay competitive with respect to passenger fares charged in the
industry if it is to maintain its passenger counts.
FOOD AND BEVERAGE REVENUES
Revenue from food and beverage sales decreased from $1,499,071 in 1996 to
$1,282,377 in 1997, a decrease of $216,694 or 14.5%. The decrease is
attributable to increased VIP passengers who are provided with complimentary
meals.
CHARTER FEES
Charter fee income decreased from $383,905 in 1996 to $327,500 in 1997, a
decrease of $56,405 or 14.7%. The decrease in charter fees is a result of the
M/V Stardancer being on charter for five months in 1997 as compared to six
months in 1996. The Company normally charters its fourth vessel, the M/V
Stardancer, to unrelated third parties for a charter fee. However, in 1996, the
Company was required to place three of its operating vessels in drydock for
repair and maintenance and to meet U.S. Coast Guard and other safety
requirements. The M/V Stardancer, therefore, was not chartered during the five
months the Company's other three operating vessels were each placed in drydock.
Instead, the M/V Stardancer
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rotated through the Company's three operating ports to replace each of the
Company's three operating vessels as each operating vessel went to drydock at
separate times.
In December, 1996, the M/V Stardancer began operations in the Tierra Verde,
Florida. In April, 1997, the Tierra Verde port was abandoned and the vessel was
relocated to a shipyard for it's regular scheduled drydock. Drydock was
completed and the vessel was time-chartered to an unrelated third party from
July 15, 1997 to December 10, 1997.
REVENUES FROM HILTON AGREEMENT
On January 31, 1997, the Company entered into an agreement with Hilton Gaming
Corporation which gave Hilton the exclusive right to negotiate a joint venture
agreement with Europa for a 180 day period of time with respect to the
development of Europa's Diamondhead, Mississippi property. In exchange for the
exclusive right to negotiate, Hilton paid Europa $400,000.
OTHER REVENUE
Other revenue increased from $223,118 in 1996 to $676,378 in 1997, an increase
of $453,260 or 203.1%, principally attributable to the $400,000 fee from Hilton
Gaming Corporation.
COSTS AND EXPENSES
VESSEL OPERATING EXPENSES
Vessel operating costs and expenses increased from $12,802,466 in 1996 to
$13,121,189 in 1997, an increase of $318,723 or 2.5% due to the increased number
of cruises operated in 1997.
ADMINISTRATIVE AND GENERAL AND OTHER OPERATING
Administrative and general costs and expenses increased from $2,150,942 in 1996
to $2,832,498 in 1997, or $681,556, an increase of 31.7%, principally as a
result of payroll related expenses and a $250,000 accrued estimated legal
settlement.
NONRECURRING SALES TAX SETTLEMENT
During 1997, the Company settled the Sales Tax assessment with the Florida
Department of Revenue. Under the terms of the settlement, the Company is to make
principal only payments for 84 months, with no interest accruing the first 36
months and interest accruing at 6% on the unpaid balance thereafter. The Company
imputed interest at 10% per annum on the above payment streams and recorded a
discount in the amount of $475,286 and approximately $1,284,664 in expense in
connection with the settlement.
OTHER OPERATING EXPENSES
Other operating expenses increased from $276,597 in 1996 to $1,053,871 in 1997,
an increase of $777,294 or 281%. This increase was due principally to the costs
incurred ($428,331) in connection with a 1997 proxy contest and a $361,644
termination fee associated with a Gaming Concession Agreement with Casinos
Austria Maritime Corporation.
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PROXY CONTEST
On or about February 21, 1997, a proxy contest was filed. The filing of the
proxy contest completely consumed top management for two full months. The true
"costs" of this proxy contest to the shareholder are unknown and incalculable.
Unfortunately, the timing of the proxy contest was filed only approximately
three weeks after the Company had entered into an exclusive negotiating
agreement with a major gaming entity. However, actual expenses incurred by the
Company for this proxy contest were substantial and totaled approximately
$428,331.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $1,544,359 in 1996 to $1,836,164 in
1997, an increase of $291,805 or 18.9%. This increase results from an increased
amortization of deferred 1996 drydock costs.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the Company met its normal operating costs and expenses from its 1997
cash flow from operations and believes it will continue to do so. The Company,
however, may be unable to meet any unusual or unanticipated cash requirements
should they arise during 1998, except through the sale of common stock or
borrowing.
The Company's working capital deficiency is $5.7 million at December 31, 1997 as
compared to $1.67 million at December 31, 1996.
During 1997, operating activities provided cash of $1,505,548, which is
principally attributable to non-cash expenses of approximately $3.3 million.
Investing activities (principally vessel improvements, major vessel repair and
maintenance, gaming equipment purchases, and Mississippi development costs)
required cash of approximately $666,000 in 1997.
BANK FINANCING
On May 23, 1995, the Company obtained an 11.35% term loan in the amount 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 then-existing debt,
except for a capital equipment lease with Casinos Austria
Liegenschaftsverwaltung-Und Leasing, GESMBH.
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 payables. The $1.2 million
due to First Union National Bank of Florida initially matured September 1, 1996
and was extended to January 31, 1997.
On October 31, 1996, the Company obtained a $2,250,000 loan from dEBIS Financial
Services, Inc. The loan carries a fixed rate of interest of 10.5% over a term of
ten years with a balloon in 5 years. The Company used the proceeds of the loan
to pay off the $1,100,000 balance due on the loan with First Union National Bank
of
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Florida due January 31, 1997 and to pay an additional $600,000 to First Union
National Bank of Florida on its original loan of approximately $6,400,000 dated
May 25, 1995. Of the remaining proceeds, $400,000 was placed in an interest
bearing escrow account at First Union National Bank of Florida to be used to
effect the buy-out of the Casinos Austria Consulting contract. The remaining
$150,000 of proceeds were used to purchase a new engine for the M/V Europa Sun
and to pay closing costs.
First Union National Bank of Florida, which holds the majority of the Company's
long-term debt, further agreed to modify certain loan covenants contained in
that Credit Agreement dated May 25, 1995. The Bank agreed to release its
security interest in the EuropaSun to facilitate the dEBIS loan, revised the
cash flow covenant to reduce the cash flow requirements required to be met by
the Company and reduced the maturity date of the note from 7 years to 5 years
with no corresponding increase in monthly payments. First Union National Bank of
Florida was also granted two Warrants from the Company to purchase 200,000
shares of common stock at a price of $2.00 per share. First Union National Bank
of Florida has piggyback registration rights for one year and one demand
registration right after one year.
As of December 31, 1997, the Company was not in compliance with the cash flow
and tangible net worth covenants required under the terms of its bank loan
agreement. The Bank has waived the Company's default through October 31, 1998,
at which time the bank may demand repayment if the Company remains out of
compliance. The loan balance of $4,375,986 has been classified as a current
liability in the accompanying 1997 consolidated balance sheet.
In the event that the Company remains out of compliance with the loan covenants
and payment is demanded, the Company believes that the value of the underlying
collateral is sufficient to refinance or extinguish the debt. The ultimate
outcome of the matter may have a material adverse effect on the Company's
financial position and operations.
DRYDOCK
A. 1997
Of the Company's four vessels, the M/V Stardancer was the only vessel that was
required to be placed in drydock during 1997 for repair and maintenance and to
comply with U.S. Coast Guard and other safety requirements. The vessel was in
drydock for approximately two weeks in June. The drydock cost was
$114,758. The cost included all Coast Guard-required items, new carpet
throughout the vessel, a new ceiling throughout the vessel, a new awning and
side curtains for the top deck.
In 1997, the Europa Sun, which sails from Miami Beach, overhauled its main
generator and auxiliary generator engines. A new alarm panel was also installed.
The cost for these repairs was $43,994.
In 1997, the Europa Sky, which sails out of Madeira Beach, overhauled both of
its generator engines, one main engine and the bow thruster hydraulic motor. The
total cost for these repairs was $60,636.
In 1997, the Europa Star, which sails from Ft. Myers Beach, had no major repairs
or overhauls.
B. 1998
Three of the Company's four vessels, the Europa Star, the Europa Sky and the
Europa Sun were scheduled for a required U.S. Coast Guard drydocking in 1998.
Two of these, the Europa Star and the Europa Sky, have fulfilled their drydock
requirements for 1998.
In January, 1998, the Europa Star went to drydock for repairs to its tailshaft.
The vessel's tailshaft was replaced. It underwent a cleaning and painting of the
hull and a Coast Guard inspection. The total cost of the drydocking was $61,051.
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In January, 1998, the Europa Sky was forced to go to drydock early due to an
emergency which required repairs to its hull. It also underwent painting and a
Coast Guard inspection. The total cost of the drydocking was $43,863.
The Europa Sun is required to be drydocked in November, 1998. The estimated cost
of this drydocking, including internal steel replacement, is $300,000.
The next required drydocking for all of the Company's vessels is as follows:
Europa Sun: November, 1998
Europa Star: January, 2000
Europa Sky: January, 2001
Europa Stardancer: June, 1999
CAPITAL EXPENDITURE REQUIREMENT
The Company has no firm commitment for capital expenditures.
The Company has not yet evaluated its computer system for "Year 2000"
compliance. However, the Company does not expect the cost of such conversion to
be material to its financial condition or results or operations, nor does it
anticipate any material disruption in its operations with respect thereto.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in
this Item 6, in particular, statements that use the words "believes," "intends,"
"anticipates" or "expects" are intended to identify forward looking statements
that are subject to risks and uncertainties including, but not limited to,
inclement weather, mechanical failures, increased competition, 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 activities of environmental groups
and the actions of federal, state, or local governments and agencies. The
results of financial operations reported herein are not necessarily an
indication of future prospects of the Company. Future results may differ
materially.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS No. 130), Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances beginning in 1998.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards (SFAS No. 131), Disclosures about
Segments of an Enterprise and Related information, supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information beginning in 1998
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public.
The impact of adoption of SFAS No. 130 and 131 has not yet been determined.
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ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements and notes thereto are included herein
beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTRACT PERSONS.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. The current executive officers of the Company and their titles are as
follows:
Name Age Title
- ---- --- -----
Deborah A. Vitale 47 Chairman of the Board, President, Chief
Executive Officer, Secretary and Treasurer
John R. Duber 42 Director, Vice-President, Assistant Secretary
and Director of Investor Relations
Paul J. DeMattia 38 Director
Gregory A. Harrison 53 Director
Deborah A. Vitale was elected Chairman of the Board of Directors in March 1995
and was appointed Secretary of the Company in November 1994. 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. On
September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and
Mississippi Gaming Corporation. On February 20, 1998, Ms. Vitale was appointed
President and Chief Executive Officer of Europa Cruises Corporation. Ms. Vitale
is a trial attorney, by background, with nineteen years of experience handling
complex civil litigation and is licensed to practice law in Maryland, Virginia
and Washington D.C. Ms. Vitale was a partner in the firm of Miller & Vitale,
P.C. from November 1990 to September 1992. From 1986 to 1990, Ms. Vitale was Of
Counsel to the firm of Jacobi & Miller in Alexandria, Virginia. Ms. Vitale has,
in the past, served as a staff attorney at the Federal Communications Commission
and had served as Listing Official for the Environmental Protection Agency.
John R. Duber was named as a Director of the Company on February 18, 1998. Since
January, 1998, Mr. Duber has been employed by the Company at its Director of
Investor Relations. Mr. Duber was elected Vice- President and Assistant
Secretary of the Company in February 1998. Since 1992, Mr. Duber has worked as a
consultant in the trucking industry. Mr. Duber received his Bachelor of Science
Degree from John Carroll University in 1977.
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Paul J. DeMattia was named as a Director of the Company on February 20, 1998.
Mr. DeMattia attended the West Side Institute of Technology from 1979 to 1983.
Mr. DeMattia is the founder of DeMattia Cartage, Incorporated, and has served as
President of the Company, which owns and operates various trucks and trailers
for specialized delivery service, since 1983. Mr. DeMattia is the recipient of
the W.W. Grainger, Inc. Outstanding service for 1992-1993.
Gregory A. Harrison was named as a Director of the Company on February 20, 1998.
Mr. Harrison is a consulting forensic engineer with over twenty-eight years of
diversified safety engineering experience with NASA, DOD, NBS, NRC, ARAMCO, and
Tenera, L.P. Mr. Harrison has qualified as an expert witness in various courts
in eight states. Mr. 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. Mr. Harrison
holds a top secret security clearance with the U.S. Department of Energy. Mr.
Harrison has served on the Board of Directors of Data Measurement Corporation
and First Patriot National Bank and is a current Advisory Board member of United
Bank.
B. The executive officers of the Company as of December 31, 1997 and their
titles were as follows:
Name Age Title
- ---- --- -----
Deborah A. Vitale 47 Chairman of the Board and Secretary
Lester E. Bullock 44 President, Chief Executive Officer and Treasurer
Debra L. Gladstone 43 Chief Financial Officer and Assistant Secretary
Piers Hedley 41 Director
Brian D'Isernia 54 Director
Jack Jevne 66 Director
Deborah A. Vitale
See above
Lester E. Bullock, served as President and Chief Executive Officer of the
Company from July 18, 1994, through February 20, 1998 and served as Director of
the Company from March 1995 through February 20, 1998. From January 1994 to June
1994, Mr. Bullock was Vice President of Operations at the Company. From January
1, 1992 through December 31, 1993, Mr. Bullock was General Manager of the
Company and was responsible for all port operations. In 1991, Mr. Bullock was
Casino Pit Manager in Ft. Myers, Florida for Casinos Austria Maritime
Corporation. From 1989 to 1990, Mr. Bullock was General Manager of the Sonesta
Beach Resort and Crystal Casino in Oranjestead, Aruba. From 1984 through 1989,
Mr. Bullock held various managerial and administrative positions at the
Tropicana Resort and Casino in Las Vegas, Nevada and the Dunes Hotel Casino and
Country Club in Las Vegas, Nevada. Mr. Bullock received a B.S. in Business, from
Arizona State University in 1974. Mr. Bullock was removed as President and Chief
Executive Officer of the Company and as an officer of any of it's subsidiaries
on February 20, 1998. Mr. Bullock resigned as a Director of the Company on
February 20, 1998.
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Debra L. Gladstone, CPA, served as Chief Financial Officer from September 1995
through February 20, 1998. From July 1993 to September 1995, Ms. Gladstone was a
Senior Manager/Partner in the international accounting firm of, BDO Seidman,
LLP. From April 1992 to July 1993, Ms. Gladstone worked as a staff accountant in
the Division of Corporation Finance at the Securities and Exchange Commission
Headquarters in Washington, D.C. Prior to April 1992, Ms. Gladstone was a
Senior Manager in a publicly held conglomerate, the Henley Group, Inc. and
started her accounting career in 1982 with the public accounting firm of Arthur
Andersen & Company. Mrs. Gladstone resigned from her position with the Company
on February 20, 1998.
Piers Hedley, served as a Director of the Company from November, 1995 through
February 20, 1998. Mr. Hedley is an Executive Managing Director of the
investment banking firm of Peerless Associates Limited in Europe. From 1991 to
1994, Mr. Hedley served as the Managing Director of the U.K. investment banking
firm, Multinational Capitol Services Limited. Mr. Hedley has also served as a
consultant to NWCM Limited, a foreign securities firm. NWCM Limited served as an
underwriter for a Regulation S offering made by the Company in 1994. Mr. Hedley
resigned as a Director on February 20, 1998.
Brian D'Isernia, served as a Director of the Company from September 2, 1997
through January 21, 1998. Mr. D'Isernia is the President, founder and operator
of Eastern Shipbuilding Group which constructs, converts and repairs marine
vessels and barges, including gambling vessels. From 1992 to 1994, when he sold
the M/V Stardancer to Europa, Mr. D'Isernia operated the Stardancer, a gambling
vessel, out of Panama City, Florida and Marco Island, Florida. Mr. D'Isernia
holds a law degree from Fordham University School of Law. Mr. D'Isernia resigned
as a Director of the Company on January 21, 1998.
Jack Jevne, served as a Director of the Company from September 2, 1997 through
January 21, 1998. Mr. Jevne is an investor and real estate developer with over
forty years of experience in residential and commercial real estate development.
Mr. Jevne's development experience extends to destination-resort properties in
Lake Tahoe, Nevada and Mammoth Lakes, California. Mr. Jevne resigned as a
Director of the Company on January 21, 1998. (See also Schedules 13D and 13D/A
and other documents filed by Mr. Jevne with the Securities and Exchange
Commission)
C. CHANGES IN MANAGEMENT AND THE BOARD OF DIRECTORS
There were material changes in management and the Board of Directors of the
Company during 1997 and in the first part of 1998. The following summarizes
these changes in chronological order.
As of September 2, 1997, there were three Directors of the Company. These were:
Deborah A. Vitale, Piers Hedley, and Lester Bullock. On September 2, 1997, the
Board of Directors added two new Directors to the Board, thus increasing the
size of the Board to five members. The two new members were: Brian D'Isernia and
Jack Jevne.
On or about January 12, 1998, Ms. Vitale requested that Mr. Jevne resign from
the Board of Directors because of questions raised as to whether Mr. Jevne's
membership on the Board would adversely impact the Company's ability to get
licensed in Mississippi and to obtain a joint venture partner and financing for
its Mississippi project. (See Schedule 13D/A filed by Mr. Jevne with the
Securities and Exchange Commission on January 16, 1998 and other documents filed
by Mr. Jevne with the Securities and Exchange Commission.) On January 19, 1998,
the Board of Directors voted to remove Ms. Vitale as an officer of the Company
and any of its subsidiaries and as Chairman of the Board. Ms. Vitale remained a
Director of the Company. On January 21, 1998, Mr. D'Isernia and Mr. Jevne
resigned as Directors of the Company. On January 21, 1998, the Board of
Directors voted to rescind all resolutions passed at the January 19, 1998 Board
of Directors meeting and reinstated Ms. Vitale as Chairman of the Board and to
all offices she held in the Company and any of its subsidiaries. The Board then
consisted of the previous three Board members: Deborah A. Vitale, Piers Hedley,
and Lester Bullock.
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On February 18, 1998, the Board of Directors voted to add two new directors to
the Board, thus increasing the size of the Board to five members. The two new
members were: John R. Duber and Jerry McCall. On February 20, 1998, the Board of
Directors voted to add Gregory Harrison to the Board of Directors. The Board
then consisted of the following six members: Deborah A. Vitale, Piers Hedley,
Lester Bullock, John R. Duber, Jerry McCall, and Gregory Harrison. On February
20, 1998, following the addition of the new Director, Piers Hedley resigned from
the Board of Directors. On February 20, 1998, following the resignation of Piers
Hedley, the Board then elected Paul DeMattia to the Board of Directors. During
the Board meeting, Jerry McCall resigned as a Director, Mr. Bullock was removed
as President and Chief Executive Officer of the Company, and Ms. Vitale was
named as President and Chief Executive Officer of the Company. Mr. Bullock was
subsequently removed from any offices he held in the Company or any of its
subsidiaries. On February 20, 1998, following the Board meeting, Mr. Bullock
resigned as a Director and Debra Gladstone resigned as Chief Financial Officer
of the Company.
On March 6, 1998, Mr. Bullock was terminated as an employee of the Company.
On or about March 24, 1997, Mr. Reddien resigned as President of Casino World,
Inc. and Mississippi Gaming Corporation, two subsidiaries of the Company. On
September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and
Mississippi Gaming Corporation.
D. CURRENT MANAGEMENT AND THE CURRENT BOARD OF DIRECTORS
The Company, under current management and the new Board of Directors, is united
in a common goal. The new Board's priorities are identical. Its first and
foremost priority is the development of the Diamondhead, Mississippi, casino
resort. In the opinion of the current Board, this project holds the greatest
potential for increasing shareholder value. The Company's financial resources
and assets will be devoted towards the development of this project. In the
opinion of the current Board of Directors, while the Company's cruise ship
operations in Florida may have constituted the core business of the Company in
the past, given the competitive nature of the cruise-to-nowhere business in
Florida and the Company's lack of resources with which to expand and compete
with the expensive, new, and more luxurious vessels entering the market, the
Company's best prospects for increasing shareholder value lie with the Company's
Mississippi casino resort.
In addition, all of the members of the current Board of Directors are readily
accessible, when required, for Board meetings and are readily available to make
the numerous and often critical decisions that must
be made, sometimes on short notice, to allow the Company to move forward. Given
the state of the cruise ship industry, as a whole, in Florida and in New York,
the Company anticipates that it will have to make significant and dramatic
changes in the core business of 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 of such forms were filed on a timely basis by reporting
persons during 1997.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table provides information concerning the compensation of certain
executive officers of the Company and its wholly owned subsidiaries, Casino
World, Inc. and Mississippi Gaming Corporation. No other person serving as an
executive officer on December 31, 1997, received cash compensation in excess of
$100,000 during any of the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
--------------------------------------------------------
Awards Payouts
------------------- -------------------------
Other
Annual Compensation Annual Restricted All Other
Name and Principal ------------------------------- Compen- Stock LTIP Compen-
Occupation Year Salary Bonus sation Awards Options Payouts sation
------------------ ---- ------ ----- ------- ---------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deborah A. Vitale(3)(4) 1997(7) $ 84,135 $50,000 None None None None None
President as of February 20, 1998 1996 None(3) None None None 800,000 None None
1995 None(3) None None None None None None
Lester E. Bullock(1)(2) 1997 $125,000 $25,000 None None None None Car Rental(5)
Former President of the Company 1996 $134,000 None None None 400,000 None Car Rental
1995 $100,000 $29,000 None None None None None
Debra L. Gladstone 1997 $ 85,000 $ 7,500 None None None None Car Rental(6)
Former Chief Financial Officer 1996 $ 70,000 None None None 50,000 None None
and 15,000
shares of
common
stock
</TABLE>
(1) On July 18, 1994, Mr. Bullock became President of the Company. On February
20, 1998, Mr. Bullock was removed as President and Chief Executive Officer
of the Company. On February 20, 1998, Mr. Bullock resigned as a Director.
(2) Mr. Bullock was granted options to purchase 400,000 shares of Common Stock
exercisable at $.75 per share. 250,000 were granted for services rendered
as a Director. 150,000 were granted for services on the Board not
traditionally provided by a Director.
(3) Ms. Vitale received no cash compensation during 1995 or 1996 as an
executive officer of the Company.
(4) Ms. Vitale was granted options to purchase 800,000 shares of Common Stock
exercisable at $.75 per share. 250,000 were granted for services rendered
as a Director. 550,000 where granted for services on the Board not
traditionally provided by a Director
(5) In 1997, Mr. Bullock's monthly vehicle lease payment, including tax, was
$783.10.
(6) In 1997, Mrs. Gladstone's monthly vehicle lease payment, including tax, was
$503.54.
(7) Ms. Vitale did not receive any salary or bonus for 1997 until 1998.
Option Grants in Last Fiscal Year
No stock options were granted to the executive officers and directors during the
year ended December 31, 1997.
Aggregate Option Exercised in Last Fiscal Year
and Fiscal year-end option values
The following table shows stock options exercised by certain executive officers
during the fiscal year ended December 31, 1997. In addition, this table includes
the number of shares covered by both exercisable and non-exercisable stock
options as of December 31, 1997. None of the following options are "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986.
30
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at Year-End At Year-End(2)
Acquired Value ------------------------------ ---------------------------------
On Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lester E. Bullock None None 550,000 None $0 --
Piers Hedley None None 250,000 None $0 --
Deborah A. Vitale None None 1,000,000 None $0 --
Debra L. Gladstone None None 50,000 None $0 --
Charles H. Reddien None None 300,000 None $0 --
</TABLE>
(1) The "Value realized" reflects the appreciation on the date of exercise
(based on the excess of the fair market value of the shares on the date of
exercise over the exercise price). However, because the officer may keep
the shares acquired upon the exercise of options or sell them at a
different price, this amount does not necessarily reflect cash realized
upon the sale of those shares.
(2) "In-the-Money Options" are options outstanding at the end of the last
fiscal year for which the fair market value of the Common Stock at the end
of the last fiscal year ($.6875 per share) exceeded the exercise price of
the options.
DIRECTORS' COMPENSATION
From January 1, 1995 through August, Directors were paid $1,500 per month for
serving as Directors of the Company. 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.
In 1996, Lester E. Bullock, a Director, was awarded 400,000 stock options
exercisable at $.75 per share, 250,000 of these options were awarded for
services rendered as a Director. In 1996, Piers Hedley, a Director, was awarded
250,000 stock options exercisable at $.75 per share for services rendered as a
Director. In 1996, Deborah A. Vitale, a Director, was awarded 800,000 options
exercisable at $.75 per share, 250,000 of these options were awarded for
services rendered as a Director.
On March 3, 1998, the Company entered into an Agreement to Cancel 500,000
Options to Purchase Common Stock held by the Company's former President, Lester
Bullock, for $75,000 or $.15 per share. These options were used, in part, to
compensate the new Board of Directors and management. On March 24, 1998, Gregory
Harrison, a Director was awarded 50,000 options exercisable at $1.00 per share
for services rendered as a Director, provided he remained a Director for six
months from the date of his appointment (unless removed by vote of the
shareholders or a failure to be nominated to the next Board of Directors or
unless unable to serve due to death or by reason of physical or mental
incapacity.) On March 24, 1998, Paul DeMattia, a Director, was awarded 50,000
options exercisable at $1.00 per share for services rendered as a Director,
provided he remained a Director for six months from the date of his appointment
(unless removed by vote of the shareholders or a failure to be nominated to the
next Board of Directors or unless unable to serve due to death or by reason of
physical or mental incapacity.) On March 24, 1998, John R. Duber, a Director,
was awarded 100,000 options exercisable at $1.00 per share, 50,000 of which were
awarded for services rendered as a Director provided he remained a Director for
six months from the date of his appointment (unless removed by vote of the
shareholders or a failure to be nominated to the next Board of Directors or
unless unable to serve due to death or by reason of physical
or mental incapacity) and 50,000 of which were awarded for other services
rendered to the Company which were not conditioned on continued service. On
April 3, 1998, Deborah A. Vitale, a Director, was awarded 750,000 options
exercisable at $1.00 per share for services rendered as Director and President
of Europa and its subsidiaries, provided she remained a Director for six months
from the date the Board awarded the options (unless removed by vote of the
shareholders or a failure to be nominated to the next Board of Directors or
unless unable to serve due to death or by reason of physical or mental
incapacity.)
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AS OF APRIL 9, 1998.
The only persons who owned of record or were known by the Company to own
beneficially on April 9, 1998, more than 5% of any class of the outstanding
voting shares of the Company were as follows:
<TABLE>
<CAPTION>
Number of Percent of Percent
Name and Address Shares Owned Class(1) Voting
- ---------------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Serco International Limited (2) 1,440,334 Common 5.27% 10.83%
P.O. Box 15, A-9010 900,000 S-NR Preferred 100.00%
Klagenfurt, Austria 926,000 S Preferred 100.00%
Austroinvest International Limited(2) 1,440,334 Common 5.27% 10.83%
P.O. Box 15, A-9010 900,000 S-NR Preferred 100.00%
Klagenfurt, Austria 926,000 S Preferred 100.00%
Gaming Invest Corporation (2) 1,440,334 Common 5.27% 10.83%
P.O. Box 15, A-9010 900,000 S-NR Preferred 100.00%
Klagenfurt, Austria 926,000 S Preferred 100.00%
Europa Cruises Corporation (3) 4,250,000 Common 15.54% 14.09%
Employee Stock Ownership Plan
Trust Agreement
150 153rd Avenue East
Madeira Beach, Florida 33708
Deborah A. Vitale, Esquire (3)(4) 6,003,500 Common 21.95% 19.91%
1013 Princess Street
Alexandria, VA 22314
John R. Duber (3)(5) 4,487,560 Common 16.41% 14.88%
20018 Westover Avenue
Rocky River, Ohio 44116
Ernst G. Walter (2) 1,440,334 Common 5.27% 10.83%
14700 Gulf Blvd., Apt. 401 900,000 S-NR Preferred 100.00%
Madeira Beach, Florida 33708 926,000 S Preferred 100.00%
</TABLE>
- ---------------
(1) Common Stock and Preferred amounts have been combined for the purpose of
calculating percentages.
(2) Serco International Limited, Austro Invest International Limited and Gaming
Invest Corporation 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 by the three corporations and Dr.
Walter includes: 900,000 shares of Series S-NR Preferred Stock and
1,040,334 shares of Common Stock owned by Serco International Limited;
926,000 shares of S Preferred Stock owned by Austroinvest International
Limited; 200,000 shares of Common Stock owned by Gaming Invest Corporation;
and 200,000 shares of Common Stock underlying options Dr. Walter has the
current right to exercise.
32
<PAGE>
(3) The Europa Cruises Corporation Employee Stock Ownership Plan, Trust
Agreement ("ESOP") was established on August 18, 1994. The Trustees of the
ESOP are Deborah A. Vitale, President, CEO, and Chairman of the Board and
John R. Duber, Vice-President and a Director. As of December 31, 1997,
750,000 ESOP shares had been released and 500,000 ESOP shares had been
allocated to participants in the ESOP. The participants in the ESOP are
entitled to direct the Trustees as to the manner in which the Company's
allocated shares are voted Unallocated shares are voted by the Trustees.
The Trustees are required to vote the ESOP shares in the best interests of
ESOP beneficiaries.
(4) Includes 4,250,000 unallocated shares of Common Stock which will be voted
by Ms. Vitale and Mr. Duber as Trustees of the ESOP.
(5) Includes options to purchase 1,750,000 shares of Common Stock.
(6) Includes options to purchase 100,000 shares of Common Stock.
The following table sets forth, as of April 9, 1998, the beneficial and record
ownership of the outstanding Common Stock of the Company held by Directors,
Nominees, Executive Officers and all Directors and Executive Officers as a
Group.
<TABLE>
<CAPTION>
Number of
Shares of Percent Percent
Common Stock of Common of Voting
Name and Address Owned Stock Stock
- ---------------- ------------ --------- ---------
<S> <C> <C> <C>
Deborah A. Vitale 6,003,500(3)(4) 21.95% 19.91%
Chairman, President, CEO,
Secretary and Treasurer;
Chairman, President,
Secretary and Treasurer of
Casino World, Inc. and
Mississippi Gaming Corp.
1013 Princess Street
Alexandria, Va 22314
John R. Duber 4,487,560(3)(5) 16.41% 14.88%
Director, Vice-President
and Assistant Secretary
20018 Westover Avenue
Rocky River, Oh 44116
Gregory Harrison 270,000(6) .99% .9%
Director
16209 Kimberly Grove
Gaithersburg, Md 20878
Paul DeMattia 139,000(6) .51% .46%
Director
6366 Eastland Rd
Brookpark, Ohio 44142
All Directors and Officers 6,650,060 24.32% 22.05%
as a Group (4 persons):
</TABLE>
33
<PAGE>
- ------------------
(1) Common Stock and Preferred Stock amounts have been combined for the purpose
of calculating percentages of Voting Stock. None of the persons listed owns
any Preferred Stock.
(2) Casino World, Inc. and Mississippi Gaming Corporation are wholly owned
subsidiaries of the Company.
(3) Includes 4,250,000 unallocated shares of Common Stock which will be voted
by Ms. Vitale and Mr. Duber as Trustees of the ESOP.
(4) Includes options to purchase 1,750,000 shares of Common Stock.
(5) Includes options to purchase 100,000 shares of Common Stock.
(6) Includes options to purchase 50,000 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 18, 1994, the Company established the Europa Cruises Corporation
Employee Stock Ownership Plan (the "ESOP"). This 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. The Trustees of this trust are Deborah A. Vitale
and John R. Duber. As of April 15, 1998, 750,000 shares of Common Stock have
been allocated to participants in the ESOP. Unallocated shares are voted by the
Trustees. The Trustees are required to vote the 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. Through December 31,
1997, the Company paid $6,925,000 to the ESOP which was used to repay principal
and interest on the promissory notes.
The Board held twelve meetings during 1996 and seven meetings during 1997. Each
Director attended at least 75% of the total number of Board meetings held during
the period for which he or she was a Director. The Board does not have an audit
compensation or nominating committee. The Board's audit committee consists of
Paul DeMattia and Gregory Harrison, both of whom are outside Directors and
Deborah A. Vitale and John R. Duber, both of whom are Directors and Officers of
the Company.
34
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
(a) 3(a)(i) Certificate of Incorporation of the Company.
(ii) Amendment to Certificate of Incorporation of the Company.
(a) 3(b) By-laws of the Company.
(g) 4.1 Subscription and Investment Agreement between Europa Cruises Corporation and
Lagoon Cruise Line, Inc. dated August 26, 1994.
(g) 4.2 Warrant Agreement between Europa Cruises Corporation and FLC Holding Corp
dated July 8, 1992.
(g) 4.2.1 Consent and Amendment of Credit Agreement Note and Warrant by and among
FLC Holding Corp. ("FLC"), EuropaSky Corporation ("EuropaSky"), Europa
Cruises Corporation and Casino World, Inc. ("Casino"), dated May 27, 1993
without Exhibits.
(g) 4.3 Warrant Agreement between Europa Cruises Corporation and The Stuart-James
Company Incorporated dated June 29, 1989.
(g) 4.3.1 Warrant Certificates and Assignments for 125,520 shares and 17,000 shares
registered in the name of Marc N. Geman dated June 22, 1994.
(g) 4.3.2 Motion to Approve Settlement Agreement Among Trustee, Marc N. Geman and
Chatfield Dean & Co., Inc. dated October 8, 1993 with Settlement Agreement
dated October 6, 1993 attached.
(g) 4.3.4 Order Approving Settlement Agreement Among Trustee, Marc N. Geman and
Chatfield Dean & Co., Inc.
(g) 4.3.5 Agreement between Marc N. Geman and Europa Cruises Corporation dated
June 15, 1993.
(g) 4.4 Convertible Promissory Note between Europa Cruises Corporation and Serco
International Ltd. dated November 11, 1993: Transfer by Serco International Ltd.
to Gaming Invest Corp. and election to convert Promissory Note by Gaming-Invest
Corp.
5.1 Qualified plan determination letter from the Internal Revenue Service dated
April 4, 1996, issued to the Europa Cruises Corporation Employee Stock Ownership Plan.
(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.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
(g) 10.1.2 Promissory Note payable to Casinos Austria Maritime Corporation dated December 30, 1994,
and Second Naval Mortgage on the M/V Stardancer.
(g) 10.1.3 Subordination Agreement between Lagoon Cruise Line, Inc., Europa Stardancer Incorporation
and Casinos Austria Maritime Corporation.
(a) 10(d) The Company's 1988 Stock Option Plan.
(b) 10(e) Standard Bareboat Charter Agreement, dated August, 1989, between Sea Lanes Bahamas
Limited and Europa Cruise Lines, Ltd.
(c) 10(f) Service Agreement, dated April 12, 1991, between Service America Corporation and Europa
Cruise Lines.
(c) 10(g) Lease Agreement, dated June 30, 1991, between Palm Grove Marina, Inc., and Europa Cruises
of Florida 1, Inc.
(c) 10(h) Memorandum of Agreement for lease, dated March 29, 1992, between Durwood Dunn and Mississippi
Gaming Corporation.
(c) 10(i) Lease Agreement, dated January 29, 1992, between Claiborne County, Mississippi Port Commission
and Mississippi Gaming Corporation.
(c) 10(j) Contract of Sale, dated February 21, 1992, between Ferry Binghamton, Inc., and Mississippi
Gaming Corporation.
(b) 10(k) Lease Agreement, dated November 30, 1990, between Europa Cruises of Florida 2, Inc., and
Hubbard Enterprises, Inc.
(b) 10(l) Reciprocal Relationship Agreement, dated December 28, 1990, amongst Europa Cruises of Florida 1,
Inc., Europa Cruises of Florida 2, Inc., the Company and Cordis, A.G.
(b) 10(m) Promissory Note, dated December 31, 1990, and Addendum thereto, dated May 2, 1991, from the Company
to Charles S. Liberis, P.A., Profit Sharing Plan.
(b) 10(n) Promissory Note, dated December 31, 1990, and Addenda thereto, dated April 18 and May 2, 1991,
from the Company to Harlan G. Allen, Jr.
(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.
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
(b) 10(s) Promissory Note, dated February 15, 1991, from Europa Cruises of Florida 1, Inc., to Midlantic.
(b) 10(t) Assumption Modification and Security Agreement, dated February 15, 1992, amongst Europa Cruises
of Florida 2, Inc., the Company and Midlantic.
(b) 10(u) Mortgage Modification Agreement, dated February 15, 1992, between Europa Cruises of Florida 2,
Inc., and Midlantic.
(b) 10(v) Guarantee Agreement, dated February 15, 1991, between Europa Cruises of Florida 2, Inc., and
Midlantic, Re: Europa Cruises of Florida 2, Inc.
(b) 10(w) Coordination Agreement, dated February 20, 1991, between Midlantic and Cordis, A.G.
(b) 10(aa) Assignment of Note Receivable, Account Receivable and Common Stock from Harlan G. Allen, Jr.
to the Company.
(b) 10(bb) Stock Purchase Agreement, dated March 31, 1991, between the Company and Freeport Cruise Line, Ltd.
(b) 10(cc) Pledge Agreement and Addendum thereto, dated April 18, 1991, between the Company and Harlan G. Allen, Jr.
(b) 10(dd) Franchise and Development Agreements between LoneStar Hospitality Corporation and Miami Subs U.S.A.,
Inc., dated July 1, 1992.
(d) 10(ee) Vessel Purchase Agreement dated July 8, 1992 between the Company and FLC, Re: Purchase of the EuropaSky.
(d) 10(ff) Contract of Sale dated July 21, 1992, between the Company and Ferry Binghamton, Inc. Re: the
Purchase of Miss New York.
(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.
(f) 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.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
(f) 10(mm) Management Agreement between the Company and Casinos Austria Maritime Corporation dated June 19, 1993.
(f) 10(nn) Diamondhead, Mississippi Loan Agreement, Continuing Guaranty, Promissory Note, and Extension of
Promissory Note between the Company and Casinos Austria Maritime Corporation mortgage to September 17, 1994.
(f) 10(oo) Convertible Promissory Note dated November 11, 1993 issued by the Company to Serco International Ltd.
(f) 10(pp) Lease Agreement between the Company and Serco International Ltd dated November 15, 1993.
(f) 10(qq) Casino World, Inc. 1993 Stock Option Plan dated March 25, 1993.
(f) 10(rr) Form of Stock Option Agreement dated as of August 31, 1994 issued to Deborah A. Vitale, Stephen M. Turner,
Ernst G. Walter and Lester E. Bullock.
(f) 10(ss) Easement dated December 22, 1994 granted to Mississippi Gaming Corporation adjacent to proposed
Diamondhead gaming site.
(f) 10(tt) Miami Beach Marina Lease dated February 10, 1995 as amended between Europa Cruises of Florida 2 and
Tallahassee Building Corp.
(f) 10(uu) Settlement Agreement dated May 9, 1994 between Europa Cruises Corporation and Harlan G. Allen, Jr.
(f) 10(vv) First Union National Bank Credit and Security Agreement and Promissory Note dated May 23, 1995
between Europa Cruises Corporation, Europa Cruises of Florida 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.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
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.
(f) 18 Letter from BDO Seidman, LLP regarding 1995 change in accounting principle.
(a) Previously filed as an exhibit to the Company's Registration Statement No. 33-26256-A and incorporated by reference.
(b) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and
incorporated by reference.
(c) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and
incorporated by reference.
(d) Previously filed as an exhibit to the Company's Form S-2 Registration Statement dated August 26, 1992 and incorporated
by reference.
(e) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1992 and
incorporated by reference.
(f) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the years ended December 31, 1993 and
1994 and incorporated by reference.
(g) Previously filed as an exhibit to the Company's S-2 Registration Statement (No. 33-89014) filed January 31, 1995 and
incorporated by reference.
</TABLE>
Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
Subsidiaries of the Registrant
Europa Cruise Line, Ltd. (Delaware)
Europa Cruises of Florida 1, Inc. (Delaware)
Europa Cruises of Florida 2, Inc. (Delaware)
EuropaJet Corporation (Delaware)
Europa Cruise Lines, Ltd. (Cayman Island)
Mississippi Gaming Corporation (Delaware)
EuropaSky Corporation (Delaware)
American Gaming Corporation (Delaware)
Casino World, Inc. (Delaware)
Europa Stardancer Corporation (Delaware)
Europa Casino Management Corporation (Delaware)
Europa Leasing Corporation (Delaware)
39
<PAGE>
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.
EUROPA CRUISES CORPORATION
/s/ Deborah A. Vitale
DATE: April 15, 1998 --------------------------------
By: Deborah A. Vitale, President
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, April 15, 1998
- -----------------------------------
President and Chairman of the Board
/s/ John R. Duber April 15, 1998
- -----------------------------------
Vice President, Director
/s/ Paul J. DeMattia April 15, 1998
- -----------------------------------
Director
/s/ Gregory A. Harrison April 15, 1998
- -----------------------------------
Director
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Page
----
Report of Independent Certified
Public Accountants. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
December 31, 1997 . . . . . . . . . . . . . . . . . .F-3 to F-4
Consolidated Statements of Operations
for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . .F-5 to F-6
Consolidated Statements of Stockholders' Equity
for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows
for the Years Ended
December 31, 1997 and 1996. . . . . . . . . . . . . .F-8 to F-9
Notes to Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . .F-10 to F-33
F-1
<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, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. 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, 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Miami, Florida BDO Seidman, LLP
February 27, 1998
F-2
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 5(a))
Current
Cash and cash equivalents $ 237,987
Accounts receivable (Note 5) 326,528
Prepaid insurance and other 436,674
- --------------------------------------------------------------------------------
Total current assets 1,001,189
Vessels, equipment and fixtures, less accumulated
depreciation (Notes 2 and 5) 13,238,633
Land under development for dockside gaming
(Note 4) 4,864,734
Dockside gaming development costs (Note 4) 188,279
Deferred drydock costs, net of amortization (Note 2) 645,963
Other assets 201,659
- --------------------------------------------------------------------------------
$20,140,457
================================================================================
F-3
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Balance Sheet
- -------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity (Note 5(a))
Current liabilities
Accounts payable and accrued expenses $ 1,433,920
Current maturities of long-term debt (Note 5) 5,267,121
Unearned cruise revenues 46,077
- -------------------------------------------------------------------------------
Total current liabilities 6,747,118
Long-term debt, less current maturities (Note 5) 3,223,977
Other liabilities 400,000
- -------------------------------------------------------------------------------
Total liabilities 10,371,095
- -------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
- -------------------------------------------------------------------------------
Stockholders' equity (Notes 6 and 7):
Preferred stock, $.01 par value; shares authorized
5,000,000; outstanding 2,808,000 ($3,963,080 aggregate
liquidation preference) 28,080
Common stock, $.001 par value - shares authorized
50,000,000; issued 28,538,588; outstanding 23,038,588 28,538
Additional paid-in capital 25,429,314
Unearned ESOP shares (6,336,564)
Deficit (9,189,850)
Treasury stock, at cost, 1,250,000 shares (190,156)
- -------------------------------------------------------------------------------
Total stockholders' equity 9,769,362
- -------------------------------------------------------------------------------
$ 20,140,457
===============================================================================
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Gaming revenue $ 15,208,517 $ 13,258,289
Passenger fares 3,353,016 3,888,395
Food and beverage 1,282,377 1,499,071
Charter fees 327,500 383,905
Other (Note 4) 676,378 223,118
- --------------------------------------------------------------------------------------
20,847,788 19,252,778
- --------------------------------------------------------------------------------------
Costs and Expenses
Vessel operating 13,121,189 12,802,466
Administrative and general 2,832,498 2,150,942
Advertising and promotion 1,571,275 1,586,931
Depreciation and amortization (Note 2) 1,836,164 1,544,359
Nonrecurring sales tax settlement (Note 9) 1,284,664 -0-
Interest, net (Note 5) 907,502 908,006
Other operating (Note 11) 1,053,871 276,597
- --------------------------------------------------------------------------------------
22,607,163 19,269,301
- --------------------------------------------------------------------------------------
Net Loss (1,759,375) (16,523)
Preferred Stock Dividends (221,248) (231,758)
- --------------------------------------------------------------------------------------
Net Loss Applicable To Common Stock $ (1,980,623) $ (248,281)
======================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Statements of Operations
(Continued)
- --------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Amounts
Net loss per common share, basic and diluted $ (.09) $ (.01)
======================================================================================
Weighted average number of common shares outstanding 22,620,251 20,171,730
======================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Statements of Stockholders
(Notes 6&7)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Unearned Common Stock
Stock Stock Capital ESOP Shares Subscribed
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 29,598 $ 24,133 $ 23,685,534 $ (7,082,188) $ 200,000
Issuances of common stock -- 2,688 1,257,241 -- (200,000)
ESOP compensation -- -- (164,687) 372,812 --
Preferred stock dividends -- 218 171,540 -- --
Common stock subscription -- -- -- -- 234,974
Stock subscription receivable -- -- -- -- -0-
Conversion of preferred to common (1,373) 137 1,236 -- --
Net loss for the year -- -- -- -- --
Balance, December 31, 1996 28,225 27,176 24,950,864 (6,709,376) 234,974
Issuances of common stock,
net of offering costs -- 1,212 510,207 -- --
ESOP compensation -- -- (152,187) 372,812 --
Preferred stock dividends -- 136 120,299 -- --
Common stock subscription -- -- -- -- (234,974)
Conversion of preferred to common (145) 14 131 -- --
Net loss for the year -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 28,080 $ 28,538 $ 25,429,314 $ (6,336,564) $ -0-
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
(Deficit) Stock Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ (6,960,946) $ (190,156) $ 9,705,975
Issuances of common stock -- -- 1,059,929
ESOP compensation -- -- 208,125
Preferred stock dividends (231,758) -- (60,000)
Common stock subscription -- -- 234,974
Stock subscription receivable -- -- -0-
Conversion of preferred to common -- -- --
Net loss for the year (16,523) -- (16,523)
Balance, December 31, 1996 (7,209,227) (190,156) 11,132,480
Issuances of common stock,
net of offering costs -- -- 511,419
ESOP compensation -- -- 220,625
Preferred stock dividends (221,248) -- (100,813)
Common stock subscription -- -- (234,974)
Conversion of preferred to common -- -- --
Net loss for the year (1,759,375) -- (1,759,375)
- -------------------------------------------------------------------------------------
Balance, December 31, 1997 $ (9,189,850) $ (190,156) $ 9,769,362
=====================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(Note 10)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net loss $(1,759,375) $ (16,523)
- -------------------------------------------------------------------------------------
Adjustments to reconcile net loss
to net cash provided by operating activities:
Nonrecurring sales tax settlement 1,284,664 --
Depreciation and amortization 1,836,164 1,544,359
ESOP provision 220,625 208,125
(Increase) decrease in:
Accounts receivable 72,204 (87,965)
Prepaids and other 144,628 899,184
(Decrease) increase in:
Accounts payable and accrued expenses (481,644) 133,662
Unearned cruise revenues (17,750) (8,212)
Other liabilities 250,000 --
- -------------------------------------------------------------------------------------
Total adjustments 3,308,891 2,689,153
- -------------------------------------------------------------------------------------
Cash provided by operating activities 1,549,516 2,672,630
- -------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment, net (918,175) (2,276,677)
Land under development for dockside gaming (150,917) (171,140)
Decrease(increase) in restricted cash 400,000 (400,000)
- -------------------------------------------------------------------------------------
Cash used in investing activities (669,092) (2,847,817)
- -------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(Note 10)
- --------------------------------------------------------------------------------
Year ended December 31, 1997 1996
- -------------------------------------------------------------------------------
Financing Activities:
Proceeds from:
Stock subscription payments $ 224,070 $ 234,974
Issuance of common stock 52,375 1,059,929
Long-term debt 492,413 2,450,000
Repayment of:
Long-term debt (1,858,562) (3,511,426)
Preferred stock dividends (100,813) (62,271)
- -------------------------------------------------------------------------------
Cash (used in) provided by financing activities (1,190,517) 171,206
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (310,093) (3,981)
Cash and cash equivalents, beginning of year 548,080 552,061
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 237,987 $ 548,080
===============================================================================
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Organization and Business
Significant
Accounting Europa Cruises Corporation and Subsidiaries (the Company)
Policies 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.
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
F-10
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
years) using the straight-line method. Expenditures for
repairs and maintenance are expended 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
$2,954,532 in 1997 and $2,100,367 in 1996.
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 or food 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, 1997 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.
F-11
<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.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 121 "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS No. 121").
SFAS no. 121 requires, among other things, impairment loss
of assets to be held and gains or losses from assets that
are expected to be disposed of be included as a component
of income from continuing operations before taxes on
income. The Company adopted SFAS No. 121 as of January 1,
1996 and its implementation did not have a material effect
on the financial statements.
Stock Based Compensation
In October, 1995, FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair
value method for accounting for stock-based compensation
plans either through recognition or disclosure. The Company
did not adopt the fair value based method but instead
discloses the proforma effects of the calculation required
by the statement.
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
F-12
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 per Common Share
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share", which simplifies
the standards for computing earnings per share ("EPS")
previously found in APB No. 15, "Earnings Per Share". It
replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital
structures and requires a reconciliation of the numerator
and denominator of the diluted EPS computation. The Company
adopted SFAS No. 128 in 1997 and its implementation did not
have a material effect on the financial statements. EPS has
been restated for all prior periods presented.
Net loss per common share (basic and diluted) is based on
the net loss after preferred stock dividends divided by the
weighted average number of common shares outstanding during
each year. Common shares outstanding includes issued shares
less shares held in treasury, and un-allocated and
uncommitted shares held by the ESOP trust.
The Company's potentially issuable shares of common stock
pursuant to outstanding stock purchase options and warrants
and convertible preferred stock are excluded from the
Company's diluted computation as their effect would be
antidilutive to the Company's net loss.
Drydock Costs
The Company uses the deferral method to account for major
repairs and maintenance in drydock whereby costs are
capitalized when incurred and amortized over the period to
the net drydock.
F-13
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income
is defined to include all changes in equity except those
resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current
accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with
the same prominence as other financial statements.
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report
information about operating segments in annual financial
statements and requires reporting of selected information
about operating segments in interim financial statements
issued to the public. It also establishes standards for
disclosures regarding products and services, geographic
areas and major customers. SFAS 131 defines operating
segments as 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 new standards are effective for financial statements
for periods beginning after December 15, 1997 and require
comparative financial information for earlier years to be
restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if
any, they may have on future financial statement
disclosures.
F-14
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Vessels, Vessels, equipment and fixtures consist of the following:
Equipment 1997
and Fixtures, ----------------------------------------------------------
and Deferred
Drydock Costs Vessels $ 13,527,221
Vessel improvements 1,778,632
Gaming equipment 2,199,981
Office and vessel equipment 867,461
Furniture, fixtures and other 268,596
Leasehold improvements 579,818
----------------------------------------------------------
19,221,709
Less accumulated depreciation (5,983,076)
----------------------------------------------------------
$ 13,238,633
----------------------------------------------------------
Deferred drydock costs consist of the following:
----------------------------------------------------------
Deferred drydock costs $ 1,385,290
Less accumulated amortization (739,327)
----------------------------------------------------------
$ 645,963
==========================================================
In August, 1994, the Company entered into a Subscription
and Investment Agreement with Lagoon Cruise Line, Inc. when
the Company purchased the M/V Stardancer, in return for
cash and stock. Under the terms of the agreement, Europa
was required to pay Lagoon, in cash, the difference, if
any, between the average five day trading price of the
stock for the period ended February 13, 1997 and $1.25 per
share for the 1,200,000 shares of stock Lagoon received in
payment for the vessel. The average five-day stock price
for the period ended February 13, 1997 was $1.38. As a
result, the stock guarantee lapsed resulting in no
additional cost to the Company.
F-15
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Investment In On December 31, 1990, the Company rescinded a transaction
And in which it had previously sold its twenty percent
Advances To ownership interest in Marne (Delaware), Inc. (Marne) by
Unconsolidat- reacquiring its investment and a $340,000 note receivable
ed Affiliate in exchange for $541,620 of promissory notes payable to a
principal stockholder and a former officer of the Company.
In October, 1996, a final Order and Judgement was issued by
the Court of Chancery of the State of Delaware in and for
New Castle County. Under the judgement, the former officer
is required to return 250,000 shares of common stock to the
Company and must pay money damages in the net amount of
$24,962 to rescind the Marne transaction. Accordingly, the
related investment, and promissory note payable were
eliminated in 1996 at no gain or loss.
4. Land Under The Company through its two wholly-owned subsidiaries,
Development Casino World, Inc. (CWI) and Mississippi Gaming Corporation
for Dockside (MGC) owns or has options to purchase a total of 404.5
Gaming and acres of unimproved land in Diamondhead, Mississippi which
Dockside was granted site approval by the Mississippi Gaming
Gaming Commission in June, 1995. The ownership and operation of a
Development gaming business in Mississippi are subject to numerous
Costs risks and uncertainties including but not limited to the
availability of financing, licensing, and the receipt of
permits from various federal, state and local agencies.
Litigation brought by environmental groups, neighbors, and
competitors 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 cost of the
land. 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 per month during construction and the remainder
of the
F-16
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$2,250,000 will be paid over the remainder of the lease
after operation of the casino commences. The lease
incorporates the Memorandum of Understanding between the
Mississippi Secretary of State and the Hancock County Port
and Harbor Commission dated November 19, 1995, which
transfers management and control of the subject tidelands
to the Port and Harbor Commission and requires a signing of
a tenant lease within one year of signing and commencement
of casino operations within three years of the signing of
the memorandum.
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.
On January 31, 1997, the Company entered into an agreement
with Hilton Gaming Corporation, which gave Hilton the
exclusive right to negotiate a joint venture agreement with
Europa for a 180 day period of time with respect to the
development of Europa's Diamondhead, Mississippi property
located on Bay St. Louis, Diamondhead, Mississippi. The
proposed joint venture was not consummated. In exchange for
the exclusive right to negotiate, Hilton paid Europa a
nonrefundable fee of $400,000, which is included in other
income in the accompanying statement of operations.
Dockside gaming development costs consist of the following:
1997
----------------------------------------------------------
Licenses $ 77,000
Other development costs 111,279
----------------------------------------------------------
$ 188,279
==========================================================
The legal, financial, political, tax, environmental,
regulatory and competitive environment in which the Company
currently operates gaming activities and in which it
intends to operate gaming activities is uncertain, dynamic
and subject to rapid change. In addition, existing
operators often support legislation and litigation designed
to make it difficult or impossible for
F-17
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
competitors to develop and operate gaming facilities. This
environment makes it impossible to predict the effects,
including costs, that changes in laws, rules, regulations
and other variables will have on the Company's proposed
dockside gaming operations or on existing operations.
5. Long-term Long-term debt consists of:
Debt 1997
----------------------------------------------------------
Bank term loan, principal and interest
payable $102,000 monthly through August
2002, floating rate of interest at
Libor plus 325 basis points (9% at
December 31, 1997) capped at 11.35%
with an interest rate swap agreement,
collateralized by accounts receivable,
three vessels, equipment and fixtures.
(a) $ 4,375,986
Equipment finance company term loan,
principal and interest payable $30,360
monthly through January 2001, including
interest at 10.5% with a balloon
payment due of $1,442,000. 2,103,730
State of Florida Sales Tax Closing
Agreement, payable $20,952 monthly
through June 2004. With interest
charged at 6% per annum beginning June
2000 and payable at maturity, less
unamortized discount based on an
imputed interest rate of 10% of
$415,995. 1,218,245
Capital lease obligation on gaming
equipment, payable $25,000 monthly to
May, 1999, including interest at 9%. 289,745
9% note payable, principal and interest
payable $4,827 monthly through November
2000, collateralized by 400,000
escrowed shares of Europa common stock. 229,437
F-18
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9% note payable, principal and interest
payable $17,700 monthly through July,
1998. 115,813
6.99% insurance financing arrangement,
payable $16,666 per month 150,000
Other 8,142
----------------------------------------------------------
Total 8,491,098
Less current maturities (5,267,121)
----------------------------------------------------------
$ 3,223,977
==========================================================
a) As of December 31, 1997, the Company was not in
compliance with the cash flow and tangible net worth
covenants required under the terms of its bank loan
agreement. The bank has waived the Company's default
through October 31, 1998, at which time the bank may demand
repayment if the Company remains out of compliance. The
loan balance of $4,375,986 has been classified as a current
liability in the accompanying 1997 consolidated balance
sheet.
The Company's cash flow during 1997 was sufficient to
sustain its operations and the Company believes it will
continue to be so. The Company however, may be unable to
meet any unusual or unanticipated cash requirements should
they arise during 1998, except through the sale of stock or
borrowing.
In the event that the Company remains out of compliance
with the loan covenants and payment is demanded, the
Company believes that the value of the underlying
collateral is sufficient to refinance or extinguish the
debt. The ultimate outcome of the matter may have a
material adverse effect on the Company's financial position
and operations.
F-19
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Annual maturities of long-term debt are as follows:
1998 $ 5,267,121
1999 367,701
2000 405,693
2001 1,841,800
2002 258,395
Thereafter 350,388
----------------------------------------------------------
$ 8,491,098
==========================================================
Interest expense consists of:
1997 1996
----------------------------------------------------------
Interest expense $950,794 $932,170
Less:
Interest income (43,292) (24,164)
----------------------------------------------------------
Interest expense (net) $907,502 $908,006
==========================================================
6. Stockholders' At December 31, 1997, the Company had a stock option plan
Equity and non-plan options, which are described below. The
Company applies APB Opinion 25. Accounting for Stock Issued
to Employees, and related Interpretations in accounting for
employee stock options. Under APB Opinion 25, because the
exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date
of grant, no compensation cost is recognized.
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. As of December 31, 1997, approximately 865,000
shares remain available under the Plan and 810,000 options
are outstanding.
F-20
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In April 1996, the Company granted five year fixed non-plan
stock options at an exercise price of $.75 (fair market
value at the date of grant) that expire in April, 2001. The
options were granted as follows:
Immediately exercisable options to acquire 250,000 shares
of common stock to each member of its Board of Directors;
an aggregate of 750,000 shares.
Immediately exercisable options to acquire 550,000 shares
of common stock to the Chairman of the Board.
Options to acquire 300,000 shares of common stock to the
President and certain management personnel of the Company.
These shares became fully vested on December 31, 1996.
Options to acquire 200,000 shares of common stock to the
President of Casino World, Inc., a wholly owned subsidiary.
Options to acquire 50,000 shares of common stock to an
officer of the Company. These options fully vested on March
31, 1997.
In April, 1997, the Company granted to an employee of
Casino World, Inc., five year fixed non-plan stock options
to acquire 100,000 shares of common stock at an exercise
price of $.8438 (quoted market value of the stock at the
date of grant) that expire in March, 2002.
During 1998, the Company reacquired options to acquire
500,000 shares of common stock from the former President of
the Company for $75,000. The total amount paid was accrued
at December 31, 1997 and included in general and
administrative expense in the accompanying Statement of
Operations.
FASB Statement 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro forma
information regarding net loss and net loss per share as if
compensation cost for the Company's employee stock options
had been determined in accordance with the fair value based
method prescribed in FASB Statement 123. The Company
estimates the fair value of each employee stock option at
the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used
F-21
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
for grants in 1997 and 1996: no dividend yield percent,
expected volatility of 94.39 and risk-free interest rate of
5.84%.
Under the accounting provisions of FASB Statement 123, the
Company's net loss and loss per share would have been as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C> <C> <C>
Net Loss As Reported $(1,980,623) $(248,281)
Applicable to Proforma $(2,045,623) $(878,281)
Common Stock
Earning per As Reported $ (.09) $ (.01)
common share Proforma $ (.09) $ (.04)
</TABLE>
A summary of status of the Company's fixed Plan and
non-plan options as of the December 31, 1997 and 1996, and
changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
December 31, 1997 December 31,1996
--------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,000,000 $ .95 1,180,000 $ 1.27
Granted 100,000 .84 1,850,000 .75
Exercised -- -- -- --
Forfeited -- -- 30,000 1.06
----------------------------------------------------------------------------------------------------
Outstanding at
end of year 3,100,000 $ .95 3,000,000 $ .95
----------------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options exercisable
at year-end 3,100,000 -- 3,000,000 --
Weighted-average fair
value of options
granted during
the year $ .65 -- $ .34 --
------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------------------
Weighted-
Number Average Weighted Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Price 12/31/97 Life Price 12/31/97 Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .75 - $2.25 3,100,000 2.5 .95 3,100,000 .95
--------------------------------------------------------------------------------------------------
</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.
F-23
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 voting common stock, at any time after February
15, 1995. During 1997 and 1996, 14,500 and 137,333 of these
shares were converted to 14,500 and 137,333 common shares
respectively. 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 1996, the Company elected
to pay all the dividends in common stock, of which 218,000
shares valued at $171,758 were issued in 1996 including
accrued dividends from 1995. During 1997, the Company paid
$120,395 of the total preferred dividend of $221,248 with
136,000 shares of its common stock.
In connection with a refinancing in 1996, the Company
granted to First Union National Bank of Florida five-year
warrants to purchase an aggregate 200,000 shares of the
Company's common stock at $2.00 per share.
In October 1995, the Company sold common stock for $500,000
in a Regulation S offering. At December 31, 1995, $200,000
proceeds had been received. The remaining proceeds were
received in May, 1996 and the Company issued 1,035,708
shares of the Company's common stock. An 8% commission,
paid in Common Stock of the company, was paid to Peerless
Associates, Ltd. Piers Hedley, a former Director of the
Company has served as a Executive Managing Director and
Consultant for Peerless Associates, Ltd..
F-24
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In February, 1996 the Company entered into a Placement
Agreement for approximately $650,000 in stock under several
Regulation S offerings and received aggregate net proceeds
of approximately $574,000 and issued 1,182,752 shares of
the Company's common stock. An 8% commission was paid, in
cash, to Suppes Securities, Inc.
In May, 1996, the Company sold common stock for $200,000 in
a Regulation S offering and issued 469,566 shares of the
Company's common stock. An 8% commission, paid in Common
Stock of the Company, was paid to Peerless Associates, Ltd.
In September 1996, the Company offered for sale up to
$500,000 in common stock in a Regulation S offering. At
December 31, 1996, $234,974 in proceeds had been received.
The remaining proceeds of approximately $224,000 net of
issuance costs of approximately $42,000 were received in
January, 1997 and the Company issued 1,163,843 shares of
common stock. An 8% commission, paid with 86,211 shares of
Common Stock of the Company, was paid to Peerless
Associates, Ltd.
During 1997, the Company issued 47,289 shares of Common
Stock in exchange for approximately $52,375.
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,
F-25
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
As of December 31, 1997, 750,000 shares have been legally
released of which, 500,000 have been allocated to
participants accounts. The remaining 250,000 are in the
process of being allocated to participants' accounts in
1998. At December 31, 1997, 4,250,000 shares with a fair
market value of $3,375,000 are unearned.
8. Income At December 31, 1997, the Company had net operating loss
Taxes carry-forwards for income taxes of approximately $13.8
million which expire through 2013. 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.
F-26
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred income taxes are comprised of the following at
December 31, 1997:
1997
----------------------------------------------------------
Depreciation $ 2,106,662
Deferred drydock 139,813
----------------------------------------------------------
Gross deferred tax liability 2,246,475
----------------------------------------------------------
Loss Carry forwards (5,180,000)
Other (8,969)
----------------------------------------------------------
Gross deferred tax asset (5,188,969)
Deferred tax asset valuation allowance 2,942,494
----------------------------------------------------------
Net deferred tax asset $ --
==========================================================
Realization of any portion of the Company's deferred tax
asset at December 31, 1997 is not considered to be more
likely than not and, accordingly, a $2,942,494 valuation
allowance has been provided.
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 and in Diamondhead, Mississippi. Rental
expense, which is primarily based on a per passenger basis,
aggregated approximately $710,000 and $710,000 in 1997 and
1996, respectively.
F-27
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Minimum rental obligations under all noncancellable
operating leases with terms of one year or more as of
December 31, 1997, are as follows:
1998 $ 623,960
1999 623,960
2000 270,000
2001 270,000
2002 270,000
-----------
$ 2,057,920
===========
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 coast
of Florida in a hurricane. What, if any, effect this will
have on the lessors' claim is unknown. The Company has
accrued approximately $400,000 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 Agreement
On September 16, 1994, the company terminated a Gaming
Concession Agreement and entered into a consulting
agreement with Casinos Austria Maritime Corporation. Under
the consulting agreement, Europa manages and
F-28
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
operates all casinos on board its vessels and CAMC was to
provide consulting services through December 31, 1997. As a
consultant to the Company, CAMC received $37,500 per month
or 3.5% of gross gaming revenue, whichever is greater, CAMC
also received $140 per cruise for the services of a Purser
on board each vessel. In February, 1997, the Company
terminated the consulting agreement with CAMC by paying a
termination fee of $361,694, which is included in other
operating cost in the accompanying Consolidated Statement
of Operations. Under the terms of the Termination
Agreement, the Company was to pay a monthly fee of 3.5% of
the gross gaming revenue, if any, from casino operations on
the M/V Stardancer through December 31, 1997, which
aggregated approximately $54,000 during 1997.
On June 19, 1994, Casino World, Inc. and Mississippi Gaming
Corporation (MGC) entered into a Management Agreement with
CAMC. Subject to certain conditions, under the Management
Agreement, CAMC will operate on an exclusive basis all of
the proposed dockside gaming casinos in the State of
Mississippi. If the Company enters into a joint venture
arrangement pursuant to which the joint venture partner
acquires a controlling interest, the agreement with CAMC
will terminate. The Management Agreement is for a term of
five (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).
(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 compensatory,
punitive, treble damages and attorneys' fees against
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 agreement
between Mr. Liberis and Serco entered into on December 12
and 14, 1992.
F-29
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On or about December 31, 1997, the case was removed to
Tampa, Florida. Discovery has started. No trial date has
been set.
The litigation pending against the Company may have an
adverse impact on the Company's ability to secure financing
for its planned Mississippi expansion and on 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 totaled approximately $7.4
million. The Florida Department of Revenue sought to assess
sales tax on gaming revenue, passenger fares, the purchase,
sale and lease of fixed assets, repairs, and other items.
In June, 1997, the Company settled the Sales Tax assessment
with the Florida Department of Revenue. Under the terms of
the settlement the Company is to make principal only
payments for 84 months, with no interest accruing the first
36 months and accruing at 6% on the unpaid balance,
thereafter. The Company imputed interest at 10% per annum
on the above payment streams and recorded a discount in the
amount of $475,286 and approximately $1,300,000 in expense
in connection with the settlement.
(e) Casino Industry Litigation
WILLIAM POULOS, ET AL. V. AMBASSADOR CRUISE LINES, INC., ET
AL. (United States District Court, District of Nevada)
(Case No. CV-S-95-936-LDG (RLH)
On or about November 29, 1994, William Poulos filed a class
action lawsuit on behalf of himself and all others
similarly situated against approximately
F-30
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 to manipulation by defendants and
others. The plaintiff seeks damages in excess of $1 billion
dollars against all defendants. Management believes there
is no support for plaintiff's factual claims and the
Company intends to vigorously defend this lawsuit.
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
F-31
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
of litigation in this matter with other defendants. On
November 3, 1997, the Court heard various motions in the
case, including a Motion to Dismiss filed by the cruise
ship defendants. The motion was denied.
GALVESTON INDEPENDENT SCHOOL DISTRICT, ET AL. V. EUROPA
CRUISE LINES OF TEXAS, INC. ET AL. (In the District Court
of Galveston County, Texas (Case No. 95TX0051)
On or about January 31, 1995, the Galveston Independent
School District filed a Petition in the District Court of
Galveston County, Texas for ad valorem taxes allegedly due
for the year 1990 in the principal amount of $211,470 and
for interest and penalties in the amount of $177,634. The
Company maintains that it is not liable for this alleged
tax. The Company believes the tax is a tangible property
tax which cannot be levied on a foreign flag vessel.
<TABLE>
<CAPTION>
10. Supplemental Supplemental schedules of interest paid are as follows:
Cash Flow
Information 1997 1996
---------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 919,000 $ 998,000
Non-cash transactions are as follows:
1997 1996
---------------------------------------------------------------------------
Expenditures paid in shares of
common stock $ -- $ 208,000
Preferred stock dividends paid with
shares of common stock 120,435 171,758
Gaming Equipment financed by seller -- 240,000
Sales Tax Settlement 1,284,664 --
</TABLE>
F-32
<PAGE>
Europa Cruises Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11. Other Other operating costs consist of the following:
Operating
Costs 1997 1996
-------------------------------------------------------------------------
<S> <C> <C>
Annual Meeting and Proxy Expenses $ 428,331 --
Termination fee associated with
the Gaming Concession Agreement 361,694 --
ESOP provision 220,625 208,125
Other 43,221 68,472
-------------------------------------------------------------------------
$ 1,053,871 $ 276,597
=========================================================================
</TABLE>
12. 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 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 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
may have 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.
The Company's financial instruments consist principally of
cash and cash equivalents, accounts receivable and
long-term debt. The carrying amounts of such financial
instruments approximated fair value at December 31, 1997
and 1996.
F-33
<PAGE>
EXHIBITS INDEX
Exhibit No. Description
- ----------- -----------
27 Amended Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 237,967
<SECURITIES> 0
<RECEIVABLES> 328,528
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,001,168
<PP&E> 12,238,833
<DEPRECIATION> 5,983,078
<TOTAL-ASSETS> 20,140,457
<CURRENT-LIABILITIES> 6,747,118
<BONDS> 0
0
28,080
<COMMON> 28,538
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,140,457
<SALES> 20,847,788
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 22,607,163
<OTHER-EXPENSES> 1,053,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 907,502
<INCOME-PRETAX> (1,759,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,759,375)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
