EUROPA CRUISES CORP, 10QSB, 1999-08-23

EUROPA CRUISES CORP
10QSB, 1999-08-23
WATER TRANSPORTATION

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

COMMISSION FILE NO: 0-17529

EUROPA CRUISES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE 59-2935476
(State of Incorporation) (I.R.S. EIN)

150-153RD AVENUE EAST, SUITE 200, MADEIRA BEACH, FLORIDA 33708
(Address of principal executive offices)

Registrant's telephone number, including area code: 727/393-2885

Indicate by check mark whether the Registrant (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 [ ]

Indicate the number of shares outstanding of each of the Issuer's classes of
common equity as of he latest practicable date: Number of Shares Outstanding at
July 22, 1999: 27,136,519

<PAGE> 2

TABLE OF CONTENTS

PART 1: FINANCIAL INFORMATION

<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS
<S> <C> <C>

Consolidated Statements of Operations for the Three
Months Ended June 30, 1999........................................................... 4

Consolidated Statements of Operations for the Six
Months Ended June 30, 1999........................................................... 5

Consolidated Balance Sheets as of June 30, 1999 ..................................... 6-7

Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and June 30, 1998 .................................................... 8-9

Notes to Consolidated Financial Statements .......................................... 10-21

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Results of Operations for the Three Months
ended June 30, 1999 ................................................................. 22

Results of Operations for the Six Months
ended June 30, 1999.................................................................. 25

PART II: OTHER INFORMATION

ITEM 1 Legal Proceedings ................................................................... 28

ITEM 4 Submission of Matters to a Vote of Security Holders ................................. 28

ITEM 6 Exhibits and Reports on Form 8-K..................................................... 29
</TABLE>

<PAGE> 3

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of Management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature.

<PAGE> 4

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30*
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:

Gaming Revenue $ 1,198,354 $ 3,475,343

Passenger Fares 304,983 749,200

Food and Beverage 119,174 265,455

Charter Revenue 635,661 406,000

Other 33,947 75,768
------------ ------------

$ 2,392,121 $ 4,971,766
------------ ------------

Costs and Expenses:

Vessel Operating 1,611,881 3,136,270

Administrative and General 292,170 548,013

Advertising and Promotion 54,621 218,559

Depreciation and Amortization 464,821 597,013

Sales Tax Settlement 200,000 --

Interest, Net 187,979 141,177

Other Operating (Note 1) 207,038 77,212
------------ ------------

3,018,510 4,718,844
------------ ------------

Net Income (Loss) (726,389) 252,922

Preferred Stock Dividends (45,005) (54,273)
------------ ------------

Net Income (Loss) Applicable to
Common Stock $ (771,394) $ 198,649
------------ ------------

Earnings (Loss) Per Share,
Basic and Diluted $ (.03) $ .01
------------ ------------

Weighted Average Number of
Common Shares Outstanding 25,374,256 23,598,440
------------ ------------
</TABLE>

*Note: The M/V Europa Sun was chartered as of March 1, 1999 and did not operate
in the second quarter.

<PAGE> 5

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30*

1999 1998
------------ ------------
<S> <C> <C>
Revenues:

Gaming Revenue $ 3,565,099 $ 7,012,969

Passenger Fares 820,015 1,520,717

Food and Beverage 281,034 495,249

Charter Revenue 1,032,548 406,000

Other 46,437 164,506
------------ ------------

$ 5,745,133 $ 9,599,441
------------ ------------

Costs and Expenses:

Vessel Operating 3,902,869 6,138,568

Administrative and General 756,223 1,074,040

Advertising and Promotion 97,219 501,783

Depreciation and Amortization 941,435 1,089,075

Sales Tax Settlement 200,000 --

Interest, Net 369,226 345,573

Other Operating (Note 1) 268,467 158,293
------------ ------------

6,535,399 9,307,332
------------ ------------

Net Income (Loss) (790,266) 292,109

Preferred Stock Dividends (90,010) (108,546)
------------ ------------

Net Income (Loss) Applicable to
Common Stock $ (880,276) $ 183,563
------------ ------------

Earnings (Loss) Per Share,
Basic and Diluted $ (.04) $ .01
------------ ------------

Weighted Average Number of
Common Shares Outstanding 24,980,498 23,145,135
------------ ------------
</TABLE>

*Note: The M/V Europa Sun was chartered as of March 1, 1999 and, therefore, did
not operate for four of the six months reported.

<PAGE> 6

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS

Current Assets:

Cash and Cash Equivalents $ 252,981

Accounts Receivable 337,424

Prepaid Insurance and Other 164,960
-----------

Total Current Assets 755,365

Vessels, Equipment and Fixtures,
Less Accumulated Depreciation 11,523,047

Land Under Development for
Dockside Gaming 5,063,645

Deferred Drydock Costs, Less
Accumulated Amortization 384,340

Other Assets 145,622
-----------

$17,872,019
-----------
</TABLE>

<PAGE> 7

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY

JUNE 30, 1999
-------------
<S> <C>

Current Liabilities:

Accounts Payable and Accrued Liabilities $ 2,447,450

Accounts Payable-Shareholders 516,300

Current Maturities of Long-Term Debt 3,951,152

Unearned Revenues 237,469
------------

Total Current Liabilities 7,152,371
------------

Long-Term Debt Less Current Maturities 2,853,191

Other Liabilities 1,350,000
------------

Total Liabilities 11,355,562
------------

Stockholders' Equity:

Preferred stock, $.01 par value;
Shares authorized: 5,000,000
Shares outstanding: 2,532,000
Aggregate Liquidation Preference ($3,411,080) 25,320

Common Stock, $.001 par value;
Shares Authorized: 50,000,000
Shares Issued: 30,196,560 30,195
Shares Outstanding: 25,071,560

Additional Paid-In-Capital: 25,654,582

Unearned ESOP Shares (5,774,064)

Deficit (13,229,420)

Treasury Stock, at Cost,
1,250,000 Shares (190,156)
------------

Total Stockholders' Equity 6,516,457
------------
$ 17,872,019
------------
</TABLE>

<PAGE> 8

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,

1999 1998
--------- -----------
<S> <C> <C>

Operating Activities:

Net Income (Loss) $(790,266) $ 292,109

Adjustments to reconcile net
Income (loss) to net cash used
In operating activities

Depreciation and Amortization 941,435 1,089,075

Release of ESOP Shares 52,500 100,000

Expenses Paid in Shares of Common Stock 75,614 --

Decrease (increase) in:

Accounts Receivable (150,287) (7,202)

Prepaid and Other Assets 228,310 180,987

Increase (decrease) in:

Accounts Payable and Accrued Liabilities (45,682) 18,224

Unearned Revenues 205,874 (46,077)

Other Liabilities 450,000 --
--------- -----------

Cash provided by Operating Activities 67,498 1,627,116
--------- -----------

Investing Activities

Purchases of Property and Equipment (251,765) (65,520)

Development Costs for Dockside Gaming -- (24,792)

Deferred costs and other (3,441) (211,036)
--------- -----------

Cash (required) Provided by
Investing Activities (255,206) (301,348)
--------- -----------
</TABLE>

<PAGE> 9

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30

1999 1998
--------- ---------
<S> <C> <C>

Financing Activities:

Proceeds from issuance of common stock $ 300,000 --

Payment of Notes and long-term debt (455,237) (643,459)

Preferred stock dividends (30,000) (108,546)
--------- ---------

Cash (used in) financing activities (185,237) (752,005)
--------- ---------

Net increase (decrease) in cash
and cash equivalents (372,945) 573,763

Cash and cash equivalents,
beginning of period 625,926 237,987
--------- ---------

Cash and cash equivalents,
end of period $ 252,981 $ 811,750
--------- ---------
</TABLE>

<PAGE> 10

EUROPA CRUISES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

(a) Casino Revenue

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 $380,747
and $972,000 for the three months ended June 30, 1999 and 1998 respectively and
$967,858 and $1,793,000 for the six months ended June 30, 1999 and 1998
respectively.

(b) Other Operating Costs

Other operating costs consist of the following:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 1999 1998
------- -------
<S> <C> <C>
ESOP Provision 33,125 50,000
Provision for Wage and Hour Audit 120,000 --
Other 53,913 27,212
------- -------
207,038 77,212
------- -------

SIX MONTHS ENDED JUNE 30 1999 1998
------- -------
ESOP Provision 52,500 100,000
Provision for Wage and Hour Audit 120,000 --
Other 95,967 58,293
------- -------
268,467 158,293
------- -------
</TABLE>

NOTE 2. EARNINGS (LOSS) PER SHARE

Net earnings /(loss) per common share is based on the net income/(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 unallocated 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 1999 computation as their effect would be
antidilutive to the Company's net (loss).

<PAGE> 11

<TABLE>
<CAPTION>
<S> <C>
Common Shares outstanding includes:
Issued Shares 30,196,560
Less: Treasury Shares (1,250,000)
Unallocated, uncommitted ESOP Shares (3,875,000)
-----------
Outstanding Shares 25,071,560
-----------
</TABLE>

NOTE 3. INCOME TAXES

The Company's taxable income in 1998 has been offset substantially by the
utilization of net operating loss contingencies.

NOTE 4. MATERIAL CONTINGENCIES

TAX-RELATED LITIGATION

FLORIDA DEPARTMENT OF REVENUE TAX AUDITS

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. 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 $1.9 million. The
settlement includes a payment schedule of approximately $21,000 per month for
seven years (payment reduced to $10,475.89 in March 1998). 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.

SETTLED
In January of 1999 through April 1999, the Florida Department of Revenue issued
various Notices of Intent to Make Audit Changes to Europa Cruises Corporation
and its subsidiaries for the period April 1, 1993 and July 1, 1994 through March
31, 1998. The proposed audit changes include an alleged tax due in the amount of
$1,710,209, penalties in the amount of $855,105 and interest in the amount of
$663,621 for a total of $3,228,935. On April 13, 1999, the Company received
Notices of Assessment relating to the foregoing which included continuing
interest to date.

Under threat of action by the Department to immediately collect all amounts
owing under the assessment, the Company entered into a negotiated settlement of
the matter in June 1999. This settlement calls for Europa to pay $1,600,000 to
the Department in monthly installments of $50,000 until satisfied. In the event
that the Company should sell one of its vessels, $800,000 would be immediately
due to the Department. Should a second vessel be sold, the remainder of

<PAGE> 12

the then-unpaid settlement amount would be due from the proceeds of that sale.
As of the filing date of this report, $1,450,000 remains due to the Department
pursuant to this settlement.

The Company recorded a contingency in the fourth quarter of 1998 in the amount
of $1,400,000 for this matter. The remaining $200,000 of the $1,600,000
settlement was charged to operations in the second quarter of 1999.

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 $211,470.00 and for
interest and penalties in the amount of $177,634.80. 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.

<PAGE> 13

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. On
March 18, 1998, the Plaintiffs filed a Motion for Class Certification. The
motion is pending.

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.

<PAGE> 14

OTHER LITIGATION

SEA LANE BAHAMAS LIMITED V. EUROPA CRUISES CORPORATION (United States District
Court for the Southern District of Florida)(Case No. 94-10004)

CASE PENDING
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 Europa Jet 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
Europa Jet 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 were selected and discovery was
taken.

Europa took the position in arbitration that the Plaintiff had failed to name
the real party in interest as Plaintiff and that it was too late to do so. On or
about March 18, 1998, the Plaintiff filed a Motion to Re-Open the case for the
purpose of considering Plaintiff's proposed Motion for Leave to Amend the
Complaint to Join Marne (Delaware), Inc. as a Party Plaintiff and for Relation
Back of [the] Amendment. The Plaintiff was attempting to add Marne (Delaware),
Inc. as a Plaintiff in the case. On or about April 16, 1998, Europa filed an
Opposition to the motion. On June 1, 1998, the District Court entered an Order
Denying Sea Lane's Motion to Re-Open and Amend. On or about June 11, 1998, Sea
Lane filed a Motion for Reconsideration. Europa filed a Memorandum in Opposition
to Sea Lane's Motion for Reconsideration. On June 22, 1998, the District Court
entered an Order Denying [Sea Lane's] Motion for Reconsideration. On or about
July 6, 1998, Sea Lane filed a Notice of Appeal to the United States Court of
Appeals for the Eleventh Circuit. Briefs have been filed. Oral argument is set
for June 22, 1999.

Europa believes that if Sea Lane is unsuccessful on appeal, this case will be
concluded inasmuch as Sea Lane's failure to have filed suit in the name of Marne
(Delaware) Inc. may have been fatal to their claim. Europa believes that if Sea
Lane is successful on appeal, this matter will be returned to arbitration for
further proceedings. In an apparent effort to attempt to avoid a successful
outcome for Europa on appeal in the above-captioned matter, on November 3, 1998,
Sea Lane Bahamas Limited and Marne (Delaware) Inc. filed a similar, companion
case against Europa Cruises Corporation and Europa Cruise Line, Ltd. in the
Circuit Court of the Eleventh Judicial Circuit In and For Miami-Dade County,
Florida (Case No. 98-25127CA02) alleging

<PAGE> 15

breach of charter, breach of settlement agreement, and fraud in the inducement
and seeking compensatory and punitive damages. In response, Europa filed a
Motion to Stay, Dismiss, and Strike.

The Company has recorded an estimated liability for losses in the above matter
in the amount of $400,000.

ASSOCIATION FOR DISABLED AMERICANS, INC. DANIEL RUIZ AND JORGE
LUIS RODRIGUEZ V. EUROPA CRUISES OF FLORIDA 2, INC. AND EUROPA
CRUISES CORPORATION (United States District Court for the Southern District of
Florida, Miami Division, Civil Action No. 98-1836)

CASE PENDING
On July 31, 1998, the Association for Disabled Americans, Inc., Daniel Ruiz and
Jorge Luis Rodriguez filed suit against Europa Cruises of Florida 2, Inc. and
Europa Cruises Corporation ("Europa") for injunctive relief pursuant to the
Americans With Disabilities Act. The Plaintiffs claim, in part, that Europa has
discriminated against them by denying them access to and full and equal
enjoyment of services, facilities, accommodations, the subject vessel and
premises and that the Company has failed to remove architectural barriers and
erect certain architecturally required improvements. The Plaintiffs have
requested that the Court issue a permanent injunction enjoining Europa from
continuing its alleged discriminatory practices, ordering Europa to alter the
subject vessel and premises, close the subject vessel and premises until the
alleged required modifications are completed and to award Plaintiffs attorneys'
fees, costs and expenses incurred. The Company intends to vigorously defend this
action.

HUBBARD ENTERPRISES, INC. V. EUROPASKY CORPORATION (Circuit Court for
Pinellas County, Floridaq, Case No. 99-003715)

CASE PENDING
On or about May 28, 1999, Hubbard Enterprises, Inc., the landlord for the
Madeira Beach operation, filed a Complaint for Declaratory Relief and damages
against EuropaSky Corporation claiming that Europa is required to pay a rental
fee for both paying and non-paying passengers as opposed to only paying
passengers. On or about June 22, 1999, Europa filed an Answer denying the
contention. In addition, Europa filed a Counterclaim for tortious interference
in business relations and/or contractual relations, extortion, and breach of
contract. Europa alleges, among other things, that Hubbard's interfered with the
sale of the Madeira Beach operation which was then-scheduled to close on May 10,
1999. Europa is seeking compensatory and punitive damages.

MISSISSIPPI-RELATED LITIGATION

BAY ST. LOUIS COMMUNITY ASSOCIATION, PRESERVE DIAMONDHEAD

<PAGE> 16

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)

CASE PENDING
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. On July 23,
1998, the Supreme Court of Mississippi reversed the lower court's decision and
remanded the case to the lower court for a hearing on the merits. On or about
August 6, 1998, Casino World, Inc. filed a Motion for Rehearing which was denied
on October 15, 1998. On or about October 26, 1998, the case was remanded to the
lower court for a hearing on the merits.

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

<PAGE> 17

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 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)).

CASE DISMISSED
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. On or about
April 16, 1998, the Defendants (with the exception of the United States Army
Corps of Engineers and United States of America) filed a Motion to Dismiss the
Complaint on grounds, inter alia, that the Court lacks subject matter
jurisdiction and that the Complaint fails to state a claim upon which relief may
be granted. On June 30, 1999, the District Court granted the defendants' motion
to dismiss.

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

<PAGE> 18

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. The Company was not named as a
party in the action. On or about August 31, 1998, the Company filed a motion for
leave to intervene as a party defendant in the action. On November 4, 1998, the
Court granted the Company's motion. Various motions and cross-motions in the
case have been filed and briefed, including motions and cross-motions for
summary judgment.

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

<PAGE> 19

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.

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

<PAGE> 20

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.

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 DISMISSED/POST DISMISSAL MOTIONS 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

<PAGE> 21

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 other claims for other tortious conduct.
On or about October 30, 1997, Liberis filed an appeal from the Order of the
Court granting the motion of Defendant Victor Gersh/Estate of Victor Gersh to
dismiss the Complaint against them. Liberis' appeal was denied. Liberis also
filed a separate action against the Estate of Victor Gersh which remains
pending. 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).

On September 30, 1998, the Honorable Susan C. Bucklew, granted the Motions to
Dismiss filed by Europa and Casinos Austria Maritime Corporation. The Judge
ordered the Court Clerk to close the case. Liberis filed a motion to have the
Court reconsider its ruling and to have certain claims remanded to the state
court. The Company filed a motion for attorneys' fees. Various other post-
ruling motions were filed.

LIBERIS V. STEVEN M. TURNER, DEBORAH A. VITALE, WILLIAM A. HEROLD, DR. ERNST
WALTER, SHARON PETTY, CHARLES "KIP" REDDIEN, SERCO INTERNATIONAL LIMITED,
CASINOS AUSTRIA MARITIME CORPORATION (CAMC), AUSTROINVEST INTERNATIONAL LIMITED,
BERTHA GERSH, AS ADMINISTRATOR OF THE ESTATE OF VICTOR GERSH, EUROPA CRUISES
CORPORATION, PETER MUELLER, STEVEN B. SOLOMON, AND JOHN DOES A-Z (CIRCUIT COURT
IN AND FOR PINELLAS COUNTY, FLORIDA)(CIVIL ACTION NO. 98-007120-CI-008)

On or about October 30, 1998, one month after the Court dismissed the previous
case, Liberis and his former spouse, Ginger Liberis, filed suit in the Circuit
Court in and for Pinellas County, Florida for fraud and conspiracy, intentional
interference with advantageous business relationships, intentional breach of
duty to facilitate stock transfers, conspiracy, negligence-failure to facilitate
stock transfers, defamation, conspiracy to defame, and intentional

<PAGE> 22

infliction of emotional distress. The Company filed a motion to dismiss the
case. On July 19, 1999, the Court granted plaintiffs sixty days to file an
amended complaint.

WAREHOUSE FIRE/GAMBLING EQUIPMENT SEIZURE

On or about September 18, 1998, the Company was informed there had been one or
two fires in a Madeira Beach warehouse used by the Company. Investigators have
informed the Company that the fire was the result of arson. A former employee of
the Company was arrested and charged with First Degree Arson and Burglary by the
Pinellas County Sheriff's Office. The Company has been informed that this
employee confessed to committing burglary and setting fire to the warehouse to
cover up this criminal activity.

During the course of the fire investigation, the investigators seized all
gambling equipment and paraphernalia found in the warehouse pursuant to a search
warrant and Chapters 849.15 and 849.231 of the Florida Code which prohibit,
among other things, the manufacture, sale or possession of certain gambling
devices except under exemption for those registered with the United States
Government pursuant to 15 U.S.C. Section 1171 et seq. The Company is registered
with the United States Government pursuant to 15 U.S.C. Sections 1171-1178 and
believes it falls within the exemption. The Company believes the investigators
who seized the equipment did not know that the Company was so registered. The
Company has retained an attorney to handle this matter.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999

It must be noted that the M/V Europa Sun was chartered beginning March 1, 1999.
Therefore, the comparison between the second quarter of 1999 and 1998 results of
operations must allow for the absence of this vessel from the Company's
operations during the second quarter of 1999. In addition, the M/V Europa Star
took on water while docked the night of April 26th and did not operate from
April 27th through May 7th, resulting in a loss of 22 cruises. This incident
resulted in a significant loss of revenue and operating income for the quarter.

The Company operated 322 cruises in 1999 as compared to 554 in 1998, a decrease
of 40.8% or 232 cruises. The decrease in the number of cruises is attributable
to the absence of Miami operations in the second quarter, and the Star incident
referred to above, which accounts for a decrease of 208 cruises. The Company
carried 29,342 passengers in 1999 as compared to 73,387 in 1998, a decrease of
44,045 passengers or 60.0%. The decrease is due, in large part, to the fact that
the M/V Europa Sun was chartered for the entire second quarter. For the three
months ended June 30, 1998, the Sun carried 25,938 passengers accounting for
58.9% of the difference. Also, based on average passengers per cruise,
management estimates that the Star lost approximately

<PAGE> 23

2300 passengers while out of service. In addition, the Company did experience a
drop in the number of passengers of approximately 21.5% in the remaining
operations during the quarter. The decrease is attributable to the continued and
expanding strong competition in the industry. The average revenue per passenger
was approximately $55.29 in 1999 as compared to $61.18 in 1998, a decrease of
$5.89 per passenger or 9.6%.

TOTAL REVENUES/GAMING REVENUES
The Company earned total revenues of $2,292,121 in 1999 as compared to total
revenues of $4,971,766 in 1998, a decrease of $2,679,645 of which $1,385,588 is
attributable to the non-operation of the Sun. The Company's gaming revenue
decreased from $3,475,343 in 1998 to $1,198,354 in 1999, a decrease of
$2,276,989, or 65.5%. Approximately $1,285,000 of the decrease is due to the
termination of the Miami operation. The remainder is attributable to a drop in
the passenger count and a low hold percentage in Ft. Myers in the month of June.
.
PASSENGER FARES
Passenger fares fell from $749,200 in 1998 to $304,983 in 1999, a decrease of
$444,217 or 59.3%. The average passenger fare in 1999 was $10.39 compared to
$10.21 in 1998, an increase of 1.8%.

FOOD AND BEVERAGE REVENUES
Revenue from food and beverage sales decreased from $265,455 in 1998 to $119,174
in 1999, a decrease of $146,281 or 55.1%. Approximately $74,000 of the decrease
is associated with the termination of the Miami operation. Per passenger
revenues were $4.06 in 1999 versus $3.62 in 1998, an increase of 12.5%.

CHARTER REVENUE
In February, 1999, the Company entered into a preliminary agreement, subject to
certain contingencies, with Stardancer Casino, Inc., a South Carolina Company.
Under the terms of the agreement, Stardancer Casino, Inc. would manage and/or
sublease the Company's Miami Beach, Florida operation. Under the terms of the
agreement, Europa would receive approximately $97,000 per month in addition to
expenses incident to the operation. The Company received a nonrefundable deposit
in the amount of $300,000. The Company's landlord has objected to an assignment
of the Company's lease. Therefore, the Company entered into an agreement
pursuant to which Stardancer Casino, Inc. has been operating the port since
March 1, 1999. One or more of the principals of Stardancer Casino, Inc. are
affiliated with Seven Star Charters, Inc. which charters the Europa Stardancer.
Revenue associated with this charter amounted to $365,661 for the second quarter
of 1999.

<PAGE> 24

charter fee in the amount of $275,000 and a Letter of Credit in the amount of
$150,000. The Stardancer is currently operated out of Myrtle Beach, South
Carolina. One or more of the principals of Seven Star Charters, Inc. are
affiliated with Stardancer Casino, Inc., which currently manages the Europa Sun
in Miami Beach, Florida. Revenue associated with this charter amounted to
$270,000 for the second quarter of 1999.

The continued receipt of revenue from these charters is contingent on the
success of the respective operations and legislation and/or court decisions
which do not prohibit these operations.

COSTS AND EXPENSES

VESSEL OPERATING EXPENSES
Vessel operating costs and expenses decreased form $3,136,270 in 1998 to
$1,611,881 in 1999, a decrease of $1,524,389 or 48.6%. Approximately $1,030,709
of the decrease was associated with 1998 operating costs of the Europa Sun. The
per cruise vessel operating cost in 1999 is $5,006 compared to $5,765 in 1998, a
decrease of $759 per cruise or a 13.2% decrease.

ADMINISTRATIVE AND GENERAL AND OTHER OPERATING EXPENSES
Administrative and general costs and expenses decreased from $548,013 in 1998 to
$292,170 in 1999, or $255,843 a decrease of 46.7%.Of that decrease, $81,884 was
associated with second quarter 1998 operations of the Europa Sun. The remaining
decrease was realized principally through elimination of administrative
positions and other salary reductions. Other operating expenses increased from
$77,212 in 1998 to $207,038 in 1999. The increase of $129,826 is almost entirely
attributable to a second quarter provision of $ 120,000 as the estimated cost of
back wages due employees as determined by an audit by the Department of Labor,
Division of Wage and Hour. The audit computes the amount due based on periods of
time that various "tipped" employees were not paid minimum wage. This is
predicated on the position that dealers cannot earn tips during part of the
period in which the vessel is sailing to international waters and no gaming
activities are taking place. The audit covers the period from January 1, 1997
through April 30, 1999.

ADVERTISING AND PROMOTION
Advertising and promotion expenses decreased from $218,559 in 1998 to $54,621 in
1999, a decrease of $ 163,938 or 75.0%. The decrease was necessitated to offset
loss of revenues resulting from new competition.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased from $548,013 in 1998 to $464,821 in
1999, a decrease of $83,192 or 15.2%.

NOTICE OF INTENT TO MAKE AUDIT CHANGES/NOTICE OF PROPOSED ASSESSMENT

<PAGE> 25

See Note 4. Material Contingencies: Tax-Related Litigation-Florida Department of
Revenue Tax Audits.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999

It must be noted that the M/V Europa Sun was chartered beginning March 1, 1999.
Therefore, the comparison between the six months ended June 30, 1999 and 1998
results of operations must allow for the absence of this vessel from the
Company's operations during the period being reported. In addition, the M/V
Europa Star took on water while docked the night of April 26th and did not
operate from April 27th through May 7th, resulting in a loss of approximately 22
cruises. This had a substantial effect on revenues and results of operations for
the six months period.

The Company operated 768 cruises in 1999 as compared to 1,048 in1998, a decrease
of 280 cruises, or 40.8%. The decrease in the number of cruises is attributable
to the absence of Miami operations from March through June 1999 and the Star
incident referred to above, which accounts for a total difference of 278
cruises. The Company carried 83,710 passengers in 1999 as compared to 143,191 in
1998, a decrease of 59,481 passengers or 41.5%. The decrease is due, in part, to
the fact that the M/V Europa Sun was chartered for the period March 1, 1999
through June 30, 1999. For the six months ended June 30, 1998, the Sun carried
43,774 passengers compared to 10,399 passengers for the same period in 1999, a
difference of 33,375 passengers. Also, based on average passengers per cruise,
management estimates that the Star lost approximately 2300 passengers while out
of service. The remaining decrease is attributable to the strong competition in
the industry. The average revenue per passenger was approximately $55.74 in 1999
as compared to $63.05 in 1998, a decrease of $7.31 per passenger, or 11.6%.

TOTAL REVENUES/GAMING REVENUES
The Company earned total revenues of $5,745,133 in 1999 as compared to total
revenues of $9,599,441 in 1998, a decrease of $3,845,308, of which $1,343,874 is
attributable to the difference in operating revenues associated with the Sun.
The Company's gaming revenue decreased from $7,012,969 in 1998 to $3,565,099 in
1999, a decrease of $3,447,870, or 49.2%. Approximately $1,777,332 of the
decrease is due to the termination of the Miami operation. The remainder is
attributable to a drop in passenger counts and extremely low hold percentages in
Ft. Myers.

PASSENGER FARES
Passenger fares fell from $1,520,717 in 1998 to
$820,015 in 1999, a decrease of $ 700,702 or 46.1%. The average passenger fare
in 1999 was $9.79 compared to $10.62 in 1998, a decrease of 7.8%.

FOOD AND BEVERAGE REVENUES
Revenue from food and beverage sales decreased from $495,249 in 1998 to $281,034
in 1999, a decrease of $214,215 or 43.3%. Approximately $118,525 of the decrease
is associated with

<PAGE> 26

the termination of the Miami operation. Per passenger revenues were $3.36 in
1999 compared to $3.46 in 1998, a decrease of 2.9%.

On December 29, 1998, the Company entered into a Charter Agreement with Seven
Star Charters, Inc. to charter the Stardancer for a five year period beginning
January 1, 1999. The Agreement calls for an annual charter fee of $1,080,000 in
addition to certain insurance payments. The Agreement gives Seven Star Charters,
Inc. an option to purchase the Stardancer for $2,800,000. or less depending on
the time of purchase. The Company received an advance charter fee in the amount
of $275,000 and a Letter of Credit in the amount of $150,000. The Stardancer is
currently operated out of Myrtle Beach, South Carolina. One or more of the
principals of Seven Star Charters, Inc. are affiliated with Stardancer Casino,
Inc., which currently manages the Europa Sun in Miami Beach, Florida. Revenue
associated with this charter amounted to $545,000 for the six months ended June
30,1999.

The continued receipt of revenue from these charters is contingent on the
success of the respective operations and legislative and/or court decisions
which do not prohibit these operations.

COSTS AND EXPENSES

VESSEL OPERATING EXPENSES
Vessel operating costs and expenses decreased form $6,138,568 in 1998 to
$3,902,869 in 1999, a decrease of $2,235,699 or 36.4%. Of that decrease, $
1,247,620 was associated with the difference in operating costs of the Europa
Sun. The per cruise vessel operating cost in 1999 is $5,082 compared to $5,857
in 1998, a decrease of $775 per cruise or a 13.2% decrease.

ADMINISTRATIVE AND GENERAL AND OTHER OPERATING EXPENSES
Administrative and general costs and expenses decreased from $1,074,040 in 1998
to $ 756,223 in 1999, or $ 317,817, a decrease of 29.6%.Of that decrease, $
111,769 was attributable to the absence of operating the Europa Sun. The
remaining decrease was realized principally through

<PAGE> 27

elimination of administrative positions and other salary reductions. Other
operating expenses increased from $158,293 in 1998 to $268,467 in 1999. The
increase of $110,174 is associated with a second quarter provision of $ 120,000
as the estimated cost of back wages due employees as determined by an audit by
the Department of Labor, Division of Wage and Hour. The audit computes the
amount due based on periods of time that various "tipped" employees were not
paid minimum wage. This is predicated on the position that dealers cannot earn
tips during part of the period in which the vessel is sailing to international
waters and no gaming activities are taking place. The audit covers the period
from January 1, 1997 through April 30, 1999.

ADVERTISING AND PROMOTION
Advertising and promotion decreased from $501,783 in 1998 to $97,219 in 1999, a
decrease of $ 404,564 or 80.6%. The decrease was necessitated to offset loss of
revenues resulting from new competition.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased from $1,089,075 in 1998 to $941,435 in
1999, a decrease of $ 147,640 or 13.6%.

NOTICE OF INTENT TO MAKE AUDIT CHANGES/NOTICE OF PROPOSED ASSESSMENT
See Note 4. Material Contingencies: Tax-Related Litigation-Florida Department of
Revenue Tax Audits.

LIQUIDITY AND CAPITAL RESOURCES
In 1999, the Company was unable to meet its normal operating costs and expenses
from operating cash flow. The Company will be unable to meet any unusual or
unanticipated additional cash requirements when they arise during 1999 except
through the sale of common stock or borrowing. In 1999, the Company paid some of
its operating expenses by issuing shares of common stock.

Investing activities (principally vessel improvements, major vessel repair and
maintenance, and gaming equipment purchases) required cash of approximately
$251,765 to date in 1999, which have been met through operating cash. The Europa
Star is scheduled for drydock in the third quarter of 1999 at an estimated cost
of approximately $400,000. It is expected that this cost will be met through the
sale of common stock . No additional major capital expenditures are planned for
1999.

In an effort to raise working capital, the Company has offered restricted common
shares to accredited investors during July and August of 1999. The Company has
received $424,963 to date for the sale of these shares. In addition, a
shareholder advance in the amount of $300,000 was satisfied through the issuance
of 1,000,000 shares of common stock in July 1999.

In an effort to maintain adequate cash for operations, the Company has
tentatively agreed to new

<PAGE> 28

terms with First Union National Bank, which holds a note that has an outstanding
balance in the amount of $3,264,353. The note calls for monthly installments of
principal and interest of approximately $103,000 and is primarily secured by
first mortgages on the Europa Sky, Europa Star, and Europa Stardancer. Under the
new terms, the Company would pay interest only on the outstanding balance, at
the same rate (a cost of approximately $33,000 per month) through March 2000, at
which time, the note will be due in full. In addition, an unwinding fee of
approximately $100,000 will be due. The Company expects to meet this obligation
through the sale of one or more of its vessels.

The charter agreements in effect for both the M/V Europa Sun, and M/V Europa
Stardancer have purchase options incorporated therein. In both cases, the
purchaser is allowed a varying credit for charter fees paid to date, dependent
on the date the option is exercised. In the case of the Europa Stardancer, the
terms of the purchase may result in a significant book loss. No loss on sale is
expected to result should the option to purchase be exercised on the Europa Sun.

The Company has evaluated its financial software for "Year 2000" compliance and
will take the necessary steps to revise the current version in the next several
weeks. However, the Company does not expect the cost of such conversion to be
material to its financial condition or results of operations, nor does it
anticipate any material disruption in its operations with respect thereto.

Except for historical information contained herein, the matters discussed
herein, 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 political and legislative situation in the gaming
industry and in the cruise-to-nowhere industry is subject to radical change.
There can be no assurance that legislation or policy decisions will not be
introduced in Florida, at the federal level, or in other states, which could
adversely affect the business of the Company or the ability of the Company or
its lessees to continue to operate cruises-to-nowhere out of Florida ports or
other states. 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. The results of financial operations
reported herein are not necessarily an indication of future prospects of the
Company. Future results may differ materially.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
See Note 4. Material Contingencies.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company's annual meeting of shareholders is scheduled for August 27, 1999 to
be held in

<PAGE> 29

Biloxi, Mississippi at which time a vote with respect to the election of a Board
of Directors will be submitted to the shareholders.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

27 Financial Data Schedule (for SEC use only)

No reports on Form 8-K have been filed during the quarter ended June 30, 1999.

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

DATE: August 19, 1999 /s/ DEBORAH A. VITALE
---------------------
By: Deborah A. Vitale
President

/s/ ROBERT ZIMMERMAN
---------------------
By: Robert Zimmerman
Chief Financial Officer

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EUROPA CRUISES CORPORATION FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 252,981
<SECURITIES> 0
<RECEIVABLES> 337,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 755,365
<PP&E> 11,523,947
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,872,019
<CURRENT-LIABILITIES> 7,152,371
<BONDS> 2,853,191
25,320
0
<COMMON> 30,195
<OTHER-SE> 6,460,942
<TOTAL-LIABILITY-AND-EQUITY> 17,872,019
<SALES> 0
<TOTAL-REVENUES> 5,745,133
<CGS> 0
<TOTAL-COSTS> 6,535,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (790,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (790,226)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)

</TABLE>