-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EnWJdhB0EIESy62b6AGudH0+BqriUxbkMJ/eGQ6jXf2L8LXFS87z03/DD9YhT74F KeeiPUd9XwQIvyTrFKFkxQ== 0000950144-99-004558.txt : 19990416 0000950144-99-004558.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950144-99-004558 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUROPA CRUISES CORP CENTRAL INDEX KEY: 0000844887 STANDARD INDUSTRIAL CLASSIFICATION: WATER TRANSPORTATION [4400] IRS NUMBER: 592935476 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-17529 FILM NUMBER: 99595170 BUSINESS ADDRESS: STREET 1: 150 153RD AVE STE 200 CITY: MADEIRA BEACH STATE: FL ZIP: 33708 BUSINESS PHONE: 8133932885 MAIL ADDRESS: STREET 1: 150 153RD AVE SUITE 200 CITY: MADELIRA BEACH STATE: FL ZIP: 33708 10KSB40 1 EUROPA CRUISES CORPORATION FORM 10-KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 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, 1998 COMMISSION FILE NO: 0-17529 EUROPA CRUISES CORPORATION (name of small business issuer in its charter) DELAWARE 59-2935476 - ------------------------------------------------ (State of Incorporation) (I.R.S. Employer Identification Number) 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 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.001 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not 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: $ 16,802,550. The aggregate market value of the voting stock held by non-affiliates of the Company is $8,433,231 based on the last reported sales price of $ .36 per share on April 8, 1999, multiplied by 23,425,642 shares of Common Stock outstanding and held by non-affiliates of the Company on April 8, 1999. As of the close of business April 8, 1999, there were 28,845,702 shares of the Registrant's Common Stock outstanding (which includes 5,000,000 shares in the Europa Cruises Corporation Employee Stock Ownership Plan). 2 TABLE OF CONTENTS PART 1 ITEM 1. DESCRIPTION OF BUSINESS .................................................................................3 ITEM 2. PROPERTIES .............................................................................................15 ITEM 3. LEGAL PROCEEDINGS ......................................................................................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................................................................25 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....................................................................................26 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ....................................................................26 ITEM 7. FINANCIAL STATEMENTS ...................................................................................31 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ....................................................................31 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT .............................................................................32 ITEM 10. EXECUTIVE COMPENSATION .................................................................................37 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .............................................................................................40 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .........................................................42 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .......................................................................43
2 3 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 is an Over the Counter Bulletin Board stock trading 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 STOCK LISTING The Company's stock formerly traded on the NASDAQ Small Cap Market under the symbol "KRUZ." On or about August 27, 1997, NASDAQ announced new listing requirements for issuers trading on NASDAQ. The rules, which became effective on February 23, 1998, required, among other things, that stocks listed on the Small Cap Market trade at a minimum bid price of $1.00 per share. The Company requested an exemption from this requirement. On November 5, 1998, NASDAQ notified the Company that its request for inclusion on the NASDAQ Small Cap Market pursuant to an exemption to the $1.00 minimum bid price requirement, had been denied. Thus, effective with the close of business November 5, 1998, the Company's stock no longer traded on the NASDAQ Small Cap Market. On November 6, 1998, the Company's securities began trading on the Over the Counter Bulletin Board (OTCBB) under the symbol "KRUZ." I. FLORIDA OPERATIONS In 1998, Europa Cruises Corporation was one of the largest day cruise operators in the United States. The Company owns four gaming vessels, the EuropaSun, the EuropaStar, the EuropaSky, and the M/V Stardancer. The four ships were operated in 1998 through four of the above-named subsidiaries. In 1998, the Company operated three of the vessels out of ports located in Miami Beach, Ft. Myers and Madeira Beach, Florida. The fourth vessel, the M/V Stardancer, was reserved for charter to third parties and to replace operating vessels that went to drydock. The EuropaSun and M/V Stardancer are currently being operated by third parties. The EuropaSky and the Madeira Beach operation are currently under contract, subject to certain material contingencies, to be sold to a third party for six million dollars. In 1998, the Company had approximately 822 gaming positions fleetwide, including approximately 447 slot machines. All gambling on the Company's vessels was and is conducted in international waters only. The Company operated 2,076 cruises in 1998 and carried 267,738 passengers in 1998. The Company earned total revenues of $ 16,802,550 in 1998. 3 4 The Company's vessels generally sail twice daily from each port. In addition to blackjack, poker, slot machines, craps, and sports betting, the Company's cruises offer dining, dancing and entertainment. In addition to its regular cruises, the Company offers various "theme" cruises and special holiday cruises for Easter, Mother's Day, the 4th of July, Halloween, Christmas and New Year's Eve. The Company also offers specialty cruises for blackjack, slot and other gaming tournaments. EMPLOYEES At year's end of 1998, the Company employed approximately 368 employees at its three operating locations. The Company currently employs approximately 252 employees. The Company currently operates and manages two of its vessels, the EuropaSky in Madeira Beach, Florida and the EuropaStar in Ft. Myers, Florida. Of the Company's 252 employees, 6 are executive and management personnel and 3 are engaged primarily in administrative positions. The remaining employees are ship officers, crew, casino, reservations, food service and other staff employed by the Company who work on or about the Company's 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 SUN/STAR 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 approximately 400 passengers. The EuropaSun had approximately 213 gaming positions in 1998, including approximately 118 slot machines. The EuropaSun is currently operated by a third party. The EuropaStar has 256 gaming positions, including approximately 139 slot machines. Each vessel has a dining area, entertainment stage, dance floor, main lounge, bars and a fully equipped galley. 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. 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 is in receipt of 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 intends to enter into a management contract. Stardancer Casino, Inc. has been managing 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. SKY 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 4 5 a capacity for 440 passengers. The EuropaSky has approximately 254 gaming positions, including approximately 130 slot machines. The EuropaSky has two dining areas, including one for VIP's, an entertainment stage, dance floor, several lounges, 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. STARDANCER 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 approximately 400 passengers. The Company attempts to time charter the vessel during periods when it is not being used as a replacement vessel when one of the Company's other operating vessels is in drydock. The M/V Stardancer had 99 gaming positions, including approximately 70 slot machines. The Stardancer has a dining area, several bars and a sun deck with seating for up to 100 persons. 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. OPTION AGREEMENT On December 30, 1998, the Company entered into an Option Agreement and Letter of Understanding with International Hospitality, Inc., a publicly-traded Canadian corporation. Under the terms of the agreement, International Hospitality, Inc. agreed to pay Europa a $300,000 refundable option fee in return for the exclusive right to negotiate with Europa for a thirty day period of time with respect to operating and managing one or all of Europa's three operations in Miami Beach, Madeira Beach, and/or Ft. Myers, Florida. The Option payment was refundable in cash or stock, at the Company's election, in the event no agreement was reached. No agreement was reached. On February 27, 1999, the Company forwarded 750,000 shares of Common Stock to International Hospitality, Inc. in repayment of the refundable option fee. The President of Europa holds the proxy to vote the shares issued for a period of one year. COMPETITION When the Company began its Florida operations in 1988, there were approximately four other vessels operating gambling day or evening cruises out of Florida. Currently,there are approximately twenty-six vessels offering such cruises, many of which compete directly with the Company's vessels. 5 6 In the past several years, competition in the day cruise industry has been fierce. Many of the competing firms offer free cruises or minimally priced cruises. This has forced the Company to adjust its fares and to offer free cruises to remain competitive. Indeed, in order to now compete in the industry, the Company must allow many of its passengers to routinely sail for free. The Company has also been forced to reduce its fares dramatically. When the Company can command a fare, the fare is nowhere near what it was in recent prior years or in the Company's earlier years. The fare must remain competitive or passengers will simply sail on the competition. The fare charged in each port also varies 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 and charterers of an entire vessel and offers special fares and complimentary fares for its rated casino patrons. The Company's vessels have been used for convention meetings, continuing education programs, weddings and various other group gatherings. The influx of operators into Florida has also placed a premium on new port locations which makes expansion in the industry more difficult. Further, the competition can relocate to any area in which the Company's vessels are currently located. Any additional increase in competition in any of the Company's ports would have an adverse impact on operations and the Company's financial position. In 1998, the advent of new competitors in all three of the Company's ports was seriously adverse for the Company. There was an immediate and dramatic decrease in total revenues. In addition to competition in the cruise-to-nowhere industry, the Company competes with a variety of other activities in those areas where it operates its vessels. These include, but are not limited to, land-based Indian gaming casinos, poker rooms, short-term cruises, resort attractions, various sports activities and numerous other recreational activities. MADEIRA BEACH, FLORIDA On or about May 21, 1998, SunKruz, the largest operator in the cruise-to-nowhere business in Florida, purchased the cruise-to-nowhere operation directly across the water from the Company's location in John's Pass in Madeira Beach, Florida. SunKruz expends significant amounts of money in advertising, marketing and promotion and buses passengers to its port. The Company does not have sufficient funds to do likewise. SunKruz operates a more modern casino vessel which is equipped with numerous, more modern slot machines. While the Company has invested in some new slot machines, for the most part, the slot machines on the Company's vessel are old when compared to the slot machines on the competitor's vessel. The Company's revenues decreased as a result of the introduction of SunKruz in Madeira Beach. MIAMI BEACH, FLORIDA On or about October 20, 1998, the Casino Princessa commenced operations in Miami Beach, Florida. The Princessa is a modern, elegant vessel with an interior that resembles that of a land-based casino. It is fully equipped with the latest gaming equipment and slot machines. It is located at Bayside, a popular shopping mall with numerous restaurants which is heavily frequented by both locals and tourists. It is within approximately five miles of the Company's port. The Company lost a large percentage of its business to the Casino Princessa. In addition, on or about December 26, 1998, another vessel, the Eldorado, opened at the Dupont Plaza Hotel, within approximately five miles of the Company's port in Miami Beach. The Eldorado 6 7 is a small, but beautifully decorated and fully equipped vessel. This operation has also taken a percentage of the Company's business. FT. MYERS, FLORIDA The Ft. Myers operation has been the mainstay of the Company. The Ft. Myers operation generated the bulk of the revenue earned by the Company for many years. The Ft. Myers operation enjoyed a virtual monopoly since it first opened. However, in or about January 1998, two vessels, the "Big M" and the "Royal Princess" commenced operations in Ft. Myers. The Royal Princess left in April of 1998. Thus, in the first quarter of 1998, the Company had competition from two competitors in Ft. Myers. In the second quarter of 1998 and continuing to date, the Company has been in direct competition with the Big M. The Big M is located within a few hundred yards of the EuropaStar. The Big M expends significant amounts of money in advertising, marketing and promotion and buses passengers to its port. The Company does not have sufficient funds to do likewise. While the Company has invested in some new slot machines, for the most part, the slot machines on the Company's vessel are old when compared to the slot machines on the competitor's vessel. The Company's revenues decreased dramatically as a direct result of the introduction of the Big M in Ft. Myers. The introduction of two competitors in Ft. Myers severely affected the Company's passenger counts and revenues in 1998 and, accordingly, its income from operations in 1998. The operation of the Big M in Ft. Myers continues to significantly affect the Company's passenger counts and revenues. 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, weather conditions severely affected the Company's operations and revenues. In 1998, El Nino and two hurricanes, Hurricane Georges and Hurricane Mitch, combined to severely impact the revenue and cash flow of the Company. El Nino affected the Company's operations in the first quarter. The Company operated 504 cruises in the first quarter of 1998, as compared to 568 cruises in the first quarter of 1997, a decrease of 64 cruises, or 11% . The Company carried only 69,804 passengers in the first quarter of 1998, as compared to 99,197 during the same period in 1997, a decrease of 29,393 passengers, or 30%. Hurricane Georges hit the Florida ports in the third quarter of 1998. In the last week of September, Hurricane Georges forced the Company to close all three of its operations. The Company was also forced to move all four of its vessels to safe harbors to avoid the effects of Hurricane Georges. Thus, in addition to a loss of revenues, the Company incurred the added expenses of securing its vessels. The Company's vessels suffered no damage as a result of the hurricanes and no injuries were reported in connection with the Company's operations. While the decrease in the number of cruises and passengers in 1998 is, in management's opinion, attributable to a combination of severe weather, drydock, and new competition, the Company obviously lost a substantial number of passengers and cruises as a result of severe weather conditions. 7 8 MARKETING AND PROMOTION The Company does not have sufficient funds with which to advertise, market and promote its cruises. The Company focuses its marketing efforts on its repeat customers, the local population and tourists. The Company tries to attract passengers from the local population to survive the seasonal fluctuations that are known to occur in the Florida tourist industry. The Company currently markets its cruises primarily through direct mail. The Company's financial ability to advertise is minimal compared to the heavy advertising, marketing and promotion of the Company's competition. GAMING EQUIPMENT Most of the gaming equipment on board the vessels which the Company operates are leased from Casinos Austria Leigenshalftwerwaltung-Und Leasing (CALL). On October 13, 1994, the Company entered into an Equipment Lease Agreement with CALL 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 an 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 was then-scheduled to end in May, 1999. However, due to a decrease in operating revenue, the Company was unable to continue to make its lease payments and the lease is in default. As of April 9, 1999, the outstanding balance on the lease was $291,986.87. The Company has notified Casinos Austria that it intends to pay the balance due on the lease out of the proceeds of the sale of the EuropaSky. The Company intends to exercise its option to purchase the equipment for $1.00. The sale of the EuropaSky, assuming it closes, is scheduled to close on or about May 10, 1999. In the event the sale does not close, the Company will either have to enter into another agreement with Casinos Austria or pay the full amount owed. FEDERAL LEGISLATION In addition to state-related legislation which could adversely affect the cruise-to-nowhere business in Florida and elsewhere, on January 6, 1999, Congressmen, Wolf, Gilchrest and Shays introduced a Bill, H.R. 316, (the "Cruises-to-Nowhere Act of 1999"), to amend the Johnson Act to restore the authority of State laws over gambling cruises-to-nowhere. This Bill, should it become law, would give states the ability to apply their own laws to gambling cruises-to-nowhere. The passage of this law would allow the state of Florida and other states to ban cruises-to-nowhere. Such a ban would destroy the business of the Company in Florida. The Bill has been referred to the House Committee on Transportation and Infrastructure Subcommittee on Coast Guard and Maritime Transportation. STATE REGULATION - FLORIDA 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 operate in Miami and Tampa where the Company operates vessels. 8 9 On an almost annual basis, a representative(s) of the Florida legislature will introduce a bill in the Florida State House of Representatives to ban all cruises-to-nowhere originating from the State of Florida. These bills have died in committee or been defeated in the past. However, there can be no assurance that bills currently pending or introduced in the future to ban cruises-to-nowhere will be similarly defeated. In addition, bills have previously been introduced seeking 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. There can be no assurance that similar bills designed to tax passengers on cruises-to-nowhere will not be introduced in the future. 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. It is the Company's understanding that 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 legislation will not be introduced in Florida 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 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. 9 10 In addition, in 1998, the Attorney General for the State of Florida had several vessels of several companies or the equipment thereon seized for various alleged civil and criminal violations of law. There can be no assurance that the Attorney General will not seize additional vessels in the future for alleged civil and criminal violations of law. 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 PORTS The Company has no present intent to open any additional ports in Florida or to expand it's day cruise operations in Florida. The Company has no present intent to open any additional ports outside of Florida or to expand it's day cruise operations outside of Florida. 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. and has one employee in Mississippi, 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. 10 11 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 was retained to 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 in Diamondhead, Mississippi. Under the Agreement signed with McDonald, which was for a term of six months, the Company was required to pay no up-front fees or monthly fees or expenses. The Agreement was contingency-fee based and all fees were contingent on the consummation of a Transaction. The agreement expired and was not renewed by the Company. MISSISSIPPI PERMITS/APPROVALS (See also Item 3. Legal Proceedings.) A. MISSISSIPPI GAMING COMMISSION On June 15, 1995, the Mississippi Gaming Commission granted site approval for the Diamondhead casino resort plan. (See Mississippi-Related Litigation.) 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. 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. The case has been remanded back to the lower court for a hearing on the merits. (See Mississippi-Related Litigation.) 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 11 12 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 and the time period for appealing has expired. (See Mississippi-Related Litigation.) 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. (See Mississippi-Related Litigation.) E. TIDELANDS LEASE 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 was for five (5) years beginning 30 days after construction on the project commenced. There were four five (5) year option renewal periods. The cost of the lease was $2,250,000 for the first five years of which $25,000 was paid on signing, and of which $95,000 was payable upon commencement of construction. Both payments were to be applied toward the lease payments which were $10,000 per month during construction. The remainder of the $2,250,000 was to be amortized over the remainder of the lease after operation of the casino commenced. Renewal options were to be at 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 was 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. The 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. Casino operations did not commence within three years of signing of the transfer and the Tidelands Lease has expired. 12 13 The Mississippi Secretary of State has indicated that he will not renew a lease with the Hancock County Port and Harbor Commission. Therefore, Casino World, Inc. will be required to apply directly to the Secretary of State for a new Tidelands Lease. There can be no assurance the Mississippi Secretary of State will grant a Tidelands Lease. F. 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 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. On November 18, 1998, Casino World, Inc. forwarded a request to the Hancock County Planning Commission for an extension or renewal, to the extent, if any, one might have been deemed necessary, of that Special Use District-Waterfront District designation given to the property to be developed by Casino World, Inc. on the Bay of St. Louis in Hancock County. On November 19,1998, the Hancock County Planning Commission passed a resolution extending the Waterfront Special Use District designation for a period of one year from January 6, 1999 to January 6, 2000. The resolution was submitted to the Hancock County Board of Supervisors for ratification and approval. On November 30, 1998, the Hancock County Board of Supervisors voted to approve the resolution. 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. (See Mississippi-Related Litigation.) 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, 13 14 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). 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. Anti-gaming activists have introduced measures designed to make gambling illegal in Mississippi. 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. 14 15 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 leased office space at the following locations during the year ended 1998.
FLORIDA: - -------- LOCATION LEASE TERMS - -------- ----------- 150-153rd Ave., Suite 200, Twelve months with an option to renew for two Madeira Beach, Florida 33708 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 (This lease was terminated.) 645 San Carlos Blvd. Five years commencing March 1, 1995 Ft. Myers Beach, Florida 33931 with option to renew for three years. 1280 5th Street Five years commencing March 1, 1995 with Miami Beach, Florida 33139 option to renew for two years. The Company exercised its option to renew in January, 1997. DOCK SPACE The Company leases dock 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. 545 San Carlos Boulevard 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 with Miami Beach, Florida 33139 option to renew for two years. The Company exercised its option to renew in January, 1997.
15 16 MISSISSIPPI: 5403 Indian Hill Blvd. Three years commencing June 1, 1995 Diamondhead, MS 39525
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 ensure 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. 16 17 ITEM 3. LEGAL PROCEEDINGS. TAX-RELATED LITIGATION 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, totalled 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. 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 17 18 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. 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. 18 19 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 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 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 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. 19 20 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) 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. 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) 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. The case was remanded to the lower court for a hearing on the merits. 20 21 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 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. 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 May 21, 1998, Casino World, Inc. filed a Memorandum Brief in Opposition to the Motion to Dismiss. Three judges have recused themselves from hearing the case. The Court heard oral argument on the Motion to Dismiss and the parties are awaiting the Court's decision. 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 21 22 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. 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 supplemental briefs from the parties. On November 10, 1997, the Supreme Court issued an Order affirming the judgment of the lower court. 22 23 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 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 23 24 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 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 24 25 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 infliction of emotional distress. The Company intends to file a motion to dismiss. 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 and to obtain the return of the seized equipment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ELECTION OF BOARD OF DIRECTORS The annual meeting of Europa Cruises Corporation was held on July 10, 1998. The election of a Board of Directors was submitted to a vote of the securities holders. The annual meeting was reconvened to July 24, 1998, for the purpose of receiving the official results of the election of the Board of Directors. The Company reported that a total of 19,757,791 shares voted. Of those, 12,866,980, or approximately 65%, voted for the incumbent Board of Directors, Deborah A. Vitale, 25 26 John R. Duber, Paul J. DeMattia and Gregory A. Harrison. A total of 6,757,658 shares, or approximately 34%, voted for the opposition slate. Approximately 133,000 votes were withheld. 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.
1998 Quarters 1997 Quarters ------------------ ------------------- High Low High Low ---- --- ---- --- First Quarter 1.03 .66 1 5/8 5/8 Second Quarter 15/16 10/16 1 3/16 25/32 Third Quarter 13/16 7/16 14/16 10/16 Fourth Quarter 11/16 7/32 1 19/32
On December 31, 1998, there were 841 registered holders of record of the Common Stock of the Company. On April 9, 1999, there were 853 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 2,076 cruises in 1998 as compared to 2,236 cruises in 1997, a decrease of 160 cruises or 7.16%. The Company carried 267,738 passengers in 1998 as compared to 330,814 passengers in 1997, a decrease of 63,076 passengers, or 19.07%. The average revenue per passenger was approximately $62.75 in 1998 as compared to $63.02 in 1997, a decrease of $.27 or .4 %. The Company carried an average of 129 passengers per cruise in 1998 as compared to an average of 148 passengers per cruise in 1997, a decrease of 19 passengers per cruise, or 12.84%. TOTAL REVENUES/GAMING REVENUES The Company earned total revenues of $16,802,550 in 1998 as compared to $20,847,788 in 1997, a decrease of $4,045,238 or 19.4%. The Company had gaming revenues of $13,092,182 in 1998 as compared to gaming revenues of $15,208,517 in 1997, a decrease of $2,116,335 or 13.9%. The 26 27 Company attributes the decrease in gaming revenues in 1998 to new competition, especially in Ft. Myers. PASSENGER FARES Passenger fares continue to decline as a direct result of competition. Passenger fares fell from $3,353,016 in 1997 to $2,260,960 in 1998, a decrease of $1,092,056, or 32.6 %. 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 if it is to remain competitive in the industry. FOOD AND BEVERAGE REVENUES Revenue from food and beverage sales decreased from $1,282,377 in 1997 to $865,356 in 1998, a decrease of $417,021 or 32.5%. The decrease is attributable to an increase in the number of passengers who are permitted to sale for free and who are provided with complimentary meals due to intense competition and fare wars in the industry. CHARTER FEES The Company tries to charter its fourth vessel, the M/V Stardancer, to unrelated third parties. On February 6, 1998, the Company entered into an agreement to charter the M/V Stardancer to Hudson Day River Line, Inc. for a three month period beginning February 9, 1998 for a total charter fee of $240,000. The charter was renewed for several additional months. In 1998, Charter fee income from the charter of the M/V Stardancer was $ 406,000, as compared to charter fee income of $327,500 in 1997, during which year the Stardancer was chartered for five months, representing an increase in charter fees of $78,500, or 23.96%. OTHER REVENUE Other revenue decreased from $676,378 in 1997, to $178,052 in 1998, a decrease of $498,326 or 73.7%. The decrease is attributable to the fact that the Company received a $400,000 option fee from Hilton Gaming Corporation in 1997. COSTS AND EXPENSES VESSEL OPERATING EXPENSES Vessel operating costs and expenses decreased substantially from $13,121,189 in 1997 to $11,999,487 in 1998, a decrease of $1,121,702, or 8.5%. The decrease is attributable to a reduction in the number of cruises and cost reductions instituted by the Company. ADMINISTRATIVE AND GENERAL AND OTHER OPERATING Administrative and general costs and expenses decreased from $2,832,498 in 1997 to $2,510,943 in 1998, a decrease of 321,555 or 11.4%. The decrease is attributable, in large part, to a decrease in payroll. 27 28 ADVERTISING AND PROMOTION Advertising and promotion costs decreased from $1,571,275 in 1997 to $634,032 in 1998, a decrease of $937,243, or 59.6%. The decrease is attributable to cost reductions instituted by the Company. OTHER OPERATING EXPENSES Other operating expenses decreased from $1,053,871 in 1997 to $307,716 in 1998, a decrease of $746,155, or 70.8%. The decrease is attributable to annual meeting and proxy expenses in 1997 of $428,331, a Gaming Concession termination fee in 1997 of $361,694, and lower ESOP expenses in 1998. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased from $1,836,164 in 1997 to $2,035,936 in 1998, an increase of $199,772, or 10.9%. The increase is attributable to a full year amortization of substantial capital expenditures made in 1997. NOTICE OF INTENT TO MAKE AUDIT CHANGES/NOTICE OF PROPOSED ASSESSMENT 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, totalled 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. In January of 1999, the Florida Department of Revenue issued a Notice 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 $1,030,823, penalties in the amount of $515,412 and interest in the amount of $402,120 for a total of $1,948,355. On April 13, 1999, the Company received Notices of Assessment relating to the foregoing which include continuing interest to date. In February of 1999, the Florida Department of Revenue issued a Notice of Intent to Make Audit Changes to Europa Cruises of Florida 1, Inc. for the period July 1, 1994 through March 31, 1998, inclusive. The proposed audit changes include an alleged tax due in the amount of $423,481.78, penalties in the amount of $211,740.97 and interest in the amount of $166,986.82, for a total of $802,209.57. It is the Company's understanding that a Notice of Intent to Make Audit Changes to Europa Cruises of Florida 2, Inc. (relating to the Miami Beach operation) will also be forthcoming. The Company was informed on April 13, 1999 that the Florida Department of Revenue had placed or would be placing liens on one or more of the Company's vessels. The Company recorded a contingency in 1998 in the amount of $1,400,000 for this matter. LIQUIDITY AND CAPITAL RESOURCES In 1998, the Company experienced new competition, a proxy contest and an inordinate amount of lost revenue due to inclement weather. The Company took 28 29 aggressive steps in 1998 to reduce operating expenses at the corporate level and in all three of its operating ports. The Company believes it will be able to meet its normal operating costs and expenses from its 1999 cash flow from operations. In 1999, the Company expects to receive substantial income from the lease of the Stardancer and from a management agreement to operate the Sun. The Company expects to keep its costs of operating the Madeira Beach port and the Ft. Myers port at or about their present levels. Thus, assuming revenues for the Madeira Beach and Ft. Myers operations compare to those of 1998, the Company should be able to meet its normal operating costs and expenses. The Company, however, may be unable to meet any unusual or unanticipated cash requirements should they arise during 1999, except through the sale of common stock or borrowing. The Company's working capital deficiency is $6.2 million at December 31, 1998 as compared to $5.7 million at December 31, 1997. During 1998, operating activities provided cash of $1,855,687, which is principally attributable to non-cash expenses of approximately $2.2 million. Investing activities (principally vessel improvements, major vessel repair and maintenance, gaming equipment purchases, and Mississippi development costs) required cash of approximately $699,552 in 1998. 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 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 29 30 Union National Bank of Florida has piggyback registration rights for one year and one demand registration right after one year. As of December 31, 1998, the Company was not in compliance with the cash flow and tangible net worth covenants required under the terms of its bank loan agreement and the loan can be called for payment upon demand. The loan balance of $3,610,259 as of December 31, 1998 has been classified as a current liability in the accompanying 1998 consolidated balance sheet. In the event that 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 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. 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 was required to be drydocked in November, 1998. The drydock was performed in Mexico. The cost of the drydocking, including internal steel replacement, was approximately $415,000. The Company did not have sufficient funds to pay for drydock. The funds for drydock were advanced by the Company's President, Deborah A. Vitale and a major shareholder of the Company. The next required drydocking for all of the Company's vessels is as follows: Europa Stardancer: February 2001 Europa Sun: December 2000 EuropaStar: January 2000 Europa Sky: January 2001 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 and cannot presently estimate the cost of any necessary conversion. However, the Company does not anticipate any material disruption in its operations with respect thereto. FORWARD LOOKING STATEMENTS 30 31 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, 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 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 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in operations in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, except for certain loan agreements with First Union National Bank of Florida, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to have a material effect on its consolidated financial statements. 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. 31 32 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTRACT PERSONS. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. A. CURRENT DIRECTORS AND OFFICERS: The current executive officers of the Company and their titles are as follows:
Name Age Title - ---- --- ----- Deborah A. Vitale 49 Chairman of the Board, President, Chief Executive Officer, Secretary and Treasurer John R. Duber 43 Director, Vice-President, Assistant Secretary and Director of Investor Relations Paul J. DeMattia 39 Director Gregory A. Harrison 54 Director Robert Zimmerman 49 Chief Financial Officer
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 over twenty years of experience handling complex civil litigation. Ms. Vitale 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 as 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. 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 32 33 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. ROBERT ZIMMERMAN was appointed Chief Financial Officer of the Company on July 27, 1998. From May of 1994 until joining Europa, Mr. Zimmerman served as Controller for the North and Central American operations of Casinos Austria Internation, Ltd. From 1980 through 1993, Mr. Zimmerman served as Vice-President of Finance for the Industrial Controls subsidiary of Emerson Electric Company. Prior to 1980, Mr. Zimmerman was employed with the public accounting firm of Fiddler and Co. for seven years. 33 34 B. CHANGES IN MANAGEMENT AND THE BOARD OF DIRECTORS There were material changes in management and the Board of Directors of the Company during 1998. The following summarizes these changes in chronological order. 34 35 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. 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. C. CURRENT MANAGEMENT AND THE CURRENT BOARD OF DIRECTORS The Company, under the current Board of Directors and current management, is united in a single, common goal. 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 management, financial resources and assets will be devoted towards the development of this goal. In the opinion of the current Board of Directors, while the Company's cruise ship operations in Florida may have constituted the original and core business of the Company in the past, the return on investment simply did not justify the enormous expenditures of time, resources, money and assets required or the enormous risks incurred. Given the highly competitive nature of the cruise-to- nowhere business in Florida today and the Company's lack of financial resources with which to 35 36 expand and compete with the expensive, new, and more luxurious vessels entering the market and with better capitalized competitors, the Company's best prospect for increasing shareholder value lies with the development of the Company's Mississippi casino resort. Moreover, in the opinion of the Board, any return on investment the shareholders might realize from the operation of cruise ships, even if operated profitably, would pale in comparison to the return on investment the shareholders might realize from the development of the Diamondhead project. In 1998, given the state of the cruise-to-nowhere industry in Florida and the advent of new competition, new management made immediate, significant and dramatic changes in the core business of the Company. It anticipates doing so as well in 1999. 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 1998. [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] 36 37 ITEM 10. EXECUTIVE COMPENSATION The following table provides information concerning the compensation of certain current and former 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, 1998, received cash compensation in excess of $100,000 during any of the last three fiscal years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- AWARDS PAYOUTS ------ ------- OTHER ANNUAL RESTRICTED ALL OTHER COMPEN- STOCK LTIP COMPEN- OCCUPATION YEAR SALARY BONUS SATION AWARDS OPTIONS PAYOUTS SATION - ---------- ---- ------ ----- ------ ------ ------- ------- ------- Deborah A. Vitale 1998(2) $125,000 None None None 750,000(4) None None President as of February 20, 1998 1997(2) $ 84,135 $50,000 None None None None None 1996(2) None None None None 800,000(3) None None 1995(1) None None None None None None None Lester E. Bullock(5) 1998 $ 40,865 None $75,000(7) None None None Car Rental(8) Former President of the Company 1997 $125,000 $25,000 None None None None Car Rental(8) 1996 $134,000 None None None 400,000(6) None Car Rental 1995 $100,000 $29,000 None None None None None Debra L. Gladstone 1998 $ 20,101 $ 7,500 None None None None None Former Chief Financial Officer 1997 $ 85,000 $ 7,500 None None None None Car Rental(9) 1996 $ 70,000 None None None 50,000 None None and 15,000 shares of common stock John Duber 1998 $ 45,000 None None None 100,000(10) None None Vice President Robert Zimmerman 1998 $ 55,000 None None None None None None Current Chief Financial Officer
(1) Ms. Vitale received no cash compensation during 1995 or 1996 as an executive officer of the Company. (2) Ms. Vitale did not receive any salary or bonus for 1997 until 1998. (3) On April 18, 1996, 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 and 550,000 where granted for services on the Board not traditionally provided by a Director. (4) On April 3, 1998, Ms. Vitale was granted options to purchase 750,000 shares of Common Stock exercisable at $1.00 per share for services rendered as a Director and President of Europa and its subsidiaries. (5) 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. On March 6, 1998, Mr. Bullock was terminated as an employee of the Company. 37 38 (6) On April 18, 1996, 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 and 150,000 were granted for services on the Board not traditionally provided by a Director. (7) 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. (8) In 1997, Mr. Bullock's monthly vehicle lease payment, including tax, was $783.10. (9) In 1997, Mrs. Gladstone's monthly vehicle lease payment, including tax, was $503.54. (10) 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. OPTION GRANTS IN LAST FISCAL YEAR During the year ended December 31, 1998, options were awarded to Directors and Officers of the Company who were also Directors of the Company. See Directors' Compensation following. 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, 1998. In addition, this table includes the number of shares covered by both exercisable and non-exercisable stock options as of December 31, 1998. None of the following options are "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1986.
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Value Options at Year-End At Year-End(2) Acquired Realized --------------------------------------------------------- On Exercise (1) Exercisable Unexercisable Exercisable Unexercisable ----------- -------- ----------- ------------- ----------- ------------- Deborah A. Vitale None None 1,650,000 None $ 0 -- John Duber None None 100,000 None $ 0 -- Lester E. Bullock None None 50,000 None $ 0 -- Piers Hedley None None 250,000 None $ 0 -- Debra L. Gladstone None None 50,000 None $ 0 -- Charles H. Reddien None None 300,000 None $ 0 --
(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. 38 39 (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 exceeded the exercise price of the options. DIRECTORS' COMPENSATION From January 1, 1995 through August 1997, 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.) 39 40 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF APRIL 9, 1999 The only persons who owned of record or were known by the Company to own beneficially on April 9, 1999, more than 5% of any class of the outstanding voting shares of the Company were as follows:
NUMBER OF PERCENT OF PERCENT NAME AND ADDRESS SHARES OWNED CLASS VOTING(1) - ---------------- ------------ ---------- --------- Serco International Limited(2) 1,440,334 Common 461% 9.88% 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 4.61% 9.88% 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 4.61% 9.88% 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) 4,000,000 Common 12.80% 12.09% Employee Stock Ownership Plan Trust Agreement 150 153rd Avenue East Madeira Beach, Florida 33708 Deborah A. Vitale(3)(4)(5)(7) 6,403,500 Common 20.49% 19.36% 1013 Princess Street Alexandria, VA 22314 John R. Duber(3)(4)(6) 4,237,560 Common 13.56% 12.81% 20018 Westover Avenue Rocky River, Ohio 44116 Ernst G. Walter(2) 1,440,334 Common 4.61% 9.88% 14700 Gulf Blvd., Apt.401 900,000 S-NR Preferred 100.00% Madeira Beach, Florida 33708 926,000 S Preferred 100.00% James Illius(8) 1,472,051 Common 4.71% 4.45% 3791 Francis Drive Rocky River, Ohio 44116
- ---------------------- (1) Common Stock and S-NR Preferred and S Preferred shares have been combined for the purpose of calculating voting percentages. 40 41 (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. (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, 1998, 1,000,000 ESOP shares had been released and 750,000 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 4,000,000 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 1,650,000 shares of Common Stock. (6) Includes options to purchase 100,000 shares of Common Stock. (7) Includes 750,000 shares of common stock held by International Hospitality, Inc. for which Ms. Vitale holds a proxy for one year. (8) The percentage of Common Stock owned is 5.10% and the percentage of Voting Stock owned is 4.80% when calculated without regard to options. The following table sets forth, as of April 9, 1999, 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.
Number of Percent Percent Shares of of Common of Voting Common Stock Stock Stock(1) Owned Name and Address Deborah A. Vitale 6,403,500(3)(4)(7) 20.49% 19.36% 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 4,237,560(3)(5) 13.56% 12.81% Director, Vice-President and Assistant Secretary 20018 Westover Avenue
41 42 Rocky River, OH 44116 Gregory Harrison 490,000(6) 1.56% 1.48% Director 16209 Kimberly Grove Gaithersburg, MD 20878 Paul DeMattia 139,000(6) .44% .42% Director 6366 Eastland Rd. Brookpark, Ohio 44142 All Directors and Officers 7,270,060 23.27% 21.98% as a Group (4 persons):
- ------------------- (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 4,000,000 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 1,650,000 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. (7) Includes 750,000 shares of Common Stock held by International Hospitality, Inc. for which Ms. Vitale holds a proxy for one year. 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 December 31, 1998, 750,000 shares of Common Stock had 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 42 43 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 sixteen meetings during 1998 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. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Exhibits (a) 3(a)(i) Certificate of Incorporation of the Company. (ii) Amendment to Certificate of Incorporation of the (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.
43 44 (g) 4.4 Convertible Promissory Note between Europa Cruises Corporation and Serco International Ltd. dated November 11, 1993: Transfer by Serco International Ltd. to Gaming Invest Corp. and election to convert Promissory Note by Gaming-Invest Corp. 5.1 Qualified plan determination letter from the Internal Revenue Service dated April 4, 1996, issued to the Europa Cruises Corporation Employee Stock Ownership Plan. (g) 10.1 Consulting Agreement between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated September 16, 1994. (g) 10.1.1 Equipment Lease between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated October 13, 1994. (g) 10.1.2 Promissory Note payable to Casinos Austria Maritime Corporation dated December 30, 1994, and Second Naval Mortgage on the M/V Stardancer. (g) 10.1.3 Subordination Agreement between Lagoon Cruise Line, Inc., Europa Stardancer Incorporation and Casinos Austria Maritime Corporation. (a) 10(d) The Company's 1988 Stock Option Plan. (b) 10(e) Standard Bareboat Charter Agreement, dated August, 1989, between Sea Lanes Bahamas Limited and Europa Cruise Lines, Ltd. (c) 10(f) Service Agreement, dated April 12, 1991, between Service America Corporation and Europa Cruise Lines. (c) 10(g) Lease Agreement, dated June 30, 1991, between Palm Grove Marina, Inc., and Europa Cruises of Florida 1, Inc. (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.
44 45 (b) 10(m) Promissory Note, dated December 31, 1990, and Addendum thereto, dated May 2, 1991, from the Company to Charles S. Liberis, P.A., Profit Sharing Plan. (b) 10(n) Promissory Note, dated December 31, 1990, and Addenda thereto, dated April 18 and May 2, 1991, from the Company to Harlan G. Allen, Jr. (b) 10(o) Stock Option and Agreement, dated December 31, 1990, between the Company and Charles S. Liberis, P.A., Profit Sharing Plan. (b) 10(p) Stock Option and Agreement, dated December 31, 1990, between the Company and Harlan G. Allen, Jr. (b) 10(q) Promissory Note, dated January 25, 1992, from Europa Cruises of Florida 1, Inc., and Europa Cruises of Florida 2, Inc., to Cordis, A.G. (b) 10(r) Release, dated January 25, 1991, by Europa Cruise Lines, Ltd. in favor of the St. Paul Fire & Marine Insurance Co. Lloyds and certain London companies, through Bain Clarkson, Ltd. (b) 10(s) Promissory Note, dated February 15, 1991, from Europa Cruises of Florida 1, Inc., to Midlantic. (b) 10(t) Assumption Modification and Security Agreement, dated February 15, 1992, amongst Europa Cruises of Florida 2, Inc., the Company and Midlantic. (b) 10(u) Mortgage Modification Agreement, dated February 15, 1992, between Europa Cruises of Florida 2, Inc., and Midlantic. (b) 10(v) Guarantee Agreement, dated February 15, 1991, between Europa Cruises of Florida 2, Inc., and Midlantic, Re: Europa Cruises of Florida 2, Inc. (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.
45 46 (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. (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.
46 47 (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. 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. 27 Financial Data Schedule (for SEC use only) (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.
47 48 (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.
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) 48 49 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: April 15, 1999 /s/ Deborah A. Vitale ---------------------------------------- By: Deborah A. Vitale, President /s/ Robert Zimmerman ---------------------------------------- By: Robert Zimmerman 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, 1999 - ---------------------------------------- President and Chairman of the Board /s/ John R. Duber April 15, 1999 - ---------------------------------------- Vice President, Director /s/ Paul J. DeMattia April 15, 1999 - ---------------------------------------- Director /s/ Gregory A. Harrison April 15, 1999 - ---------------------------------------- Director
49 50 EUROPA CRUISES CORPORATION AND SUBSIDIARIES
CONTENTS - -------------------------------------------------------------------------------------------------------------------- PAGE ---- Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheet as of December 31, 1998 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1997 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1997 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F-7 Notes to Consolidated Financial Statements F-8 to F-34
F-1 51 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, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998. 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, 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Miami, Florida BDO Seidman, LLP April 8, 1999 F-2 52 EUROPA CRUISES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, 1998 ----------- ASSETS (NOTE 5(A)) CURRENT Cash and cash equivalents $ 625,926 Accounts receivable (Note 5) 187,137 Prepaid insurance and other 393,270 ----------- Total current assets 1,206,333 VESSELS, EQUIPMENT AND FIXTURES, LESS ACCUMULATED DEPRECIATION (Notes 2 and 5) 11,990,391 LAND UNDER DEVELOPMENT FOR DOCKSIDE GAMING (Note 4) 4,868,139 DOCKSIDE GAMING DEVELOPMENT COSTS (Note 4) 195,506 DEFERRED DRYDOCK COSTS, NET OF AMORTIZATION (Note 2) 586,838 OTHER ASSETS 162,010 ----------- $19,009,217 ===========
F-3 53 EUROPA CRUISES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, 1998 ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (NOTE 5(A)) CURRENT LIABILITIES Accounts payable and accrued expenses (Note 14) $ 2,493,132 Current maturities of long-term debt (Note 5) 4,390,847 Due to stockholders (Note 6) 516,300 Unearned cruise revenues 31,595 ------------ Total current liabilities 7,431,874 LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 5) 2,868,733 OTHER LIABILITIES (Notes 10(a) and 10(d)) 1,800,000 ------------ Total liabilities 12,100,607 ------------ COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (Notes 7 and 8) Preferred stock, $.01 par value; shares authorized 5,000,000; outstanding 2,692,000 ($3,731,080 aggregate liquidation preference) 26,920 Common stock, $.001 par value - shares authorized 50,000,000; issued 28,875,059; outstanding 23,625,059 28,875 Additional paid-in capital 25,353,679 Unearned ESOP shares (5,961,564) Deficit (12,349,144) Treasury stock, at cost, 1,250,000 shares (190,156) ------------ Total stockholders' equity 6,908,610 ------------ $ 19,009,217 ============
See accompanying notes to consolidated financial statements. F-4 54 EUROPA CRUISES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 ------------ ------------ REVENUES Gaming revenue $ 13,092,182 $ 15,208,517 Passenger fares 2,260,960 3,353,016 Food and beverage 865,356 1,282,377 Charter fees 406,000 327,500 Other (Note 4) 178,052 676,378 ------------ ------------ 16,802,550 20,847,788 ------------ ------------ COSTS AND EXPENSES Vessel operating 11,999,487 13,121,189 Administrative and general 2,510,943 2,832,498 Advertising and promotion 634,032 1,571,275 Depreciation and amortization (Note 2) 2,035,936 1,836,164 Provision for sales taxes (Note 10) 1,400,000 1,284,664 Interest, net (Note 5) 878,107 907,502 Other operating (Note 12) 307,716 1,053,871 ------------ ------------ 19,766,221 22,607,163 ------------ ------------ NET LOSS (2,963,671) (1,759,375) PREFERRED STOCK DIVIDENDS (195,623) (221,248) ------------- ------------ NET LOSS APPLICABLE TO COMMON STOCK $ (3,159,294) $ (1,980,623) ============ ============ PER SHARE AMOUNTS Net loss per common share, basic and diluted $ (.14) $ (.09) ------------ ------------ Weighted average number of common shares outstanding 23,320,053 22,620,251 ============ ============
See accompanying notes to consolidated financial statements. F-5 55 EUROPA CRUISES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 7 AND 8)
Additional Common Preferred Common Paid-in Unearned Stock Stock Stock Capital ESOP Shares Subscribed -------- ------- ------------ ----------- ---------- 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) -- ESOP compensation -- -- (219,103) 375,000 -- Preferred stock dividends -- 221 142,424 -- -- Conversion of preferred to common (1,160) 116 1,044 -- -- Net loss for the year -- -- -- -- -- -------- ------- ------------ ----------- --------- Balance, December 31, 1998 $ 26,920 $28,875 $ 25,353,679 $(5,961,564) $ -- ======== ======= ============ =========== =========
Treasury (Deficit) Stock Total ------------ --------- ----------- 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 ESOP compensation -- -- 155,897 Preferred stock dividends (195,623) -- (52,978) Conversion of preferred to common -- -- -- Net loss for the year (2,963,671) -- (2,963,671) ------------ --------- ------------ Balance, December 31, 1998 $(12,349,144) $(190,156) $ 6,908,610 ============ ========= ============
See accompanying notes to consolidated financial statements. F-6 56 EUROPA CRUISES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 11)
Year ended December 31, 1998 1997 ----------- ----------- OPERATING ACTIVITIES Net loss $(2,963,671) $(1,759,375) ----------- ----------- Adjustments to reconcile net loss to net cash provided by operating activities: Provision for sales taxes 1,400,000 1,284,664 Depreciation and amortization 2,035,936 1,836,164 ESOP provision 155,897 220,625 (Increase) decrease in: Accounts receivable 139,391 72,204 Prepaids and other 43,404 144,628 (Decrease) increase in: Accounts payable and accrued expenses 1,059,212 (481,644) Unearned cruise revenues (14,482) (17,750) Other liabilities -- 250,000 ----------- ----------- Total adjustments 4,819,358 3,308,891 ----------- ----------- Cash provided by operating activities 1,855,687 1,549,516 ----------- ----------- INVESTING ACTIVITIES Purchases of property and equipment, net (142,730) (635,318) Increase in deferred drydock costs (546,190) (282,857) Land under development and dockside gaming costs (10,632) (150,917) Decrease in restricted cash -- 400,000 ----------- ----------- Cash used in investing activities (699,552) (669,092) ----------- ----------- FINANCING ACTIVITIES Repayment of long-term debt (1,231,518) (1,858,562) Preferred stock dividends (52,978) (100,813) Advances from stockholders, net 516,300 -- Proceeds from: Stock subscription payments -- 224,070 Issuance of common stock -- 52,375 Long-term debt -- 492,413 ----------- ----------- Cash (used in) financing activities (768,196) (1,190,517) ----------- ----------- Net increase (decrease) in cash and cash equivalents 387,939 (310,093) Cash and cash equivalents, beginning of year 237,987 548,080 ----------- ----------- Cash and cash equivalents, end of year $ 625,926 $ 237,987 =========== ===========
See accompanying notes to consolidated financial statements. F-7 57 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT Organization and Business ACCOUNTING POLICIES Europa Cruises Corporation and Subsidiaries (the Company) principally owns, operates and promotes four cruise vessels offering day and evening cruises. The Company's cruises include a variety of shipboard activities such as dining, casino operations, sightseeing, live music and other entertainment. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is at least reasonably possible that the Company's estimate of the ultimate outcome of contingencies could change in the near term. Principles of Consolidation The consolidated financial statements include the accounts of Europa Cruises Corporation and all of its subsidiaries. All material intercompany balances and transactions have been eliminated in the consolidation. Cash Equivalents The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents. F-8 58 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Vessels, Equipment and Fixtures Vessels are depreciated over 20 years using the straight-line method. Vessel improvements, furniture, fixtures and equipment are recorded at cost and are depreciated over their estimated useful lives (which range from two to twenty years) using the straight-line method. Expenditures for repairs and maintenance are 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 $3,652,100 in 1998 and $2,954,500 in 1997. Passenger Fare Revenue and Unearned Cruise Revenues Unearned cruise revenues, which represent customer cruise deposits, are included in the consolidated 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, 1998 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 F-9 59 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 unallocated shares used to pay debt service are reported as a reduction of the indebtedness to the Company; (2) on unallocated 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 The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At such time the evaluations indicate that the future undiscounted cash flows of the long-lived assets would not be sufficient to recover the carrying value of such assets, the assets would be adjusted to their fair values. F-10 60 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Taxes on Income The Company accounts for income taxes pursuant to the provisions of FASB No. 109, "Accounting for Income Taxes," which requires, among other things, a liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Net Loss per Common Share 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. F-11 61 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 next drydock. Reporting Comprehensive Income During 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 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. The adoption of SFAS No. 130 did not have any effect on the Company's financial statements for the year ended December 31, 1998. Segment Information Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, supersedes SFAS No. 14, Financial Reporting for F-12 62 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segments of a Business Enterprise. SFAS No. 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 No. 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 Company currently operates solely in one line of business, short-term cruises. Included in total assets, are $5,063,645 (27% of total assets) of land and dockside gaming development costs which relate to planned future operations. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in operations in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, except for certain bank loan agreements, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. The Company does not expect adoption of the new standard on January 1, 2000 to have a material effect on its consolidated financial statements. F-13 63 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. VESSELS, EQUIPMENT AND Vessels, equipment and fixtures consist of FIXTURES, AND DEFERRED the following: DRYDOCK COSTS
1998 ------------ Vessels $ 13,527,221 Vessel improvements 1,789,838 Gaming equipment 2,208,361 Office and vessel equipment 965,337 Furniture, fixtures and other 289,863 Leasehold improvements 583,818 ------------ 19,364,438 Less accumulated depreciation (7,374,047) ------------ $ 11,990,391 ------------ Deferred drydock costs consist of the following: Deferred drydock costs $ 1,931,480 Less accumulated amortization (1,344,642) ------------ $ 586,838 ============
3. INVESTMENT IN AND On December 31, 1990, the Company rescinded a ADVANCES TO transaction in which it had previously sold UNCONSOLIDATED its twenty percent ownership interest in AFFILIATE Marne (Delaware), Inc. (Marne) by reacquiring its investment and a $340,000 note receivable 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 F-14 64 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 DEVELOPMENT FOR subsidiaries, Casino World, Inc. (CWI) and DOCKSIDE GAMING AND Mississippi Gaming Corporation (MGC) owns or DOCKSIDE GAMING has options to purchase a total of 404.5 acres DEVELOPMENT\ of unimproved land in Diamondhead, Mississippi COSTS which was granted site approval by the Mississippi Gaming Commission in June, 1995. The ownership and operation of a gaming business in Mississippi are subject to numerous 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. 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 $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 F-15 65 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Casino operations did not commence within three years of signing of the transfer and the Tidelands Lease has expired. The Mississippi Secretary of State has indicated that he will not renew a lease with the Hancock County Port and Harbor Commission. Therefore, Casino World, Inc. will be required to apply directly to the Secretary of State for a new Tidelands Lease. There can be no assurance the Mississippi Secretary of State will grant a Tidelands Lease. There are no assurances that the necessary regulatory approvals can be obtained or that financing will be available. At December 31, 1998, 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 the Company for a 180 day period 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 1997 consolidated statement of operations. Dockside gaming development costs consist of the following:
1998 -------- Licenses $ 77,000 Other development costs 118,506 -------- $195,506 ========
F-16 66 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 DEBT At December 31, 1998, long-term debt consists of:
1998 -------------- 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, 1998) capped at 11.35% with an interest rate swap agreement, collateralized by accounts receivable, three vessels, equipment and fixtures. (a) $ 3,610,259 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. 1,953,189 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. 1,184,186
F-17 67 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital lease obligation on gaming equipment, payable $25,000 monthly to May, 1999, including interest at 9%. ($250,000 past due) 287,648 9% note payable, principal and interest payable $4,827 monthly through November 2000, collateralized by 400,000 escrowed shares of the Company's common stock. 190,588 9% note payable, principal and interest payable $17,700 monthly through February 1999. 33,710 ---------- Total 7,259,580 Less current maturities (4,390,847) ---------- $ 2,868,733 ===========
a) As of December 31, 1998, the Company was not in compliance with the cash flow and tangible net worth covenants required under the terms of its bank loan agreement and the loan can be called for repayment upon demand. The loan balance of $3,610,259 has been classified as a current liability in the accompanying 1998 consolidated balance sheet. In the event that 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 results of operations. The Company's cash flow during 1998 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 1999, except through the sale of stock or borrowing. F-18 68 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1998, annual maturities of long-term debt are as follows:
1999 $4,390,847 2000 419,609 2001 445,831 2002 487,094 2003 481,968 Thereafter 1,034,231 ---------- $7,259,580 ==========
Interest expense consists of:
1998 1997 --------- --------- Interest expense $ 897,145 $ 950,794 Less interest income (19,038) (43,292) --------- --------- Interest expense (net) $ 878,107 $ 907,502 ========= =========
6. RELATED PARTY During 1998, the Company borrowed $584,211 TRANSACTIONS from two stockholders which was used for working capital purposes. These loans are unsecured, do not bear interest and are due on demand. Outstanding balance as of December 31, 1998 is $516,300. F-19 69 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. STOCKHOLDER'S At December 31, 1998, the Company had a EQUITY stock option plan 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, 1998, approximately 865,000 shares remain available under the Plan and 810,000 options are outstanding. In March 1998, the Company granted five year fixed non-plan stock options at an exercise price of $1.00 (fair market value at the date of grant) that expire in March 2003. The options were granted as follows: Immediately exercisable options to acquire 200,000 shares of common stock to three members of the Board of Directors. Immediately exercisable options to acquire 750,000 shares of common stock to the President, Chief Executive Officer and Chairman of the Board of Directors. Immediately exercisable options to acquire 10,000 shares of common stock to an employee of the Company. In April, 1997, the Company granted to an employee of Casino F-20 70 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 consolidated Statements 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 for grants in 1998 and 1997: no dividend yield percent, expected life of 5 years, expected volatility of 46.10% and 94.39% in 1998 and 1997 and risk-free interest rate of 5.47% and 5.84% in 1998 and 1997, respectively. Under the accounting provisions of FASB Statement 123, the Company's net loss and loss per share would have been as follows:
1998 1997 ------------- ------------- Net loss As Reported $ (3,159,294) $ (1,980,623) Applicable to Common Stock Proforma (3,354,294) (2,045,623) Earning per As Reported $ (.14) $ (.09) common share Proforma $ (.14) $ (.09)
F-21 71 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of status of the Company's fixed Plan and non-plan options as of December 31, 1998 and 1997, and changes during the years ended on those dates is presented below:
December 31, 1998 December 31, 1997 -------------------------- ---------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ---------- ----- --------- ----- Outstanding at beginning of year 3,100,000 $ .95 3,000,000 $.95 Granted 960,000 1.00 100,000 .84 Exercised -- -- -- -- Forfeited (650,000) (1.06) -- -- ---------- ----- --------- ----- Outstanding at end of year 3,410,000 $ .96 3,100,000 $.95 ---------- ----- --------- ----- Options exercisable at year-end 3,410,000 -- 3,100,000 -- Weighted-average fair value of options granted during the year -- $ .33 -- $.65 ========== ===== ========= =====
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------------ --------------------------- Weighted- Number Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise at Contractual Exercise at Exercise Prices 12/31/98 Life Price 12/31/98 Price ------------------------------------------------------------------------------------- $.75 - $2.25 3,410,000 2.5 $ .96 3,410,000 $ .96 -------------------------------------------------------------------------------------
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. F-22 72 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On September 13, 1993, the Company issued to Serco International Limited (SERCO) (a wholly-owned subsidiary of AustroInvest International Inc. and a stockholder of the Company) 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock, in exchange for proceeds of $999,000. Non-cumulative three percent per annum dividends are payable quarterly. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. In 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 1998 and 1997, 116,000 and 14,500 of these shares were converted to 116,000 and 14,500 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 1998, the Company paid $142,645 of the total preferred dividend of $195,623 with 220,471 shares of its common stock. During 1997, the Company paid $120,395 of the total preferred dividend of $221,248 with 136,000 shares of its common stock. F-23 73 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 per share. 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 an entity in which a former Director of the Company served as an officer and consultant. During 1997, the Company issued 47,289 shares of Common Stock in exchange for approximately $52,375. F-24 74 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. EMPLOYEE STOCK On August 18, 1994, the Company established OWNERSHIP PLAN the Europa Cruises Corporation PLAN Employee Stock Ownership Plan (ESOP). The ESOP, which is intended to be a qualified retirement plan under provisions of Section 401(a) of the Internal Revenue Code and an employee stock ownership plan pursuant to Section 4975(3)(7) of the Internal Revenue Code, was established primarily to invest in stock of the Company. All employees as of December 31, 1994 and subsequent new employees having completed one year of service are eligible to participate in the ESOP. The Company also established a trust called Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement to serve as the funding vehicle for the ESOP. On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000 shares of the Company's common stock with the proceeds of the loan. On August 25, 1994, the Company loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional 2,120,000 shares of the Company's common stock with the proceeds of the loan. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In 1995 the Company extended the maturity of the loans to twenty years. Shares are allocated to the participants' accounts in relation to repayments of the loans from the Company. Cash dividends paid by the Company, are used to repay the loans from the Company or allocated to the participants' accounts at the discretion of the plan administrator and stock dividends are allocated to the participants' accounts. No dividends have been paid by the Company. At December 31, 1998, 1,000,000 shares have been legally released of which, 750,000 have been allocated to participants F-25 75 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS accounts. The remaining 250,000 are in the process of being allocated to participants' accounts in 1999. At December 31, 1998, 4,000,000 shares with a fair market value of $1,500,000 are unearned. 9. INCOME TAXES At December 31, 1998, the Company had net operating loss carry-forwards for income taxes of approximately $17.3 million which expire through 2014. 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. Deferred income taxes are comprised of the following at December 31, 1998:
1998 ----------- Depreciation $ 2,284,000 Deferred drydock 109,000 ----------- Gross deferred tax liability 2,393,000 ----------- Loss carry forwards (6,491,000) ----------- Deferred tax asset valuation allowance 4,098,000 ----------- Net deferred tax asset $ -- ===========
Realization of any portion of the Company's deferred tax asset at December 31, 1998 is not considered to be more likely than not and, accordingly, a $4,098,000 valuation allowance has been provided. F-26 76 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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 $697,000 and $750,000 in 1998 and 1997, respectively. Minimum rental obligations under all noncancellable operating leases with terms of one year or more as of December 31, 1998, are as follows:
1999 $ 615,000 2000 545,000 2001 470,000 2002 245,000 2003 33,000 ---------- $1,908,000 ==========
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 F-27 77 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 (CAMC). Under the consulting agreement, Europa manages and 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 F-28 78 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On September 30, 1998, the case was dismissed. Various post-dismissal motions are pending. 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 accompanying consolidated financial statements do not include any adjustments that might result from this uncertainty. F-29 79 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. In January and February of 1999, the Florida Department of Revenue (DOR) issued to the Company Notices of Intent to make Sales and Use Tax Audit Changes for the period of July 1, 1994 through March 31, 1998. The proposed audit changes, including penalties and interest totaled approximately $2.8 million. The DOR seeks to assess tax on passenger fares, food and beverage expenses, fixed asset purchases, repairs and other items and place liens on one or more of the Company's vessels to collateralize payment. The Company strongly disagrees with the proposed audit changes and intends to contest the factual, statutory and regulatory issues which form the basis for the proposed audit changes. However, the Company does believe that certain matters may ultimately be sustained by the DOR and/or agreed to by the Company and has provided a $1.4 million charge to 1998 operations. The ultimate outcome of this matter may be at amounts which differ from the recorded $1.4 million and may have a material adverse impact on the Company's results of operations and financial position. F-30 80 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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 F-31 81 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On March 18, 1998, the Plaintiffs filed a motion for Class Certification. The motion is pending. 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 $177,635. 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. F-32 82 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. SUPPLEMENTAL CASH FLOW Supplemental schedules of interest paid are INFORMATION as follows:
1998 1997 ---------- ---------- Cash paid for interest $ 866,500 $ 919,000 Non-cash transactions are as follows: 1998 1997 ---------- ---------- Preferred stock dividends paid with shares of common stock $ 142,645 $ 120,435 Sales tax provision 1,400,000 1,284,664
12. OTHER OPERATING Other operating costs consist of the COSTS following:
1998 1997 ---------- ---------- Annual meeting and proxy expenses $ 61,588 $ 428,331 Termination fee associated with the Gaming Concession Agreement -- 361,694 ESOP provision 155,897 220,625 Other 90,231 43,221 ---------- ---------- $ 307,716 $1,053,871 ========== ==========
13. FAIR VALUE OF The Company's financial instruments consist FINANCIAL principally of cash and cash equivalents, INSTRUMENTS accounts receivable and long-term debt. The carrying amounts of such financial instruments approximated fair value at December 31, 1998 and 1997. F-33 83 EUROPA CRUISES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SUBSEQUENT On April 5, 1999, the Company entered into EVENTS an agreement with Poseidon Sea Kruz, L.C., a Florida limited liability company for the sale of one of its vessels together with related assets for a total price of $6,000,000. The agreement is contingent on, among other things, the buyer obtaining financing to close this transaction. At December 31, 1998, included in accounts payable and accrued expenses is a $300,000 refundable fee received from a prospective vessel management entity. Pursuant to the terms of the option agreement, the Company refunded the fee by issuing 750,000 shares of the Company's Common Stock in February 1999. F-34 EX-27 2 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EUROPA CRUISES CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1997 DEC-31-1998 625,926 0 187,137 0 0 1,206,333 11,990,391 7,374,047 19,009,217 7,431,874 0 0 26,920 28,875 0 19,009,217 16,802,550 0 0 19,766,221 307,716 0 878,107 (2,963,671) 0 0 0 0 0 (2,963,671) (.14) (.14)
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