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As filed with the Securities and Exchange Commission on May 27, 2015

File No. 000-17529

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10/A

 

Amendment No. 1

 

GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

DIAMONDHEAD CASINO CORPORATION

(Exact name of registrant as specified in charter)

 

Delaware

 

59-2935476

(State of Incorporation)

 

(I.R.S. EIN)

 

1013 Princess Street, Alexandria, Virginia 22314

(Address of principal executive offices/zip code)

 

Registrant’s telephone number, including area code:   703-683-6800

 

Securities to be registered pursuant to Section 12(b) of the Act: None

 

Securities to be registered pursuant to Section 12(g) of the Act: Common Stock par value $ .001

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company x

 

 

 



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TABLE OF CONTENTS

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

12

 

 

 

Item 2.

Financial Information

12

 

 

 

Item 3.

Properties

22

 

 

 

Item 4.

Security Ownership of Certain Beneficial Owners and Management

23

 

 

 

Item 5.

Directors and Executive Officers

26

 

 

 

Item 6

Executive Compensation

29

 

 

 

Item 7.

Certain Relationships and Related Transactions, and Director Independence

31

 

 

 

Item 8.

Legal Proceedings

32

 

 

 

Item 9.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

33

 

 

 

Item 10.

Recent Sales of Unregistered Securities

34

 

 

 

Item 11.

Description of Registrant’s Securities to be Registered

35

 

 

 

Item 12.

Indemnification of Directors and Officers

36

 

 

 

Item 13.

Financial Statements and Supplementary Data

36

 

 

 

Item 14.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

36

 

 

 

Item 15

Financial Statements and Exhibits

36

 

 

 

 

Signatures

39

 

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FORWARD LOOKING STATEMENTS

 

This Registration Statement on Form 10 contains forward-looking statements and involves risks and uncertainties that could materially affect the Company’s future plans, business strategy, expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding our ability to implement our business plan and business strategy, our ability to obtain financing to sustain the Company, our ability to finance our future development and future operations, our ability to attract key personnel, and our ability to operate profitably in the future. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Any statements contained in this document that are not statements of historical fact may be deemed to be forward-looking statements. You can identify forward-looking statements as those that are not historical in nature, particularly those that use terminology such as “may”, “will”, “should”, “expects”, “anticipates”, “contemplates”, “estimates”, “believes”, “intends”, “plans”, “projects”, “predicts”, “potential” or “continue” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider risks and uncertainties relating to various factors, including, but not limited to, financing, licensing, construction and development, competition, legal actions, federal, state, county and/or city government actions, general financing conditions, and general economic conditions.

 

The Company’s actual results may differ significantly from results projected in the forward-looking statements. We undertake no obligation to revise or update forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements

 

Throughout this Registration Statement references to “we”, “our”, “us”, “Diamondhead Casino Corporation”, the “Company”, and similar terms refer to Diamondhead Casino Corporation and its wholly-owned subsidiaries, unless the context indicates otherwise.

 

ITEM 1.      BUSINESS

 

The Company is a Delaware corporation which was incorporated on November 15, 1988, under the name “Europa Cruises Corporation.”  In 1989, the Company became a publicly-held company. On November 22, 2002, the Company amended its Certificate of Incorporation to change its name to “Diamondhead Casino Corporation.” The Company currently has three subsidiaries.

 

The Company has no current operations in any state. The Company has had no income or revenue from any operations since 2000. The Company currently has no employees other than two persons who serve in executive officer capacities.

 

For the two years ending December 31, 2013 and December 31, 2014, the Company’s resources were dedicated to finding the funding to sustain and maintain the Company, to negotiating a financing, to papering the financing, and working on the obligations required by the financing.

 

In or about July 2013, the Company began discussions with respect to a potential financing. These evolved into negotiations relating to a private placement of securities.  The original deal was papered in the last quarter of 2013. However, the structure of the deal changed and the first quarter of 2014 was devoted to the legal task of repapering the private placement which was dated February 14, 2014 and which closed on March 31, 2014. The Company spent the remainder of 2014 working with its former Chief Financial Officer and outside auditors preparing periodic reports and financial statements.

 

In or about May 2014, the Company also turned its attention to obtaining Gaming Site Approval for a casino on its Diamondhead, Mississippi property. On or about May 29, 2014, after working with its surveyors and engineers, the Company filed an application for Gaming Site Approval with the Mississippi Gaming Commission. After negotiations with Gaming Commission staff and several changes to the original application site, the Company received Gaming Site Approval on August 21, 2014, for a fifty acre site in Diamondhead, Mississippi.

 

Despite the Company’s efforts during the second quarter of 2014 to prevent it, the Company’s stock registration was revoked effective September 4, 2014. Therefore, the last quarter of 2014 was devoted to negotiating amendments to the private placement dated February 14, 2014 to address the stock revocation that had occurred, and to amending and repapering the private placement.  In addition, the Company began preparation of a Form 10 to be filed to reregister its common stock, together with two years of audited financial statements.

 

Securities and Exchange Commission Revocation of Securities Registration

 

As described below, the Company was not in compliance with its reporting requirements under Section 13(a) of the Securities Exchange Act of 1934 and, as a result, its stock registration was revoked under said Act effective September 4, 2014. The Company

 

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did not file any financial statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or other periodic reports with the Securities and Exchange Commission, which it was required to file, after it filed its Form 10-Q for the period ended June 30, 2011. The Company did not file the foregoing because it did not have sufficient funds to retain accountants, outside auditors, and/or outside attorneys to prepare, review and file the documents and/or financial statements required to have been filed during certain periods in which it was obligated to file the foregoing with the Securities and Exchange Commission (the “SEC”).

 

On June 18, 2014, the SEC issued an Order of Suspension of Trading with respect to the Company’s securities. The Order stated, among other things, that “[t]he Commission was of the opinion that the public interest and the protection of investors require[d] a suspension of trading” and the Commission ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the Company’s securities be suspended from June 18, 2014 through July 1, 2014. On June 18, 2014, the SEC also issued an Order Instituting Administrative Proceedings (“OIP”) and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, alleging that the Company was delinquent in its periodic filings with the SEC, having not filed any periodic reports since it filed its Form 10-Q for the period ended June 30, 2011 and, therefore, that the Company had failed to comply with Securities Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder.

 

On June 27, 2014, the Company filed an Answer to the OIP in which it admitted that it had not filed certain periodic reports since it filed its Form 10-Q for the period ended June 30, 2011. On July 29, 2014, the Company attended a prehearing conference at which it requested an in-person hearing. On August 11, 2014, the SEC issued an Initial Decision on Default and Order for Motion for Summary Disposition as to Diamondhead Casino Corporation. The SEC found that there were no issues of material fact that required an in-person hearing, granted the Division leave to file a motion for summary disposition, and set a briefing schedule for the parties to file their briefs.

 

The Board of Directors of the Company determined that defending the Company against the OIP would likely have resulted in extensive, time-consuming and expensive litigation. Moreover, the Company believed that litigation would not have resulted in a favorable outcome inasmuch as the Company had not, in fact, met its reporting requirements. Accordingly, the Board of Directors determined that litigation would have constituted a waste of the Company’s scarce resources and capital.

 

On August 29, 2014, the Company made an Offer of Settlement in which it admitted that it had failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder because it had not filed any periodic reports with the SEC since the quarterly period ended June 30, 2011. The Company consented to the entry of an Order, pursuant to Section 12(j) of the Exchange Act, revoking the registration of the Company’s securities registered pursuant to Section 12 of the Exchange Act. On September 4, 2014, the SEC entered an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Diamondhead Casino Corporation, pursuant to the Company’s Offer of Settlement. Thus, effective September 4, 2014, the registration of each class of the Company’s securities registered pursuant to Section 12 of the Exchange Act was revoked and, since that date, the Company’s Common Stock has not traded on any exchange or other public market.

 

Re-Registration of the Company’s Common Stock

 

After the Company’s registration was revoked, the Board of Directors voted to take those steps required to re-register the Company’s Common Stock. On March 31, 2015, the Company filed a Form 10, together with two years of audited financial statements, with the Securities and Exchange Commission for the purpose of re-registering its Common Stock under the Securities and Exchange Act of 1934. However, there can be no assurance that the Company’s Common Stock will be successfully re-registered.

 

To ensure the Company remains current on its reporting obligations, the Company intends to raise sufficient funds to allow it to retain and pay the professionals whose services are required to stay current in our periodic filings.

 

Previous Florida Operations

 

From inception through approximately August of 2000, the Company operated gambling vessels in international waters. The vessels sailed from various state ports into international waters where gaming operations were conducted. From approximately 1994 through August of 2000, operations were conducted primarily out of ports located in Miami Beach, Florida, Ft. Myers Beach, Florida, and Madeira Beach, Florida.  By the end of 2000, the Company had divested itself of its gaming operations to satisfy financial obligations to its vendors, lenders and taxing authorities and to focus its resources on the development of a casino resort in Diamondhead, Mississippi.  The Company has had no gaming operations since 2000. The Company has no current operations in Florida, no offices in Florida, and no employees in Florida.

 

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Mississippi

 

The Company is a single asset entity. It owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation, an approximate 404 acre undeveloped property located at 7051 Interstate 10, Diamondhead, Mississippi 39525 (hereafter “the Diamondhead Property” or “the Property”). The Company intends to develop the Property beginning with a casino resort.  The Company is in the early development stages of the project. There can be no assurance that the substantial funds required for the design and construction of the project can be obtained or obtained on acceptable terms.  Moreover, there can be no assurance that if the requisite financing for the project is obtained and the project is constructed, that the project will be successful. The Company has no current operations in Mississippi, no offices in Mississippi, and no employees in Mississippi.

 

Property Zoning

 

The Diamondhead Property is located entirely within the City of Diamondhead and Hancock County.  The City of Diamondhead incorporated in February of 2012. On October 15, 2012, the Mayor and City Council adopted a Zoning Ordinance in which the City of Diamondhead zoned the entire Property as “C-2 - Interstate Commercial/Gaming/Resort.”  Thus, the requisite City zoning is currently in place for a casino.

 

Land-Based Gaming

 

All references in this section to Mississippi law are qualified in their entirety by reference to the actual text of the law.

 

On August 29, 2005, Hurricane Katrina struck the Gulf coast of the United States causing extensive damage to Louisiana and Mississippi, including Biloxi, Gulfport, and Bay St. Louis, Mississippi.  Hurricane Katrina damaged or destroyed most of the casinos on the Gulf coast.  Prior to Hurricane Katrina, Mississippi law required that casinos on the Gulf coast be built in, on, or above the water and be located a minimum of fifty percent below mean high tide.

 

On October 17, 2005, in response to the devastation caused by Hurricane Katrina, Mississippi passed new legislation that allows casinos located in certain statutorily-described areas, including St. Louis Bay, where the Diamondhead Property is located, to be constructed on land no more than 800 feet from the mean high-water line. Under Mississippi’s new legislation, the part of the structure in which licensed gaming activities are conducted must be located entirely in an area which is located no more than eight hundred (800) feet from the mean high-water line (as defined in Section 29-15-1 of the Mississippi Code) of the waters within the State of Mississippi, which lie adjacent to the State of Mississippi south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay or, with regard to Harrison County only, no farther north than the southern boundary of the right-of-way for U.S. Highway 90, whichever is greater. In the case of a structure that is located in whole or part on shore, the part of the structure in which licensed gaming activities are conducted must lie adjacent to state waters south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay. When the site upon which the structure is located consists of a parcel of real property, easements and rights-of-way for public streets and highways are not construed to interrupt the contiguous nature of the parcel, nor is the footage contained within the easements and rights-of-way counted in the calculation of the distances specified above.

 

The Company intends to take advantage of the Mississippi legislation that allows casinos to be built on land.

 

Annual In-Lieu Tidelands Assessment

 

Since the Company intends to construct a casino on land in Mississippi, the Company will no longer require a tidelands lease from the Secretary of State. Under Mississippi’s prior law, which required that the Company’s casino be in, on, or above water and a minimum of fifty percent at or below mean high tide, the Company would have required a tidelands lease to lease water-bottoms owned by the State.

 

However, on or about October 17, 2005, when Mississippi passed new legislation permitting casinos to be built on land in certain locations, Mississippi also passed a companion law that requires any person possessing a license under the Mississippi Gaming Control Act, who operates a gaming establishment in any of the three most southern counties of the State (including Hancock County in which the Company’s Property is located), and who does not lease public trust tidelands from the State, to pay an annual in-lieu tidelands assessment to the Public Trust Tidelands Assessments Fund. For calendar year 2006, the annual in-lieu tidelands assessment was between $400,000 and $750,000, based on an escalating scale which is measured by the capital investment in the part of the structure in which the licensed gaming activities are conducted. For each calendar year thereafter, the Secretary of State is required to review and adjust the value of the capital investment and the annual in-lieu tidelands assessment due. Such review and adjustment shall be tied to the Consumer Price Index.

 

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This annual in-lieu tidelands assessment will apply to any casino constructed on land on the Diamondhead Property.

 

Mississippi Gaming Site Approval

 

In the State of Mississippi, in addition to local zoning, a proposed gaming site must obtain Gaming Site Approval. Only the Mississippi Gaming Commission has the authority to grant Gaming Site Approval. On or about May 29, 2014, the title holder of the Property, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company, applied for gaming site approval for a fifty (50) acre site on the Diamondhead Property. In its Notice of Intent, the applicant anticipated the casino would contain approximately 1250 slot machines and approximately 40 table games and contain an estimated 80,000 square feet of gaming space. On August 21, 2014, the Mississippi Gaming Commission granted Gaming Site Approval for a fifty acre site on the Diamondhead Property.

 

The Mississippi Gaming Commission found, in pertinent part, as follows: 1) that in accordance with the Mississippi Gaming Control Act of 1990, codified as Miss. Code Ann . § 75-76-1 et seq., Miss. Code Ann . § 19-3-79, and Miss. Code Ann. §97-33-1, as amended, the citizens of Hancock County, Mississippi voted to authorize gaming in Hancock County, and thus gaming is legal at qualifying locations within Hancock County, Mississippi; that the proposed gaming area is within 800 feet of the mean high water line of the Bay of St. Louis and is thus a legal gaming site under the Mississippi Control Act of 1990, as amended, and 13 Mississippi Administrative Code Part 2 Rule 2.2(a)(1) and (3); and that the Proposed Site is properly zoned for gaming.

 

The Gaming Site Approval was granted for a period expiring three years after the date Approval to Proceed with Development is granted. The Property owner has not yet applied for Approval to Proceed with Development.

 

Additional Permits, Authorizations and Approvals Are Required

 

In addition to Gaming Site Approval, the development of the Diamondhead Property requires the Company to obtain additional permits, authorizations and approvals from various federal, state, county, and/or city agencies, boards and commissions, which may include, but not be limited to, the following: U.S. Army Corps of Engineers,  Environmental Protection Agency,  U.S. Fish and Wildlife Service, U.S. Coast Guard,  Port and Harbor Commission,  Mississippi Gaming Commission, Mississippi Department of Marine Resources, Mississippi Commission on Environmental Quality, Mississippi Department of Transportation, Hancock County, and/or the City of Diamondhead. The regulatory environment relating to such permits, authorizations and approvals is uncertain and subject to constant change. There can be no assurance that all permits, authorizations and/or approvals can be obtained, or that if obtained, that they will be renewed. While there is no pending environmental litigation, the foregoing permits, authorizations and approvals remain subject to future litigation and the actions of environmental groups and various federal, state, county and/or local governments and agencies, including, but not limited to, the foregoing. The Company will be required to spend significant funds to pay the architects, surveyors, engineers, accountants, attorneys, consultants and other experts required to prepare and process the applications required for the permits, authorizations and approvals required. The amount ultimately required is unknown at this time, but the Company does not have sufficient funds required for this purpose. There can be no assurance the Company will be able to obtain the funds required for this purpose or can obtain the funds required on acceptable terms.

 

Uncertain Regulatory and Political Environment

 

The political environment in which the Company and/or its subsidiaries intend to operate is also uncertain, dynamic and subject to rapid change. Existing operators often propose and support legislation and/or litigation designed to make it difficult or impossible for competition to enter a market. This political and regulatory environment makes it impossible to predict the effects that the adoption of and changes in gaming laws, rules and regulations and/or competition will have on development of a gaming resort. Moreover, legislatures in states in which gaming is legal often consider wide-ranging legislation and regulations which could adversely affect operations and expected revenues. Likewise, the federal government often considers legislation which could adversely affect operations and expected revenues. More recently, certain states have legalized internet gaming. The long term effects of legalizing internet gaming on the casino industry in general and on the Company’s proposed casino operation, are unknown.

 

Anti-Gaming Referenda

 

On at least three separate occasions since 1998, certain anti-gaming groups have proposed referenda that, if adopted, would have banned gaming in Mississippi and required that gaming entities cease operations within two years after the ban.  All three of the proposed referenda were ruled illegal by Mississippi State trial courts. If such a referendum were to be approved by the voters, it would have a material adverse effect on the Company.

 

Mississippi Regulation

 

The Company has no current operations in Mississippi and does not operate any gaming facility in Mississippi. The Company intends to develop its Diamondhead property as a destination casino resort.

 

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Assuming it is successful in developing its resort, the Company and its subsidiaries and/or affiliates will be subject to federal, state, county, city and local, laws, rules, ordinances and regulations with respect to the operation of any gaming facility. The following is intended to serve as a partial description of the Mississippi regulatory environment in which the Company or its subsidiaries or joint venture partner(s) would seek approvals to construct and operate a gaming facility and is not intended to be a complete, precise, or up-to-date recitation of all applicable laws, rules, regulations or ordinances that might affect the Company’s operations or with which the Company would be required to comply. Additional or more restrictive laws, rules and regulations could be adopted at any time or gambling could be completely banned.

 

The location of, ownership of, and operation of gaming facilities in Mississippi are subject to extensive state and local regulation, primarily through the licensing and control of the Mississippi Gaming Commission and the Mississippi State Tax Commission. The Company and/or its subsidiaries must register and be licensed under the Mississippi Gaming Control Act and its gaming operations will be subject to the regulatory control of the Mississippi Gaming Commission, the Mississippi State Tax Commission and various state, county and local regulatory agencies.

 

The Mississippi Gaming Control Act gives the Mississippi Gaming Commission (the “Commission”) extensive power to enforce the Act and adopt regulations in furtherance of the Act (the “Mississippi Regulations”). The laws, regulations and supervisory procedures of Mississippi and the Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming Commission; (4) prevent cheating and fraudulent practices; (5) provide a source of state and local revenues through taxation and licensing fees; and (6) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Commission. Changes in Mississippi law or the regulations or the Commission’s interpretation thereof may limit or otherwise materially affect the types of gaming that may be conducted and could have a material adverse effect on Mississippi gaming operations.

 

Approval Process

 

The Commission has divided the approval process into two separate phases: (1) gaming site approval; and (2) approval to proceed with development.

 

1.  Gaming Site Approval

 

Mississippi Gaming Corporation, which holds title to the Property and is a wholly-owned subsidiary of the Company, obtained Gaming Site Approval on August 21, 2014. With respect to gaming site approval, approval constitutes only the Commission’s finding that the location complies with applicable gaming laws and regulations. Gaming site approval does not entitle the recipient to proceed with development, nor does it constitute a license to engage in gaming or a right to a gaming license. Gaming site approval is a revocable privilege and no holder acquires any vested right therein. The Mississippi Gaming Commission reserves the right to revoke any site approval should the circumstances change that would make the site illegal or unsuitable.

 

An application for gaming site approval in the three most southern counties must include evidence satisfactory to the Commission in support thereof including: (1) a survey indicating the specific location of the property; (2) the current use of any adjacent property as well as the location of the nearest residential area, church and school; (3) evidence that all applicable zoning ordinances allow gaming at the proposed site; and (4) a survey establishing the mean high water line, performed by a qualified surveyor for performance of tidal surveys.

 

Gaming establishments in the three most southern counties in the State of Mississippi, including Hancock County, are permitted to be permanent inland structures. No point in the gaming area may be more than eight hundred (800) feet from the nineteen (19) year mean high water line. Harrison County establishments south of Highway 90 may exceed the eight hundred (800) foot measurement up to the southern boundary of Highway 90. All public easements and rights-of-way for public streets and highways are excluded from the 800 foot measurement. Any point of reference used to determine the 800 foot distance from the mean high water line must be located on the applicant or licensee’s premises. The applicant or licensee must own and/or lease the land that is contiguous both to the parcel used to conduct gaming and the point of reference used to determine the mean high water line, and this land must be shown to be an integral part of the project. The Commission has final authority in reviewing and approving each site as it pertains to meeting the requirements of this regulation.

 

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2.  Approval to Proceed with Development

 

With respect to obtaining the Commission’s approval to proceed with development, the following information, together with documentation to support this information, must be submitted to the Commission:

 

1) Architectural plans or renderings showing details of all proposed construction and renovation for the project, together with a footprint of the project and a description of the construction and type of parking facilities, as well as parking lot capacity. Commission approval requires that the project include a 500-car, or larger parking facility in close proximity to the casino complex, and infrastructure facilities shall include a 300-room, or larger hotel of at least a three diamond rating as defined by an acceptable travel publication to be determined by the Commission. In addition, infrastructure facilities must include a restaurant capable of seating at least 200 people and a fine dining facility capable of seating at least 75 people, and the casino floor must be at least 40,000 square feet. The project will also have or support an amenity that will be unique to the market and will encourage economic development and promote tourism. The Commission will have authority in determining the quality of the amenity and the ultimate approval of the amenity, and may, in its discretion, reduce the requirements above should it determine that there is a justification to do so in certain markets. The Commission will further determine, in its discretion, if the prerequisite hotel and dining facilities may be supplanted by an amenity of high value to the overall tourism market in that the amenity will likely encourage economic development and promote tourism. As used herein, infrastructure facilities are not such items as parking facilities, roads, sewage and water systems, or civic facilities normally provided by cities and/or counties.

 

The qualifying infrastructure must be owned or leased by (i) the holder of the site approval, or (ii) an affiliated company of the holder of the site approval where both the affiliated company and the holder of the site approval have identical direct or indirect equity ownership.  This regulation shall apply to any new applicant for a gaming license for a new gaming facility and to the acquisition or purchase of a licensee or gaming facility for which gaming operations have ceased prior to the time of acquisition or purchase. It does not apply to any licensee which has been licensed by the Commission, or to any person which has received Approval to Proceed with Development from the Commission prior to December 31, 2013 (or to such licensee upon any licensing renewal after such date.)

 

Any change to the plan, or placement or design of the establishment, cruise vessel or vessel, shall be submitted in advance to the Executive Director for determination of whether such a change constitutes a material change. If the Executive Director determines that a material change has occurred, Commission approval is required for same.

 

2) Statements reflecting the total estimated cost of construction or renovation of the establishment, vessel, or cruise vessel and shore and dock facilities, distinguishing between known costs and projections, and separately identifying: facility design expense; land acquisition costs; site preparation costs; construction costs or renovation costs; equipment acquisition costs; costs of interim financing; organization, administrative and legal expenses; projected permanent financing costs; qualified infrastructure costs; and non-qualifying infrastructure costs.

 

3) A construction schedule for completion of the project, including an estimated date of project completion, indicating whether a performance bond will be required by the applicant to be furnished by the contractor.

 

4) Current financial statements, including, at a minimum, a balance sheet and profit and loss statement for the proposed licensee.

 

5) A detailed statement of the sources of funds for all construction and renovation proposed by the site development plans. Any funding, whether equity or debt, to be obtained, must be supported by firm written commitments satisfactory to the Commission. The applicant will have 120 days in which to close all financing and start construction or the approval is deemed void.

 

6) Evidence that the following agencies (if applicable) were notified of the development and/or do not oppose the site development: U.S. Corps of Engineers, U.S. Coast Guard, Mississippi Department of Transportation, Mississippi Department of Environmental Quality, Department of Marine Resources, Port and Harbor Commission, Levee Board, City and County government, and such other agencies as the Executive Director deems appropriate.

 

The application for a Gaming Operator’s License must be filed no later than ninety (90) days after the Commission grants approval to proceed with development. The gaming site approval will expire three (3) years from the date approval to proceed with development is granted unless the Commission grants an extension. Approval to proceed with development is not subject to sale, assignment or transfer.

 

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Opening of a Casino

 

Before any gaming facility may open to the public, all infrastructure requirements must be fully operational. The development shall be completed in accordance with the approved plan and be ready for operation within the gaming site approval time period. Gaming site approval may be extended within the discretion of the Commission.

 

Application Information Required is Extensive and Must be Complete and Accurate

 

In addition to other information required by law and Commission regulations, an applicant must provide complete information regarding the proposed operation, including but not limited to, a certification that any establishment to be used by the proposed operation has been inspected and approved by all appropriate authorities; fingerprints for each individual applicant; the nature, source, and amount of any financing; the proposed uses of all available funds; the amount of funds available after opening for the actual operation of the establishment; and economic projections for the first three years of operation of the establishment. Each applicant must provide complete information regarding his or her background for the ten-year period preceding submission of the application.

 

Every application to become a license holder must contain the following additional information:  actual establishment blueprints, including a layout of each floor stating the projected use of each area; the number of miles from the nearest population center and a description of transportation facilities serving that population center, a description of the casino size and configuration of slot machines, video games of chance and table games; a description of the availability of fire protection and the adequacy of law enforcement at the establishment and emergency evacuation plans for hurricane and flooding disasters; a description of the arrangements for food and drink concessions, the names and addresses of the concessionaires and the terms of the concession contracts, if applicable; the type of slot machines and video games of chance to be used and the proposed distributors and manufacturers of this equipment; a description of the physical location, size and floor plan of the section of the establishment reserved for patrons under 21 years of age and plans for activities and staffing for this section; periods of time that the gaming areas will be in operation; a description of the proposed management of the facility, management personnel by function, and tip distribution policies; all known feasibility studies made available to the applicant which have been done on the type of gaming in the particular locale where the applicant intends to conduct gaming, and a description of procurement policies that emphasize the utilization of Mississippi employees, resources, and goods and services in the operation of the gaming establishment.

 

Timetable for Financing and Construction

 

License applicants must submit, simultaneously with submission of their completed application, a timetable for financing arrangements (including applications for approval of public offerings or private placements), and commencement and completion of construction activities, setting forth the date upon which gaming activities will commence. The timetable will be subject to approval by the Commission and monitored for compliance by the Executive Director. The Commission may grant extensions of time upon the recommendation of the Executive Director. License applicants must not advertise or promote the opening of their proposed casino nor the commencement of employee training for their proposed casino until the applicant is granted a license by the Mississippi Gaming Commission. Applicants may request a waiver of this regulation from the Executive Director, which waiver, if granted would be subject to revocation.

 

Unsuitable Locations

 

The Executive Director may recommend that an application for a license be denied if the Executive Director believes that the place or location for which the license is sought is unsuitable for the conduct of gaming operations. The Commission may deny an application for a state gaming license if it deems that the place or location for which the license is sought is unsuitable for the conduct of gaming operations. Without limiting the generality of the foregoing, the following locations may be deemed unsuitable: premises located within the immediate vicinity of residential areas, churches, schools and children’s public playgrounds; premises where gaming is contrary to any county or city ordinance, including, but not limited to, zoning ordinances restricting the permissible locations for gaming facilities, so long as such ordinances do not have the effect of absolutely excluding or prohibiting legal gaming; premises which fail to meet federal, state or local health and safety standards, and any other applicable laws or regulations; premises frequented by minors; premises lacking adequate supervision or surveillance; premises difficult to police or where adequate fire protection may be difficult; any other premises where the conduct of gaming would be inconsistent with the public policy of the State of Mississippi.

 

Building Standards

 

Any establishment to be constructed for gaming will be required to meet the Southern Standard Building Code. If the local county or city has a building code, then the local code will be the applicable standard. The Commission requires, as a condition of licensure, that gaming establishments meet strict hurricane emergency standards and procedures.

 

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Objection by County or Municipality

 

Whenever the Commission receives a completed application for a gaming license proposing to operate a gaming establishment in a particular county or municipality, the Executive Director, within ten days after receipt of the application, must notify the board of supervisors of the county and, if applicable, the chief executive of the municipality in which the proposed operation will be located of the receipt of the application and specify the name of the applicant and the proposed location for the gaming establishment. The county or municipality in which the applicant proposes to operate may file a duly enacted resolution specifying any objections or endorsements with the Executive Director.

 

Individual Licensing of Shareholders of Corporate Licensee

 

The Commission may request persons, affiliated entities and greater than 5% equity owners to submit an application for finding of suitability in which event the application must be submitted within thirty days of the request.

 

All Officers and Directors of a Corporation Must be Licensed

 

All officers and directors of a corporation which holds or applies for a state gaming license must be licensed individually and, if in the judgment of the Mississippi Gaming Commission the public interest will be served by requiring any or all of the corporation’s individual stockholders, lenders, holders of evidence of indebtedness, underwriters, key executives, agents, or employees to be licensed, the corporation shall require such persons to apply for a license. An officer or director shall apply for a license within thirty days after he becomes an officer or director. A person required to be licensed pursuant to a decision of the commission must apply for a license within thirty days after the executive director requests him to do so.

 

Licensing is a Privilege and Revocable

 

It is the declared policy of the State of Mississippi that all establishments where gambling games are conducted or operated must be licensed and controlled so as to better protect the public health, safety, morals, good order and welfare of its inhabitants. Any license, registration, finding of suitability, or approval by the Commission is deemed to be a revocable privilege and no person holding such a license, registration, finding of suitability, or approval is deemed to have any vested rights therein.

 

An application for a state gaming license or any other affirmative Commission action is seeking the granting of a privilege and the burden of proving his qualification to receive any license, registration, finding of suitability or approval, is at all times on the applicant.  The applicant must document compliance with all applicable federal, state and local rules, regulations and permit requirements. An applicant must accept any risk of adverse publicity, embarrassment, criticism, or other action, or financial loss which may result from action with respect to an application and expressly waive any claim for damages as a result thereof. An application for a license, finding of suitability, or registrations constitutes a request to the Executive Director for a recommendation and to the Commission for a decision upon the applicant’s general suitability, character, integrity, and ability to participate or engage in , or be associated with, the gaming industry in the manner or position sought by the application, or the manner or position generally similar thereto.

 

Certain Commission Considerations for Licensing

 

The Commission will consider various factors when deciding whether to issue a license to conduct gaming in an establishment, including but not limited to, the following: revenue provided by a facility to the state and local communities through direct taxation on its operation and indirect revenues from tourism, ancillary businesses, creation of new industry and taxes on employees and patrons. It will consider whether the proposed establishment is: economically viable and properly financed, planned in a manner that provides for adequate security for all aspects of its operation and for people working, visiting, or traveling to the establishment;  planned in a manner which promotes efficient and safe operation; is planned in a manner that provides efficient, safe, and enjoyable use by patrons of the establishment and parking facilities, concessions, the casino, access to cashier windows and rest rooms; compliance with state and federal laws regarding fire, health, construction, zoning, and other similar matters; whether the applicant will employ the persons necessary to operate the establishment in a manner consistent with the needs, safety, and interests of persons who will be in the establishment; the population of the area to be served by the establishment and the location of other establishments within and without the state. The Commission will consider the character and reputation of all persons identified with ownership and operation of the establishment and their capability to comply with rules of the Commission and the Mississippi Code; whether the proposed operation will maximize development; whether it is beneficial to Mississippi tourism, the number and quality of employment opportunities for Mississippians created and promoted by the proposed operation, and the amount and type of shore developments associated with the establishment.

 

A license which authorizes a holder to operate a gaming establishment is granted for no longer than three years from the date of issue and may be granted for a period of less than three years based within the discretion of the Commission.

 

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Gaming Licenses

 

Neither the Company nor any of its subsidiaries has a license to operate a casino in Mississippi or in any other jurisdiction. Gaming licenses require the periodic payment of fees and taxes and are not transferable except in accordance with applicable Mississippi law and regulations and with the prior approval of the Commission. Gaming licenses in Mississippi are issued for a maximum term of three years and must be renewed periodically thereafter. There can be no assurance that the Company or any of its subsidiaries will be licensed. There can be no assurance that if licensed, new licenses can be obtained at the end of any particular licensure period. Moreover, the Commission may, at any time, and for any cause it deems reasonable, revoke, suspend, condition or limit a license or approval to own shares of stock in a company that operates in Mississippi. The Mississippi Act also requires that a publicly traded company register under the Act. The Company and/or its subsidiaries will be required to periodically submit detailed financial, operating and other reports to the Commission and Mississippi State Tax Commission. A violation under a gaming license held by a subsidiary of a Company operating in Mississippi could be deemed a violation of all other licenses, if any, then held by the Company. Numerous transactions, including substantially all loans, leases, sales of securities and similar financing transactions entered into by any subsidiary of the Company operating a casino in Mississippi must be reported to or approved by the Commission. In addition, the Commission may, at its discretion, require additional information about the operations of the Company.

 

Edson R. Arneault, Chairman of the Board of Directors of the Company and Chief Executive Officer of Casino World, Inc., a wholly-owned subsidiary of the Company, though not currently licensed, has previously held gaming licenses in Pennsylvania, West Virginia, Ohio, and Nevada. Deborah Vitale, President and Chief Executive Officer of the Company, though not currently licensed, has previously held a gaming license in Colorado.

 

Finding of Suitability

 

The following persons must apply for a finding of suitability and must be found suitable by the Commission in order to be involved with a licensee: i) each person who serves as Chairman of the Board of Directors of any corporation, public or private, licensed or registered by the Commission; and ii) each person who has a vote on any issue before the Board of Directors of any corporation, public or private, licensed or registered by the Commission and who is also an employee of the corporation or any of its subsidiaries. In addition, the following persons shall apply for a finding of suitability: i) each person who serves as Chairman of the audit or compliance committee of any corporation, public or private, licensed or registered by the Commission, and ii) any executive, employee, or agent of a gaming licensee that the Commission determines as having the power to exercise a significant influence over decisions concerning any part of the operation of a gaming licensee. If the nature of the job changes from that for which the applicant is found suitable, he may be required to submit himself to a new determination of her or his suitability.

 

The Commission can require any employee to be found suitable if it finds that the public interest and policies set forth in the Act will be served thereby. The Commission is not restricted by job titles, but will consider the functions and responsibilities of the person, including but not limited to, persons acting in the capacity of a property level general manager, assistant general manager, or executive level personnel actively and directly engaged in the administration or supervision of the activities of a licensee. Any executive, employee or agent of a gaming licensee who is listed or should be listed in an annual employee report may be required to apply for a finding of suitability.

 

A finding of suitability is granted for a period of no longer than ten years from the date of issue. A finding of suitability may be granted for a period of less than ten years within the discretion of the Commission. A holder of a finding of suitability must file with the Investigations Division of the Commission by June 30th of each year, the “Investigations Division Annual Report,” providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. A holder of a finding of suitability must immediately inform the Commission of any arrest or conviction.

 

The Commission has full and absolute power and authority, at any time, to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered, found suitable or approved, for any cause deemed reasonable by the commission. The Commission has the power, at any time, to investigate and require the finding of suitability of any record or beneficial stockholder of the Company. The Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 5% of any class of voting securities of a publicly traded corporation registered with the Mississippi Gaming Commission, must notify the Mississippi Gaming Commission of this acquisition. The Act also requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of any class of voting securities of a publicly traded corporation registered with the Commission must be found suitable by the Mississippi Gaming Commission and pay the costs and fees that the Commission incurs in conducting the investigation.

 

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Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company’s securities beyond such time as the Commission prescribes, may be guilty of a misdemeanor.

 

The Company may be required to disclose to the Commission upon request, the identities of holders of any debt or other securities. Under the Act, the Commission may, in its discretion, (1) require holders of debt securities of registered corporations to file applications; (2) investigate such holders; and (3) require the holders to be found suitable to own such securities.

 

The Mississippi regulations provide that a change in control of a Company may not occur without the prior approval of the Commission. Mississippi law prohibits the Company from making a public offering of its securities without the approval of the Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. The Commission has the authority to grant a continuous approval of securities offerings subject to renewal every three years by certain issuers.

 

Employees associated with gaming in Mississippi must obtain work permits that are subject to immediate suspension under certain circumstances. The Commission will refuse to issue a work permit to a person who has been convicted of a felony, committed certain misdemeanors or knowingly violated the Mississippi Gaming Control Act, and it may refuse to issue a work permit to a gaming employee for any other reasonable cause.

 

The Company believes there may be persons with prior felony convictions, who are affiliated with certain shareholders, who beneficially own in excess of 5% of a class of voting stock of the Company, who may be found unsuitable by the Mississippi Gaming Commission.  Article X of the Company’s Articles of Incorporation, as amended, provides that the “Company may repurchase or redeem shares, at fair market value, held by any person or entity whose status as a shareholder, in the opinion of the Company’s Board of Directors, jeopardizes the approval, continued existence, or renewal by any gaming regulatory authority, of a contract to manage gaming operations, or any other tribal, federal or state license or franchise held by the Company or any of its subsidiaries.” However, there can be no assurance the Company would have sufficient funds to purchase shares held by such a person or entity.  In the event the Company was unable to purchase such shares, its ability to obtain a license could be materially and adversely affected.

 

License Fees and Taxes

 

License fees and taxes are payable to the State of Mississippi and to the counties and cities in which the Mississippi Gaming Subsidiary’s respective operations will be conducted. The license fee payable to the State of Mississippi is based upon “gaming receipts”, which are generally defined as gross receipts less payouts to customers as winnings. The fee equals 4% of the first $50,000 or less of gross revenue per calendar month, plus 6% of the next $84,000 of gross revenue per calendar month, plus 8% of gross revenue over $134,000 per calendar month. License fees paid in any taxable year are allowed as a credit against the Mississippi State income tax liability of a licensee for that taxable year.

 

A licensee must pay an annual license fee of $5,000. In addition, each licensee must pay a license fee based on the number of games it operates. If it operates over 35 games, the fee is equal to $81,200 plus $100 for each game over 35 games. In addition to state gaming license fees or taxes, a municipality or county may impose a gross revenue fee upon a licensee based on all gaming receipts derived from the establishment equal to approximately 4%. An additional license tax may apply to gaming devices.

 

Beer, Wine and Liquor Licensing

 

The sale of alcoholic beverages by casinos, including beer and wine, is subject to licensing, regulation and control by both the local jurisdiction and the Alcoholic Beverage Control Division (the “ABC”) of the Mississippi Department of Revenue. All licenses are revocable and non-transferable. The ABC has full power to limit, condition, suspend or revoke any license, and any disciplinary action could, and revocation would, have a material adverse impact upon the operations of an affected casino, its financial condition and its results of operations.

 

Extensive Non-Gaming Laws and Regulations

 

In addition to the foregoing, the Company and/or its subsidiaries will be subject to additional federal, state, county and city, safety, food, alcohol, health, employment, and other laws, rules, regulations and ordinances that apply to non-gaming businesses generally.  In addition, Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Treasury Department require currency transactions in excess of $10,000 occurring within a gaming day to be reported, including identification of the patron by name and social security number.  Substantial penalties can be imposed for failure to comply with these and numerous other regulations. The foregoing is just one example of the pervasiveness of the non-gaming laws, rules, regulations and ordinances that would apply to a casino operator.

 

Competition

 

There is intense competition in the Mississippi market in which the Company intends to operate and in surrounding markets. The Company will compete directly with other existing gaming facilities located in Mississippi and in bordering states, including

 

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Louisiana. The Company will also be competing directly and indirectly, with gaming facilities throughout the United States and throughout the world, as well as with Native American gaming operations which enjoy certain tax advantages. The Company expects this competition to increase as new gaming operators enter these markets, existing competitors expand their operations, gaming activities expand in existing jurisdictions, gaming is legalized in new jurisdictions, and legalized gaming expands on the internet.

Assuming it is successful in developing a destination casino resort, the Company will also be competing with other forms of gaming and entertainment, including but not limited to, bingo, online gambling, pull tab games, card parlors, sports-book operations, pari-mutuel betting, dog racing, lotteries, jai-alai, video lottery terminals, and video poker terminals.

 

The following chart identifies casinos which are located in Mississippi and with which the Company will compete. Except for distances, the information contained in the chart is derived from the Mississippi Gaming Commission’s Quarterly Survey Information (Property Data) for the period October 1, 2014 through December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distance to

 

 

 

Gaming

 

Slot

 

Table

 

Poker

 

Hotel

 

Total

 

Diamondhead

 

COASTAL REGION

 

Sq. Ft

 

Games

 

Games

 

Games

 

Rooms

 

Parking

 

(in miles)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beau Rivage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

75,744

 

1,936

 

83

 

16

 

1,740

 

3,959

 

35

 

Boomtown Casino

 

51,665

 

945

 

16

 

0

 

0

 

1,490

 

33

 

Golden Nugget

 

54,728

 

1,210

 

54

 

9

 

705

 

1,346

 

35

 

Hard Rock Casino

 

53,800

 

1,302

 

51

 

4

 

479

 

1,802

 

35

 

Harrah’s Gulf

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coast

 

31,275

 

774

 

31

 

0

 

494

 

2,705

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IP Casino Resort

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spa

 

81,733

 

1,701

 

62

 

13

 

985

 

3,700

 

33

 

Palace Casino

 

38,000

 

884

 

26

 

0

 

234

 

1,590

 

33

 

Treasure Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

28,140

 

817

 

26

 

0

 

207

 

1,096

 

31

 

Island View Casino

 

82,935

 

1,942

 

42

 

0

 

565

 

4,250

 

23

 

Hollywood Casino

 

56,300

 

1,152

 

19

 

5

 

291

 

1,700

 

12

 

Silver Slipper

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

36,826

 

947

 

28

 

0

 

0

 

1,700

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region Totals

 

591,146

 

13,610

 

438

 

47

 

5,700

 

25,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NORTHERN REGION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bally’s Tunica

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

46,535

 

945

 

17

 

0

 

238

 

1,699

 

377

 

Fitzgerald’s Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tunica

 

38,457

 

1,040

 

20

 

0

 

506

 

1,795

 

379

 

Gold Strike Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resort

 

54,205

 

1,372

 

59

 

0

 

1,133

 

2,412

 

373

 

Hollywood Casino-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tunica

 

55,000

 

1,095

 

20

 

6

 

494

 

1,801

 

379

 

Horseshoe Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

And Hotel

 

63,000

 

1,123

 

76

 

24

 

507

 

1,775

 

373

 

Isle of Capri-Lula

 

63,500

 

904

 

20

 

0

 

486

 

1,500

 

345

 

Resorts Tunica

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel & Casino

 

42,902

 

800

 

14

 

0

 

201

 

2,738

 

378

 

Sam’s Town-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tunica

 

66,000

 

1,181

 

29

 

0

 

842

 

4,308

 

378

 

Tunica Roadhouse

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

31,000

 

699

 

24

 

0

 

135

 

4,265

 

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region Totals

 

460,599

 

9,159

 

279

 

30

 

4,542

 

22,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CENTRAL REGION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ameristar Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel

 

72,210

 

1,533

 

27

 

10

 

149

 

3,063

 

210

 

Diamondjacks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino & Hotel

 

28,000

 

640

 

13

 

0

 

122

 

631

 

211

 

Harlow’s Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resort

 

33,000

 

755

 

13

 

0

 

105

 

1,500

 

285

 

Isle of Capri Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—Natchez

 

17,634

 

625

 

6

 

0

 

121

 

908

 

200

 

Lady Luck Casino

 

25,000

 

1,186

 

8

 

0

 

89

 

948

 

212

 

Magnolia Bluffs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

16,032

 

468

 

16

 

0

 

0

 

427

 

199

 

Riverwalk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

287 Casino

 

25,000

 

692

 

15

 

0

 

80

 

748

 

211

 

Trop Casino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

22,822

 

602

 

13

 

0

 

40

 

734

 

287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region Totals

 

239,698

 

6,501

 

111

 

10

 

706

 

8,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STATE TOTALS

 

1,291,443

 

29,270

 

828

 

87

 

10,948

 

56,590

 

 

 

 

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Table of Contents

 

Louisiana Competition

 

The Company believes that its greatest competition will come from the Mississippi Gulf Coast casinos because of their close proximity to the Diamondhead Property. While the Company’s primary competition will come from the Mississippi Gulf Coast casinos, the Company’s Diamondhead, Mississippi casino will also compete with casinos and other gaming located in the adjacent State of Louisiana.

 

Louisiana has four land-based casinos. Inasmuch as the Company’s casino will be land-based, the Company’s primary competition is expected to come from Harrah’s land-based casino located in downtown New Orleans. This casino is approximately one hour from the Diamondhead site. Three of the land-based casinos in Louisiana are Indian casinos, which are located in Marksville in central Louisiana and in Kinder and Charenton in southern Louisiana. These are not expected to represent significant competition because of their distance from the Diamondhead site.

 

Fifteen riverboat casinos are authorized to operate in Louisiana. There are six riverboat casinos in Shreveport-Bossier, three in Lake Charles, which is approximately 246 miles from the Diamondhead Property; three in East Baton Rouge Parish, which is approximately 123 miles from the Diamondhead Property, and one each in Kenner, Harvey and Amelia, which are approximately 73, 71, and 139 miles, respectively, from the Diamondhead Property.  As of June 30, 2013, there were 2,044 video poker outlets and 14,108 video poker devices in the 31 parishes in Louisiana where video poker gaming had been approved in the State. These machines are authorized in bars, restaurants, hotels, off-track betting parlors and truck stops. Louisiana also has racetrack gaming. The cumulative effect of the foregoing could be seen as having a significant competitive effect on the Diamondhead Property project.

 

ITEM 1A.  RISK FACTORS

 

Smaller reporting companies are not required to provide the information required by this item.

 

ITEM 2.    FINANCIAL INFORMATION

 

Liquidity, Capital Resources, and Financial Results

 

This section should be read together with the consolidated financial statements and related notes thereto, for the fiscal years ended December 31, 2014 and 2013 and the condensed unaudited consolidated statements for the three months ended March 31, 2015 and 2014, attached as Item 13 to this Form 10.

 

Overview

 

The Company’s current priority is the development of a casino resort on its Property located in Diamondhead, Mississippi. The Company’s management, financial resources and assets will be devoted towards the development of this Property. There can be no assurance that the Property can be developed or, that if developed, that the project will be successful.

 

Liquidity

 

The Company has incurred continued losses over the past several years and certain conditions raise substantial doubt about the Company’s ability to continue as a going concern .

 

Financial Results and Analysis

 

Twelve Months Ended December 31, 2014 and 2013

 

As reflected in the accompanying consolidated financial statements, the Company incurred a loss applicable to common shareholders of $3,377,375 and $1,414,526 for the years ending December 31, 2014 and 2013, respectively, and expects continued losses for the foreseeable future. The net losses include a charge for the change in fair value of a derivative liability in the amount of $1,904,233 in 2014 and a charge in the amount of $352,892 for stock-based compensation in 2013. General and administrative expenses incurred totaled $974,844 and $625,148 for the years ending December 31, 2014 and 2013, respectively. The table below depicts the major categories comprising those expenses:

 

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December 31,

 

December 31,

 

DESCRIPTION

 

2014

 

2013

 

Payroll and Related Taxes

 

$

544,409

 

$

300,812

 

Director Fees

 

71,250

 

60,000

 

Accounting and Audit Services

 

87,530

 

93,230

 

Survey, Engineering and Consulting Fees Associated with Site Approval

 

54,153

 

 

Feasibility Study and Appraisal Fees

 

27,500

 

 

Stock Transfer and Escrow Fees

 

14,212

 

7,572

 

Rents and Insurances

 

89,688

 

87,943

 

Fines and Penalties

 

59,348

 

47,505

 

All Other Expenses

 

26,754

 

28,086

 

 

 

 

 

 

 

Total General and Administrative Expenses

 

$

974,844

 

$

625,148

 

 

The increase in payroll and related taxes in 2014 in the amount of $243,597 as well as the increase in Director fees in the amount of $11,250 were the result of compensation paid to a new Director of the Company as well as appointing that Director as President of the Company’s wholly owned subsidiary, Casino World, Inc. effective March 31, 2014.

 

The Company also incurred one-time expenses in 2014 in the amount of $54,153 for various professional costs incurred in preparation of its application to the Mississippi Gaming Commission for gaming site approval on a portion of the Company’s Mississippi property. The Company was subsequently granted site approval by the Commission. In addition, the Company engaged professionals to perform a feasibility study regarding the expected performance of a casino at a cost of $20,000 and engaged an appraiser to value a portion of the Company’s property, as required by the amended closing terms for Tranche 3 of the sale of Convertible Debentures, at a cost of $7,500. None of the aforementioned costs were incurred in 2013.

 

Interest expense incurred totaled $306,182 in 2014 versus $272,606 in 2013, an increase of $33,576. The increase is attributable to the impact of the full year interest expense accrued for unpaid payroll from 2013 and the additional interest expense of $10,411 which accrued on the Tranche 1 debentures in 2014.

 

Three Months Ended March 31, 2015 and 2014

 

During the three months ended March 31, 2015 and 2014 the Company incurred net losses, exclusive of the recording of change in the fair value of derivatives, of $388,216 and $226,384, respectively. However, the Company recorded a decrease in the fair value of the derivative liability in the amount of $1,353,280 resulting in net income applicable to common stockholders of $939,664 for the three months ended March 31, 2015. Conversely, the Company recorded an increase in the fair value of the derivative liability in the amount of $2,053,176 resulting in a net loss applicable to common stockholders of $2,304,960 for the three months ended March 31, 2014. General and administrative expenses incurred totaled $256,588 and $141,048 for the three months ending March 31, 2015 and 2014, respectively. The table below depicts the major categories comprising those expenses:

 

 

 

March 31,

 

March 31,

 

DESCRIPTION

 

2015

 

2014

 

Payroll and Related Taxes

 

$

154,596

 

$

75,000

 

Director Fees

 

18,750

 

15,000

 

Professional Services

 

9,100

 

 

Annual Meeting Expenses

 

14,797

 

 

Stock Transfer and Escrow Fees

 

2,711

 

7,755

 

Rents and Insurances

 

22,947

 

23,164

 

Fines and Penalties

 

23,768

 

14,130

 

All Other Expenses

 

9,919

 

5,999

 

 

 

 

 

 

 

Total General and Administrative Expenses

 

$

256,588

 

$

141,048

 

 

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The increases in payroll and related taxes for the three months ended March 31, 2015 versus 2014 in the amount of $79,596, as well as the increase in Director fees in the amount of $3,750, were the result of compensation paid to a new Director of the Company as well as appointing that Director as President of the Company’s wholly-owned subsidiary, Casino World, Inc., effective March 31, 2014. In addition, the Company incurred professional fees in the amount of $9,100 in connection with determining the fair value of its stock. The Company also incurred annual meeting costs totaling $14,797 for an annual meeting originally scheduled for March 25, 2015 during the three months ended March 31, 2015. The Company did not incur any expense relating to the aforementioned items for the three months ended March 31, 2014.

 

Interest expense incurred totaled $82,980 and $71,346 for the three months ended March 31, 2015 and 2014, respectively, an increase of $11,634. The increase is attributable to the impact of accrued interest on the Tranche 1 debentures, which, under the terms of the debentures, began accruing interest on September 28, 2014.

 

The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi Property . The development of the Diamondhead Property is dependent on obtaining the necessary capital, unilaterally, or in conjunction with one or more partners, through equity and/or debt financing, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort.  In order to raise capital to continue to pay ongoing costs and expenses, the Company has borrowed funds and offered, through Private Placements, convertible instruments more fully described in Note 5 to the attached consolidated financial statements.

 

Private Placement Dated February 14, 2014

 

Pursuant to a Private Placement Memorandum dated February 14, 2014, the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures were offered in three tranches as follows:

 

Tranche 1: The Company offered $1,000,000 of First Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 (the “First Tranche Debentures”), subject to certain conditions. The First Tranche Debentures were originally convertible, at a Conversion Price of $.30 per share into an aggregate of 3,333,333 shares of Common Stock of the Company. The minimum principal amount of First Tranche Debentures that could be purchased was $50,000.

 

On March 31, 2014, subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. Thus, the First Closing occurred on that date. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000. The First Tranche Debentures bear interest at 4% per annum after 180 days and are secured by a lien on the Company’s Mississippi property.

 

The First Tranche Debentures were originally convertible into 3,333,333 shares of Common Stock when and if:

 

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1) the Second Closing Obligations described in the Memorandum had been met; and 2) the average closing price of the Common Stock on the principal trading market for the Company’s Common Stock was 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

The First Tranche Debentures would be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the First Tranche Debentures would be released.

 

The “Second Closing Obligations,” as originally described in the Memorandum, were as follows:

 

1.               The Company has filed its Annual Reports on Form 10-K for the years ended December 31, 2011 and 2012, and any other Annual Report on Form 10-K that would have been required to have been filed as of the date of the Second Closing;

 

2.               The Company has filed its Quarterly Reports on Form 10-Q for the periods ended September 30, 2011, March 31, 2012, June 30, 2012, September 30, 2012, March 31, 2013, June 30, 2013 and September 30, 2013, and any other Quarterly Report on Form 10-Q that would have been required to have been filed as of the date of the Second Closing;

 

3.               The Company and its subsidiaries have filed their federal and state tax returns for the years ended 2011 and 2012;

 

4.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and Federal law, at which the stockholders of the Company approved an increase in the number of authorized shares of Common Stock of the Company from fifty million to one hundred million, or the Company has otherwise obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

5.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the investors of this Offering in accordance with the terms of the Private Placement Memorandum;

 

6.               The Company has obtained an updated property survey and preliminary engineering estimates for the construction of a casino/hotel on the Property;

 

7.               The Company has obtained a site location engineering study identifying viable locations(s) for the placement of the proposed casino/hotel on the Property; and

 

8.               The Company has obtained preliminary architectural estimates for the construction of the casino/hotel on the Property.

 

However, as explained in Item 1. Business - “Securities and Exchange Commission Revocation of Securities Registration,” the Company’s securities registration was revoked effective September 4, 2014.  Therefore, on December 4, 2014, the Company extended offers to the investors to amend the Private Placement dated February 14, 2014. The Company offered to amend certain terms and conditions, including the conversion terms of the First Tranche Debentures, which were issued on March 31, 2014 (“Amendment I”). The Company separately offered to amend certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended (“Amendment II”).

 

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To re-register its stock, the Company is required to file a Form 10 with two years of audited financial statements with the Securities and Exchange Commission. Thus, the Company was no longer required to file the Form 10-K’s and Form 10-Q’s it contemplated filing under the terms of the original Private Placement. Therefore, the Company decided to offer to amend the terms for conversion of the First Tranche Debentures and for issuance and conversion of the Second and Third Tranche Debentures. On December 31, 2014, Investors representing $950,000 of First Tranche Debentures, convertible into 3,166,666 common shares, agreed that the First Tranche Debentures would be converted when and if:

 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

The remaining $50,000 investment from the First Tranche remains as a collateralized Debenture payable in six years without the conversion rights.

 

Tranche 2 :  The Company originally offered $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Second Tranche Debentures were convertible, at a Conversion Price of $.45 per share, into an aggregate of 2,222,222 shares of Common Stock, on certain terms and conditions. The minimum principal amount of Second Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares agreed to amend the Closing Obligations for issuance of the Second Tranche Debentures by eliminating the prior Closing Obligations and substituting a single requirement instead, namely, that “[t]he Company has filed an application for gaming site approval with the Mississippi Gaming Commission pursuant to Rule 1.4 of the Mississippi Gaming Regulations (2013 edition).”

 

The Company had filed this application in May 2014 and had obtained Gaming Site Approval on August 21, 2014. Therefore, a second closing occurred on December 31, 2014, when the amended terms were agreed to, at which time the Escrow Agent released $850,000 to the Company and the Company issued the Second Tranche Debentures. The remaining $150,000 of the original $1,000,000 of subscriptions escrowed for the Second Tranche Debentures was returned to three investors who did not agree to the amended terms for issuance and conversion of the Second Tranche Debentures.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares also agreed to amend the conversion terms of the Second Tranche Debentures. The Debentures would be converted when and if:

 

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1.               The Company has filed a Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

Tranche 3 :  The Company originally offered $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Third Tranche Debentures were originally convertible, at a Conversion Price of $0.55 per share, into an aggregate of 1,818,182 shares of Common Stock, or convertible, at a Conversion Price of $0.75 per share, into an aggregate of 1,333,333 shares of Common Stock, subject to certain terms and conditions. The Conversion Price will depend upon a combined appraised value of an independent third party appraisal firm of (1) the Company’s casino project (including the value of that land upon which it is expected to be located) and (2) the undeveloped remaining Property (collectively, the “Valuation”). If the Valuation is $175 million or more, then the Conversion Price for the Third Tranche Debentures would be $0.75 per share. If the Valuation is less than $175 million, then the Conversion Price for the Third Tranche Debentures would be $0.55 per share. The minimum principal amount of Third Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Third Tranche Debentures convertible into 1,545,455 common shares at $.55 per share or 1,133,333 common shares at $.75 per share, depending on the “Valuation,” agreed to amended Third Closing Obligations, to be completed by June 30, 2015, as follows:

 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market, interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of the Debenture; and

 

5                  The required appraisals have been completed and the “Valuation” calculated to determine the Conversion Price of the Tranche 3 Debentures.

 

At the Third Closing, assuming it occurs, the gross proceeds from the sale of the Third Tranche Debentures in the principal amount of $850,000, will be released from Escrow to the Company. The Third Tranche Debentures will bear interest at 4% per annum after 180 days and will be secured by a lien on the Company’s Mississippi property.

 

As amended, the Third Tranche Debentures will be converted into shares of Common Stock when and if the average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the applicable Third Tranche Debenture Conversion Price, based upon the Valuation, for the thirty consecutive business days immediately prior to such conversion date. The Third Tranche Debentures will be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the Third Tranche Debentures will be released upon conversion.

 

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The gross proceeds received for the Third Tranche Debentures are being held in Escrow and will not be released unless and until the Third Closing Obligations have been met by June 30, 2015 and a certification to that effect has been forwarded to the Escrow Agent and each of the Investors (the “Third Closing”). If the Third Closing Obligations are not met, there will be no Third Closing and the remaining $850,000 in Escrow relating to the Third Tranche Debentures will be returned to the Investors without deduction or interest. There can be no assurance that the Company will satisfy the Third Closing Obligations. The Company believes that its failure to meet the Third Closing Obligations would have a material adverse impact on the Company.

 

Maximum Offering

 

In the event all of the terms and conditions for issuance of all of the Debentures, as amended, have been met and in the event that all of the Debentures are eventually converted to Common Stock at the Conversion Prices in the Debentures, the Company will have issued a minimum of 6,188,888 shares of Common Stock upon conversion of all of the Debentures or a maximum of 6,601,010 shares of Common Stock upon conversion of all of the Debentures, depending on the Valuation required for the Third Tranche Debentures. Assuming a third closing, the aggregate proceeds to the Company from the sale of all of the Debentures would be $2,700,000 before deduction of commissions and expenses.

 

The following elements of the Debenture agreement remain unchanged:

 

Escrow Agent

 

The proceeds from the offering were placed in an escrow account at Continental Stock Transfer & Trust Company, which is serving as the Escrow Agent.

 

Maturity Date and Interest Rate of Debentures

 

The maturity date of the Debentures shall be six years from the issue date of each of the Debentures. The Debentures may not be prepaid without the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever. The maturity date may be extended upon the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever.

 

Any interest due on the Debentures shall be computed based on a 365 day year and, at the option of the Company, be payable in cash or in Common Stock on March 1 of each year. If paid in Common Stock, the number of shares of Common Stock payable shall be computed by dividing the interest due by the average closing price of the Common Stock for the thirty consecutive business days immediately prior to the payment date.

 

Collateral for Debentures

 

The payment obligations under the Debentures will be secured by a lien on the Company’s Mississippi property (the “Investors Lien”). The Investors Lien will be pari passu with a lien that has been placed on the Property in favor of Ms. Vitale, the President of the Company, Gregory Harrison, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). Ms. Vitale will serve as Lien Agent for the Executives Lien.

 

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Anti-Dilution Provision

 

The conversion rights on each Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:

 

1)                                      The issuance of any of the other Debentures in the Offering or the issuance of shares of Common Stock upon conversion of any of the Debentures in the Offering;

 

2)                                      The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company prior to the issue date of the First Tranche Debentures in the Offering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.

 

The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).

 

Piggyback Registration Rights

 

The Investors received “piggyback” registration rights with respect to the common stock underlying the Debentures, on all registrations of equity securities of the Company under the Securities Act of 1933 for sale to the public.

 

Commissions and Expenses of the Offering

 

No commission or other remuneration was paid to any officer or director of the Company in connection with any sale of the Debentures. The Company agreed to pay Henley & Company, LLC (“Henley”), a commission of 6% of the gross proceeds to the Company from the sale of the Debentures, to reimburse Henley for related expenses up to a total of $75,000, and to issue warrants to purchase up to 75,000 shares of the Company’s Common Stock as described below.

 

The Company’s agreement with Henley provides that commissions due will be paid when, as, and if proceeds of the Offering are released to the Company. Following the First Closing, Henley received commissions of $60,000 and reimbursement for legal fees and expenses of $55,000. Henley was also issued a three year warrant to purchase 25,000 shares of common stock at $0.30 per share. The Company recorded deferred financing costs in the amount of $16,210 in the first quarter of 2014 based on the valuation of this warrant using the Black-Scholes option pricing model. In addition, following the Second Closing, Henley received commissions of $51,000 and reimbursement for legal fees and expenses of $10,000. Henley was issued an additional three year warrant to purchase 25,000 shares of common stock at $ 0.45 per share. The Company recorded additional deferred financing costs in the amount of $8,890 in the fourth quarter of 2014 based on the valuation of this warrant using the Black-Scholes option pricing model. Henley is also entitled to receive, upon the Third Closing, assuming it occurs, a commission of 6% of the proceeds received by the Company at such Closing, a three year warrant to purchase 25,000 shares of Common Stock at $0.55 or $0.75 per share (depending on the Valuation) and reimbursement of its related expenses up to a maximum of $10,000. For periods after September 3, 2014 (the last trading date of the Company’s stock before deregistration), the Company obtained a valuation of its stock price from an independent valuation expert.

 

In determining the fair value of each warrant granted, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 139.49% at March 31, 2014 and 130.39% at December 31, 2014, and risk-free interest rates of 0.9% at March 31, 2014 and 1.1% at December 31, 2014.

 

The Investors in the offering of the Debentures were “accredited investors” as defined in Rule 501 of Regulation D promulgated under Securities Act of 1933, as amended (the “Securities Act”). The offering was made in reliance on the exemption from registration afforded under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act.

 

As of December 31, 2014, the Company had $843,083 of operating cash on hand and current accounts payable and accrued expenses totaling $3,304,479. As of March 31, 2015, the Company had $458,039 of operating cash on hand and current accounts payable and accrued expenses totaling $3,290,445. In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008 was payable in November 2012. Also, Convertible Notes issued via two Private Placements offered in 2010 totaling $962,500 in aggregate at December 31, 2014, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of the notes.

 

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As of March 31, 2015, the Company had received $1,850,000 of proceeds from the closing of the First and Second Tranche Convertible Debentures and had expended $1,392,028 of those proceeds for the payment of placement fees, costs associated with gaming site approval, and working capital, as summarized in the chart below.

 

 

 

 

 

Jan –Mar

 

 

 

Description of Expenditures

 

2014

 

2015

 

Total

 

 

 

 

 

 

 

 

 

Private Placement related fees, commissions and expenses

 

$

185,785

 

$

 

$

185,785

 

Payment to the President per the Private Placement applied to past due office rents

 

100,000

 

 

100,000

 

Accounting, audit and legal fees

 

75,000

 

128,070

 

203,070

 

Payroll paid to the Chairman and President and related taxes

 

319,409

 

142,652

 

462,061

 

Office rents paid to the President

 

40,806

 

18,136

 

58,942

 

Mississippi Property taxes and property related fees and expenses

 

58,258

 

64,291

 

122,549

 

State Franchise taxes, fines and penalties and registered agent fees

 

22,435

 

4,860

 

27,295

 

Mississippi property development consulting fees, engineering and survey costs and other fees and expenses

 

55,114

 

 

55,114

 

Feasibility Study

 

15,000

 

 

15,000

 

Appraisal Fee

 

12,500

 

 

12,500

 

Repayment of advance from a Director

 

10,000

 

 

10,000

 

Repayment of Advance from a Shareholder

 

25,000

 

 

25,000

 

Stock transfer and escrow fees

 

14,125

 

2,711

 

16,836

 

Director and Officer liability and other insurance premiums

 

13,339

 

9,536

 

22,875

 

Other operating expenses

 

60,100

 

14,901

 

75,001

 

 

 

 

 

 

 

 

 

Total

 

$

1,006,871

 

$

385,157

 

$

1,392,028

 

 

In order to complete the requirements for a third closing and obtain the remaining $850,000 currently remaining in escrow, the Company is required to meet the Third Closing Obligations enumerated above. The Company does not have an estimate of the cost required to complete these items at this time.

 

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Off-Balance Sheet Arrangements

 

Management Agreement

 

On June 19, 1993, two subsidiaries of the Company, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000.  The Company believes this Agreement is no longer in effect.  However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.

 

There are no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to our stockholders.

 

Critical Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentrated Credit Risk

 

The Company maintains its cash and cash equivalents with one institution which exceeded federally insured limits throughout the year. At December 31, 2014, the Company had cash on deposit of approximately $593,000 in excess of the federal insured limit of $250,000.

 

Fair Value Measurements

 

The Company follows the provisions of Accounting Standards Codification (“ASC) Topic 820 “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard does not require any new fair value measurements, but discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable input that reflects our own assumptions.

 

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Sensitivity Analysis to Changes in Level 3 Assumptions

 

Significant inputs include the expected dates when required conditions are met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses, and discount for lack of marketability while in the delisted mode, and reversed when the Company becomes publicly listed as projected by management. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.

 

Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.

 

The convertible debentures and derivative liability approximate fair value based on Level 3 inputs.

 

Impairment of Long-Lived Asset

 

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means.

 

Stock Based Compensation Expense

 

In determining the fair value of options and warrants granted or modified, the Company uses the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718. Valuations are determined using the weighted-average assumptions of dividend yield, expected volatility and risk-free interest rates.

 

Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.

 

ITEM 3.  PROPERTIES

 

Diamondhead, Mississippi Property

 

The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation, an approximate 404 acre tract of unimproved land in Diamondhead, Mississippi. The property is located at 7051 Interstate 10, Diamondhead, Mississippi 39525 (hereafter “the Diamondhead Property” or “the Property”). The Property is located entirely within the City of Diamondhead and Hancock County. The Property is zoned “C-2 - Interstate Commercial/Gaming/Resort.”

 

Purchase Price and Payment for the Property

 

On June 19, 1993, the Company, through its wholly-owned subsidiary, Mississippi Gaming Corporation (hereafter “MGC”), exercised an option to purchase the 404.5 acres of land in Diamondhead, Mississippi for $4,000,000.  MGC obtained a $2,000,000 loan from Casinos Austria Maritime Corporation (“CAMC”) to complete the purchase of the property. The loan was secured by a first mortgage on the property. The first mortgage loan was payable, interest only, at 8% per annum for fifteen months. The full principal balance on the first mortgage loan was due and payable on June 30, 1995. Prior to its due date, the first mortgage was paid in full from the proceeds of a loan obtained by the Company in May of 1995 from First Union National Bank of Florida. The loan due to First Union National Bank of Florida was subsequently paid in full.

 

On June 19, 1993, MGC also entered into an Option Agreement to purchase approximately 80 acres of land included within the 404 acre site for a purchase price of ten dollars ($10.00). The option was originally purchased so as to avoid certain limitations that attached to the underlying parcels.  It was in the interest of the Company and its Diamondhead project that certain litigation instituted by the seller of the property be completed before MGC exercised this option. The litigation was finalized in 2002.  In December 2002, MGC exercised its option. The property was transferred to MGC by Warranty Deed on December 18, 2002.  The exercise of this option gave MGC full title to the entire 404 acre tract.

 

Liens on Diamondhead Property

 

In 2014, liens were placed on the Property to secure certain obligations of the Company. These consist of an Executives Lien and an Investors’ Lien which are in pari passu .

 

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There is an “Executives Lien” on the Property for a maximum of $2 million in favor of certain executives to whom monies are owed for accrued, but unpaid salaries, expenses and Directors fees. The President of the Company is the primary beneficiary of this lien.

 

In addition, there is an Investors Lien on the Property securing the investment of purchasers of securities in a Private Placement dated February 14, 2014, as amended.  There is a lien in the aggregate amount of $1 million in favor of the Holders of the original and/or Amended and Restated First Tranche Collateralized Convertible Senior Debentures issued for an aggregate of $1 million and a lien in the aggregate amount of $850,000 in favor of the Holders of the Second Tranche Collateralized Convertible Senior Debentures issued for an aggregate of $850,000.

 

In addition, there will be a lien on the Property in favor of the Holders of the Third Tranche Collateralized Convertible Senior Debentures in the aggregate amount of $850,000, if and when the Third Tranche Collateralized Convertible Senior Debentures are issued. Thus, there could be a maximum lien in favor of the Holders of the foregoing Debentures in the maximum, aggregate amount of $2.7 million.

 

The Amended and Restated First Tranche Collateralized Convertible Senior Debentures, the Second Tranche Collateralized Convertible Senior Debentures and the Third Tranche Collateralized Convertible Senior Debentures are convertible, under certain circumstances, to common stock of the Company. If and when these Debentures have been converted to common stock of the Company, the liens securing these Debentures will be removed. There can be no assurance that the foregoing Debentures will be able to be converted to common stock of the Company and that these liens will be removed.

 

Thus, there are liens in the maximum aggregate amount of $3.85 million on the Property. If and when the Third Tranche Collateralized Convertible Senior Debentures are issued, there would be liens in the maximum aggregate amount of $4.7 million on the Property.

 

Residential Lot

 

In January 2010, the Company purchased a small, residential lot located on a canal southwest of the Property near the back entrance of the Property. The Company paid $65,000 for the lot. The purchase price was paid with 108,000 shares of common stock of the Company. The property, which comprises less than a quarter of an acre, was acquired to permit the Company to control the appearance and approach to the back entrance of its commercial Property. The residential lot is located at 3518 Diamondhead Drive South, Diamondhead, Mississippi 39525.

 

Office Location

 

The Company leases a furnished and equipped townhouse office from its President at 1013 Princess Street, in Alexandria, Virginia 22314, pursuant to a Landlord/Tenant Month to Month Lease. The terms of the lease, as adjusted for square footage and certain other applicable differences, were based on the terms of the last lease signed by the Company with an unrelated third party for unfurnished office space leased in Largo, Florida.  The Company pays a base rent in the amount of $4,534 per month for approximately 2473 square feet of commercial space, in addition to any and all expenses relating to the property, including property taxes, property insurance, telephone, electric, water and cable. The Company’s executive office and all of its active files are located in this office.

 

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of May 10, 2015, to the Company’s knowledge, based on filings with the Securities & Exchange Commission by certain beneficial owners and/or information received by the Company, the beneficial ownership of the outstanding Voting Stock held by (i) each person or entity beneficially owning more than 5% of the shares of any class of Voting Stock, (ii) each director, nominee, and certain executive officers, individually, and (iii) all directors and executive officers as a group. The Common Stock and the Voting Preferred Stock vote as a single class and each share thereof is entitled to one vote per share.

 

BENEFICIAL OWNER

 

AMOUNT
OF STOCK

 

CLASS OF
STOCK

 

PERCENT
OF
CLASS

 

PERCENT
OF VOTING
(1)

 

 

 

 

 

 

 

 

 

 

 

Europa Cruises Corporation
Employee Stock Ownership
Plan Trust
Deborah A. Vitale, Trustee (2) 
1013 Princess Street
Alexandria, Virginia 22314

 

2,386,370

 

Common

 

5.14

%

4.94

%

 

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BENEFICIAL OWNER

 

AMOUNT
OF STOCK

 

CLASS OF
STOCK

 

PERCENT
OF
CLASS

 

PERCENT
OF VOTING
(1)

 

 

 

 

 

 

 

 

 

 

 

Edson Arneault (3)
Chairman of the Board
President of Casino

 

 

 

 

 

 

 

 

World, Inc.
1 Riverside Drive
New Cumberland,
West Virginia 26047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deborah A. Vitale (2)(4) 
Director, President,
Secretary and Treasurer
Chairman and Treasurer
of Casino World, Inc.
Chairman, President,
Treasurer of Mississippi
Gaming Corporation
1013 Princess Street
Alexandria, Virginia 22314

 

6,399,128

 

Common

 

13.78

%

13.26

%

 

 

 

 

 

 

 

 

 

 

Gregory Harrison (5) 
Director and Vice President
16209 Kimberly Grove
Gaithersburg, Maryland 20878

 

1,417,279

 

Common

 

3.05

%

2.94

%

 

 

 

 

 

 

 

 

 

 

Benjamin J. Harrell (6) 
Director
162 Hesper Avenue
Metairie, Louisiana 70005

 

475,000

 

Common

 

.87

%

.84

%

 

 

 

 

 

 

 

 

 

 

Martin Blount
Director
c/o 1013 Princess Street
Alexandria, Virginia 22314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert S. Crow III (7)

Director

5910 Coral Sea Avenue

Rockville, Maryland 20851

 

1,154,869

 

Common

 

2.49

%

2.39

%

 

 

 

 

 

 

 

 

 

 

John St. Peter (8)

Director

22121 Creekview Drive

Gaithersburg, Maryland 20882

 

403,001

 

Common

 

.87

%

.83

%

 

 

 

 

 

 

 

 

 

 

Stephanie M. Stevens (9)

Director

4309 Chastain Walk NE

Atlanta, Georgia 30342

 

405,274

 

Common

 

.87

%

.84

%

 

 

 

 

 

 

 

 

 

 

Serco International Financial Advisory and

 

901,831

 

Common S-NR

 

1.94

%

5.65

%

Management Services Limited (10)

 

900,000

 

Preferred S-

 

100.00

%

 

 

P.O. Box 52 A-1072
Vienna, Austria

 

926,000

 

Preferred

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

Austroinvest International Limited (10)

 

901,831

 

Common S-NR

 

1.94

%

5.65

%

30, DeCastro Street,

 

900,000

 

Preferred S-

 

100.00

%

 

 

Road Town
Tortola, British Virgin Islands

 

926,000

 

Preferred

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

Serco International Limited (10)

 

901,831

 

Common S-NR

 

1.94

%

5.65

%

4, George Street

 

900,000

 

Preferred S-

 

100.00

%

 

 

Mareva House
P.O. Box N-3937
Nassau, Bahamas

 

926,000

 

Preferred

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

Ernst G. Walter (10)

 

901,831

 

Common S-NR

 

1.94

%

5.65

%

P.O. Box 15

 

900,000

 

Preferred S-

 

100.00

%

 

 

1072 Vienna, Austria

 

926,000

 

Preferred

 

100.00

%

 

 

 

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Table of Contents

 

BENEFICIAL OWNER

 

AMOUNT
OF STOCK

 

CLASS OF
STOCK

 

PERCENT
OF
CLASS

 

PERCENT
OF VOTING
(1)

 

 

 

 

 

 

 

 

 

 

 

College Health and Investment Ltd. (11)
College Health and Investment LP (11)
Samuel I. Burstyn, General Partner

 

3,215,982

 

Common

 

6.92

%

6.66

%

701 Brickell Avenue, 24th Fl
Miami, FL 33131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Directors & Executive
Officers (8 Persons)

 

10,254,551

 

Common

 

22.08

%

21.24

%

 


(1)                               Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages.

 

(2)                                   The Europa Cruises Corporation Employee Stock Ownership Plan (“ESOP”) was established on August 18, 1994. The Trustee of the ESOP is Deborah A. Vitale. As of December 31, 2014, a total of 2,295,450 ESOP shares had been released for allocation to participants in the ESOP and an additional 318,180 shares had been forfeited by the Trust. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 2,386,370 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.

 

(3)                                   Pursuant to a Private Placement dated February 14, 2014, on March 31, 2014, Mr. Arneault purchased a Collateralized Convertible Senior Debenture convertible into 166,667 shares of Common Stock. On December 31, 2014, pursuant to the same Private Placement, as amended, he purchased a second Collateralized Convertible Senior Debenture convertible into 111,111 shares of Common Stock.  The conditions required for conversion of the Debentures into Common Stock of the Company have not yet been met.  Assuming the conditions required for conversion are met in the future, Mr. Arneault’s Debentures would be converted into a total of 277,778 shares of Common Stock without any action on the part of Mr. Arneault.

 

(4)                                   Includes 2,386,370 unallocated common shares of the ESOP Trust; 767,000 shares of Common Stock owned directly by Ms. Vitale; options to purchase 2,825,000 shares of Common Stock; and 420,758 shares of Common Stock, which represent shares of Common Stock held in Ms. Vitale’s fully vested ESOP participant account.

 

(5)                               Includes 1,217,279 shares of Common Stock owned directly by Mr. Harrison; options to purchase 150,000 shares of Common Stock; and a convertible Promissory Note which is convertible or exercisable into a total of 50,000 shares of common stock. Pursuant to a Private Placement dated February 14, 2014, on March 31, 2014, Mr. Harrison purchased a Collateralized Convertible Senior Debenture convertible into 166,667 shares of Common Stock. The conditions required for conversion of this Debenture into Common Stock of the Company have not yet been met. Assuming the conditions required for conversion are met in the future, Mr. Harrison’s Debenture would be converted into a total of 166,667 shares of Common Stock without any action on the part of Mr. Harrison, at which time his holdings, assuming no other changes occurred, would total 1,583,946.

 

(6)                                   Includes 400,000 shares of Common Stock owned directly by Mr. Harrell and an option to purchase 75,000 shares of Common Stock.

 

(7)                                   Includes 949,869 shares of Common Stock owned directly by Mr. Crow, options to purchase 105,000 shares of Common Stock, and a convertible Promissory Note which is convertible or exercisable into a total of 100,000 shares of Common Stock.

 

(8)                                   Includes 400,501 shares of Common Stock owned directly by Mr. St. Peter and 2,500 shares of Common Stock owned by Marilyn St. Peter, his spouse.

 

(9)                                   Includes 405,274 shares of Common Stock owned directly by Ms. Stevens.

 

(10)          Serco International Financial Advisory and Management Services Ltd., Austroinvest International Limited, and Serco International Limited (f/k/a Serco International Financial Advisory and Management Services, Ltd.), are affiliated entities. The Company is informed that Dr. Ernst Walter is the sole Director and President of each company. The total beneficial ownership of securities of the Company held by the foregoing includes: 901,831 shares of Common Stock owned by Serco International Financial Advisory and Management Services, Ltd.; 926,000 shares of Series S Preferred Stock owned by

 

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Table of Contents

 

Austroinvest International Limited; and 900,000 shares of Series S-NR Preferred Stock owned by Serco International Limited.

 

(11)          Includes 1,659,868 shares of Common Stock owned by College Health & Investment LP, 506,164 shares of Common Stock owned by College Health & Investment Ltd, 200,000 shares of Common Stock owned by Alana Burstyn, 199,950 shares of Common Stock owned by Sean Burstyn, c/o Burstyn.  College Health & Investment Ltd. holds a Promissory Note, issued March 25, 2010, convertible into 300,000 shares of Common Stock and Warrants to purchase 350,000 shares of Common Stock at $0.25 per share. The foregoing persons and entities appear to share a common address, 701 Brickell Avenue, Miami, FL 33131. Samuel I. Burstyn is the General Partner of College Health & Investment LP, which the General Partner maintains, is also known as College Health & Investment, Ltd. Does not include 200,000 shares of Common Stock held by Shari Jakobowitz, Custodian FBO Ava Burstyn, under the Florida Uniform Transfer Minor Act.

 

ITEM 5.    DIRECTORS AND EXECUTIVE OFFICERS

 

Below is information regarding the Company’s current officers and directors. Officers are appointed annually by the Board of Directors to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer dies, resigns, is replaced, or is removed by the Board of Directors. Directors are elected to serve until the next annual meeting of shareholders and until their successors are elected and qualified. A majority of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at a meeting, in person or telephonically, to constitute a quorum. Any action required or permitted to be taken by the Board of Directors individually or collectively, may be taken without a meeting if all members of the Board of Directors consent, in writing, to the action.

 

Officers and

 

 

 

 

Directors

 

Age

 

Position(s )

Edson R. “Ted” Arneault

 

67

 

Chairman of the Board of Diamondhead Casino Corporation, President,
Chief Executive Officer
Casino World, Inc.

Martin Blount

 

52

 

Director

Benjamin J. Harrell

 

61

 

Director

Gregory A. Harrison

 

70

 

Director, Vice-President

Deborah A. Vitale

 

64

 

Director, President, Chief Executive Officer,
Chief Financial Officer, Secretary and Treasurer

Robert S. Crow III

 

59

 

Director

John St. Peter

 

72

 

Director

Stephanie M. Stevens

 

39

 

Director

 

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Table of Contents

 

Background of Current Executive Officer and Directors

 

Edson R. “Ted” Arneault was elected a Director of the Company and Chairman of the Board of Directors of the Company on March 31, 2014. On the same date, the Board of Directors of Casino World, Inc., a wholly-owned subsidiary of the Company, which is expected to develop and operate the Diamondhead casino, named Mr. Arneault to the Board of Directors of Casino World, Inc. and elected Mr. Arneault to the position of President and CEO of Casino World, Inc.  From 1992 through 2008, Mr. Arneault served as Chairman, President and Chief Executive Officer of MTR Gaming Group (NASDAQ: MNTG), a publicly-traded company. Mr. Arneault has significant experience in the gaming industry and, though not currently licensed, has previously held gaming licenses in Pennsylvania, West Virginia, Ohio, and Nevada. Since 2009, Mr. Arneault has served as President of New ERA Consulting, which provides marketing, government relations, capital formation, financing, and human resources consulting services to various companies. Since 2009, Mr. Arneault has also served as a principle and co-CEO of Braneault Enterprises, LLC, which advises political, commercial and entrepreneurial enterprises in all facets of marketing management. Since 2001, Mr. Arneault has served as a co-host of “Black and Gold Sunday,” a sports program on KDKA radio. Since 1981, Mr. Arneault has served as President of Century Energy Management Co., Inc. and its predecessors, an oil and gas operating company founded in 1980, which has drilled and operated numerous gas wells. Mr. Arneault is also a member of the American Institute of Certified Public Accountants and was previously licensed as a CPA in Michigan, Ohio, and Louisiana. Mr. Arneault has worked as a tax partner with Seidman and Seidman (BDO Seidman) and as a tax consultant for Arthur Andersen & Company. Mr. Arneault was a Distinguished Military Graduate and served as a Captain in the United States Air Force from 1969 to 1972 and on active duty in the Middle East, Africa and Asia. The Board believes Mr. Arneault is qualified to serve as a Director due to his specific experience as Chairman of the Board, President and Chief Executive Officer of a publicly-traded company, his knowledge of the industry, and his specific familiarity with the Diamondhead Project.

 

Martin C. Blount has served as a Director of the Company since June 9, 2010. Since approximately 1986, Mr. Blount has been a stock broker and a registered investment banking representative. Since approximately April of 2013, Mr. Blount has also served as a licensed structured settlement agent for Galaher Settlements & Insurance Services, Inc. Mr. Blount also represents professional athletes and is a certified Major League Baseball agent. Mr. Blount is a graduate of West Virginia Wesleyan College and holds a B.A. degree in Sociology. The Board believes Mr. Blount is qualified to serve as a Director due to his prior experience as a Director of the Company and his experience in the securities and financial industry.

 

Benjamin J. Harrell has served as a Director of the Company since July 18, 2002. Mr. Harrell was the founder and served as President and CEO of Pete Fountain Productions, Inc. from 1979 until it was acquired in 1999 by Production Group International, Inc. (“PGI”), a global event communications company, which was subsequently acquired by TBA Global Events, LLC in 2005. Mr. Harrell managed the acquiring company’s business in the New Orleans area. He currently serves as Head of U.S. Operations of Kuoni Destination Management, Inc., a global event and travel company which specializes in event solutions, corporate meetings, incentive programs and sporting events. He also served as Vice President of Pete Fountain Entertainment, LLC, which until March 2003 operated one of the largest jazz clubs in New Orleans. Since 1975, Mr. Harrell has served as personal manager for the internationally noted jazz artist, Pete Fountain. Mr. Harrell handled all aspects of Mr. Fountain’s career, including promotion, concerts, personal appearances and commercial endorsements. From 1985 through 2003, Mr. Harrell served as President of Cresent Sound & Light, Inc, a professional sound, lighting, video and staging company for the convention and entertainment industry. Mr. Harrell served as a Director of the New Orleans Metropolitan Convention and Visitors Bureau from 1997 through 1999. On January 15, 2004, Mr. Harrell was elected to the Board of Directors of Mississippi Gaming Corporation, a wholly owned subsidiary of the Company. The Board believes Mr. Harrell is qualified to serve as a Director due to his prior experience as a Director of the Company and his extensive knowledge of, familiarity with, and active participation in all aspects of the Diamondhead Project, including site approval.

 

Gregory A. Harrison, Ph.D., P.E . has served as a Director of the Company since February 20, 1998. Dr. Harrison was appointed Vice-President of the Company on July 18, 2002. Mr. Harrison served as Secretary of the Company from July 25, 2002 until January 2012. Dr. Harrison is a consulting forensic engineer with forty-nine years of diversified fire protection/safety/project engineering experience with NASA, DOD, NBS, NRC, ARAMCO, and Tenera, L.P. Dr. Harrison is licensed in six states and, effective August 27, 2004, became a Professional Engineer licensed to practice in the state of Mississippi. Dr. Harrison is an expert with respect to the concept of Highly Protective Risk (HPR) and HPR insurance principles and is intimately familiar with Factory Mutual Global Insurance construction requirements. Dr. Harrison has qualified as an expert witness in various courts in fifteen states. Dr. Harrison received a B.S. degree in Fire Protection Engineering from the University of Maryland, an M.S. degree in Civil Engineering from the University of Maryland, an M.S. degree in Engineering Administration from George Washington University and a Ph.D. in Safety Engineering from Kennedy-Western University. Dr. Harrison has held a top secret security clearance with the U.S. Department of

 

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Table of Contents

 

Energy, the U.S. Nuclear Regulatory Commission, and the Department of Defense. Dr. Harrison has served on the Board of Directors of Data Measurement Corporation and was an Advisory Board member of United Bank and First Patriot National Bank.  The Board believes Mr. Harrison is qualified to serve as a Director due to his prior experience as a director on other Boards, due to his prior experience as a Director and Vice-President of the Company when it was an operating casino entity, and due to his background and experience in construction management, structural engineering, environmental engineering, fire protection and life safety.

 

Deborah A. Vitale has served as President, Chief Executive Officer and Treasurer of the Company since February 1998, as Chief Financial Officer of the Company since September 2011, and as Chairman of the Board of the Company from March 1995 through March 31, 2014. Ms. Vitale served as Secretary of the Company from November 1994 until July 2002, and as Interim Secretary from January 11, 2012 until appointed Secretary again on January 29, 2015. As President and CEO, Ms. Vitale was responsible for all phases of the day-to-day operations of four casino ships sailing out of three Florida ports into international waters and for the management and supervision of up to approximately 400 casino, marine and land-based employees. She has been a Director of the Company since December 1992. On February 14, 1997, Ms. Vitale was appointed Chairman of the Board of Directors of Casino World, Inc. and Chairman of the Board of Directors of Mississippi Gaming Corporation, each a subsidiary of the Company.  On September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and Mississippi Gaming Corporation.  On March 31, 2014, Ms. Vitale stepped down as Chairman of the Board of the Company and as President and CEO of Casino World, Inc. Ms. Vitale is a trial attorney by background with over thirty years of experience handling complex civil litigation. Ms. Vitale is licensed to practice law in Washington, D.C., Maryland, and Virginia. The Board believes Ms. Vitale is qualified to serve as a Director due to her experience as President and Chief Executive Officer of the Company, her management experience in operating ship-based casinos, her knowledge of and participation in all aspects of the Diamondhead Project, and her extensive legal background and experience.

 

Robert S. Crow, III has served as a Director of the Company since April 20, 2015.  Mr. Crow is a licensed real estate agent with extensive experience in contract negotiations involving real estate and mortgage banking, having closed on approximately five hundred homes. Mr. Crow also has experience in land development, home renovations, and real estate marketing. Since approximately 1976, Mr. Crow’s sales have placed him in the top 1% of real estate agents in the United States.  Since 1991, Mr. Crow has worked as an independent contractor for RE/MAX Realty Group located in Gaithersburg, Maryland.  Mr. Crow has been involved in various City projects and several zoning related matters and has served on the Executive Committee of his neighborhood Citizen’s Association. Mr. Crow has been a shareholder of the Company for over fifteen years, is intimately familiar with the Company, its history, its former operations, and the history of the Diamondhead Property, which he has inspected. The Board believes Mr. Crow is qualified to serve as a Director due to his extensive experience in contract negotiations and real estate.

 

John St. Peter has served as a Director of the Company since April 21, 2015.  Mr. St. Peter graduated with a BS degree in business from American University and received an MBA from Hood College. Mr. St. Peter has been retired for approximately twenty years. Prior to his retirement, Mr. St. Peter served as Senior Vice President for Planning at AVEMCO, an Insurance Holding Company, listed on the New York Stock Exchange, with an emphasis on general aviation. While with AVEMCO, Mr. St. Peter held various positions and managed a federally licensed Small Business Investment Company. Mr. St. Peter has had experience with various sized mergers and acquisitions and corporate turnarounds and divestitures, all under the umbrella of AVEMCO.  Mr. St. Peter has served on a number of Not for Profit and Charity Boards.  Mr. St. Peter has visited the Company’s Diamondhead Property on multiple occasions and is familiar with the Diamondhead, Mississippi, New Orleans and surrounding geographic area. The Board believes Mr. St. Peter is qualified to serve as a Director due to his corporate and business background and experience with a publicly-traded company.

 

Stephanie M. Stevens has served as a Director of the Company since April 24, 2015.  Since approximately 2003, Ms. Stevens has served as a member of the Board of Directors of the IBM Southeast Employees Federal Credit Union Board, a highly regulated co-

 

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Table of Contents

 

operative credit union, responsible for over $850 million in assets. Ms. Stevens has served as Secretary of the Board of Directors of the Credit Union since 2007. From 2004 to 2007, Ms. Stevens served on the Credit Union’s Supervisory Committee, which dealt with internal accounting oversight and the Credit Union’s outside auditors. Ms. Stevens has fifteen years of professional work experience in translating complex data analytics and technology into tangible user-friendly products and solutions. In 2011, Ms. Stevens joined Telogis, Inc., an innovation leader in connected location intelligence located in Aliso Viejo, California and expanded their commercial insurance telematics program.  From 2009 until 2011, Ms. Stevens worked with LexisNexis to develop and implement the company’s insurance telematics strategy. Ms. Stevens previously worked as a Senior Account Executive for IVOX, as a Senior National Sales Manager for NAVTEQ, as a National Sales Manager for Experient, as a Pharmaceutical Products Sales Representative for Sanofi-Aventis, and as a Consultant for Computer Sciences Corporation.  Ms. Stevens is a 1997 graduate of Georgia State University and holds a Bachelor of Interdisciplinary Studies Degree in Intrapreneurial Leadership and Corporate Communications. The Board believes Ms. Stevens is qualified to serve as a Director due to her prior Board experience, her prior committee experience, and her work background and experience.

 

ITEM 6.  EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The Company compensated two executives in 2014, the Chairman of the Board of Directors, who also serves as President and Chief Executive Officer of Casino World, Inc., a wholly-owned subsidiary of the Registrant, and the President and CEO, who also serves as a Director, and Chief Financial Officer, Treasurer and Secretary of the Registrant and holds various positions in the Registrant’s subsidiaries. The Board of Directors monitors and approves compensation paid to executives of the Company.

 

Executive Compensation

 

Mr. Arneault was appointed Chairman of the Board on March 31, 2014.  Based on his past industry-specific experience and, due to the Company’s limited finances, the Board of Directors determined his annual salary to be $300,000.

 

The Board of Directors determined Ms. Vitale’s base salary to be $300,000 per annum. Ms. Vitale’s base salary reflects her contribution to the Company in a myriad of corporate roles and responsibilities and more fairly compensates her based upon industry peer review. The Board recognized that Ms. Vitale manages the Company’s business without the benefit of any administrative staff normally associated with the management of a publicly-traded company at significant savings to the Company. Since mid-November of 2009, the Company has, from time to time, been unable to pay Ms. Vitale the salary due her because of a lack of funds. At December 31, 2014, Ms. Vitale was entitled to cash compensation of $1,091,996 for services rendered from 2010 through 2014, which has accrued and is unpaid at December 31, 2014. In addition, on October 12, 2012, the Board of Directors approved a motion to pay interest on the unpaid compensation due Ms. Vitale retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Accrued interest through December 31, 2014 amounted to $227,687.

 

No other additional cash compensation was paid to Mr. Arneault or Ms. Vitale during the two year period ended December 31, 2014.

 

The following table provides information concerning the compensation of the Chairman of the Board of Directors and the President and Chief Executive Officer. No compensation was paid to any other person during 2014 and 2013.

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Equity

 

Nonqualified

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

 

Incentive

 

Deferred

 

All

 

 

 

Name and

 

 

 

(1)

 

 

 

Stock

 

Option

 

Plan

 

Compensation

 

Other

 

 

 

Occupation

 

Year

 

Salary

 

Bonus

 

Awards

 

Awards

 

Compensation

 

Earnings

 

Compensation

 

Total

 

Edson Arneault

 

2014

 

$

225,000

 

None

 

None

 

None

 

None

 

None

 

$

11,250

 

$

236,250

 

Chairman

 

2013

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deborah A. Vitale

 

2014

 

$

300,000

 

None

 

None

 

None

 

None

 

None

 

$

106,739

 

$

406,739

 

President

 

2013

 

$

300,000

 

None

 

None

 

$

343,348

 

None

 

None

 

$

85,428

 

$

728,776

 

 

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(1)                              Mr. Arneault became employed by the Company effective March 31, 2014. In 2014, Mr. Arneault was paid $150,000 of his salary with the remaining $75,000 to be paid when Company finances permit. In 2014, Ms. Vitale was paid $150,000 of her salary for 2014 with the remaining $150,000 to be paid when Company finances permit. In 2013, Ms. Vitale received no cash compensation and payment of all of her 2013 compensation was accrued.

 

(2)                               In the first quarter of 2013, the Board of Directors awarded an option to purchase 2,000,000 shares of common stock at a price of $0.19 per share to Deborah A. Vitale, President, Chief Executive Officer, Chief Financial Officer, Treasurer Interim Secretary and then-Chairman of the Board of Directors. In conjunction with the award, Ms. Vitale agreed to forfeit a previously-awarded option to purchase 450,000 shares of common stock at $1.25 per share, which would have expired on October 27, 2015. At the same time, the Board of Directors voted to extend the expiration date of a previously-awarded option to Ms. Vitale to purchase 750,000 shares of common stock at $ 0.30 per share from March 11, 2013 to October 27, 2015 and voted to extend the expiration date of a previously awarded option to Ms. Vitale to purchase 75,000 shares of common stock at $ 0.75 per share from July 23, 2013 to October 27, 2015.

 

Reference is hereby made to Note 3, “Summary of Significant Accounting Policies — Stock Based Compensation” in the attached consolidated financial statements, for a determination of the variables used in computing the value of option awards.

 

(3)                       In 2014, Mr. Arneault earned a pro-rated portion of the annual Director fee of $15,000. None of the earned Director fee was paid to Mr. Arneault in 2014.

 

In 2014, Ms. Vitale earned an annual Director fee of $15,000. In addition, Ms. Vitale earned interest on the portion of her unpaid compensation for the years 2010 through 2014. In 2014, interest in the amount of $91,739 was earned. In 2013, Ms. Vitale earned an annual Director fee of $15,000. In addition, Ms. Vitale earned interest on the portion of her unpaid compensation for the years 2010 through 2014 in the amount of $70,428. None of the above amounts were paid to Ms. Vitale in 2014 or 2013.

 

The following tables provide a summary of the outstanding equity awards of the Chairman of the Board and President at December 31, 2014.

 

SUMMARY OF OUTSANDING EQUITY AWARDS AT FISCAL YEAR END

 

Option Awards

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Incentive

 

 

 

 

 

 

 

 

 

 

 

Plan

 

 

 

 

 

 

 

 

 

 

 

Awards

 

 

 

 

 

 

 

Number of

 

Number of

 

Number of

 

 

 

 

 

 

 

Securities

 

Securities

 

Securities

 

 

 

 

 

 

 

Underlying

 

Underlying

 

Underlying

 

 

 

 

 

 

 

Unexercised

 

Unexercised

 

Unexpired

 

Option

 

Option

 

 

 

Options

 

Options

 

Unexercised

 

Exercise

 

Expiration

 

Name

 

Exercisable

 

Unexercisable

 

Options

 

Price

 

Date

 

Edson Arneault

 

None

 

None

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deborah A. Vitale

 

2, 000,000

 

None

 

None

 

$

0.19

 

3/13/18

 

 

 

750,000

 

None

 

None

 

$

0.30

 

10/27/15

 

 

 

75,000

 

None

 

None

 

$

0.75

 

10/27/15

 

 

Stock Awards

 

 

 

 

 

 

 

Equity

 

Incentive

 

 

 

 

 

 

 

Incentive

 

Plan Awards

 

 

 

 

 

 

 

Plan Awards

 

Market or

 

 

 

 

 

 

 

Number of

 

Payout Value

 

 

 

Number of

 

Market Value of

 

Unearned

 

of Unearned

 

 

 

Shares or Units

 

Shares or Units

 

Shares, Units or

 

Shares, Units or

 

 

 

Of Stock That

 

Of Stock That

 

Other Rights That

 

Other Rights That

 

 

 

Have Not

 

Have Not

 

Have Not

 

Have Not

 

Name

 

Vested

 

Vested

 

Vested

 

Vested

 

Edson Arneault

 

None

 

None

 

None

 

None

 

Deborah A. Vitale

 

None

 

None

 

None

 

None

 

 

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OPTION EXERCISES AND STOCK VESTED IN 2014

 

 

 

Option Awards

 

Stock Awards

 

 

 

Number of

 

 

 

Number of

 

 

 

 

 

Shares

 

Value

 

Shares

 

Value

 

 

 

Acquired

 

Realized

 

Acquired

 

Realized

 

 

 

On

 

On

 

On

 

On

 

Name

 

Exercise

 

Exercise

 

Vesting

 

Vesting

 

 

 

 

 

 

 

 

 

 

 

Edson Arneault

 

None

 

None

 

None

 

None

 

Deborah A. Vitale

 

None

 

None

 

None

 

None

 

 

The Company sponsors an employee stock ownership plan which is a tax deferred defined contribution pension plan formed in 1994. Ms. Vitale has been a plan participant since 1998. No contributions were made to Ms. Vitale’s participant account for the years ending December 31, 2014 or 2013.

 

At December 31, 2014, Ms. Vitale was 100% vested in 420,758 share of common stock which had been contributed to the plan on her behalf in past years .

 

Directors’ Compensation

 

Effective January 1, 2013, the directors of the Company will be compensated at a rate of $15,000 per annum. Each Director will be eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors will be prorated based upon months served in their initial year as a Director. Directors are reimbursed for certain approved expenses incurred in connection with Company business and for certain approved expenses incurred in connection with attendance at non-telephonic Board, committee, or other meetings.  Directors are from time to time, awarded non-qualified options to purchase common stock of the Company.

 

The table below summarizes Director Compensation for the year ended December 31, 2014.

 

DIRECTOR COMPENSATION

 

 

 

Earned or

 

 

 

 

 

Non- Equity

 

Deferred

 

(1)

 

 

 

 

 

Paid in

 

Stock

 

Option

 

Incentive Plan

 

Compensation

 

All Other

 

 

 

Name

 

Cash

 

Awards

 

Awards

 

Compensation

 

Earnings

 

Compensation

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gregory A. Harrison

 

$

15,000

 

None

 

None

 

None

 

None

 

$

10,903

 

$

25,903

 

Benjamin Harrell

 

$

15,000

 

None

 

None

 

None

 

None

 

None

 

$

15,000

 

Martin Blount

 

$

15,000

 

None

 

None

 

None

 

None

 

None

 

$

15,000

 

 


(1)                                  Mr. Harrison earned $10,903 of interest accruing to his benefit for unpaid compensation for the years 2010 and 2011. None of the above interest was paid to Mr. Harrison in 2014.

 

Other Compensation Arrangements

 

The Company has an agreement with Director Blount pursuant to which he will be paid a bonus in the event of any recovery received from litigation against BP relating to the oil spill. This Director will receive ten percent of any amounts received by the Company, after deduction of attorney fees and expenses relating to the litigation.

 

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

On August 18, 1994, the Company (f/k/a Europa Cruises Corporation), established the Europa Cruises Corporation Employee Stock Ownership Plan (the “ESOP”). The ESOP, which is a qualified retirement plan under the provisions of Section 401(a) of the Internal Revenue Code and an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code, was established primarily to invest in stock of the Company. All employees as of December 31, 1994, and subsequent new employees having completed 1,000 hours of service, are eligible to participate in the ESOP. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. Deborah A. Vitale is the sole Trustee of the Trust.

 

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As of December 31, 2014, a total of 2,295,450 shares of Common Stock had been released for allocation to participants in the ESOP.  An additional 318,180 shares had been forfeited by the Trust. The Company made no contributions to the ESOP Plan for the years ended December 31, 2011, 2012, 2013 and 2014 . The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 2,386,370 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.

 

On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000 shares of the Company’s Common Stock with the proceeds of the loan. On August 25, 1994, the Company loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional 2,120,000 shares of the Company’s Common Stock with the proceeds of the loan. The shares of Common Stock were pledged to the Company as security for the loans. The promissory notes will be repaid with the proceeds of annual contributions made by the Company to the ESOP. In April of 1995, the Company agreed to extend the maturity of the loans to twenty years. Effective for the Plan year beginning January 1, 2001, the Company amended the plan and related loans for the purpose of limiting excise tax liability for plan contributions in excess of IRS Code Section 415 limitations. To accomplish this, the Company agreed to extend the maturity of the loans to fifty years.

 

The Company leases a furnished and equipped townhouse office from its President at 1013 Princess Street, in Alexandria, Virginia 22314, pursuant to a Landlord/Tenant Month to Month Lease. The terms of the lease, as adjusted for square footage and certain other applicable differences, were based on the terms of the last lease signed by the Company with an unrelated third party for unfurnished office space leased in Largo, Florida. The Company pays a base rent in the amount of $4,534 per month for approximately 2,473 square feet of commercial space, in addition to any and all expenses relating to the property, including property taxes, property insurance, telephone, electric, water and cable. The Company’s office and all of its active files are located in this office. On April 30, 2015, Ms. Vitale served notice to the Company that she will be terminating the lease with the Company effective June 1, 2015.

 

Rent expense associated with this lease amounted to $70,348 and $70,272 for the years ended December 31, 2014 and 2013, respectively. Ms. Vitale received direct cash payments totaling $140,806 for current and past year rents in 2014 and no direct cash payments in 2013.

 

On March 31, 2014, the Company accepted a subscription in the amount of $150,000 from Mr. Edson Arneault in the Private Placement dated February 14, 2014, in which the Company offered to sell $3,000,000 in Collateralized Convertible Senior Debentures. Effective March 31, 2014, as part of the Private Placement, Mr. Arneault was appointed a Director and Chairman of the Board of Directors of the Company. On the same date, the Company accepted a subscription in the amount of $150,000 from Gregory A. Harrison, a Director and Vice President of the Company. On or about December 31, 2014, Mr. Harrison elected to reject the Company’s Offer to Amend the terms for issuance and conversion of the Second and Third Tranche Collateralized Convertible Senior Debentures and was refunded $100,000 from funds held in Escrow pursuant to the terms of the Private Placement Memorandum dated February 14, 2014.

 

The Company has an agreement with a current Director which would give rise to payment of a fee under certain conditions. See Item 6. Executive Compensation — Other Compensation Arrangements.

 

The Company’s policies and procedures require Board of Director approval of any related party transaction that involves an Officer or Director of the Company or any of its subsidiaries.

 

Director Independence

 

Our common stock is not listed on any national securities exchange or quoted on any inter-dealer quotation service that imposes independent standards on our Board of Directors. However, in evaluating the independence of its members, the Company’s management determined that Mr. Blount and Mr. Harrell are independent directors by virtue of the fact that they are not officers or employees of the Company.  The Company has no written independence standards it follows in making the above determination. See Item 6. Executive Compensation-Other Compensation Arrangements.

 

ITEM 8.  LEGAL PROCEEDINGS

 

College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Superior Court of the State of Delaware In and For New Castle County) (Case No. N15C-01-119 WCC)

 

On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the

 

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amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower’s right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. The matter is pending.

 

College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of Chancery of the State of Delaware) (Case No. 10663-CB)

 

On February 13, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company’s annual stockholders’ meetings. The plaintiff sought costs and expenses, including reasonable attorneys’ fees.

 

College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell (In the Court of Chancery of the State of Delaware) (Case No. 10793-CB)

 

On March 14, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The defendants believe that plaintiff’s claims are without merit and intend to vigorously defend this lawsuit. The plaintiff sought injunctive relief, but no monetary damages other than attorneys’ fees.

 

ITEM 9.  MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

The Company’s securities are not being traded on any United States market or any foreign market. There is no established public trading market for the common stock of the Company or for the preferred stock of the Company or for any other securities issued by the Company or underlying any securities. See Item 2. Financial Information-Liquidity-Private Placement Dated February 14, 2014 (which includes a description of the SEC’s issuance of an Order of Suspension of Trading with respect to the Company’s securities and an Order, effective September 4, 2014, revoking the registration of the Company’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended).

 

The Company intends to file for inclusion of our common stock on the Over-the-Counter Bulletin Board, however, there can be no assurance that FINRA will approve the inclusion of our common stock.

 

At December 31, 2014, there were (i) 3,440,000 shares of Common Stock subject to existing options to purchase common equity of the Company, (ii) 3,036,500 shares of Common Stock subject to existing warrants to purchase common equity of the Company, (iii)1,925,000 shares of Common Stock issuable upon the conversion of outstanding promissory notes of the Company, (iv)  260,000 shares of Common Stock issuable upon conversion of the Company’s Series S-PIK Junior, Non-Voting, Convertible, Non-Redeemable Preferred Stock, and (v) up to 5,055,555 shares of Common Stock issuable upon conversion of outstanding debentures issued by the Company pursuant to its Private Placement dated February 14, 2014, as amended (see “Item 2. Financial Information - Private Placement Dated February 14, 2014, as amended).

 

Of the issued and outstanding shares of the Company’s Common Stock, the Company believes that 8,350,976 shares could be sold under Rule 144 promulgated under the Securities Act of 1933, as amended. In addition, derivatives composed of non-plan stock options, warrants to purchase common stock, convertible notes, convertible debentures and convertible preferred stock, if converted into shares of the Company, may increase the total number of common shares of the Company which may be sold under Rule 144 to an aggregate total of 22,068,031 common shares.

 

The Company has no agreement in place to register any of its shares with the Securities and Exchange Commission other than with respect to certain piggy-back registration rights in connection with the Company’s private placement of convertible debentures dated February 14, 2014 and the shares of Common Stock underlying such debentures.  See “Item 2. Financial Information - Private Placement Dated February 14, 2014 - Piggyback Registration Rights.”

 

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Market Price

 

The market price of the Company’s common stock was highly volatile when it traded in the past. A lack of liquidity in the stock, announcements by the Company, its competitors, the industry, or other casino-related, gaming-related, economy-related, or various other announcements, can lead to wide swings in the market price of the Common Stock if and when it does trade.

 

From November 22, 2002 until September 3, 2014, shares of the Company’s Common Stock, $.001 par value (the “Common Stock”), traded on the over-the-counter market under the symbol “DHCC.” The following table sets forth the high and low closing price quotations of the Common Stock in each full quarter during the periods set forth. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

 

 

2013

 

2014

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.25

 

$

0.15

 

$

0.86

 

$

0.61

 

Second Quarter

 

0.20

 

0.12

 

0.74

 

0.42

 

Third Quarter

 

0.35

 

0.08

 

0.75

 

0.36

 

Fourth Quarter

 

0.75

 

0.22

 

0.46

*

0.46

*

 


*The Registrant’s common stock last traded on September 3, 2014. The stock had a closing price of $ 0.46 per share on that date.  The Registrant’s common stock did not trade in the fourth quarter of 2014.

 

On March 1, 2015, there were 878 registered holders of record of the Common Stock of the Company.

 

Dividends on Common Stock

 

We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings, if any, to fund operations and promote our business strategy. Any future determination to pay cash dividends on our Common Stock will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, if any, capital requirements, and such other factors as the Board of Directors deems relevant.

 

Equity Compensation Plans

 

On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The option price may not be less than 100% of the market value of the shares on the date of the grant.  The options expire within ten years from the date of grant.  At December 31, 2014, no options from this plan were issued or exercised.

 

See “Item 6. Executive Compensation” which is included elsewhere in this registration statement and includes a summary of the attributes of non-plan options issued to Executive Officers and Directors of the Company.

 

ITEM 10.  RECENT SALES OF UNREGISTERED SECURITIES

 

The Company has no operations and no revenue stream. The Company has had to raise funds to sustain itself and pay its costs and expenses through the sale of securities. Since 2012, the Company has offered and sold securities pursuant to the following two private placements.

 

Private Placement Dated February 14, 2014, as Amended

 

Pursuant to a Private Placement Memorandum dated February 14, 2014, the Company offered up to an aggregate of $3,000,000 of its securities to accredited or institutional investors in three tranches. The offering was made in reliance on the exemption from registration afforded under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506 of Regulation D under the Securities Act.  See “Item 2. Financial Information-Private Placement Dated February 14, 2014” which is included elsewhere in this registration statement and includes a description of the attributes of the convertible debentures issued and issuable with respect to the Company’s February 14, 2014 private placement, as amended, including, without limitation, related commissions and expenses.

 

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The Company raised aggregate gross proceeds of $1 million from the sale of the First Tranche Debentures and aggregate gross proceeds of $850,000 from the sale of the Second Tranche Debentures. A total of $850,000 is being held in Escrow for the purchase of the Third Tranche Debentures. The Escrow Agent will release the $850,000 to the Company and the Company will issue the Third Tranche Debentures to the Investors, assuming the conditions for issuance of the Third Tranche Debentures have been met by the Company on or before June 30, 2015.

 

As of December 31, 2014, the Company had used proceeds totaling approximately $1,006,900 from the sale of the First and Second Tranche Debentures. A detailed description of the use of proceeds is contained in a table included in Item 2 —Liquidity.

 

Private Placement Dated July 1, 2012

 

Pursuant to a Private Placement dated July 1, 2012, the Company offered to sell a minimum of 20 Units, for a minimum offering of $105,000, and a maximum of 50 Units, for a maximum offering of $262,500. Each Unit cost $5,250 and consisted of 35,000 shares of Common Stock, par value $ .001 per share, and a five year Warrant to purchase 35,000 shares of Common Stock at a purchase price of $ .25 per share.

 

The Investors in the offering were “accredited investors” as defined in Rule 501 of Regulation D promulgated under Securities Act of 1933, as amended (the “Securities Act”). The offering was made in reliance on the exemption from registration afforded under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act. No commissions, fees or bonuses were paid to any placement agent, director, or officer in connection with the offering.

 

The Company raised an aggregate of $151,725 from the sale of the Units and sold an aggregate of 1,011,500 shares of Common Stock. The proceeds of the offering were used to pay taxes on the Diamondhead Property, to pay property insurance premiums, to pay directors and officers liability insurance premiums, to pay certain then-current liabilities of the Company, for general corporate purposes and working capital, and to sustain the Company while it sought additional financing.

 

The Warrants may be redeemed, at the option of the Company, at any time prior to the Expiration Date, at the price of $ .001 per Warrant Share (“Redemption Price”), provided that the last sales price of the Common Stock has been at least $ .50 per share, on each of ten consecutive trading days ending on the third business day prior to the date on which notice of redemption is given. In the event the Company elects to redeem the Warrant, the Company shall fix a date for the redemption. Notice of redemption shall be given to the Holder of the Warrant not less than 30 calendar days prior to the date fixed for redemption (“the Redemption Date”). The Warrant may be exercised by the Holder in whole only, at any time after notice of redemption shall have been given by the Company and prior to the time and date fixed for redemption. On and after the Redemption Date, the Holder shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price.

 

ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

 

Our authorized capital stock consists of 50,000,000 shares of Common Stock par value $ .001, and 5,000,000 shares of preferred stock, par value $.01 per share. The following description of our Common Stock is intended as a summary only and is qualified in its entirety by reference to our Certificate of Incorporation, as amended, and By-laws, as amended, to date.

 

Each share of common stock shall entitle the holder thereof to one vote. At each meeting of the stockholders, each stockholder entitled to vote thereat may vote in person or by proxy duly appointed by an instrument in writing subscribed by such stockholder.

 

Under our Bylaws, the holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at the Annual Meetings of stockholders. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. The vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the stockholders’ meeting, unless the vote of a greater number is required by law or the certificate of incorporation. Approval of a proposed amendment to our Certificate of Incorporation, as amended, requires the affirmative vote of the holders of a majority of the outstanding stock of each class entitled to vote thereon as a class.

 

According to our charter documents, holders of our Common Stock do not have preemptive rights and are not entitled to cumulative voting rights. There are no conversion or redemption rights or sinking funds provided for our common stockholders. Shares of our Common Stock share ratably in dividends, if any, as may be declared from time to time by the Board of Directors, in its discretion, from funds legally available for distribution as dividends. In the event of a liquidation, dissolution, or winding up of the Company, the holders of our Common Stock are entitled to share pro rata all assets remaining after payment in full of all liabilities and distributions to holders of preferred stock with preferential liquidation rights to distributions. All of the outstanding shares of our Common Stock are fully paid and non-assessable.

 

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Table of Contents

 

ITEM 12.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

Our Certificate of Incorporation limits the liability of our directors and provides for indemnification of our directors to the fullest extent permitted by Delaware General Corporation Law, as amended. Our Certificate of Incorporation provides that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. Our Certificate of Incorporation further provides that if the Delaware General Corporation Law is amended after approval of the Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

 

In addition, our Bylaws require that the corporation hold harmless and indemnify its officers and directors from and against all judgments, fines, liabilities, amounts paid in settlement and expenses, including attorneys’ fees, incurred directly or indirectly, as a result of or in connection with any threatened, pending or completed action, suit or proceeding, provided that such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Such provisions substantially limit a shareholders’ ability to hold officers and directors liable for breaches of fiduciary duty and may require us to indemnify our officers and directors for any liability incurred as well as for legal fees and expenses incurred in defending any claims or actions. The general effect of the foregoing is that a current or former officer or director of the Company may be insured or indemnified by the Company for any liability incurred, or legal fees and expenses incurred, arising from their actions or inactions while serving as an officer or director.

 

Under Delaware law, we may indemnify our directors or other persons who were, are, or are threatened to be made a party to an action, suit or proceeding because the person is or was our director, officer, employee or agent, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with the action, suit or proceeding, if the person (i) acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, and (ii) with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.

 

ITEM 13.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements for the years ended December 31, 2014 and 2013 and the condensed unaudited consolidated financial statements for the three months ended March 31, 2015 and 2014 are attached to this report as Exhibits 99.1 and 99.2, respectively.

 

ITEM 14.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 15.              FINANCIAL STATEMENTS AND EXHIBITS

 

Exhibits

 

 

 

 

 

 

 

(a)

 

3.1

 

Certificate of Incorporation of the Company, as filed with the Secretary of State of Delaware on November 15, 1988.

 

 

 

 

 

(e)

 

3.1.1

 

Amendment to Certificate of Incorporation of the Company, as filed with the Secretary of State of Delaware on September 4, 1992.

 

 

 

 

 

(e)

 

3.1.2

 

Amendment to Certificate of Incorporation of the Company, as filed with the Secretary of State of Delaware on November 22, 2002.

 

 

 

 

 

(a)

 

3.2

 

By-laws of the Company.

 

 

 

 

 

(e)

 

3.2.1

 

Amendment of By-laws of the Company, dated February 16, 2015.

 

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Table of Contents

 

(e)

 

4.1

 

Certificate of Designation of Preferences, Rights, and Limitations of Series S Voting, Non-Convertible, Redeemable Preferred Stock Par value $0.01 per Share as filed with the Secretary of State of Delaware on August 5, 1993.

 

 

 

 

 

(e)

 

4.2

 

Certificate of Designation of Preferences, Rights, and Limitations of Series S-NR Voting, Non-Convertible, Non-Redeemable Preferred Stock Par value $0.01 per Share, as filed with the Secretary of State of Delaware on September 13, 1993.

 

 

 

 

 

(e)

 

4.3

 

Certificate of Designation of Preferences, Rights, and Limitations of Series S-PIK Junior, Non-Voting, Convertible, Non-Redeemable Preferred Stock Par value $0.01 per Share, as filed with the Secretary of State of Delaware on March 23, 1994.

 

 

 

 

 

(a)

 

10.1

 

Management Agreement between the Company and Casinos Austria Maritime Corporation dated June 19, 1993.

 

 

 

 

 

(b)

 

10.6

 

Term Sheet (Redacted) for $1 Million Line of Credit dated October 22, 2008.

 

 

 

 

 

(c)

 

10.7

 

Private Placement Memorandum dated March 1, 2010.

 

 

 

 

 

(c)

 

10.7.1

 

Appendix (C) to Private Placement Memorandum dated March 1, 2010 (Form of Promissory Note).

 

 

 

 

 

(c)

 

10.7.2

 

Appendix (D) to Private Placement Memorandum dated March 1, 2010 (Form of Warrant).

 

 

 

 

 

(c)

 

10.8

 

Private Placement Memorandum dated October 25, 2010.

 

 

 

 

 

(c)

 

10.8.1

 

Appendix (C) to Private Placement Memorandum dated October 25, 2010 (Form of Promissory Note).

 

 

 

 

 

(c)

 

10.8.2

 

Appendix (D) to Private Placement Memorandum dated October 25, 2010 (Form of Warrant).

 

 

 

 

 

(d)

 

10.9

 

Private Placement Memorandum dated February 14, 2014.

 

 

 

 

 

(e)

 

10.9.1

 

Offers to Amend dated December 4, 2014.

 

 

 

 

 

(e)

 

21.1

 

List of Subsidiaries of the Company.

 

 

 

 

 

(a)

 

99.1

 

Consolidated Financial Statements of the Company for the years ended December 31, 2014 and 2013.

 

 

 

 

 

(a)

 

99.2

 

Condensed Uaudited Consolidated Financial Statements of the Company for the three months ended March 31, 2015 and 2014.

 

37



Table of Contents

 

Index to Exhibits

 

 

(a)                                  Attached as an Exhibit to this Form 10.

 

(b)                                   Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 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, 2010 and incorporated by reference.

 

(d)                                   Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed April 4, 2014 and incorporated by reference.

 

(e)                                    Previously filed with Form 10 on March 31, 2015 and incorporated by reference.

 

38



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Diamondhead Casino Corporation

 

(Registrant)

 

 

 

 

Date:

May 27, 2015

 

/s/ Deborah A. Vitale

 

 

 

By:

Deborah A. Vitale

 

 

President

 

39


Exhibit 3.1

 

FILED

NOV 15 1988 9am

 

CERTIFICATE OF INCORPORATION

 

OF

 

EUROPA CRUISES CORPORATION

 

ARTICLE I

 

The name of this corporation is Europa Cruises Corporation.

 

ARTICLE II

 

The address of the corporation’s registered office in Delaware is Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the corporation’s registered agent at such address is Corporation Service Company.

 

ARTICLE III

 

The purpose for which the corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

 

ARTICLE IV

 

The corporation shall have authority to issue Fifty Million (50,000,000) shares of Common Stock, par value $.001 per share (the “Common Stock”).

 

The designations and the preferences, limitations and relative rights of the Common Stock of the corporation are as follows:

 

A.                                     Provisions Relating to the Common Stock .

 

1.                                       Except as otherwise required by law all rights to vote and all voting power shall be vested exclusively in the holders of the Common Stock.

 

2.                                       The holders of the Common Stock shall be entitled to receive when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise.

 

3.                                       Upon any liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, the remaining net assets of the corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests.

 



 

B.                                     General Provisions

 

1.                                       Cumulative voting by any stockholder is hereby expressly denied.

 

2.                                       No stockholder of this corporation shall have, by reason of holding shares of any class or series of stock of this corporation, any preemptive or preferential rights to purchase or subscribe for any other shares of any class or series of this corporation now or hereafter to be authorized, or any other equity securities, or any notes, debentures, warrants, bonds, or other securities convertible into or carrying options or warrants to purchase shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares or equity securities, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such stockholder.

 

ARTICLE V

 

The corporation shall have perpetual existence.

 

ARTICLE VI

 

The number of directors of this corporation shall not be less than three (3) nor more than ten (10), the exact number to be fixed from time to time in the manner provided in the bylaws of the corporation.

 

ARTICLE VII

 

The name and address of the Incorporator is Leslie J. Croland, Esq., 1110 Brickell Avenue, Penthouse, Miami, Florida 33131.

 

ARTICLE VIII

 

A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval of this article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director

 

2



 

of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

 

Any repeal or modification of the foregoing paragraph by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification.

 

ARTICLE IX

 

The Board of Directors is authorized to make, alter or repeal the Bylaws of the corporation. Election of directors need not be by written ballot.

 

ARTICLE X

 

The corporation reserves the right to amend, alter, or repeal any provision contained in this certificate of incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner now or hereinafter provided herein or by statute, and all rights, preferences and privileges of any nature whatsoever conferred upon the stockholders of the corporation by and pursuant to this certificate of incorporation in its present form are granted subject to the provisions of this Article X.

 

IN WITNESS WHEREOF, I, the undersigned, being the Incorporator hereinabove named for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and, accordingly, I have hereunto set my hand this 9th day of November, 1988.

 

 

EUROPA CRUISES CORPORATION

 

 

 

 

 

/s/ Leslie J. Croland,

 

Leslie J. Croland, Incorporator

 

STATE OF FLORIDA

)

 

 

)

SS:

COUNTY OF DADE

)

 

 

BEFORE ME, a notary public, authorized to take acknowledgments in the State and County set forth above, personally appeared Leslie J. Croland, Incorporator, known to me and known by me to be the person who executed the foregoing Certificate of Incorporation on

 

3



 

behalf of Europa Cruises Corporation and he acknowledged before me that he executed said Certificate of Incorporation.

 

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal, in the State and County aforesaid.

 

 

/s/ Gail H. Doyle

 

Notary Public, State of Florida at Large

 

My Commission Expires:

 

4


EXHIBIT 3.2

 

BYLAWS OF EUROPA CRUISES CORPORATION

(A DELAWARE CORPORATION)

(APRIL 19, 1989)

 



 

INDEX

 

 

Page

 

Number

 

 

ARTICLE ONE - OFFICES

1

1.

Registered Office

1

2.

Other Offices

1

 

 

 

ARTICLE TWO - MEETINGS OF STOCKHOLDERS

1

1.

Place

1

2.

Time of Annual Meeting

1

3.

Call of Special Meeting

1

4.

Notice

1

5.

Business of Special Meetings

2

6.

Quorum

2

7.

Required Vote

2

8.

Voting of Shares

2

9.

Proxies

3

10.

Stockholder List

3

11.

Action Without Meeting

3

12.

Closing of Transfer Books and Fixing Record Date

3

 

 

 

ARTICLE THREE - DIRECTORS

4

1.

Number, Election and Term

4

2.

Vacancies

4

3.

Powers

5

4.

Place of Meeting

5

5.

Annual Meeting

5

6.

Regular Meetings

5

7.

Special Meetings and Notice

5

8.

Quorum and Required Vote

5

9.

Action Without Meeting

6

10.

Telephone Meetings

6

11.

Committees

6

12.

Compensation of Directors

7

13.

Chairman of the Board

7

14.

Vice Chairman of the Board

7

 

 

 

ARTICLE FOUR - OFFICERS

8

1.

Positions

8

2.

Election of Specified Officers by Board

8

3.

Election or Appointment of Other Officers

8

4.

Salaries

8

5.

Term

8

6.

Presidents

8

7.

Vice Presidents

9

8.

Secretary

9

9.

Treasurer

9

 



 

INDEX

(cont’d.)

 

 

 

Page

 

 

Number

 

 

 

ARTICLE FIVE - CERTIFICATE FOR SHARES

9

1.

Issue of Certificates

9

2.

Legends for Preferences and Restrictions on Transfer

10

3.

Facsimile Signatures

10

4.

Lost Certificates

11

5.

Transfer of Shares

11

6.

Registered Stockholders

11

 

 

 

ARTICLE SIX - GENERAL PROVISIONS

11

1.

Dividends

11

2.

Reserves

11

3.

Checks

12

4.

Fiscal Year

12

5.

Seal

12

 

 

 

ARTICLE SEVEN - INDEMNIFICATION

12

 

 

 

1.

Indemnification

12

2.

Continuation of Indemnity

13

3.

Advancement and Repayment of Expenses

13

4.

Authorization

13

5.

Notification and Defense of Claim

14

6.

Nonexclusivity

15

7.

Indemnification of Other Expenses

15

8.

Length of Effectiveness

15

 

 

 

ARTICLE EIGHT - AMENDMENT OF BYLAWS

15

 

ii



 

EUROPA CRUISES CORPORATION

 

BYLAWS

 

ARTICLE ONE

 

OFFICES

 

Section 1.                                            Registered Office. The registered office shall be located in the City of Wilmington, County of New Castle, State of Delaware.

 

Section 2.                                            Other Offices . The corporation may also have offices at such other places, either within or without the State of Delaware, as the board of directors may from time to time determine or as the business of the corporation may require.

 

ARTICLE TWO

 

MEETINGS OF STOCKHOLDERS

 

Section 1.                                            Place . All annual meetings of stockholders shall be held at the offices of the corporation in the City of Pensacola, State of Florida, or at such other place, within or without the State of Delaware, as may be designated by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of stockholders may be held at such place, within or without the State of Florida, and at such time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

 

Section 2.                                            Time of Annual Meeting . Annual meetings of stockholders shall be held on the date and at the time fixed, from time to time, by the Board of Directors, provided, that there shall be an annual meeting held every calendar year at which the stockholders shall elect a board of directors and transact such other business as may properly be brought before the meeting.

 

Section 3.                                            Call of Special Meeting . Special meetings of the stockholders may be called by the president, the board of directors or the holders of not less than a majority of all shares entitled to vote at the meeting.

 

Section 4.                                            Notice . Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the day of the meeting, either personally or by mail, by or at the direction of the president, the secretary, or the officer or person calling the meeting, to each stockholder of

 



 

record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the stockholders at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. If a meeting is adjourned to another time and/or place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice.

 

Section 5.                                            Business of Special Meetings . Business transacted at any special meeting shall be confined to the purposes stated in the notice thereof.

 

Section 6.                                            Quorum . The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of stockholders except as otherwise provided in the certificate of incorporation. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified and called. The stockholders present at a duly organized meeting may continue to transact business notwithstanding the withdrawal of some stockholders prior to adjournment, but in no event shall a quorum consist of the holders of less than one-third (1/3) of the shares entitled to vote and thus represented at such meeting.

 

Section 7.                                            Required Vote . The vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the stockholders’ meeting, unless the vote of a greater number is required by law or the certificate of incorporation.

 

Section 8.                                            Voting of Shares . Each outstanding share, regardless of class, shall be entitled to vote on each matter submitted to a vote at a meeting of stockholders, except to the extent that the voting rights of the shares of any class are

 

2



 

limited or denied by the corporation’s certificate of incorporation or the Delaware General Corporation Act.

 

Section 9.                                            Proxies . A stockholder may vote in person or by proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid after three (3) years from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable, and unless otherwise made irrevocable by law.

 

Section 10.                                     Stockholder List . The officer or agent having charge of the corporation’s stock transfer book shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of, and the number and class and series, if any, of shares held by each. Such list, for a period of ten (10) days prior to such meeting, shall be subject to inspection by any stockholder at any time during the usual business hours at the place where the meeting is to be held. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer book or to vote at any such meeting of stockholders.

 

Section 11.                                     Action Without Meeting . Any action required by the statutes to be taken at a meeting of stockholders, or any action which may be taken at a meeting of the stockholders, may be taken without a meeting or notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of stockholders, taken at such a meeting.

 

Section 12.                                     Closing of Transfer Books and Fixing Record Books . For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purposes, the board of directors may provide that the stock transfer books shall be closed for a stated period not to exceed, in any case, sixty (60) days. If the stock transfer books shall be closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer

 

3



 

books, the board of directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than sixty (60) days, and, in case of a meeting of stockholders, not less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment or a dividend, the date of which the notice of the meeting is mailed or the date on which the resolutions of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the board of directors fixes a new record date or the determination has been made through the closing of stock transfer books and the stated period of closing has expired.

 

ARTICLE THREE

 

DIRECTORS

 

Section 1.                                            Number, Election and Term . The number of directors of the corporation shall not be less than three (3) nor more than ten (10), and within that minimum and maximum shall be such number as shall be from time to time specified by resolution of the board of directors; provided, however, no director’s term shall be shortened by reason of a resolution reducing the number of directors. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office for the term for which he is elected and until his successor is elected and qualified. Directors need not be residents of the State of Delaware or stockholders of the corporation. Any director may be removed at any time, with or without cause, at a special meeting of the stockholders called for that purpose.

 

Section 2.                                            Vacancies . A director may resign at any time by giving written notice to the board of directors or the chairman of the board. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors, or may be filled by an election at an annual or special meeting of the stockholders called for that purpose. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in

 

4



 

office, or until the next election of one or more directors by stockholders if the vacancy is caused by an increase in the number of directors.

 

Section 3.                                            Powers . The business and affairs of the corporation shall be managed by its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised and done by the stockholders.

 

Section 4.                                            Place of Meetings . Meetings of the board of directions, regular or special, may be held either within or without the State of Delaware.

 

Section 5.                                            Annual Meeting . The first meeting of each newly elected board of directors shall be held, without call or notice, immediately following each annual meeting of stockholders.

 

Section 6.                                            Regular Meetings . Regular meetings of the board of directors may also be held without notice at such time and at such place as shall from time to time be determined by the board of directors.

 

Section 7.                                            Special Meetings and Notice . Special meetings of the board of directors may be called by the president and shall be called by the secretary on the written request of two (2) directors. Written notice of special meetings of the board of directors shall be given to each director at least twenty-four (241 hours before the meeting. Except as required by statute, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of such meeting. Notices to directors shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when same shall be received. Notice to directors may also be given by telegram, and shall be deemed delivered when same shall be deposited at a telegraph office for transmission and all appropriate fees therefor have been paid. Whenever any notice is required to be given to any director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

 

Section 8.                                            Quorum and Required Vote . A maiority of directors shall constitute a quorum for the transaction of business and the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board

 

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of directors, unless a greater number is required by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified and called.

 

Section 9.                                            Action Without Meting . Any action required or permitted to be taken at a meeting of the board of directors or committee thereof may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by all of the members of the board of directors or the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting.

 

Section 10.                                     Telephone Meetings . Directors and committee members may participate in and hold a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other Participation in such a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground the meeting is not lawfully called or convened.

 

Section 11.                                     Committees . The board of directors may, by resolution passed by a majority of the whole board, designate one or more other committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

 

Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation) adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all

 

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or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

 

Section 12.                                     Compensation of Directors . The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

 

Section 13.                                     Chairman of the Board . The board of directors ors may, in its discretion, choose a chairman of the board who shall preside at meetings of the stockholders and of the directors and shall be an ex officio member of all standing committees The chairman of the board shall have such other powers and shall perform such other duties as shall be designated by the board of directors. The chairman of the board shall be a member of the board of directors but no other officers of the corporation need be a director. The chairman of the board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the board of directors.

 

Section 14.                                     Vice Chairman of the Board . The board of directors may, at its discretion, choose a vice chairman of the board who shall preside at meetings of the stockholders and directors in the absence of the chairman of the board. The vice chairman of the board shall have such other powers and shall perform such other duties as shall be designated by the board of directors. The vice chairman of the board shall serve until hi successor is chosen and qualified, but he may be removed at an time by the affirmative vote of a majority of the board of directors.

 

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ARTICLE FOUR

 

OFFICERS

 

Section 1.                                            Positions . The officers of the corporation shall be chosen by the board of directors and shall be a president, a vice-president, a secretary and a treasurer. The board of directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide.

 

Section 2.                                            Election of Specified Officers by Board . The board of directors at its first meeting after each annual meeting of stockholders shall elect a President, one or more Vice Presidents, a Secretary and a Treasurer.

 

Section 3.                                            Election or Appointment of Other Officers . Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the board of directors, or, unless otherwise specified herein, appointed by the president of the corporation. The board of directors shall be advised of appointments by the president at or before the next scheduled Board meeting.

 

Section 4.                                            Salaries . The salaries of all officers of the corporation to be elected by the board of directors pursuant to Article Four, Section 2 hereof shall be fixed from time to time by the board of directors or pursuant to its discretion. The salaries of all other elected or appointed officers of the corporation shall be fixed from time to time by the president of the corporation or pursuant to his direction.

 

Section 5.                                            Term . The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer or agent elected or appointed by the board of directors or the president of the corporation may be removed, with or without cause, by the board of directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officers or agents appointed by the president of the corporation pursuant to Section 3 of this Article Four may also be removed from such officer positions by the president, with or without cause. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise shall be filled by the board of directors, or, in the case of an officer appointed by the president of the corporation, by the president or the board of directors.

 

Section 6.                                            President . The president shall be the chief executive officer of the corporation, shall have general and active management of the business of the corporation and shall see that

 

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all orders and resolutions of the board of directors are carried into effect. In the absence of the chairman of the board or in the event the board of directors shall not have designated a chairman of the board, the president shall preside at meetings of the stockholders and the board of directors.

 

Section 7.                                            Vice Presidents . The vice presidents in the order of their seniority, unless otherwise determined by the board of directors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president. They shall perform such other duties and have such other powers as the board of directors shall prescribe or as the president may from time to time delegate.

 

Section 8.                                            Secretary . The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He or she shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he or she shall be. He or she shall keep in safe custody the seal of the corporation and, when authorized by the board of directors, affix the same to any instrument requiring it.

 

Section 9.                                            Treasurer . The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors at its regular meetings or when the board of directors so requires an account of all his or her transactions as treasurer and of the financial condition of the corporation.

 

ARTICLE FIVE

 

CERTIFICATES OF SHARES

 

Section 1.                                            Issue of Certificates . The corporation shall deliver certificates representing all shares to which stockholders are entitled; and such certificates shall be signed by the president or a vice president, and the secretary or an assistant secretary of the corporation, and may be sealed with the seal of the corporation or a facsimile thereof. No certificate shall be issued for any share until the consideration therefor has been

 

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fully paid. Each certificate representing shares shall state upon the face thereof, the name of the corporation, that the corporation as organized under the laws of the State of Delaware, and name of the person to whom issued, the number and class and the designation of the series, if any, which such certificate represents, and the par value of each share represented by such certificate.

 

Section 2.                                            Legends for Preferences and Restrictions on Transfer . Every certificate representing shares issued by the corporation shall set forth or fairly summarize upon the face or back of the certificate, or shall state that the corporation will furnish to any stockholder upon request and without charge a fill statement of:

 

(a)                      The designation, preferences, limitation and relative rights of the shares of each class or series authorized to be issued.

 

(b)                      The variations in the relative rights and preferences between the shares of each such series, if the corporation is authorized to issue any preferred or special class in series and so far as the same have been fixed and determined.

 

(c)                       The authority of the board of directors to fix and determine the relative rights and preferences of subsequent series.

 

Every certificate representing shares which are restricted as to the sale, disposition, or the transfer of such shares shall also state that such shares are restricted as to transfer and shall set forth or fairly summarize upon the certificate, or shall state the corporation will furnish to any stockholder upon request and without charge, a full statement of, such restrictions. If the corporation issues any shares which are not registered under the Securities Act of 1933, as amended, and registered or qualified under the applicable state securities laws, the transfer of any such shares shall be restricted substantially in accordance with the following legend:

 

“THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION (SATISFACTORY TO THE CORPORATION) OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED.”

 

Section 3.                                            Facsimile Signatures . The signatures of the president or vice president and the secretary or assistant secretary upon a certificate may be facsimiles, if the certificate is manually signed by a transfer agent, or registered by a registrar,

 

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other than the corporation itself or an employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of the issuance.

 

Section 4.                                            Lost Certificates . The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed.

 

Section 5.                                            Transfer of Shares . Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

 

Section 6.                                            Registered Stockholders . The corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.

 

ARTICLE SIX

 

GENERAL PROVISIONS

 

Section 1.                                            Dividends . The board of directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in cash, property, or its own shares pursuant to law and subject to the provisions of the corporation’s certificate of incorporation.

 

Section 2.                                            Reserves . The board of directors may by resolution create a reserve or reserves out of earned surplus for

 

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any proper purpose or purposes, and may abolish any such reserve in the same manner.

 

Section 3.                                            Checks . All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate.

 

Section 4.                                            Fiscal Year . The fiscal year of the corporation shall end on May 31 of each year unless otherwise fixed by resolution of the board of directors.

 

Section 5.                                            Seal . The corporate seal shall have inscribed thereon the name and state of incorporation of the corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

 

ARTICLE SEVEN

 

INDEMNIFICATION

 

Section 1.                                            Indemnification . The corporation hereby agrees to hold harmless and indemnify any of its officers, directors, employees or agents from and against and to reimburse such person for, any and all judgments, fines, liabilities, amounts paid in settlement and expenses, including attorneys’ fees, incurred directly or indirectly as a result of or in connection with any threatened, pending or completed action, suit or proceeding whether or not such action, suit or proceeding is by or in the right of the corporation to procure a judgment in its favor, including an action, suit or proceeding by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise for which such person served in any capacity at the request of the corporation to which such person is, was or at any time becomes a party, or is threatened to be made a party, or as result of or in connection with any appeal therein, by reason of the fact that such person is, was or at any time becomes a director or officer of the corporation or is or was at any time serving or at any time serves such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, whether arising out of any breach of such person’s fiduciary duty as a director or officer of such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise under any state or federal law or otherwise; provided , however , that (i) indemnification shall be paid pursuant to this Article Seven if and only if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and (ii) no indemnification shall be payable pursuant to

 

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this Article Seven if a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which be reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding had reasonable cause to believe that this conduct was unlawful. No indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper.

 

Section 2.                                            Continuation of Indemnity .  All agreement and obligation of the corporation contained herein shall continue during the period such person shall serve as a director or officer of the corporation and shall continue thereafter so long as such person shall be subject to any possible claim or threatened pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person was a director or officer of the corporation or served at the request of the corporation in any capacity for any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.

 

Section 3.                                            Advancement and Repayment of Expenses .  Expenses incurred by an officer or director in defending any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, shall be paid by the corporation in advance of the final disposition thereof, other than those expenses for which such director or officer is not entitled to indemnification pursuant to the proviso to, or the last Sentence of, Section 1 of this Article Seven. The corporation shall make such payments upon receipt of (i) a written request made by such person for payment of such expenses, (ii) an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized herein and (iii) evidence satisfactory to the corporation as to the amount of such expenses.

 

Section 4.                                            Authorization .  Any indemnification under this Article Seven (unless ordered by a court) Shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 of this

 

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Article Seven.  Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by a written opinion of independent legal counsel, or (iii) by the stockholders of the corporation.

 

Section 5.                                            Notification and Defense of Claim .  Promptly after receipt by a person seeking indemnification pursuant to this Article Seven of notice of the commencement of any action, suit or proceeding, such person will, if a claim in respect thereof is to be made against the corporation under this Article Seven, notify the corporation of the commencement thereof; but the omission so to notify the corporation will not relieve it from any liability which it may have to such person otherwise than under this Article Seven. With respect to any such action, suit or proceeding as to which such person notifies the corporation of the commencement thereof.

 

A.                                     The corporation will be entitled to participate therein at its own expense; and,

 

B.                                     Except as otherwise provided below, to the extent that it may wish, the corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to the person to be indemnified. After notice from the corporation to the person to be indemnified of its election so to assume the defense thereof the corporation will not be liable to such person under this Article Seven for any legal or other expenses subsequently incurred by such person in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The person to be indemnified shall have the right to employ his or her own counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the corporation of its assumption of the defense thereof shall be at the expense of such person unless (i) the employment of counsel by such person has been authorized by the corporation in connection with the defense of such action, (ii) such person shall have reasonably concluded that there may be a conflict of interest between the corporation and such person in the conduct of the defense of such action, or (iii) the corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for such person shall be borne by the corporation (it being understood, however, that the corporation shall not be liable for the expenses of more than one counsel for such person in connection with any action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances). The corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the corporation or as to

 

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which such person shall have made the conclusion provided for in (ii) above.

 

C.                                     anything in this Section to the contrary notwithstanding, the corporation shall not be liable to indemnify any person seeking indemnification under this Article Seven for any amounts paid in settlement of any action or claim effected without its written consent. The corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on the person to be indemnified without such person’s written consent. Neither the corporation nor any such person will unreasonably withhold their consent to any proposed settlement.

 

Section 6.                                            Nonexclusivity .  The indemnification and advancement of expenses provided by, or granted pursuant to this Article Seven shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the General Corporation Law of the State of Delaware, the corporation’s Certificate of Incorporation, Bylaws, as now in effect or as hereafter amended, any agreement, any vote of stockholders or directors, any applicable law, or otherwise.

 

Section 7.                                            Indemnification of other Expenses .  In the event any person seeking indemnification hereunder is required to bring any action to enforce rights or to collect monies due under this Article Seven and is successful in such action, the Company shall reimburse such person for all costs and expenses, including attorneys’ fees, incurred by such person in connection with such action.

 

Section 8.                                            Length of Effectiveness .  The indemnification and advancement of expenses provided by or granted pursuant to this Article Seven shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

ARTICLE EIGHT

 

AMENDMENTS OF BYLAWS

 

These bylaws may be altered, amended or repealed or new bylaws may be adopted at any meeting of the board of directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting (provided notice of the proposed alteration, amendment or repeal is contained in the notice of the meeting), subject to repeal or change at any meeting of the stockholders at which a quorum is present, by the affirmative vote of a majority of the stockholders present at such meeting (provided notice of the proposed alteration, amendment or repeal is contained in the notice of the meeting).

 

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EXHIBIT 10.1

 

MANAGEMENT AGREEMENT

 

This Agreement, dated and executed this 19 th  day of June, 1993, by and between CASINO WORLD INC., a corporation organized under the laws of the State of Delaware, and its wholly-owned subsidiary MISSISSIPPI GAMING CORPORATION (hereinafter referred to collectively as the “Owner”), with its principal offices in Pensacola, Florida, and CASINOS AUSTRIA MARITIME CORPORATION, a corporation organized under the laws of the State of Florida (hereinafter referred to as “Manager”), with its principal office in Madeira Beach, Florida.

 

W I T N E S S E T H:

 

WHEREAS, Owner has acquired an interest in certain dockside gaming sites in the State of Mississippi, U.S.A., and intends to acquire additional gaming sites in the State of Mississippi, all such existing and future gaming sites to be known as the Mississippi Gaming Sites, on which Owner intends to construct, license and operate gaming casinos under the laws of the State of Mississippi, the gaming casinos to be generally known and referred to as the “The Mississippi Casinos” or as a “Casino” (such improvements and operations referred to herein as “Mississippi Gaming operations”); and

 

WHEREAS, Manager covenants, represents and warrants, that Manager has substantial experience in managing casino operations including the management and operation of gaming tables, coin operated slot machines, video poker machines, lottery, and keno (hereinafter “gaming operations”) and the Manager anticipates that it will be duly licensed by the Mississippi Gaming Commission to operate and manage the gaming operations of the Mississippi Casinos; and

 

WHEREAS, Owner desires to employ Manager on an exclusive basis as an independent contractor to assist owner with design and layout of each of the Mississippi Casinos, to provide employee training and necessary pre-opening Casino activities, and, upon opening of each of the Mississippi Casinos, to manage and operate the gaming operations of the Mississippi Casinos on behalf of and for the account and benefit of Owner; and

 

WHEREAS, the Manager shall loan to the Owner the sum of $2,000,000 to acquire the proposed dockside casino site known as Diamondhead, Mississippi as evidenced by the forms Loan Agreement, Promissory Note, Land Deed of Trust and Guaranty which are attached hereto and made a part hereof as Exhibit A (hereinafter referred to as the “Loan Documents”); and

 



 

MANAGEMENT AGREEMENT

 

This Agreement, dated and executed this 19 th  day of June, 1993, by and between CASINO WORLD INC., a corporation organized under the laws of the State of Delaware, and its wholly—owned subsidiary MISSISSIPPI GAMING CORPORATION (hereinafter referred to collectively as the “Owner”), with its principal offices in Pensacola, Florida, and CASINOS AUSTRIA MARITIME CORPORATION, a corporation organized under the laws of the State of Florida (hereinafter referred to as “Manager”), with its principal office in Madeira Beach, Florida.

 

W I T N E S S E T H:

 

WHEREAS, Owner has acquired an interest in certain dockside gaming sites in the State of Mississippi, U.S.A., and intends to acquire additional gaming sites in the State of Mississippi, all such existing and future gaming sites to be known as the Mississippi Gaming Sites, on which Owner intends to construct, license and operate gaming casinos under the laws of the State of Mississippi, the gaming casinos to be generally known and referred to as the “The Mississippi Casinos” or as a “Casino” (such improvements and operations referred to herein as “Mississippi Gaming Operations”); and

 

WHEREAS, Manager covenants, represents and warrants, that Manager has substantial experience in managing casino operations including the management and operation of gaming tables, coin operated slot machines, video poker machines, lottery, and keno (hereinafter “gaming operations”) and the Manager anticipates that it will be duly licensed by the Mississippi Gaming Commission to operate and manage the gaming operations of the Mississippi Casinos; and

 

WHEREAS, Owner desires to employ Manager on an exclusive basis as an independent contractor to assist owner with design and layout of each of the Mississippi Casinos, to provide employee training and necessary pre-opening Casino activities, and, upon opening of each of the Mississippi Casinos, to manage and operate the gaming operations of the Mississippi Casinos on behalf of and for the account and benefit of Owner; and

 

WHEREAS, the Manager shall loan to the Owner the sum of $2,000,000 to acquire the proposed dockside casino site known as Diamondhead, Mississippi as evidenced by the forms Loan Agreement, Promissory Note, Land Deed of Trust and Guaranty which are attached hereto and made a part hereof as Exhibit A (hereinafter referred to as the “Loan Documents”); and

 



 

WHEREAS, Manager further represents and warrants that Manager’s operations contemplated in this Agreement will be identified as a United States trade and/or business and that Manager will file all necessary United States of America tax returns as required by the laws of the United States of America and shall be responsible for the payment of such taxes, which include all federal, state and local taxes; and

 

WHEREAS, the owner is ready and willing to contract exclusively with the Manager to operate and manage Owner’s Mississippi Gaming operations at the Mississippi Casinos in the State of Mississippi; and

 

WHEREAS, this Agreement will cover the following two phases with respect to each Mississippi Casino:

 

·              Pre-Operating Phase (period from the day of signing this Agreement until the opening of a Mississippi Casino) and

 

·              Operating Phase (period from the opening of a Mississippi Casino until termination of this Agreement); and

 

WHEREAS, Manager will act on behalf of and for the benefit of Owner and as Owner’s agent upon and subject to the terms and conditions hereinafter set forth during all phases of this Agreement.

 

NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, and for other valuable considerations acknowledged by each of the parties to be satisfactory and adequate, the parties hereto covenant and agree as follows:

 

l.                      TERM OF THIS AGREEMENT

 

1.1.                             subject to the provisions of Section 1.2 below and unless earlier terminated pursuant to the provisions of this Agreement, the term of this Agreement shall commence on the date first above written and shall expire and terminate five (5) years from the first day of actual Mississippi Gaming Operations at the first Mississippi Casino to commence gaming operations.

 

1.2.                             Notwithstanding anything to the contrary contained in this Agreement, it is the understanding of the Owner and the Manager that at such time (the date upon which this shall occur hereinafter referred to as the “License Date”) as all parties who are required to be licensed by the Mississippi Gaming Comission in order for Owner to commence gaming operations have in fact been granted such required licensure (“Required Licensure”), other than Manager, and

 

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Manager shall not have been granted the Required Licensure within thirty (30) days after the License Date, then Owner and Manager shall jointly select another party to carry out the duties and obligations imposed upon the Manager (the “Interim Manager”) pursuant to the terms and conditions of this Agreement until such time as Manger shall have been granted the Required Licensure. In the event Owner and Manager are unable to agree upon the selection of an Interim Manager, then Owner’s selection shall be employed as Interim Manager. The terms of the Interim Manager’s employment shall allow Owner to terminate the Interim Manager at any time after the Interim Manager shall have worked for ninety (90) days (the “Minimum Employment Period”). Upon Manager’s receipt of the Required Licensure, the Interim Manager shall be terminated and Manager shall resume his place in this Agreement. Notwithstanding the foregoing, the Manager shall not resume its place in this Agreement and the Interim Manager shall not be terminated if the Interim Manager shall not have been employed by the Owner for the Minimum Employment Period. At such time as the Interim Manager shall have been employed by the Owner for the Minimum Employment Period, the Interim Manager shall be terminated and the Manager shall resume its place in this Agreement. The term of this Agreement shall commence on the first day of actual Mississippi Gaming Operations at the first Mississippi Casino to commence Gaming Operations. In the event the Manager shall not have been granted the Required Licensure within the one (1) year period immediately following the License Date, then this Agreement shall terminate.

 

2.                        SERVICES PROVIDED BY MANAGER

 

2.1.                             Exclusive Manager. Subject to the limitations and conditions herein set forth, Owner hereby appoints Manager, and Manager hereby accepts appointment as the exclusive manager of each of the Mississippi Gaming Operations, including any Mississippi Gaming Operation fifty (50%) percent or more of which is owned by any existing or future parent, brother-sister corporation or subsidiary of the Owner, or any unincorporated entity or association owned by any of the foregoing. Manager shall use its best efforts to do and perform all services, acts, or things necessary to oversee the design, layout, construction, and interior decoration of the Mississippi Casinos and shall assume full responsibility for employee training and other pre-opening activities of each Mississippi Gaming Operation, and, thereafter, upon opening of each Mississippi Casino, to direct, supervise and manage the operation of each Mississippi Casino. The operations and activities undertaken by Manager pursuant to this Agreement shall be on behalf of, and for the account and benefit of the Owner of the Mississippi Casinos. The Manager and all of Manager’s on-site employees shall be duly licensed as required under Mississippi law pursuant to regulations of the Mississippi Gaming Commission.

 

2.2.                             Excluded Activities. For purposes of this Agreement, Mississippi Gaming Operations and management hereunder shall not include operations and management related to food, beverage (including licensed liquor and hospitality operations), showroom or

 

3



 

entertainment, arcade or parking operations or facilities ancillary to or undertaken in conjunction with, but not directly related to Mississippi Gaming Operations (referred to herein as the “Ancillary Operations and Facilities”). Owner agrees to use its best efforts to insure that the conduct of such activities and the prices charged to patrons will be at reasonable and competitive levels so as not to have a material adverse effect on potential Mississippi Casino customer traffic.

 

2.3.                             Manager’s Duties - Initial Term/Pre-Operational Phase. Commencing with the execution of this Agreement and continuing through the commencement and completion of construction and licensing of each Mississippi Casino, Manager shall perform the following services:

 

1.                         Immediately after execution of this Agreement, Manager shall take all steps necessary to secure required Mississippi gaming licenses for the Manager and Manager’s personnel who are required to be licensed by the Mississippi Gaming Commission.

 

2.                         With respect to each Mississippi Casino and all Mississippi Gaming Operations, Manager and Owner shall jointly prepare pre-opening Casino budgets, preliminary pro-formas for the first year of each Mississippi Casino operation and any other requirements related to Mississippi Casino Operations which must be addressed by Owner. Owner and Manager shall jointly prepare line item budgets for pre-opening and operations. The pre-opening budgets and operational plans (herein the “Pre-Opening Budget and Operational Plan”) shall include a schedule of expenditures, personnel requirements, hiring schedules, Mississippi Casino employees’ training program, pre-marketing plan, organizational aspects of the Mississippi Casino Operations during construction, and other matters which should be accomplished during construction for timely openings and the successful operations of each Mississippi Casino.

 

3.                         Assist the Owner with preparation of detailed plans for the design, the layout and construction of all Casino facilities, the selection of all gaming equipment, tokens, chips, cards, currency counters, wrapping machines, safes and other security equipment, the furniture and furnishings to be utilized in all casino facilities, and the uniforms to be worn by Casino employees.

 

4.                         Select applicants and organize a training school for local staff needed in each Mississippi Casino, and establish training programs for all local casino staff at a location provided by the owner. All training costs, including travel and accommodations, salaries for trainers, training equipment, and advertising will be borne and paid by the Owner. Manager shall

 

4



 

provide Owner a training plan and budgets for prior approval and coordination with Owner’s Human Resources Department.

 

5.                          Assist Owner in establishing such accounting, auditing, record-keeping and reporting systems and systems of internal control as are required under applicable Mississippi law and the Regulations of the Mississippi Gaming Commission or Mississippi Department of Revenue.

 

6.                          Assist the Owner in the preparation of Cash Flow Projections and Statements of Pre-Opening Cash requirements for filing in conjunction with applications for required gaming licenses.

 

7.                          Commence recruitment, licensing and hiring of executives, key employees, professionals and other personnel for and on behalf of the Owner necessary to staff each Mississippi Casino (excluding the Ancillary Operations and Facilities) in a timely fashion to insure the adequacy and proper licensing of such staff upon opening of each Mississippi Casino. Notwithstanding the foregoing, Owner and Manager shall mutually agree upon the hiring of executives and key employees and all personnel recruited shall be screened by Owner and Manager.

 

8.                          With the prior approval of the Owner and in compliance with all applicable statutes, regulations, and rules, Manager shall select and purchase or lease the necessary gaming equipment (principally, slot machines and gaming tables) in the name and for the account of Owner utilizing funds made available and provided by Owner. In addition, Manager will select with the prior approval of the Owner and purchase for the account of Owner, all related accessory equipment, including, but not limited to, gaming machine tokens, chips and cards for table games, coin handling equipment, currency counters, wrapping machines, special tools and other equipment as well as spare parts. Owner reserves the option to purchase or lease the aforementioned gaming and accessory equipment directly from third parties in the event that such purchase or lease from third parties results in a lower cost to Owner. Owner shall retain ownership over all of the foregoing gaming equipment and related accessory equipment whether or not described above, and will be responsible for payment of any customs, export or other duties.

 

9.                          Manager shall assist the Owner in establishing a computerized security and management system, a double key system, a standardized security slot machine cash box, double-check accounting procedures, etc., as well as appropriate control, supervision and surveillance techniques, provided that all such systems, devices and equipment shall be in accordance and conformity with all applicable laws, rules, and regulations of the Mississippi Gaming Commission.

 

5



 

10.                   Manager shall provide the necessary casino specialist(s) to supervise the installation of the gaming equipment.

 

11.                   Manager shall assist the Owner’s accounting and bookkeeping staff in order to keep proper and detailed books, accounts and records as required by Owner showing complete Pre-Operational activities, the receipt and expenditure of monies in connection therewith or otherwise for the account of Owner or its authorized employees or agents, to assist the members of the Owner’s Internal Audit Department in carrying out an audit of such books, accounts and records as Owner may from time to time reasonably require. Owner will have a Finance and Internal Audit Department which will review the operations for internal controls, financial controls and internal compliance at Owner’s sole discretion.

 

12.                                Manager shall cooperate with the Owner’s accountants in order to submit to owner a Pre-Operating Phase budget, by month, within one week after the construction of each Mississippi Casino has commenced, or such other time as the parties may agree.

 

13.                   Manager shall credit and allow, in full, to Owner any commission, discount, rebate, deduction or other allowance of any description, which Manager shall receive or be allowed in the course of its managing activities; including and concerning the purchase of any gaming equipment, gaming devices, gaming machinery and their accessories, and other items described in Section 2.3.8 of this Agreement.

 

14.                   Manager shall submit to Owner at least fourteen (14) days prior to the end of each month a notice of Manager’s anticipated cash requirements for the following month. At the end of each month, Manager shall provide Owner with a statement which itemizes for that month both the funds advanced to it by Owner and the cash disbursements made during last month. All excess funds held by Manager shall be held in interest bearing accounts with interest accruing to Owner.

 

15.                   Once Owner and Manager agree to a final budget for the Pre-Operating Phase, any expenses and costs incurred by Manager in excess of those set forth in the final budget must be approved by Owner.

 

3.                                       Manager’s Duties - Operational Term /Operational Phase.

 

3.1.                             During the Operational Term, Manager shall on behalf of Owner, and for the benefit and account of, and at Owner’s expense, perform the following enumerated duties upon the opening of each Mississippi Casino:

 

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1.                          Comply with all applicable gaming statutes and regulations of the State of Mississippi and all other federal, state, county and city laws relating to the Mississippi Gaming Operations of the Owner at each Mississippi Casino.

 

2.                          Once construction of a Mississippi Casino facility has been completed, all business and casino affairs in connection with the day-to-day operation, management, and maintenance of that Casino shall be the sole and exclusive responsibility of the Manager who is hereby granted the necessary power and authority to carry out Manager’s duties and responsibilities under this Agreement in accordance with Standard Operating Procedures jointly prepared by Owner and Manager.

 

3.                          In the name of and on behalf of the Owner, the Manager shall hire, promote, discharge and supervise the work of the executive staff, including the Mississippi Casino Executive Manager (“Designated Executive Manager”), assistant Managers and department heads. Through such executive staff, the Designated Executive Manager shall supervise the hiring, promotion, discharge and work of all other operating and service employees performing such services in or about the Mississippi Casinos. All of Manager’s corporate employees not employed in or about the Mississippi Casinos shall be employees of Manager and or Manager’s payroll, and Owner shall not be liable to such employees for their wages or compensation, nor to Manager or others for any act or omission on the part of such employees, except with respect to the Designated Executive Manager as provided herein. Except for the Designated Executive Manager, all Mississippi Casino employees employed in or about the Casino shall be employees and paid by the Owner. Manager shall have the authority in all cases to create appropriate job descriptions for and hire, promote, discharge and supervise the work of any such employees. Manager shall procure and maintain, at the owner’s expense, adequate workmen’s compensation insurance and such other insurance as the State of Mississippi shall require covering all the Owner’s employees. For purposes of this paragraph, Manager and Owner shall jointly prepare a Standard Operating Procedure, business plan and budgets, variance from which shall require Owner’s approval.

 

4.                          Manager shall appoint one of its principal executive officers as the Designated Executive Manager to perform and oversee the duties of Manager under this Agreement. The Designated Executive Manager shall perform his duties on-site at the Mississippi Casinos, and shall relocate to Mississippi. Manager shall be responsible for obtaining any United States visa necessary for the Designated Executive Manager to work in the United States. Owner shall not be responsible for reimbursement of all costs attributable to the Designated Executive Manager, including but not limited to salary, bonuses, relocation costs, fringe benefits, retirement benefits, overseas housing allowances, any expatriate tax grose-up allowance and reimbursement for non-

 

7



 

U.S. taxes.

 

5.                               Manager shall establish and supervise, at Owner’s expense, an accounting department with appropriate casino accounting and cost systems, including such accounting, record-keeping and reporting systems as may be required by federal, state, county and city laws and regulations, including regulations of the Mississippi Gaming Commission and in accordance with Standard Operating Procedures jointly prepared by Owner and Manager. At Owner’s expense, Manager shall prepare and timely file or cause the preparation and timely filing of all reports and returns required by such laws and regulations, and all reports and returns relating to withholding taxes, social security taxes, unemployment insurance, disability insurance, and all other statements and reports pertaining to employment with respect to Manager’s and Owner’s payroll in or about the Mississippi Casinos. Manager shall provide copies of all such reports and returns to Owner not later than the time such are required to be filed or otherwise submitted to the appropriate governmental authority, and shall furnish the Owner with proof of payment of taxes and fees required to be paid pursuant to federal, state or local laws. Manager shall not be responsible for the preparation or filing of any federal, state or local income tax or franchise tax returns on behalf of Owner.

 

6.                    On behalf of, for the benefit of, at the expense of the Owner, and in accordance with Standard Operating Procedures jointly prepared by Owner and Manager, arrange for an appropriate security sufficient to reasonably assure safety of customers, personnel, monies, and property of each Mississippi Casino facility. Any security force shall be comprised of security officers employed directly by the Owner or provided under a contract with a third party and the Owner. The third party or security officer shall report directly to the Manager and the Owner. Each security officer shall be bonded in sufficient amounts commensurate with their enforcement duties and obligations. The cost of such security force shall be included in the operating expenses of the gaming facility. The Manager shall also receive, consider and handle the complaints of all guests or users of all Mississippi Casino facilities or gaming devices.

 

7.                    Assist the Owner, if requested, in the selection of vendors for the furnishing to each Mississippi Casino of electricity, gas, water, steam, telephone, cleaning (including window cleaning), vermin exterminators, elevator and boiler maintenance, air-conditioning maintenance, master television antennas and/or master cable television service, and at the expense of the Owner, purchase or lease all materials and supplies, including gaming devices and equipment.

 

8.                    Arrange for the making or installation, in the name of and at the expense of Owner, of alterations, repairs, decorations, replacements, equipment or installations.

 

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9.                          Open and maintain, in accordance with Standard Operating Procedures jointly prepared by Owner and Manager, and on behalf of the Owner, one or more Casino operating account(s) for each Mississippi Casino in a money market fund or funds or banking institution or institutions selected by the Owner and deposit therein all monies furnished by the Owner as gaming bankroll or other working funds, all monies received, retained or set aside as reserves by Manager for or on behalf of Owner and deposit daily therein all monies generated by the daily operations of each Mississippi Casino. Manager shall be the signer on all such accounts provided that, all transfers, checks and withdrawals from such account shall also require the signature of Owner’s authorized signatory if the amount is for $10,000.00 or more. During all hours in which the Casino is in operation, the Owner shall maintain on or about the Casino premises a person authorized to sign checks on behalf of the Owner. Provided, further, that Owner shall indemnify and hold Manager harmless from any liability for payroll taxes or sums owed which have been incurred in the operation with respect to Owner’s employees and payroll, but for which there are insufficient funds to pay. The amounts of such bankroll, working funds and reserves shall be in an amount determined necessary and appropriate by the Owner. Manager shall pay from such accounts, expenses reasonably required for the operation of each Mississippi Casino, including without limitation, all gaming equipment taxes and fees, and all assessments and charges of every kind imposed by any governmental authority having jurisdiction and interest and penalties thereon; license fees, permit fees, and insurance appraisal fees; fines, penalties and court disbursements incurred in connection with the operation of each Mississippi Casino; premiums on policies and insurance and all expenses and payments authorized by this Agreement.

 

10.                                Comply with all statutes, ordinances, laws, rules, regulations, orders and determinations affecting or issued in connection with each Mississippi Casino by the Mississippi Gaming Commission and any other governmental authority having jurisdiction thereof, as well as with all orders and requirements of the Mississippi Gaming Commission and of any other governmental or regulatory body. Manager shall notify Owner of all such orders, determinations and requirements and any alleged violation of any statute, ordinance, law, rule, regulations, order determination or requirement as soon as Manager receives notice (formal or informal) thereof. Manager shall make any alterations or repairs so ordered or so required. Unless otherwise directed by Owner, Manager, at Owner’s expense may protest or contest in an appropriate court or forum any order, rule or regulation or claimed violation thereof affecting any Mississippi Casino. Manager may settle or compromise any such claim for less than $10,000.00 in its discretion (and shall notify Owner promptly of such settlement or compromise). All fines and penalties imposed on Manager or Owner under this subsection except as a result of Manager’s gross negligence (unless at the specific direction of Owner) shall be paid by the Owner and

 

9



 

Owner shall indemnify, protect and defend Manager from and against any liability therefore. All fines and penalties imposed upon Owner, or imposed on Manager as the result of Manager’s compliance with Owner’s specific directions, shall be paid by Owner. Legal fees for any action shall be limited to $5,000.00 unless otherwise agreed to by Owner.

 

11.                                With the consent of the Owner and subject to the rules and regulations of the Mississippi Gaming Commission, determine the number and types of gaming tables and gaming machines, pay back percentages, table limits, changes in table limits, number of decks and manner of dealing blackjack, general casino rules and game rules, treatment of customers by casino personnel and dealers, settlement of disputes with patrons, the conduct of casino personnel while off duty, including but not limited to consumption of alcoholic beverages, meals, break area, association with casino patrons, and other activities which reflect on the business of the Owner and Manager.

 

12.                                With the consent of the Owner, institute any necessary legal action or proceeding to collect charges, rents or other income for, or debts owing to any Mississippi Casino or to oust or dispossess guests, or other persons in possession or to cancel or terminate any lease for the breach thereof or default thereunder, all in accordance with Standard Operating Procedures jointly prepared by Owner and Manager (including credit procedures) and with the consent of the Owner.

 

13.                                At Owner’s expense, render statements to the Owner as follows:

 

(a)                                  On or before the fifteenth (15th) day of each calendar month, Manager shall render to Owner, and to any persons designated by Owner, a detailed profit and loss statement prepared on a cash basis for the operation of each Mississippi Casino for the preceding calendar month and for the portion of the operating year ended on the last day of such preceding calendar month and for such calendar month and calendar year a statement of all capital expenditures made by the Manager for the account of the Owner, a statement of management compensation, lease payments, and any amounts distributable to the Owner.

 

(b)                                  Manager shall render to Owner, to the certified public accountants designated Owner and to any other persons designated by Owner, in a timely fashion, copies of such records, reports, financial statements, audits and supplemental information as may be reasonably requested by Owner and as required by all applicable federal, state, county and city laws and regulations, including, without limitation, Mississippi gaming statutes and regulations of the Mississippi Gaming Commission.

 

(c)                                   Manager shall make available to the Owner

 

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and its designated agents, who shall have the right to inspect, copy and analyze them, all journals, ledgers and any other original source documents, internal statements and reports, analyses and other information kept or used by Manager in connection with rendering the reports, balance sheets and statements described in this Section 3.1, which are deemed necessary by Owner to determine and satisfy Owner that Manager is complying with this Agreement.

 

(d)                          The Manager shall render to the Owner any other financial statements or written matters that are required to be prepared by the Manager and submitted to the Owner by the Mississippi Gaming Commission.

 

3.2                 Except a otherwise provided for in Standard Operating Procedures jointly prepared by Owner and Manager, the Manager’s duties provided for in Section 3.1 above, shall not apply to Ancillary Operations and Facilities.

 

4.                        Manager’s Compensation.

 

4.1.                             Initial Term Fees.  During the pre-Operational Phase (i.e., the Initial Term), and in accordance with the plan and budgets prepared jointly by the Owner and the Manager, no fees shall be paid to Manager for its services provided pursuant to this Agreement, except for training of Mississippi Casino employees in anticipation of any Mississippi Casino opening (“Pre-Opening Casino Employee Training Services”). Owner shall bear all out-of-pocket training costs incurred by the Manager and pay in advance such sums as may be reasonably requested by the Manager for anticipated training costs. Manager will use its best efforts to coordinate such training activities within the two (2) months preceding an anticipated Casino opening date, subject to any changes therein.

 

4.2.                             Operational Term Management Fee.  In consideration of the services to be provided by Manager pursuant to the provisions of this Agreement, Owner shall pay to Manager an annual fee (hereinafter referred to as the “Operational Term Management Fee”) with respect to each Casino for each twelve (12) consecutive month period, or part thereof, with the first such period beginning on the date of the opening of the Mississippi Casino and ending on the first anniversary thereof (each such twelve [12] month period or part thereof hereinafter referred to as an “Annual Period”), in an amount equal to the sum of the following:

 

(a)                                  An amount equal to the sum of the following percentages of the accumulated “Gross Gaming Revenue,” as such term is hereinafter defined, for each Annual Period:

 

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Accumulated Annual

 

 

 

Gross Gaming Revenue

 

Percentage

 

$0.01 - $100,000,000.00

 

1.2

%

$100,000,001.00 - $140,000,000.00

 

.75

%

Over $140,000,000.00

 

.50

%

 

(b)                                  An amount equal to the sum of the following percentages of the accumulated “Net Gaming Revenue,” as such term is hereinafter defined, for each Annual Period:

 

Accumulated Annual

 

 

 

Net Gaming Revenue

 

Percentage

 

$0.01 - $25,000,000.00

 

2

%

Over $25,000,000.00

 

3

%

 

The Operational Term Management Fee shall be paid monthly on the tenth (10th) day of each month.

 

4.3.                             For purposes of computing the Operational Term Management Fee herein, “Gross Gaming Revenue” shall mean all amounts bet by patrons at a Mississippi Casino subtracted by the amounts paid out to patrons at such Mississippi Casino as winnings, as well as that percentage of the proceeds of any business interruption insurance policy carried by Owner that is the same percentage which the revenue generated by the particular Mississippi Casino for the twelve (12) month period ending on the date of an occurrence giving rise to a claim under any such business interruption insurance policy bears to the total revenue generated by the entire Mississippi Gaming Operation of which the particular Mississippi Casino is a part, for the same period. Gross Gaming Revenue shall not include interest income, revenues from Ancillary Operations or Facilities as identified in Section 2.2 of this Agreement, or tips given by players to employees “Net Gaming Revenue” shall mean “Gross Gaming Revenue” less the costs and expenses attributable to Mississippi Gaming Operations, as such costs and expenses are listed on Schedule A , attached hereto and made a part hereof (hereinafter referred to as the “Costs and Expenses”). The amount of the Costs and Expenses shall be computed in accordance with generally accepted accounting principles applied on a consistent basis.

 

5.                  Owner’s Duties.

 

5.1                                Owner shall provide consultants, policy support, and information to reasonably assist Manager in the discharge of Manager’s duties and responsibilities hereunder.

 

5.2.               During the Operational Terms, Owner shall be responsible for providing and maintaining all necessary cash and cash reserves

 

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adequate for the opening of each Mississippi Casino and the day-to-day gaming operations of each Mississippi Casino, as established in consultation with Manager and subject to any requirements of the Mississippi Gaming Commission.

 

5.3.                             During the term of this Agreement, Owner shall provide sufficient funds to bankroll gaming operations and working capital in amounts which the Owner and Manager mutually agree are adequate to assure the uninterrupted and efficient operations of each Mississippi Casino.

 

5.4.                             Owner shall perform such duties and obligations as may be provided for elsewhere in this Agreement including, but not limited to, construction and decoration of each Mississippi Casino in a timely manner and in consultation with the Manager.

 

6.                                       Insurance.

 

6.1.                             Manager shall maintain, at Owner’s expense and approval and with companies and through brokers selected by Owner, insurance of such kinds and amounts as Owner shall be required to carry pursuant to the provisions of any deed of trust, loan agreement, lease or other agreement affecting each Mississippi Casino, as well as any other insurance that may be required or necessary by applicable gaming regulations. The Owner shall provide the Manager with copies of all insurance policies as the Manager may from time to time request.

 

6.2.                             There shall be maintained, at the expense of Owner, throughout the term of this Agreement such fidelity and other bonds as may be required from time to time by the appropriate regulatory authorities or for the protection of the respective interests of the Owner and Manager. Any such bonds shall also protect the interests of the holder of any mortgage, or deed of trust, and shall be in such amounts and obtained from such surety companies as owner, lender or mortgage holder shall direct.

 

6.3.                             All policies insuring against liability, damage to any Mississippi Casino or portions thereof or interruption of business, rent or the like and fidelity and other bonds shall name Owner, Manager, and such other parties as may be required by the provisions of any mortgage, lease, other agreement or regulation as the insured thereunder, as their respective interest may appear. All policies of hazard insurance shall include loss payment clauses in the form required by any deed of trust, lease or other agreement. All insurance and bond premiums shall be paid from the Casino operating accounts. Certificates of all policies of insurance and duplicates thereof shall be delivered to the Owner, Manager, any holder of any deed of trust or to such other persons or governmental authorities as Owner shall direct.

 

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6.4.                             Provided Manager or Owner shall procure and keep in force all of the procurable insurance mutually agreed upon by Owner and Manager and required to be obtained pursuant to the foregoing provisions of this Section, and shall name Manager as additional insured thereon, then to the extent that the same are covered by such Insurance, neither Owner nor Manager shall assert against the other any claims for any losses, damages, liability or expenses (including attorneys’ fees) incurred or sustained by either of them on account of damage or injury to person or property arising out of the ownership, operation or maintenance of each Mississippi Casino. The parties agree that all policies of insurance to be procured by Manager or Owner shall permit the foregoing waiver.

 

6.5.                             In accordance with Standard Operating Procedures jointly prepared by Owner and Manager, Owner shall give to Manager, and Manager shall give to Owner, prompt notice of any claim made against Owner or Manager in excess of Five Thousand and no/100 Dollars ($5,000.00), and each party shall cooperate fully with each other and with any insurance carrier to the end that all such claims will be properly investigated, defended and compromised. Claims should be promptly submitted to the insurance carrier, and if said claims are less than the deductible, they may be settled by Manager, in its sole discretion.

 

7.                        Indemnification.

 

7.1.                             Owner shall indemnify and hold Manager, its officers, directors, agents, employees or affiliates harmless against any losses, damages or expenses, or claims of third parties (including legal and other fees) in excess of the amount of any insurance proceeds paid to Manager, which is incurred or sustained by Manager as a result of or attributable to any breach of this agreement, negligent or intentional acts, violation of any law, rule, regulation or agreement with any governmental authority by Owner or any person or entity acting on behalf of or who is under the control or supervision of Owner.

 

7.2                                Manager shall indemnify and hold owner, its officers, directors agents, employees or affiliates harmless against any losses, damages or expenses, or claims of third parties (including legal and other fees) in excess of the amount of any insurance proceeds paid to Owner, which is incurred or sustained by Owner as a result of or attributable to any breach of this agreement, negligent or intentional acts, violation of any law, rule, regulation or agreement with any governmental authority by Owner or any person or entity acting on behalf of or who is under the control or supervision of Manager.

 

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8.                                       Casualty.

 

8.1.                             In the event of any damage or loss to a Mississippi Casino by fire or other casualty, Manager shall act as follows: If the damage or loss involves more than Five Thousand Dollars ($5,000.00), Manager shall give immediate written notice thereof to Owner.

 

8.2.                             Regardless of the amount of such damage or loss, as agent for Owner, Manager shall promptly make claim for the proceeds of any insurance covering such damage or loss, and in owner’s name shall litigate or negotiate for payment of such proceeds, selecting counsel if necessary for such purpose, unless counsel is designated by Owner.

 

8.3.                             Manager shall give written notice of any proposed settlement to Owner, shall settle such claim and, on behalf of Owner, collect the proceeds thereof; provided that, Owner’s written consent, which shall not be unreasonably withheld or delayed, shall be required to validate the settlement of any claim for loss or damage in excess of Ten Thousand Dollars ($10,000.00).

 

9.                        Early Termination of Agreement.

 

9.1.                             Except as to liabilities or claims which shall have accrued or arisen prior to such termination, including, without limitation, the amount of all accrued Operational Term Management Fee payable to Manager pursuant to Section 4.2, through the date of any such termination (which shall survive termination), at the election of Owner, all obligations hereunder may be terminated only upon the occurrence of any of the following events:

 

(1)                                  If the Manager fails or refuses to submit the required application for licensure by the Mississippi Gaming Commission, after thirty (30) days prior written notice of such failure or refusal, or

 

(2)                                  If the Manager’s application is formally rejected in writing by the Mississippi Gaming Commission or if approval is subsequently revoked or suspended in the State of Mississippi, or

 

(3)                                  If the Manager is convicted of a felony or misdemeanor (other than a conviction for a traffic offense and other than a conviction which does not cause the revocation or suspension of any gaming license issued by the State of Mississippi which is required for the ownership or operation of a Mississippi Gaming Operation), or if the Owner reasonably believes the Manager jeopardises or causes the withdrawal of any gaming license, permit or authorization necessary to conduct the business of the owner, or

 

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(4)                                  If there shall be filed by Manager in any court pursuant to any statute either of the United States or of any state a petition in bankruptcy or insolvency or for a reorganization or for the appointment of a receiver or trustee of all or a substantial part of Manager’s property, or if Manager makes an assignment for or petitions for or enters into an arrangement for the benefit of creditors or if an involuntary petition in bankruptcy is filed against Manager which is not dismissed within ninety (90) days thereafter.

 

9.2.                             Except as to liabilities or claims which shall have accrued or arisen prior to such termination, including, without limitation, the amount of all accrued Operational Term Management Fee payable to Manager pursuant to Section 4.2, through the date of any such termination (which shall survive termination), at the election of Manager, all obligations hereunder may be terminated only upon the occurrence of any of the following, events:

 

(1)                                  If the Owner shall fail or refuse to provide the capital and operating funds required pursuant to a budget previously approved by Owner, after ten (10) days prior written notice of such failure or refusal, or

 

(2)                                  Owner’s failure or refusal to pay Manager the operational Term Management Fee payable to Manager pursuant to Section 4.2, or

 

(3)                                  The occurrence of a default under any of the Loan Agreements, or

 

(4)                                  If the Manager reasonably believes that Owner is not cooperating with Manager or with the Mississippi Gaming Commission, in connection with any proceeding involving the application, maintenance or reinstatement of a gaming license or permit from the State of Mississippi, or

 

(5)                                  In the event of the sale of all or substantially all of the assets of a Mississippi Gaming Operation, in which event Manager may elect to terminate this Agreement as to any such Mississippi Gaming Operation and Owner shall pay Manager the sum of One Hundred Thousand ($100,000.00) Dollars which shall be paid at the time of the closing of any such sale. Owner and Manager have negotiated the amount provided for above and agree and acknowledge that it represents fair payment and is not intended to be nor shall it be deemed to be a penalty, or

 

(6)                                  In the event more than fifty (50%) percent of the outstanding voting capital stock of Owner is sold, or in the event of the merger or liquidation and dissolution of Owner, or

 

(7)                                  If there shall be filed by Owner in any court pursuant to any statute either of the United States or of any state

 

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a petition in bankruptcy or insolvency or for a reorganization or for the appointment of a receiver or trustee of all or a substantial part of Owner’s property, or if owner makes an assignment for or petitions for or enters into an arrangement for the benefit of creditors or if an involuntary petition in bankruptcy is filed against Owner which is not dismissed within ninety (90) days thereafter.

 

9.3.                             Upon termination of this Agreement by either party, Manager shall turn over to Owner all property, books and records of the Casino, and Owner and Manager shall fully cooperate with each other in connection with all matters relating to the Casino which took place prior to termination.

 

10.                 Damage or Destruction of Casino.

 

10.1.                      Subject to the requirements of any deed of trust, mortgage or other security device encumbering any Mississippi Casino or its property and to the extent that there are insurance proceeds available to Owner, if the Casino, or any portion thereof, shall be damaged or destroyed at any time or times during the term of this Agreement by storm, fire or any other casualty, Owner, at no expense or risk to Manager, shall apply available insurance proceeds to repair, rebuild or replace the same (such repairing, rebuilding or replacing being herein called “restoration”) so that after such restorations the Casino shall be substantially the same as prior to such damage or destruction, and all proceeds of insurance, other than business interruption, shall be made available to owner for such purpose; provided that, Manager shall have the right to ensure that such proceeds of insurance shall be applied to such restoration. If Owner fails to undertake such restoration within ninety (90) days after such storm, fire or other casualty, or shall fail to complete the same diligently, Manager may, but shall not be obligated to, undertake or complete such restoration and, to the extent of available insurance proceeds, shall be entitled, upon demand, to be repaid therefor, including all necessary incidental costs and expense incurred in connection therewith, together with interest on the aggregate out-of-pocket amount expended at a per annum rate equal to the prime or base rate for commercial loans publicly announced by Chase Manhattan Bank, National Association, or its successors, at the time of such expenditure, plus two percent (2%) per annum (but not to exceed the maximum interest allowed by law) from the date of making such expenditure or expenditures until repayment thereof. In such case, the proceeds of insurance shall be made available to Manager for this purpose; provided that, Owner shall have the right to ensure that such proceeds of insurance shall be applied to such restoration. If the restoration costs less than One Hundred Thousand and No/100 dollars ($100,000.00) to complete, Manager shall supervise all aspects of the restoration at no additional cost to the Owner, provided, however, if the proceeds of insurance

 

17



 

provide for a supervisory fee, such fee shall be paid to Manager up to an amount not to exceed Twenty Five Thousand and No/100 Dollars ($25,000.00).

 

10.2.                      Notwithstanding anything contained in this Section 10.2 to the contrary, if, in connection with any casualty, a Casino shall be so damaged or destroyed such that it cannot be restored within nine (9) months after the casualty, and Owner shall elect not to use the proceeds of insurance to rebuild, repair or restore the Casino, then either Owner or Manager shall have the right, exercisable by written notice to the other, given within ninety (90) days from the occurrence of such casualty, to terminate this Agreement as to such damaged or destroyed Casino.

 

10.3.                      Should the period of restoration exceed ninety (90) days, then commencing on the 91st day, Manager shall be entitled to one-half of its Management Fees during the remaining period of restoration based on the average monthly fee paid to the Manager during the three months immediately preceding the casualty.

 

11.                 Arbitration.

 

The parties agree that any dispute arising out of interpretation or performance of this Agreement involving an aggregate sum of Two Hundred Thousand and No/100 Dollars ($200,000.00) or less, shall be submitted to binding arbitration in Jackson, Mississippi, in accordance with the Commercial Arbitration Rules of the American Arbitration Association by arbitrators chosen and paid for as provided in this Section 11. Owner and Manager shall each select and pay the fees and expenses of one arbitrator and those two shall select a third arbitrator. The fees of the third arbitrator shall be paid one-half by the Owner and one-half by the Manager. The arbitrators shall have the power to award attorneys’ fees and costs of arbitration to the prevailing party in any arbitration under this Section. The arbitrators shall set forth the reasons for any decision.

 

12.                Gaming Licensure Expenses.

 

Manager shall bear and pay all expenses, including investigative fees under Mississippi Gaming Commission Regulations with respect to the licensure of Manager and any of its employees.

 

13.                Loan.

 

Manager shall loan to the Owner the sum of $2,000,000 upon the terms and conditions contained in the Loan Documents.

 

18



 

14.                                No Partnership or Joint Venture.

 

The relationship between the Owner and Manager is not intended to be nor shall it be deemed a partnership or joint venture. The Owner and Manager agree that neither shall pledge the other’s credit in any manner and sum and that all property in and about the Mississippi Casinos shall be and will remain the property of the Owner free and clear of all liens and security interests of or incurred by the Manager except as may otherwise be specifically provided for in this Agreement.

 

13.                                Severability: Conflict with Mississippi Gaming Commission Rules and Regulations.

 

If any provisions of this Agreement shall be determined by a court of competent jurisdiction or by the Mississippi Gaming Commission to be illegal, invalid or unenforceable, such determination shall not effect or impair the validity, legality, or enforceability of the remaining provisions contained herein. If there shall be any conflict between any provision in this Agreement and the rules and regulations of the Mississippi Gaming Commission, then such rules and regulations shall govern and control the conduct and actions of the Owner and Manager.

 

16.                                Notices.

 

Any notice, demand, request or other instrument which may be or is required to be given under this Agreement shall be delivered in person, by prepaid recognized national or international courier service, return receipt requested, or sent by United States registered or certified mail, postage prepaid, return receipt requested, addressed to the respective parties at the addresses set forth on the signature page(s) below or at such other address as such party shall designate by like written notice, and shall be effective upon receipt. A copy of any notice, demand, request or other instrument which may be or is required to be given under this Agreement shall be sent to:

 

Alan R. Chase, Esq.

Cohen, Chase & Trautman, P.A.

9400 South Dadeland Boulevard

Suite 600

Miami, Florida 33158

Facsimile No.: (305) 666-8152

 

Michael F. Cavanaugh, Esq.

771 Beach Boulevard

Biloxi, Mississippi 39530

Facsimile No.: (601) 374-2252

 

19



 

A copy of each notice, demand, request or other instrument transmitted in accordance with this Section shall simultaneously be transmitted by facsimile machine to the Owner, the Manager, and above-named counsel at the following telephone numbers:

 

Owner Facsimile No.:

 

Manager Facsimile No.: (813) 397-0758

 

17.                                Assignment.

 

Neither this agreement nor any other rights or obligations hereunder may be assigned or transferred by either party without express written consent of Manager and Owner, which consent shall not be unreasonably withheld.

 

16.                                Controlling Law.

 

This Agreement shall be governed by and construed in accordance with the laws of the United States where applicable and otherwise by the laws of the State of Mississippi, except those pertaining to choice of law. Venue for all disputes shall be in the State of Mississippi, U.S.A., and the parties consent to such venue in all cases.

 

19.                                Binding Effect.

 

This Agreement shall be only for the benefit of and binding upon the Owner and Manager and their respective successors and assigns.

 

20.                                Counterparts.

 

This Agreement shall be executed in six (6) counterparts, each of which shall be deemed an original of this Agreement.

 

21.                                Interpretation and Rules of Construction.

 

Section and subsection headings are for reference purposes only and are not intended to affect the meaning, interpretation, or construction of this Agreement. All references to amounts expressed in dollars shall refer to the lawful currency of the United States of America. Owner and Manager acknowledge and agree that they have each reviewed this Agreement and that any rule of construction resolving ambiguities against the drafting party shall not be employed in the interpretation of this Agreement or any amendment, exhibit or schedule hereto.

 

20



 

22.                                Further Assurances.

 

Owner and Manager hereby agree for themselves and for their respective successors and assigns to execute and deliver any instruments and to perform any acts which may be necessary or helpful to carry out the purposes of this Agreement.

 

23.                                Attorneys’ Fees.

 

In the event a suit or proceeding is brought by Owner or Manager to enforce or to defend its provisions, or to seek remedy for any breach hereof, the prevailing party shall be entitled to receive its reasonable attorneys’ fees and disbursements incurred in connection with such suit or proceeding, including fees and expenses incurred in any appellate proceedings.

 

24.                                Entire Agreement.

 

This Agreement contains the final and entire agreement between the parties hereto regarding management of the Mississippi Casinos. No change or modification of this Agreement shall be valid or binding upon the parties hereto unless such change or modification shall be in writing and signed by the parties hereto, and neither the parties nor their agents shall be bound by any terms, conditions, statements, warranties or representations, oral or written, not herein contained.

 

IN WITNESS WHEREOF, the parties hereto have signed and sealed this Agreement the day and year first above written.

 

 

CASINO WORLD INC.

 

Address:

200 Government St. East

 

 

Pensacola, FL 32501

 

 

 

 

 

 

 

By:

/s/ Charles H. Reddien

 

 

CHARLES H. REDDIEN, President

 

 

 

 

 

MISSISSIPPI GAMING CORPORATION

 

Address:

200 Government St. East

 

 

Pensacola, FL 32501

 

 

 

 

 

 

 

By:

/s/ Charles H. Reddien

 

 

CHARLES H. REDDIEN, President

 

21



 

 

CASINOS AUSTRIA MARITIME CORPORATION

 

Address:

150 153rd Avenue East

 

 

Suite 3008

 

 

Madeira Beach, FL 33708

 

 

 

 

 

 

 

By:

/s/ Peter Mueller

 

 

PETER MUELLER,

 

 

Executive Vice President

 

22



 

SCHEDULE A TO MANAGEMENT AGREEMENT BETWEEN CASINO WORLD INC. AND MISSISSIPPI GAMING CORPORATION, (COLLICTIVELY, OWNERS) AND CASINOS AUSTRIA MARITIME CORPORATION (MANAGER) DATED JUNE 19, 1993

 

·                                           All necessary operating expenses directly related to the operations of the Casinos, Including but not limited to:

 

·                                           tax and license expenses attributable to gaming revenues;

 

·                                           Casinos receivable collection expenses;

 

·                                           straight line depreciation of Casino fixed assets;

 

·                                           finance costs related to Casino furniture, fixtures, and equipment;

 

·                                           all insurance costs (liability, property, employee bonding).

 

·                                           Casino marketing and advertising costs including Casino complimentaries and junket expenses.

 

·                                           Maintenance and upkeep costs allocated to the Casinos on a square foot basis.

 

·                                           Payroll and related expenses attributable to Casino employees

 

It is agreed that necessary operating expenses directly related to the operation of the Casinos shall not include the allocation of any costs and expenses attributable to Owners’ non-Casino overhead or attributable to Ancillary Operations and Facilities.

 

/s/ Michael F. Cavanaugh

 

/s/ Alan R. Chase

MICHAEL F. CAVANAUGH, ESQUIRE

ALAN R. CHASE, ESQUIRE

(Counsel to Owner)

(Counsel to Manager)

 


Exhibit 99.1

 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONTENTS

 

 

Page

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-2

 

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2013

F-3

 

 

CONSOLIDATED STATEMENTS OF LOSS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

F-4

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

F-5

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

F-6

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-7

 

F-1



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of:

Diamondhead Casino Corporation and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of Diamondhead Casino Corporation and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of loss, changes in stockholders’ equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 2014. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamondhead Casino Corporation and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the consolidated financial statements, the Company has incurred significant recurring net losses over the past few years. In addition, the Company has no operations, except for its efforts to develop the Diamondhead, Mississippi property. Such efforts may not contribute to the Company’s cash flows in the foreseeable future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to raise the necessary capital with which to satisfy liabilities, fund future costs and expenses and develop the Diamondhead, Mississippi property. Management’s plans in regard to these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Friedman LLP

New York, New York

March 31, 2015

 

F-2



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2014 AND 2013

 

 

 

2014

 

2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

843,083

 

$

7,106

 

Other current assets

 

36,655

 

12,687

 

Total current assets

 

879,738

 

19,793

 

 

 

 

 

 

 

Land held for development (Note 3)

 

5,476,097

 

5,476,097

 

 

 

 

 

 

 

Deferred financing costs (net of amortization of $18,518 in 2014 and $64,094 in 2013)

 

182,582

 

 

Other assets

 

80

 

80

 

 

 

 

 

 

 

 

 

$

6,538,497

 

$

5,495,970

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Notes payable

 

$

1,962,500

 

$

1,962,500

 

Short term financing agreement

 

14,905

 

10,325

 

Accounts payable and accrued expenses

 

3,304,479

 

2,690,744

 

Total current liabilities

 

5,281,884

 

4,663,569

 

 

 

 

 

 

 

Debenture payable (net of unamortized discount of $48,887)

 

1,113

 

 

 

 

 

 

 

 

Convertible debentures payable (net of unamortized discount of $1,778,859)

 

21,141

 

 

 

 

 

 

 

 

Derivative liability

 

3,754,233

 

 

 

 

 

 

 

 

Total liabilities

 

9,058,371

 

4,663,569

 

 

 

 

 

 

 

Commitments and contingencies (Notes 3 and 11)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficiency) (Note 8)

 

 

 

 

 

Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,086,000 in 2014 and 2013 (aggregate liquidation preference of $2,519,080 in 2014 and 2013).

 

20,860

 

20,860

 

Common stock, $.001 par value; shares authorized 50,000,000, Issued: 39,052,472 in 2014 and 2013, outstanding: 36,297,576 in 2014 and 2013.

 

39,052

 

39,052

 

Additional paid-in capital

 

35,568,649

 

35,624,525

 

Unearned ESOP shares

 

(3,558,078

)

(3,676,679

)

Accumulated Deficit

 

(34,461,551

)

(31,084,176

)

Treasury stock, at cost, 368,526 shares at December 31, 2014 and 288,981 shares at December 31, 2013

 

(128,806

)

(91,181

)

 

 

 

 

 

 

Total stockholders’ equity (deficiency)

 

(2,519,874

)

832,401

 

 

 

 

 

 

 

 

 

$

6,538,497

 

$

5,495,970

 

 

See the accompanying notes to these consolidated financial statements.

 

F-3



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF LOSS

 

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

2014

 

2013

 

COSTS AND EXPENSES

 

 

 

 

 

Administrative and General

 

$

974,844

 

$

625,148

 

Stock-based Compensation

 

 

352,892

 

Amortization

 

18,518

 

856

 

Other

 

55,958

 

62,174

 

 

 

 

 

 

 

 

 

1,049,320

 

1,041,070

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Amortization of Debt Discount

 

(22,254

)

 

Interest Expense

 

(306,182

)

(272,606

)

Change in Fair Value of Derivative Liability

 

(1,904,233

)

 

Other Miscellaneous Income

 

6,214

 

750

 

 

 

 

 

 

 

 

 

(2,226,455

)

(271,856

)

 

 

 

 

 

 

NET LOSS

 

(3,275,775

)

(1,312,926

)

 

 

 

 

 

 

PREFERRED STOCK DIVIDENDS

 

(101,600

)

(101,600

)

 

 

 

 

 

 

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

 

$

(3,377,375

)

$

(1,414,526

)

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(.093

)

$

(.040

)

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

36,297,575

 

35,472,805

 

 

See the accompanying notes to these consolidated financial statements.

 

F-4



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

2014

 

2013

 

Preferred Stock

 

 

 

 

 

Balance January 1

 

$

20,860

 

$

20,860

 

Balance December 31

 

$

20,860

 

$

20,860

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Balance January 1

 

$

39,052

 

$

37,275

 

Issued in Private Placement

 

 

1,011

 

Issued for Interest

 

 

766

 

Balance December 31

 

$

39,052

 

$

39,052

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

Balance January 1

 

$

35,624,525

 

$

35,036,631

 

Issuance of Shares in Private Placement

 

 

150,714

 

Stock-based Awards

 

25,100

 

352,892

 

Issued for Interest

 

 

148,799

 

ESOP Defaulted Shares

 

(80,976

)

(64,511

)

Balance December 31

 

$

35,568,649

 

$

35,624,525

 

 

 

 

 

 

 

Common Stock Subscriptions

 

 

 

 

 

Balance January 1

 

$

 

$

151,725

 

Issuance of Stock for Sale

 

 

(151,725

)

Balance December 31

 

$

 

$

 

 

 

 

 

 

 

Unearned ESOP Shares

 

 

 

 

 

Balance January 1

 

$

(3,676,679

)

$

(3,795,281

)

Shares Acquired from ESOP

 

118,601

 

118,602

 

Balance December 31

 

$

(3,558,078

)

$

(3,676,679

)

 

 

 

 

 

 

Accumulated (Deficit)

 

 

 

 

 

Balance January 1

 

$

(31,084,176

)

$

(29,669,650

)

Preferred Stock Dividends

 

(101,600

)

(101,600

)

Net Loss for Year

 

(3,275,775

)

(1,312,926

)

Balance December 31

 

$

(34,461,551

)

$

(31,084,176

)

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

Balance January 1

 

$

(91,181

)

$

(37,091

)

Shares Acquired from ESOP

 

(37,625

)

(54,090

)

Balance December 31

 

$

(128,806

)

$

(91,181

)

 

 

 

 

 

 

Total Stockholders’ Equity (Deficiency)

 

$

(2,519,874

)

$

832,401

 

 

See the accompanying notes to these consolidated financial statements

 

F-5



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

 

 

2014

 

2013

 

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(3,275,775

)

$

(1,312,926

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Amortization

 

18,518

 

856

 

Change in fair value of derivative liability

 

1,904,233

 

 

Amortization of debt discount

 

22,254

 

 

Stock-based Compensation

 

 

352,892

 

Decrease (Increase) in:

 

 

 

 

 

Other assets

 

(23,968

)

85

 

Increase in:

 

 

 

 

 

Accounts payable and accrued expenses

 

512,135

 

851,335

 

Net cash used in operating activities

 

(842,603

)

(107,758

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from Private Placements, net of financing costs

 

1,674,000

 

20,500

 

Proceeds from Short Term Note

 

16,355

 

11,444

 

Payment of Short Term Note

 

(11,775

)

(11,921

)

Net cash provided by financing activities

 

1,678,580

 

20,023

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

835,977

 

(87,735

)

Cash beginning of year

 

7,106

 

94,841

 

Cash end of year

 

$

843,083

 

$

7,106

 

 

 

 

 

 

 

Cash paid for interest

 

$

404

 

$

261

 

 

 

 

 

 

 

Non-Cash Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Stock issued to satisfy payment of interest

 

$

 

$

149,565

 

 

 

 

 

 

 

Warrants included in deferred financing costs

 

$

25,100

 

$

 

 

 

 

 

 

 

Unpaid preferred stock dividends included in accounts payable and accrued expenses

 

$

355,600

 

$

254,000

 

 

See the accompanying notes to these consolidated financial statements.

 

F-6



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Business

 

Diamondhead Casino Corporation and Subsidiaries (the “Company”) owns a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi on which it plans, in conjunction with one or more partners, to construct a casino resort and hotel and associated amenities. The Company was originally formed to principally own, operate and promote gaming vessels offering day and evening cruises in international waters.

 

The Company was previously registered with the Securities and Exchange Commission and its stock traded on the over-the counter bulletin board under the symbol “DHCC”.

 

Note 2. Liquidity and Going Concern

 

These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, has no operations, generates no operating revenues, and as reflected in the accompanying consolidated financial statements, incurred a loss applicable to common stockholders of $3,377,375 and $1,414,526 for the years ended December 31, 2014 and 2013 respectively.

 

The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, open, and operate a casino resort.

 

In the recent past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds and offered, through Private Placements, convertible instruments more fully described in Note 4 to these consolidated financial statements.

 

Pursuant to a Private Placement Memorandum dated February 14, 2014, the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures were offered in three tranches as follows:

 

Tranche 1:    The Company offered $1,000,000 of First Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 (the “First Tranche Debentures”), subject to certain conditions. The First Tranche Debentures were originally convertible at a Conversion Price of $.30 per share into an aggregate of 3,333,333 shares of Common Stock of the Company. The minimum principal amount of First Tranche Debentures that could be purchased was $50,000.

 

On March 31, 2014, subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. Thus, the First Closing occurred on that date. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000. The First Tranche Debentures bear interest at 4% per annum after 180 days and are be secured by a lien on the Company’s Mississippi property.

 

The First Tranche Debentures were originally convertible into 3,333,333 shares of Common Stock when and if:

 

F-7



 

1.               the Second Closing Obligations (as defined below) had been met on or before December 31, 2014; and

 

2.               the average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

The First Tranche Debentures would be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the First Tranche Debentures would be released upon conversion.

 

The “Second Closing Obligations” were originally as follows:

 

1.               The Company has filed its Annual Reports on Form 10-K for the years ended December 31, 2011 and 2012, and any other Annual Report on Form 10-K that would have been required to have been filed as of the date of the Second Closing;

 

2.               The Company has filed its Quarterly Reports on Form 10-Q for the periods ended September 30, 2011, March 31, 2012, June 30, 2012, September 30, 2012, March 31, 2013, June 30, 2013 and September 30, 2013, and any other Quarterly Report on Form 10-Q that would have been required to have been filed as of the date of the Second Closing;

 

3.               The Company and its subsidiaries have filed their federal and state tax returns for the years ended 2011 and 2012;

 

4.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and Federal law, at which the stockholders of the Company approved an increase in the number of authorized shares of Common Stock of the Company from fifty million to one hundred million, or the Company has otherwise obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

5.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the investors of this Offering in accordance with the terms of the Private Placement Memorandum;

 

6.               The Company has obtained an updated property survey and preliminary engineering estimates for the construction of a casino/hotel on the Property;

 

7.               The Company has obtained a site location engineering study identifying viable locations(s) for the placement of the proposed casino/hotel on the Property; and

 

8.               The Company has obtained preliminary architectural estimates for the construction of the casino/hotel on the Property.

 

However, on June 18, 2014, the SEC issued an Order of Suspension of Trading with respect to the Company’s securities. The Order stated, among other things, that “[t]he Commission was of the opinion that the public interest and the protection of investors require[d] a suspension of trading” and the Commission ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the Company’s securities be suspended from June 18, 2014 through July 1, 2014. On June 18, 2014, the SEC also issued an Order Instituting Administrative Proceedings (“OIP”) and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, alleging that the Company was delinquent in its periodic filings with the SEC, having not filed any periodic reports since it filed its Form 10-Q for the period ended June 30, 2011 and, therefore, that the Company had failed to comply with Securities Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder.

 

F-8



 

On June 27, 2014, the Company filed an Answer to the OIP in which it admitted that it had not filed certain periodic reports since it filed its Form 10-Q for the period ended June 30, 2011. On July 29, 2014, the Company attended a prehearing conference at which it requested an in-person hearing. On August 11, 2014, the SEC issued an Initial Decision on Default and Order for Motion for Summary Disposition as to Diamondhead Casino Corporation. The SEC found that there were no issues of material fact that required an in-person hearing, granted the Division leave to file a motion for summary disposition, and set a briefing schedule for the parties to file their briefs.

 

The Board of Directors of the Company determined that defending the Company against the OIP would likely have resulted in extensive, time-consuming and expensive litigation. Moreover, the Company believed that litigation would not have resulted in a favorable outcome inasmuch as the Company had not, in fact, met its reporting requirements. Accordingly, the Board of Directors determined that litigation would have constituted a waste of the Company’s scarce resources and capital.

 

On August 29, 2014, the Company made an Offer of Settlement in which it admitted that it had failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder because it had not filed any periodic reports with the SEC since the quarterly period ended June 30, 2011. The Company consented to the entry of an Order, pursuant to Section 12(j) of the Exchange Act, revoking the registration of the Company’s securities registered pursuant to Section 12 of the Exchange Act. On September 4, 2014, the SEC entered an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Diamondhead Casino Corporation, pursuant to the Offer of Settlement. Thus, effective September 4, 2014, the registration of each class of the Company’s securities registered pursuant to Section 12 of the Exchange Act was revoked and the Company’s Common Stock no longer trades on any exchange or other public market.

 

To re-register its stock, the Company is required, in addition to other steps, to file a Form 10 with two years of audited financial statements with the Securities and Exchange Commission.  Thus, the Company was no longer required to file the Form 10-K’s and Form 10-Q’s it contemplated filing under the terms of the original Private Placement. Therefore, the Company decided to offer to amend the terms for conversion of the First Tranche Debentures and for issuance and conversion of the Second and Third Tranche Debentures. On December 31, 2014, Investors representing $950,000 of First Tranche Debentures, convertible into 3,166,666 common shares, agreed that the First Tranche Debentures would be converted when and if:

 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

F-9



 

The remaining $50,000 investment from the First Tranche remains as a collateralized Debenture payable in six years without the conversion rights.

 

Tranche 2 :  The Company originally offered $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Second Tranche Debentures are convertible, at a Conversion Price of $.45 per share, into an aggregate of 2,222,222 shares of Common Stock, on certain terms and conditions. The minimum principal amount of Second Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares agreed to amend the Closing Obligations for issuance of the Second Tranche Debentures by eliminating the prior obligations and substituting a single requirement instead, namely, that “[t]he Company has filed an application for gaming site approval with the Mississippi Gaming Commission pursuant to Rule 1.4 of the Mississippi Gaming Regulations (2013 edition).”

 

The Company had filed this application in May 2014 and had obtained Gaming Site Approval on August 21, 2014.  Therefore, a second closing occurred on December 31, 2014, when the amended terms were agreed to, at which time the Escrow Agent released $850,000 to the Company. The remaining $150,000 of the original $1,000,000 of subscriptions escrowed for the Second Tranche Debentures was returned to three investors who did not agree to the amended terms for issuance and conversion of the Second Tranche Debentures.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares also agreed to amend the conversion terms of the Second Tranche Debentures. The Debentures would be converted when and if:

 

1.               The Company has filed a Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

Tranche 3 :   The Company originally offered $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Third Tranche Debentures were originally convertible, at a Conversion Price of $0.55 per share, into an aggregate of 1,818,182 shares of Common Stock, or convertible, at a Conversion Price of $0.75 per share, into an aggregate of 1,333,333 shares of Common Stock, subject to certain terms and conditions. The Conversion Price will depend upon a combined appraised value of an independent third party appraisal firm of (1) the Company’s casino project (including the value of that land upon which it is expected to be located) and (2) the undeveloped remaining Property (collectively, the “Valuation”). If the Valuation is $175 million or more, then the Conversion Price for the Third Tranche Debentures would be $0.75 per share. If the Valuation is less than $175

 

F-10



 

million, then the Conversion Price for the Third Tranche Debentures would be $0.55 per share. The minimum principal amount of Third Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Third Tranche Debentures convertible into 1,545,455 common shares at $.55 per share or 1,133,333 common shares at $.75 per share, depending on the “Valuation”, agreed to amend Third Closing Obligations to be completed by June 30, 2015, as follows:

 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the- counter market, interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of the Debenture; and

 

5                  The required appraisals have been completed and the “Valuation” calculated to determine the Conversion Price of the Tranche 3 Debentures.

 

At the Third Closing, assuming it occurs, the gross proceeds from the sale of the Third Tranche Debentures in the principal amount of $850,000 will be released from Escrow to the Company. The Third Tranche Debentures will bear interest at 4% per annum after 180 days and will be secured by a lien on the Company’s Mississippi property.

 

As amended, the Third Tranche Debentures will be converted into shares of Common Stock when and if the average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the applicable Third Tranche Debenture Conversion Price, based upon the Valuation, for the thirty consecutive business days immediately prior to such conversion date. The Third Tranche Debentures will be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the Third Tranche Debentures will be released upon conversion.

 

The gross proceeds received for the Third Tranche Debentures are being held in Escrow and will not be released unless and until the Third Closing Obligations have been met by June 30, 2015 and a certification to that effect has been forwarded to the Escrow Agent and each of the Investors (the “Third Closing”). If the Third Closing Obligations are not met, there will be no Third Closing and the remaining $850,000 in Escrow relating to the Third Tranche Debentures will be returned to the Investors without deduction or interest. There can be no assurance that the Company will satisfy the Third Closing Obligations. The Company believes that its failure to meet the Third Closing Obligations would have a material adverse impact on the Company.

 

Maximum Offering

 

In the event all of the terms and conditions for issuance of all of the Debentures have been met and in the event that all of the Debentures are eventually converted to Common Stock at the Conversion Prices in the Debentures (as amended), the Company will have issued a minimum of 6,188,888 shares of Common Stock upon conversion of all of the Debentures or a maximum of 6,601,010 shares of Common Stock upon conversion of all of the Debentures, depending on the Valuation required for the Third Tranche Debentures. Assuming a third closing, Tte proceeds to the Company from the sale of the Debentures will be $2,700,000 before deduction of commissions and expenses.

 

F-11



 

The following elements of the Debenture agreement remain unchanged and are as follows:

 

Escrow Agent

 

The proceeds from this offering were placed in an escrow account at Continental Stock Transfer & Trust Company, which is serving as the Escrow Agent.

 

Maturity Date and Interest Rate of Debentures

 

The maturity date of the Debentures shall be six years from the issue date of each of the Debentures. The Debentures may not be prepaid without the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever. The maturity date may be extended upon the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever.

 

Any interest due on the Debentures shall be computed based on a 365 day year and, at the option of the Company, be payable in cash or in Common Stock on March 1 of each year. If paid in Common Stock, the number of shares of Common Stock payable shall be computed by dividing the interest due by the average closing price of the Common Stock for the thirty consecutive business days immediately prior to the payment date.

 

Collateral for Debentures

 

The payment obligations under the Debentures will be secured by a lien on the Company’s Mississippi property (the “Investors Lien”). The Investors Lien will be pari passu with a lien that has been placed on the Property in favor of the President of the Company, the Vice President , and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). The President of the Company will serve as Lien Agent for the Executives Lien.

 

Anti-Dilution Provision

 

The conversion rights on each Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:

 

1.               The issuance of any of the other Debentures in the Offering or the issuance of shares of Common Stock upon conversion of any of the Debentures in the Offering;

 

2.               The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company prior to the Issue Date of the First Tranche Debentures in the Offering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.

 

The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).

 

Piggyback Registration Rights

 

The Investors received “piggyback” registration rights with respect to the common stock underlying the Debentures, on all registrations of equity securities of the Company under the Securities Act of 1933 for sale to the public.

 

F-12



 

Commissions and Expenses of the Offering

 

No commission or other remuneration was paid to any officer or director of the Company in connection with any sale of the Debentures. The Company agreed to pay Henley & Company, LLC (“Henley”), a commission of 6% of the gross proceeds to the Company from the sale of the Debentures, to reimburse Henley for related expenses up to a total of $75,000, and to issue warrants to purchase up to 75,000 shares of the Company’s Common Stock as described below.

 

The Company’s agreement with Henley provides that commissions due will be paid when, as, and if proceeds of the Offering are released to the Company. Following the First Closing, Henley received commissions of $60,000 and reimbursement for legal fees and expenses of $55,000. Henley was also issued a three year warrant to purchase 25,000 shares of common stock at $0.30 per share. The Company recorded deferred financing costs in the amount of $16,210 in the first quarter of 2014 based on the valuation of this warrant using the Black-Scholes option pricing model. In addition, following the Second Closing, Henley received commissions of $51,000 and reimbursement for legal fees and expenses of $10,000. Henley was issued an additional three year warrant to purchase 25,000 shares of common stock at $ 0.45 per share. The Company recorded additional deferred financing costs in the amount of $8,890 in the fourth quarter of 2014 based on the valuation of this warrant using the Black- Scholes option pricing model. Henley is also entitled to receive, upon the Third Closing, assuming it occurs, a commission of 6% of the proceeds received by the Company at such Closing, a three year warrant to purchase 25,000 shares of Common Stock at $0.55 or $0.75 per share (depending on the Valuation) and reimbursement of its related expenses up to a maximum of $10,000. For periods after September 3, 2014 (the last trading date of the Company’s stock before deregistration), the Company obtained a valuation of its stock price from an independent valuation expert.

 

In determining the fair value of each warrant granted, the Black-Scholes option-pricing model, consistent with the provisions of Financial Accounting Standards Board Accounting Standard Codification (“ASC”) Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 139.49% at March 31, 2014 and 130.39% at December 31, 2014, and risk-free interest rates of 0.9% at March 31, 2014 and 1.1% at December 31, 2014.

 

The Investors in the offering of the Debentures were “accredited investors” as defined in Rule 501 of Regulation D promulgated under Securities Act of 1933, as amended (the “Securities Act”). The offering was made in reliance on the exemption from registration afforded under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act.

 

As of December 31, 2014, the Company had $843,083 of operating cash on hand and current accounts payable and accrued expenses totaling $3,304,479. In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008 was payable in November 2012. Also, Convertible Notes issued via two Private Placements offered in 2010 totaling $962,500 in aggregate at December 31, 2014, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of the notes.

 

As of December 31, 2014, the Company had received $1,850,000 of proceeds from the closing of the First and Second Tranche Convertible Debentures and had expended approximately $1,006,900 of those proceeds for the payments of placement fees, costs associated with gaming site approval and working capital as summarized in the chart below.

 

F-13



 

Description of Expenditures

 

Amount

 

 

 

 

 

Private Placement related fees, commissions and expenses

 

$

185,785

 

Payment to the President per the Private Placement applied to past due office rents

 

100,000

 

Accounting and audit fees

 

75,000

 

Payroll paid to the Chairman and President for the period April 1, 2014 through December 31, 2014, and related taxes

 

319,409

 

Office rents for April 1, 2014 through December 31, 2014 paid to the President

 

40,806

 

Mississippi Property taxes and property related fees and expenses

 

58,258

 

State Franchise taxes, fines and penalties and registered agent fees

 

22,435

 

Mississippi property development consulting fees, engineering and survey costs and other fees and expenses

 

55,114

 

Feasibility Study

 

15,000

 

Appraisal Fee

 

12,500

 

Repayment of advance from a Director

 

10,000

 

Repayment of Advance from a Shareholder

 

25,000

 

Stock Transfer and Trust Company fees

 

14,125

 

Director and Officer liability insurance premiums

 

13,339

 

Other operating expenses

 

60,100

 

 

 

 

 

Total

 

$

1,006,871

 

 

In order to complete the requirements for a third closing and obtain the remaining $850,000 currently remaining in escrow, the Company is required to meet the Third Closing Obligations enumerated above. The Company does not have an estimate of the cost required to complete these items at this time.

 

Note 3. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all short term highly liquid investments with a maturity of three months or less to be cash equivalents.

 

Concentrated Credit Risk

 

The Company maintains its cash and cash equivalents with one institution which exceeded federally insured limits throughout the year. At December 31, 2014, the Company had cash on deposit of approximately $593,000 in excess of the federal insured limit of $250,000.

 

Land Held for Development

 

Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.

 

Land development costs, which have been capitalized, consist of the following:

 

F-14



 

Land under development

 

$

4,934,323

 

Licenses

 

77,000

 

Engineering and costs associated with permitting

 

464,774

 

 

 

 

 

 

 

$

5,476,097

 

 

Fair Value Measurements

 

The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable input that reflects management’s own assumptions.

 

The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and 2013:

 

 

 

2014

 

2013

 

Beginning balance

 

$

 

$

 

 

 

 

 

 

 

Total change in unrealized appreciation (depreciation) included in net assets

 

1,904,233

 

 

 

 

 

 

 

 

Purchases, other settlements and issuances, net

 

1,850,000

 

 

 

 

 

 

 

 

Ending balance

 

$

3,754,233

 

$

 

 

Sensitivity Analysis to Changes in Level 3 Assumptions

 

Significant inputs include the expected dates when required conditions are met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability while in the delisted mode and reversed when the Company becomes publicly listed as projected by management. In addition, use of different range of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.

 

Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.

 

The convertible debentures and derivative liability approximate fair value based on Level 3 inputs, as further discussed in Note 6.

 

F-15



 

Long-Lived Assets

 

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of December 31, 2014.

 

Employee Stock Ownership Plan

 

The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP.  Deborah A. Vitale is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.

 

As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:

 

(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.

 

In 2011, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. In each successive year, the Plan returned the 79,545 shares, which would have been allocated to employees annually, to treasury.

 

Income Taxes

 

Under the asset and liability method of ASC Topic 740, “Accounting for Income Taxes,” deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.

 

The Company follows the provisions of ASC Topic 740, “Accounting for Uncertainty in Income Taxes.” The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this standard, an entity may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standard also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods and requires increased disclosures. The Company does not have a liability for unrecognized tax benefits.

 

The Company is subject to U.S. federal or state income tax examinations by tax authorities for years after 2010. During the periods open to examination, the Company has net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these NOL carryforwards may be utilized in future periods, they remain subject to examination until they expire.

 

F-16



 

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2014 and 2013, the Company has no accrued interest or penalties related to uncertain tax positions.

 

Net Loss per Common Share

 

Basic earnings/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings/ (loss) per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially Convertible Debentures since the requirements for possible conversion have not yet, and may never be, met.

 

The table below summarizes the components of potential dilutive securities at December 31, 2014 and 2013.

 

 

 

December 31,

 

December 31,

 

Description

 

2014

 

2013

 

 

 

 

 

 

 

Convertible Preferred Stock

 

260,000

 

260,000

 

Options to Purchase Common Shares

 

3,440,000

 

3,440,000

 

Private Placement Warrants

 

3,036,500

 

2,986,500

 

Convertible Promissory Notes

 

1,925,000

 

1,925,000

 

 

 

 

 

 

 

Total

 

8,661,500

 

8,611,500

 

 

Segment Information

 

Operating segments are components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

The Company currently operates solely in one segment, development of land, which relates to planned future operations.

 

Stock Based Compensation

 

The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values.  In the first quarter of 2013, the Board of Directors awarded an option to purchase 2,000,000 shares of common stock at a price of $0.19 per share to the President, and then-Chairman of the Board of Directors (“the President”). In conjunction with the award, the President agreed to forfeit a previously-awarded option to purchase 450,000 shares of common stock at $1.25 per share, which would have expired on October 27, 2015. At the same time, the Board of Directors voted to extend the expiration date of a previously-awarded option to the President to purchase 750,000 shares of common stock at $0 .30 per share from March 11, 2013 to October 27, 2015 and voted to extend the expiration date of a previously-awarded option to the President to purchase 75,000 shares of common stock at $0.75 per share from July 23, 2013 to October 27, 2015. In addition, in the first quarter of 2013, the Board of Directors voted to extend the expiration date of a previously-awarded option granted to a Director  to purchase 75,000 shares of common stock at $0.75 per share, from July 23, 2013 to October 27, 2015 and to extend the expiration date of certain previously-awarded options to purchase common stock granted to former employees of the Company and an Honorary Director of the Company, to purchase a combined total of 90,000 shares of common stock at $0.75 per share, from August 12, 2013 to October 27, 2015.

 

F-17



 

In determining the fair value of each option granted or modified, the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility ranging from 244.38% to 127.09% and a risk-free interest rates ranging from .9%  to .2%.

 

Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standard Board (“FASB”) issued ASU 2014-12, “Compensation — Stock Compensation (Topic 718)”. The amendments in this ASU require a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in the ASU are effective for annual periods beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Company’s financial condition or results of operations.

 

In August 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15,  Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern  (“ASU 2014-15”). ASU 2014-15 requires that, in connection with preparing financial statements for each annual and interim reporting period, the Company should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the date that the financial statements are available to be issued. If the Company identifies conditions or events that raise substantial doubt about its ability to continue as a going concern, the Company should disclose how it plans are intended to mitigate or alleviate those relevant conditions or events raising substantial doubt about its ability to continue as a going concern. ASU 2014-15 is effective for all entities with annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. The standard will not have a material impact on the consolidated financial statements.

 

In November 2014, the FASB issued ASU 2014-17, “Business Combinations (Topic 805): Pushdown Accounting”. The amendments in this ASU apply to the separate financial statements of an acquired entity and its subsidiaries that are a business (either public or nonpublic) when an acquirer obtains control of an acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change in control event occurs. If pushdown accounting is applied to an individual change in control event, the election is irrevocable. The amendments in the ASU are effective on November 18, 2014. The adoption of this guidance did not have a material effect on the Company’s financial condition or results of operations.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP and will align more closely with International Accounting Standards 1, “Presentation of Financial Statements”. The amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance should not have a material effect on the Company’s financial condition or results of operations.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve current

 

F-18



 

GAAP. The amendments in the ASU are effective beginning after December 15, 2016. The adoption of this guidance should not have a material effect on the Company’s financial condition or results of operations.

 

Note 4 . Accounts Payable and Accrued Expenses

 

The table below outlines the elements included in accounts payable and accrued expenses at December 31, 2014 and 2013:

 

 

 

December 31,

 

December 31,

 

Description

 

2014

 

2013

 

 

 

 

 

 

 

Accrued payroll due officers

 

1,288,136

 

1,063,136

 

Accrued interest due officers

 

270,166

 

167,234

 

Accrued interest

 

756,405

 

555,119

 

Accrued dividends

 

355,600

 

254,000

 

Other accounts payable and accrued expenses

 

634,172

 

651,255

 

 

 

 

 

 

 

Total accounts payable and accrued expenses

 

3,304,479

 

2,690,744

 

 

Included in other accounts payable and accrued expenses are accrued director fees at December 31, 2014 and 2013 of $131,250 and $60,000, respectively, and rents payable due the President of the Company in the amounts of $62,602 and $143,119 for the years ending December 31, 2014 and 2013, respectively.

 

Note 5.  Notes Payable

 

Line of Credit

 

On October 23, 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum originally payable quarterly based on the pro rata number of days outstanding. All funds originally advanced under the facility were due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire following repayment in full by the Company of the amount borrowed.

 

As of December 31, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. In addition, the Company and the lender had verbally agreed that payment of all interest accrued subsequent to June 30, 2009 would be deferred until the date payment in full is due. The lender is now deceased and it is unclear if his estate will honor that verbal agreement. If it is not honored, the Company could be considered to be in default for non-payment of interest due on the note which totaled $493,669 at December 31, 2014. Interest on this debt incurred prior to June 30, 2009 has been paid in full. The Company was unable to satisfy the principal obligation of $1,000,000 by the due date of November 1, 2012 or any interest which accrued on the obligation after June 30, 2009 and is in default under the repayment terms of the note.

 

Convertible Notes and Warrants

 

Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes is payable either in cash or common stock at the option of the Company. The Company ultimately accepted subscriptions totaling $450,000 from unrelated subscribers and an additional $25,000 for one Unit purchased by a Director of the Company.  The offering of these Units expired on June 29, 2010 pursuant to the terms of the Private Placement Memorandum.

 

F-19



 

Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. The Company accepted subscriptions totaling $212,500 from unrelated accredited investors in 2010 and accepted an additional $300,000 of subscriptions from unrelated accredited investors in 2011. The Company paid a finders commission of $25,000 to an unrelated third party during the nine months ended September 30, 2011 before the offering terminated June 29, 2011. On July 2, 2011, the Company redeemed a note in the principal amount of $25,000 by issuing 50,000 shares of common stock.

 

The Convertible Notes issued via the Private Placements discussed above total $962,500 in aggregate and became due and payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes.

 

The table below summarizes the Company’s notes payable at December 31, 2014 and 2013:

 

 

 

Gross Amount

 

Loan Facility

 

Owed

 

 

 

 

 

Line of Credit

 

$

1,000,000

 

 

 

 

 

Private Placements:

 

 

 

March 1, 2010

 

475,000

 

October 25, 2010

 

487,500

 

 

 

 

 

Total Private Placements

 

962,500

 

 

 

 

 

Total Note Payable

 

$

1,962,500

 

 

Note 6. Convertible Debentures and Derivative Liability

 

Pursuant to a Private Placement Agreement dated February 14, 2014, the terms of which are more fully described in Note 2 to these consolidated financial statements, the Company had various Convertible Debentures with maturity dates of six years from issuance and a coupon rate of 4% per annum issued and outstanding at December 31, 2014. The Debentures are convertible from the date of issuance, subject to certain Company milestones being met, into fully paid non-assessable common shares of the Company. The notes have an anti-dilution provision providing for a full ratchet reset of the conversion price.

 

For purposes of determining the proper accounting treatment and valuation of the instruments, the Company applied the provisions set forth in ASC Topic 820, Fair Value in Financial Instruments and ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities. Since the Notes issued have derivative features, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. In addition, the valuation is required to be conducted for each reporting period the instrument was in existence (i.e. for Tranche 1 March 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014 and for Tranche 2 December 31, 2014).

 

As previously noted, the Company’s stock registration was revoked effective September 4, 2014. Therefore the Company engaged an independent valuation expert to determine the fair value of its shares of common stock at September 30, 2014 and December 31, 2014. For periods after September 3, 2014, the fair valuewas estimated by adjusting the most recent market price by changes in the underlying market cap due to borrowings and continuing losses and applying a discount for a lack of marketability while in the delisted mode and reversed when the Company becomes publicly listed as projected by management. Monte Carlo models were developed to value the derivative liability within the Notes using historical volatility rates ranging from 172% - 197%, discount bond rates based on the expected remaining term of each instrument ranging from 5.78% - 9.85% and

 

F-20



 

expected conversion requirements being met by December 31, 2014 for the first and second quarter of 2014 and June 30, 2015 for the third and fourth quarter of 2014.

 

The estimated fair value for the derivative liability relating to each Debenture at issuance and quarter ends were as follows:

 

 

 

March 31, 2014

 

June 30, 2014

 

September 30, 2014

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Tranche 1

 

$

3,053,176

 

$

2,294,190

 

$

1,849,148

 

$

2,014,733

 

Tranche 2

 

 

 

 

1,739,500

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability

 

$

3,053,176

 

$

2,294,190

 

$

1,849,148

 

$

3,754,233

 

 

At the initial valuation date of each Tranche, a portion of the derivative liability was allocated to the Convertible Debentures as debt discount, with the remainder being recorded as other income/expense. At March 31, 2014, the initial valuation of Tranche 1 Debentures, $1,000,000 was allocated to debt discount and at December 31, 2014, the initial valuation of Tranche 2 Debentures, $850,000 was allocated to debt discount. The debt discount is subsequently amortized to expense using an effective interest methodology. Amortization of debt discount amounted to $21,141 for Convertible Debentures and $1,113 for the non-convertible Debenture for the year ended December 31, 2014. The Company recorded $1,904,233 of expense associated with the change in fair value of the derivatives.

 

In the event the Company fails to meet the conditions for conversion of the Debentures, the First Tranche Convertible Debentures which total $950,000 would be due on March 31, 2020, the Second Tranche Debentures which total $850,000 would be due December 31, 2020. The sole remaining non-convertible Debenture in the amount of $50,000 is due March 31, 2020.

 

Note 7.  Related Party Transactions

 

The President of the Company is owed deferred salary in the amount of $1,091,996 and the Vice President and current Director of the Company is owed deferred salary in the amount of $121,140 as of December 31, 2014. On October 12, 2012 the Board of Directors approved a motion to pay these individuals interest on their deferred compensation retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Accrued interest through December 31, 2014 and 2013 amounted to $270,166 and $167,234, respectively.

 

Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, expenses and utilities. Rent expense associated with this lease amounted to $70,348 and $70,272 for the years ended December 31, 2014 and 2013, respectively. The President received direct cash payments totaling $140,806 for current and past year rents in 2014 and no direct cash payments in 2013.

 

Effective January 1, 2013, the directors of the Company will be compensated at a rate of $15,000 per annum. Each Director will be eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors will be prorated based upon months served in their initial year as a Director.

 

The Company has been unable to pay directors’ fees to date. As of December 31, 2014 and 2013 a total of $131,250 and $60,000 respectively, was due and owing to the Company’s directors. Directors have previously been compensated and may, in the future, be compensated for their services with Common Stock or options to purchase Common Stock of the Company. Directors are reimbursed for expenses incurred in attending meetings. Directors may be paid a consulting fee for services performed outside the scope of their directorship.

 

F-21



 

In the first quarter of 2013, the Board of Directors awarded an option to purchase 2,000,000 shares of common stock at a price of $0.19 per share to the President and then-Chairman of the Board of Directors. In conjunction with the award, the President agreed to forfeit a previously-awarded option to purchase 450,000 shares of common stock at $1.25 per share, which would have expired on October 27, 2015. At the same time, the Board of Directors voted to extend the expiration date of a previously-awarded option to the President to purchase 750,000 shares of common stock at $0.30 per share from March 11, 2013 to October 27, 2015 and voted to extend the expiration date of a previously-awarded option to Ms. Vitale to purchase 75,000 shares of common stock at $0.75 per share from July 23, 2013 to October 27, 2015.

 

In the first quarter of 2013, the Board of Directors voted to extend the expiration date of a previously-awarded option granted to a Director of the Company to purchase 75,000 shares of common stock at $0.75 per share, from July 23, 2013 to October 27, 2015.

 

In the first quarter of 2013, the Board of Directors voted to extend the expiration date of certain previously-awarded options to purchase common stock granted to former employees of the Company and an Honorary Director of the Company, to purchase a combined total of 90,000 shares of common stock at $0.75 per share, from August 12, 2013 to October 27, 2015.

 

On May 21, 2013, a Director of the Company received an interest payment in the amount of $4,496 paid in 22,853 shares of common stock. The payment was for accumulated interest on a $25,000 convertible note for the period January 1, 2011 through June 30, 2012.

 

On January 10, 2014, a Director of the Company advanced $10,000 to the Company for capital needed by the Company prior to the first closing of the Private Placement dated February 14, 2014. On April 2, 2014, the Company repaid the Director in full for the advance.

 

On March 31, 2014, in conjunction with the Company’s offer of $3,000,000 in Collateralized Convertible Debentures, the Company accepted a subscription in the amount of $150,000 from a Director and Chairman of the Board of Directors of the Company effective March 31, 2014. On the same date, the Company accepted a subscription in the amount of $150,000 from another Director and Vice President of the Company.  On December 31, 2014, that Director rejected the amended terms offered by the Company for the Second and Third Tranches of the Collateralized Convertible Debentures and was refunded $100,000 from funds held in Escrow under that agreement.

 

In the second quarter of 2014, the President of the Company received $100,000 from the proceeds of the First Tranche Collateralized Convertible Senior Debentures in partial payment of accrued rent on the office premises located in Alexandria, Virginia which she leased to the Company pursuant to a lease effective September 1, 2011. Additionally, the President received $40,806 for current rents on that facility for the period April 1 through December 31, 2014.

 

In the second quarter of 2014, the Company retained the brother of the current Chairman of the Board of Directors to perform certain consulting services relating to the Mississippi Gaming Commission site approval for a parcel on the Company’s Diamondhead property. The brother was paid $10,000 per month for his services for the months of April 2014 and May 2014.

 

Company Directors

 

Effective March 31, 2014, the President, Chief Executive Officer, Treasurer, Chief Financial Officer, Interim Secretary and Chairman of the Board of Directors of the Company, resigned as Chairman of the Board of Directors.

 

F-22



 

Effective March 31, 2014, the Company appointed a new Director of the Company who was then appointed Chairman of the Board of Directors of the Company and President and Chief Executive Officer of Casino World, Inc., a subsidiary of the Company.

 

Note 8.  Stockholders’ Equity

 

At December 31, 2014 and 2013, the Company had a stock option plan and non-plan options, which are described below.

 

Non-Plan Stock Options

 

On January 9, 2013, the Board of Directors voted to extend the expiration date of previously-awarded options granted as follows:

 

Options to purchase 750,000 shares of common stock at $0.30 per share issued to the President, originally scheduled to expire on March 11, 2013 were extended to October 27, 2015.

 

Options to purchase 75,000 shares of common stock at $0.75 per share issued to the President, originally scheduled to expire on July 23, 2013 were extended to October 27, 2015.

 

Options to purchase 75,000 shares of common stock at $0.75 per share issued to a Director originally scheduled to expire on July 23, 2013 were extended to October 27, 2015.

 

Options to purchase a combined total of 90,000 shares of common stock at $0.75 per share issued to former employees and a Honorary Director of the Company originally scheduled to expire on August 12, 2013 were extended to October 27, 2015.

 

On March 13, 2013 the Board of Directors awarded the President of the Company options to purchase 2,000,000 shares of common stock at $0.19 per share for a period of five years. The Board, however, required the President to forfeit options to purchase 450,000 shares of common stock at $1.25 per share which would not have otherwise expired until October 27, 2015.

 

Stock Option Plan

 

On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The exercise price may not be less than 100% of the market value of the shares on the date of the grant.  The options expire within ten years from the date of grant.  At December 31, 2014, no options from this plan were issued or exercised.

 

Summary of Stock Options

 

A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2014 and 2013, and changes during the years ended December 31, 2014 and 2013 is presented below.

 

F-23



 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Shares

 

Price

 

Shares

 

Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

3,440,000

 

$

.44

 

1,890,000

 

$

.98

 

Granted

 

 

 

 

 

2,000,000

 

.19

 

Exercised

 

 

 

 

 

 

 

Expired

 

 

 

(450,000

)

1.25

 

Outstanding at end of year

 

3,440,000

 

$

.44

 

3,440,000

 

$

.44

 

Options exercisable at year-end

 

3,440,000

 

 

 

3,440,000

 

 

 

Weighted-average fair value of options granted during the year

 

 

 

 

 

 

 

$

.19

 

 

The following tables summarize information about stock options outstanding and exercisable at December 31, 2014 and 2013:

 

December 31, 2014

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Number

 

Average

 

Weighted

 

Number

 

Weighted-

 

Range of

 

Outstanding

 

Remaining

 

Average

 

Exercisable

 

Average

 

Exercise

 

At

 

Contractual

 

Exercise

 

At

 

Exercise

 

Prices

 

12/31/14

 

Life (Yrs.)

 

Price

 

12/31/14

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 .19

 

2,000,000

 

3.20

 

$

.19

 

2,000,000

 

$

.19

 

$

 .30

 

750,000

 

.82

 

.30

 

750,000

 

.30

 

$

 .75

 

240,000

 

.82

 

.75

 

240,000

 

.75

 

$

1.25

 

150,000

 

.82

 

1.25

 

150,000

 

1.25

 

$

1.75

 

300,000

 

(a)

 

1.75

 

300,000

 

1.75

 

 

 

3,440,000

 

 

 

 

 

3,440,000

 

 

 

 

December 31, 2013

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Number

 

Average

 

Weighted

 

Number

 

Weighted-

 

Range of

 

Outstanding

 

Remaining

 

Average

 

Exercisable

 

Average

 

Exercise

 

At

 

Contractual

 

Exercise

 

At

 

Exercise

 

Prices

 

12/31/13

 

Life (Yrs.)

 

Price

 

12/31/13

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 .19

 

2,000,000

 

4.16

 

$

.19

 

2,000,000

 

$

.19

 

$

 .30

 

750,000

 

1.82

 

.30

 

750,000

 

.30

 

$

 .75

 

240,000

 

1.82

 

.75

 

240,000

 

.75

 

$

1.25

 

150,000

 

1.82

 

1.25

 

150,000

 

1.25

 

$

1.75

 

300,000

 

(a)

 

1.75

 

300,000

 

1.75

 

 

 

3,440,000

 

 

 

 

 

3,440,000

 

 

 

 


(a) Options expire upon payment in full of an outstanding note payable with an original due date of November 1, 2012 but remains outstanding at December 31, 2014 and 2013.

 

Warrants

 

The Company has previously issued warrants to purchase shares of the Company’s common stock in conjunction with convertible debentures issued in private placements dated March 25, 2010 and October 25, 2010. The Company also issued warrants in conjunction with a private placement of shares of the Company’s common stock dated July 1, 2012.

 

F-24



 

On March 31, 2014, the Company issued a warrant to purchase 25,000 shares of common stock exercisable at $0.30 per share for a period of three years as part of the broker commission for the First Tranche Convertible Debentures discussed in Note 2.

 

On December 31, 2014, the Company issued a second warrant to purchase 25,000 shares of common stock exercisable at $0.45 per share for a period of three years as part of the broker commission for the Second Tranche Convertible Debentures discussed in Note 2.

 

A summary of the status of the Company’s outstanding warrants as of December 31, 2014 and 2013, and changes during the years ended on December 31, 2014 and 2013 is presented below.

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Exercise

 

 

 

Shares

 

Price

 

Shares

 

Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

2,986,500

 

$

.750

 

2,986,500

 

$

.750

 

Granted

 

50,000

 

.375

 

 

 

 

Exercised

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding at end of year

 

3,036,500

 

$

.740

 

2,986,500

 

$

.750

 

Warrants exercisable at year-end

 

3,036,500

 

 

 

2,986,500

 

 

 

Weighted-average fair value of warrants granted during the year

 

 

 

$

.375

 

 

 

None

 

 

The following tables summarize information about warrants outstanding and exercisable at December 31, 2014 and 2013:

 

December 31, 2014

 

 

 

Warrants Outstanding

 

Warrants Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Number

 

Average

 

Weighted

 

Number

 

Weighted-

 

Range of

 

Outstanding

 

Remaining

 

Average

 

Exercisable

 

Average

 

Exercise

 

At

 

Contractual

 

Exercise

 

At

 

Exercise

 

Prices

 

12/31/14

 

Life (Yrs.)

 

Price

 

12/31/14

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$

.25

 

1,011,500

 

2.82

 

.25

 

1,011,500

 

.25

 

$

 .30

 

25,000

 

2.25

 

.30

 

25,000

 

.30

 

$

 .45

 

25,000

 

3.00

 

.45

 

25,000

 

.45

 

$

1.00

 

1,975,000

 

.65

 

1.00

 

1,975,000

 

1.00

 

 

 

3,036,500

 

 

 

 

 

3,036,500

 

 

 

 

December 31, 2013

 

 

 

Warrants Outstanding

 

Warrants Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Number

 

Average

 

Weighted

 

Number

 

Weighted-

 

Range of

 

Outstanding

 

Remaining

 

Average

 

Exercisable

 

Average

 

Exercise

 

At

 

Contractual

 

Exercise

 

At

 

Exercise

 

Prices

 

12/31/13

 

Life (Yrs.)

 

Price

 

12/31/13

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$

.25

 

1,011,500

 

3 .89

 

.25

 

1,011,500

 

.25

 

$

1.00

 

1,975,000

 

1.85

 

1.00

 

1,975,000

 

1.00

 

 

 

2,986,500

 

 

 

 

 

2,986,500

 

 

 

 

F-25



 

Preferred Stock

 

Series S Preferred Stock

 

On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting, Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of $1,000,080. The Company is required to pay quarterly cumulative dividends of three percent per annum on these shares.

 

These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share for each quarter that such shares are outstanding.  The shares also have a $1.08 per share preference in involuntary liquidation of the Company. At December 31, 2014 and 2013, outstanding Series S preferred stock totaled 926,000 shares. Cumulative dividends in arrears at December 31, 2014 and 2013 amounted to $105,000 and $75,000 respectively.

 

Series S-NR Preferred Stock

 

On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned subsidiary of Austroinvest International, Inc.), in exchange for proceeds of $999,000. The Company is required to pay quarterly, non-cumulative dividends of three percent per annum on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At December 31, 2014 and 2013, outstanding Series S-NR preferred stock totaled 900,000 shares.

 

Series S-PIK Preferred Stock

 

In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit, each unit consisting of one share of the Company’s $.001 par value common stock and two shares of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of the Company’s common voting stock at any time after February 15, 1995. No shares were converted during 2014 and 2013 . The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of the Company. Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of $2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK preferred stock. At December 31, 2014 and 2013, outstanding Series S-PIK preferred stock totaled 260,000 shares. Cumulative dividends in arrears at December 31, 2014 and 2013 amounted to $145,600 and $104,000 respectively.

 

Payment of Preferred Dividends

 

The Company did not pay any dividends due on its preferred stock in 2014 or 2013.

 

Note 9.  Employee Stock Ownership Plan

 

The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans.  The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In the event that the Company elects not to make a Plan contribution in any given year, the corresponding shares applicable to that year are released from the Trust to the Company in consideration of that years’ note payment. In January 2001, the Plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.

 

F-26



 

Assuming a Plan contribution is made, shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company. At December 31, 2014, 2,386,370 shares with a fair market value of $1,128,753 are unearned. At December 31, 2013, 2,465,915 shares with a fair market value of $1,676,822 were unearned.

 

In 2011, the Company decided to temporarily suspend contributions to the Plan. Therefore the Trust was unable to make its annual loan payment to the company and a loan default occurred. In accordance with the Pledge Agreement between the Company and the Trust, the shares attached to the loan payments subsequent to the 2010 contribution reverted back to the Company as treasury shares. In 2014, 79,545 shares, with a market value of $37,625, reverted back to the Company treasury. In 2013, 79,545 shares with a market value of $54,091 reverted back to the Company treasury.

 

Note 10.  Income Taxes

 

At December 31, 2014, the Company had net operating loss carryforwards for income taxes of approximately $12.5 million, which expire during various periods through 2034. Realization of deferred income taxes as of December 31, 2014 and 2013 is not considered likely. Therefore, by applying a Federal statutory rate of 35% to the carryforward amounts, a valuation allowance of approximately $4.4 million and $4.1 million has been established for the entire amount of deferred tax assets relative to the net operating loss at December 31, 2014 and 2013, respectively, resulting in an effective tax rate of 0% and no deferred tax asset recognition. The valuation allowance increased by approximately $300,000 in 2014 and $400,000 in 2013.

 

Note 11.  Commitments and Contingencies

 

Leases

 

Effective September 1, 2011, the Company entered into a month-to-month lease with Deborah A. Vitale, President and CEO of the Company for office space in a building owned by Ms. Vitale in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance real estate taxes, expenses and utilities.

 

The Company also leases storage facilities in Alexandria, Virginia on a month-to month basis.

 

Rental expenses for all facilities totaled $70,348 in 2014 and $71,072 in 2013.

 

The Company is not liable for future minimum lease payments.

 

Management Agreement

 

On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. Management of the Company believes this Agreement is no longer in effect.  However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.

 

F-27



 

Related Parties

 

The Company has an agreement with a Director pursuant to which he will be paid a bonus in the event of any recovery received from litigation against BP relating to the oil spill. This Director will receive ten percent of any amounts received by the Company, after deduction of attorney fees and expenses relating to the litigation.

 

Other

 

The Company’s obligations under the Collateralized Convertible Senior Debentures will be secured by a lien on the Company’s Mississippi property (the “Investors Lien”).  On March 31, 2014, the Company issued $1 million of First Tranche Collateralized Convertible Senior Debentures and on December 31, 2014 the Company issued $850,000 of Second Tranche Collateralized Convertible Senior Debentures. Thus, liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in pari passu with a lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). Ms. Vitale will serve as Lien Agent for the Executives Lien.

 

The Company is currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the years ended December 31, 2010, 2011, 2012 and 2013. The Company did not have the funds to pay professionals to prepare and file these documents and forms when due.  Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by both the Department of Labor and the Internal Revenue Service on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $57,305 and $47,505 in penalties for the years ending December 31, 2014 and 2013 respectively based on the current delinquent filings. In addition, the Company expects that cumulative penalties for all delinquent ESOP filings could total approximately $142,600 through December 31, 2014. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor and the Internal Revenue Service with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.

 

The Company has agreements with various unrelated persons and entities that could be entitled to substantial commissions if the Company enters into an agreement relating to the development of its Diamondhead property as a result of their efforts.

 

Note. 12  Pending and Threatened Litigation

 

College Health & Investment, L.P. v. Diamondhead Casino Corporation

 

On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower’s right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. The matter is pending.

 

F-28



 

College Health & Investment, L.P. v. Diamondhead Casino Corporation

 

On February 13, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company’s annual stockholders’ meetings. The plaintiff sought costs and expenses, including reasonable attorneys’ fees.

 

College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell

 

On March 14, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The defendants believe that plaintiff’s claims are without merit and intend to vigorously defend this lawsuit.  The plaintiff sought injunctive relief, but no monetary damages other than attorney’s fees.

 

F-29


EXHIBIT 99.2

 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONTENTS

 

 

Page

 

 

CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2015 AND DECEMBER 31, 2014

F-2

 

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

F-3

 

 

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

F-4

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

F-5

 

F-1



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

458,039

 

$

843,083

 

Other current assets

 

15,331

 

36,655

 

Total current assets

 

473,370

 

879,738

 

 

 

 

 

 

 

Land held for development (Note 3)

 

5,476,097

 

5,476,097

 

 

 

 

 

 

 

Deferred financing costs (net of amortization of $27,814 at March 31, 2015 and $18,518 at December 31, 2014)

 

173,286

 

182,582

 

Other assets

 

80

 

80

 

 

 

 

 

 

 

 

 

$

6,122,833

 

$

6,538,497

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Notes payable

 

$

1,962,500

 

$

1,962,500

 

Short term financing agreement

 

9,031

 

14,905

 

Accounts payable and accrued expenses

 

3,290,445

 

3,304,479

 

Total current liabilities

 

5,261,976

 

5,281,884

 

 

 

 

 

 

 

Debenture payable (net of unamortized discount of $48,669 at March 31, 2015 and $48,887 at December 31, 2014)

 

1,331

 

1,113

 

 

 

 

 

 

 

Convertible debentures payable (net of unamortized discount of $1,761,217 at March 31, 2015 and $1,778,859 at December 31, 2014)

 

38,783

 

21,141

 

 

 

 

 

 

 

Derivative liability

 

2,400,953

 

3,754,233

 

 

 

 

 

 

 

Total liabilities

 

7,703,043

 

9,058,371

 

 

 

 

 

 

 

Commitments and contingencies (Notes 8 and 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficiency)

 

 

 

 

 

Preferred stock, $.01 par value; shares authorized 5,000,000,
outstanding 2,086,000 at March 31,2015 and December 31, 2014 (aggregate liquidation preference of $2,519,080 at Mach 31, 2015 and December 31, 2014)

 

20,860

 

20,860

 

Common stock, $.001 par value; shares authorized 50,000,000,
Issued: 39,052,472 at March 31, 2015 and December 31, 2014, outstanding: 36,297,576 at March 31, 2015 and December 31, 2014

 

39,052

 

39,052

 

Additional paid-in capital

 

35,568,649

 

35,568,649

 

Unearned ESOP shares

 

(3,558,078

)

(3,558,078

)

Accumulated Deficit

 

(33,521,887

)

(34,461,551

)

Treasury stock, at cost, 368,526 shares at March 31, 2015 and December 31, 2014

 

(128,806

)

(128,806

)

 

 

 

 

 

 

Total stockholders’ equity (deficiency)

 

(1,580,210

)

(2,519,874

)

 

 

 

 

 

 

 

 

$

6,122,833

 

$

6,538,497

 

 

See the accompanying notes to these condensed consolidated financial statements.

 

F-2



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

(UNAUDITED)

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2015

 

2014

 

COSTS AND EXPENSES

 

 

 

 

 

Administrative and General

 

$

256,588

 

$

141,048

 

Amortization

 

9,296

 

 

Other

 

21,492

 

13,990

 

 

 

 

 

 

 

 

 

287,376

 

155,038

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Amortization of Debt Discount

 

(17,860

)

 

Interest Expense

 

(82,980

)

(71,346

)

Change in Fair Value of Derivative Liability

 

1,353,280

 

(2,053,176

)

 

 

1,252,440

 

(2,124,522

)

 

 

 

 

 

 

NET INCOME (LOSS)

 

965,064

 

(2,279,560

)

 

 

 

 

 

 

PREFERRED STOCK DIVIDENDS

 

(25,400

)

(25,400

)

 

 

 

 

 

 

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS

 

$

939,664

 

$

(2,304,960

)

 

 

 

 

 

 

Net earnings (loss) per common share, basic

 

$

.026

 

$

(.063

)

 

 

 

 

 

 

Net earnings (loss) per common share, fully diluted

 

$

.021

 

$

(.063

)

 

 

 

 

 

 

Weighted average number of common shares, basic

 

36,297,575

 

36,297,575

 

 

 

 

 

 

 

Weighted average number of common shares, fully diluted

 

44,359,076

 

36,297,575

 

 

See the accompanying notes to these condensed consolidated financial statements.

 

F-3



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

 

(UNAUDITED)

 

 

 

2015

 

2014

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

965,064

 

$

(2,279,560

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

Amortization

 

9,296

 

 

Change in fair value of derivative liability

 

(1,353,280

)

2,053,176

 

Amortization of debt discount

 

17,860

 

 

Other assets

 

21,324

 

(670

)

Accounts payable and accrued expenses

 

(39,434

)

209,307

 

Net cash used in operating activities

 

(379,170

)

(17,747

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from Private Placements, net of financing costs

 

 

885,000

 

Proceeds from Short Term Note

 

 

1,826

 

Payment of Short Term Note

 

(5,874

)

(2,639

)

Net cash provided by (used in) financing activities

 

(5,874

)

884,187

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(385,044

)

866,440

 

Cash beginning of period

 

843,083

 

7,106

 

Cash end of period

 

$

458,039

 

$

873,546

 

 

 

 

 

 

 

Cash paid for interest

 

$

252

 

$

134

 

 

 

 

 

 

 

Non-Cash Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Warrants included in deferred financing costs

 

$

25,100

 

$

 

 

 

 

 

 

 

Unpaid preferred stock dividends included in accounts payable and accrued expenses

 

$

381,000

 

$

279,400

 

 

See the accompanying notes to these condensed consolidated financial statements.

 

F-4



 

DIAMONDHEAD CASINO CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

Note 1. Organization and Business

 

Diamondhead Casino Corporation and Subsidiaries (the “Company”) owns a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi on which it plans, unilaterally or in conjunction with one or more partners, to construct a casino resort and hotel and associated amenities. The Company was originally formed to principally own, operate and promote gaming vessels offering day and evening cruises in international waters.

 

The Company’s Common Stock was previously registered with the Securities and Exchange Commission and traded on the over-the counter bulletin board under the symbol “DHCC”.  The Company’s stock registration was revoked effective September 4, 2014. Thus, effective September 4, 2014, the registration of each class of the Company’s securities registered pursuant to Section 12 of the Exchange Act was revoked and, since that date, the Company’s Common Stock has not traded on any exchange or other public market and the stock no longer trades on any exchange.

 

Note 2. Liquidity and Going Concern

 

These condensed consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, has no operations and generates no operating revenues. During the three months ended March 31, 2015 and 2014 the Company incurred net losses applicable to common shareholders, exclusive of the recording of change in the fair value of derivatives, of $413,616 and $251,784, respectively.

 

The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, open, and operate a casino resort.

 

In the recent past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds and offered, through Private Placements, convertible instruments more fully described in Note 5 to these condensed consolidated financial statements.

 

Pursuant to a Private Placement Memorandum dated February 14, 2014, the Company offered up to a maximum of $3,000,000 of Collateralized Convertible Senior Debentures to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000. The Debentures were offered in three tranches as follows:

 

Tranche 1:    The Company offered $1,000,000 of First Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 (the “First Tranche Debentures”), subject to certain conditions. The First Tranche Debentures were originally convertible at a Conversion Price of

 

F-5



 

$.30 per share into an aggregate of 3,333,333 shares of Common Stock of the Company. The minimum principal amount of First Tranche Debentures that could be purchased was $50,000.

 

On March 31, 2014, subscriptions in the amount of $3,000,000 were received in Escrow and accepted by the Company. Thus, the First Closing occurred on that date. The Escrow Agent released $1,000,000 to the Company and the Company issued First Tranche Debentures in the aggregate principle amount of $1,000,000. The First Tranche Debentures bear interest at 4% per annum after 180 days and are be secured by a lien on the Company’s Mississippi property.

 

The First Tranche Debentures were originally convertible into 3,333,333 shares of Common Stock when and if:

 

1.               The Second Closing Obligations (as defined below) had been met on or before December 31, 2014; and

 

2.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

The First Tranche Debentures would be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the First Tranche Debentures would be released upon conversion.

 

The “Second Closing Obligations” were originally as follows:

 

1.               The Company has filed its Annual Reports on Form 10-K for the years ended December 31, 2011 and 2012, and any other Annual Report on Form 10-K that would have been required to have been filed as of the date of the Second Closing;

 

2.               The Company has filed its Quarterly Reports on Form 10-Q for the periods ended September 30, 2011, March 31, 2012, June 30, 2012, September 30, 2012, March 31, 2013, June 30, 2013 and September 30, 2013, and any other Quarterly Report on Form 10-Q that would have been required to have been filed as of the date of the Second Closing;

 

3.               The Company and its subsidiaries have filed their federal and state tax returns for the years ended 2011 and 2012;

 

4.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and Federal law, at which the stockholders of the Company approved an increase in the number of authorized shares of Common Stock of the Company from fifty million to one hundred million, or the Company has otherwise obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

5.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the investors of this Offering in accordance with the terms of the Private Placement Memorandum;

 

6.               The Company has obtained an updated property survey and preliminary engineering estimates for the construction of a casino/hotel on the Property;

 

F-6



 

7.               The Company has obtained a site location engineering study identifying viable locations(s) for the placement of the proposed casino/hotel on the Property; and

 

8.               The Company has obtained preliminary architectural estimates for the construction of the casino/hotel on the Property.

 

However, on June 18, 2014, the SEC issued an Order of Suspension of Trading with respect to the Company’s securities. The Order stated, among other things, that “[t]he Commission was of the opinion that the public interest and the protection of investors require[d] a suspension of trading” and the Commission ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the Company’s securities be suspended from June 18, 2014 through July 1, 2014. On June 18, 2014, the SEC also issued an Order Instituting Administrative Proceedings (“OIP”) and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, alleging that the Company was delinquent in its periodic filings with the SEC, having not filed any periodic reports since it filed its Form 10-Q for the period ended June 30, 2011 and, therefore, that the Company had failed to comply with Securities Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder.

 

On June 27, 2014, the Company filed an Answer to the OIP in which it admitted that it had not filed certain periodic reports since it filed its Form 10-Q for the period ended June 30, 2011. On July 29, 2014, the Company attended a prehearing conference at which it requested an in-person hearing. On August 11, 2014, the SEC issued an Initial Decision on Default and Order for Motion for Summary Disposition as to Diamondhead Casino Corporation. The SEC found that there were no issues of material fact that required an in-person hearing, granted the Division leave to file a motion for summary disposition, and set a briefing schedule for the parties to file their briefs.

 

The Board of Directors of the Company determined that defending the Company against the OIP would likely have resulted in extensive, time-consuming and expensive litigation. Moreover, the Company believed that litigation would not have resulted in a favorable outcome inasmuch as the Company had not, in fact, met its reporting requirements. Accordingly, the Board of Directors determined that litigation would have constituted a waste of the Company’s scarce resources and capital.

 

On August 29, 2014, the Company made an Offer of Settlement in which it admitted that it had failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder because it had not filed any periodic reports with the SEC since the quarterly period ended June 30, 2011. The Company consented to the entry of an Order, pursuant to Section 12(j) of the Exchange Act, revoking the registration of the Company’s securities registered pursuant to Section 12 of the Exchange Act. On September 4, 2014, the SEC entered an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Diamondhead Casino Corporation, pursuant to the Offer of Settlement. Thus, effective September 4, 2014, the registration of each class of the Company’s securities registered pursuant to Section 12 of the Exchange Act was revoked and the Company’s Common Stock no longer trades on any exchange or other public market.

 

To re-register its stock, the Company was required to file a Form 10 with two years of audited financial statements with the Securities and Exchange Commission. Thus, the Company was no longer required to file the Form 10-K’s and Form 10-Q’s it contemplated filing under the terms of the original Private Placement. Therefore, the Company decided to offer to amend the terms for conversion of the First Tranche Debentures and for issuance and conversion of the Second and Third Tranche Debentures. On December 31, 2014, Investors representing $950,000 of First Tranche Debentures, convertible into 3,166,666 common shares, agreed that the First Tranche Debentures would be converted when and if:

 

F-7



 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

The remaining $50,000 investment from the First Tranche remains as a collateralized Debenture payable in six years without the conversion rights.

 

Tranche 2 :   The Company originally offered $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Second Tranche Debentures were convertible, at a Conversion Price of $.45 per share, into an aggregate of 2,222,222 shares of Common Stock, on certain terms and conditions. The minimum principal amount of Second Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares agreed to amend the Closing Obligations for issuance of the Second Tranche Debentures by eliminating the prior closing obligations and substituting a single closing requirement instead, namely, that “[t]he Company has filed an application for gaming site approval with the Mississippi Gaming Commission pursuant to Rule 1.4 of the Mississippi Gaming Regulations (2013 edition).”

 

The Company had filed this application in May 2014 and had obtained Gaming Site Approval on August 21, 2014.  Therefore, a second closing occurred on December 31, 2014, when the amended terms were agreed to, at which time the Escrow Agent released $850,000 to the Company. The remaining $150,000 of the original $1,000,000 of subscriptions escrowed for the Second Tranche Debentures was returned to three investors who did not agree to the amended terms for issuance and conversion of the Second Tranche Debentures.

 

On December 31, 2014, Investors representing $850,000 of Second Tranche Debentures convertible into 1,888,889 common shares also agreed to amend the conversion terms of the Second Tranche Debentures. The Debentures would be converted when and if:

 

1.               The Company has filed a Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the-counter market interdealer quotation system or similar market or system;

 

F-8



 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of this Debenture; and

 

5.               The average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the Conversion Price for the thirty consecutive business days immediately prior to the Conversion Date.

 

Tranche 3 :   The Company originally offered $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures in the aggregate principal amount of $1,000,000 subject to certain conditions. The Third Tranche Debentures were originally convertible, at a Conversion Price of $0.55 per share, into an aggregate of 1,818,182 shares of Common Stock, or convertible, at a Conversion Price of $0.75 per share, into an aggregate of 1,333,333 shares of Common Stock, subject to certain terms and conditions. The Conversion Price will depend upon a combined appraised value of an independent third party appraisal firm of (1) the Company’s casino project (including the value of that land upon which it is expected to be located) and (2) the undeveloped remaining Property (collectively, the “Valuation”). If the Valuation is $175 million or more, then the Conversion Price for the Third Tranche Debentures would be $0.75 per share. If the Valuation is less than $175 million, then the Conversion Price for the Third Tranche Debentures would be $0.55 per share. The minimum principal amount of Third Tranche Debentures that could be purchased was $50,000.

 

On December 31, 2014, Investors representing $850,000 of Third Tranche Debentures convertible into 1,545,455 common shares at $.55 per share or 1,133,333 common shares at $.75 per share, depending on the “Valuation”, agreed to amend Third Closing Obligations to be completed by June 30, 2015, as follows:

 

1.               The Company has filed a Registration Statement on Form 10 (or a Form 8-A that incorporates by reference a Form S-1) with the Securities and Exchange Commission;

 

2.               The Company’s common stock is trading on a national securities exchange or any over-the- counter market, interdealer quotation system or similar market or system;

 

3.               The Company has held an Annual Meeting of Stockholders in accordance with applicable state and/or federal law, to seek stockholder approval to increase the number of authorized shares of Common Stock from fifty million to one hundred million shares or the Company has obtained such approval by written consent of its stockholders pursuant to Section 228 of the Delaware General Corporation Law;

 

4.               The Company is otherwise able to issue and deliver fully paid and non-assessable shares of Common Stock to the Holder upon conversion of the Debenture; and

 

5                  The required appraisals have been completed and the “Valuation” calculated to determine the Conversion Price of the Tranche 3 Debentures.

 

F-9



 

At the Third Closing, assuming it occurs, the gross proceeds from the sale of the Third Tranche Debentures in the principal amount of $850,000 will be released from Escrow to the Company. The Third Tranche Debentures will bear interest at 4% per annum after 180 days and will be secured by a lien on the Company’s Mississippi property.

 

As amended, the Third Tranche Debentures will be converted into shares of Common Stock when and if the average closing price of the Common Stock on the principal trading market for the Company’s Common Stock is 150% or more of the applicable Third Tranche Debenture Conversion Price, based upon the Valuation, for the thirty consecutive business days immediately prior to such conversion date. The Third Tranche Debentures will be converted into Common Stock without any required action on the part of the Debenture Holders and the lien securing the Third Tranche Debentures will be released upon conversion.

 

The gross proceeds received for the Third Tranche Debentures are being held in Escrow and will not be released unless and until the Third Closing Obligations have been met by June 30, 2015 and a certification to that effect has been forwarded to the Escrow Agent and each of the Investors (the “Third Closing”). If the Third Closing Obligations are not met, there will be no Third Closing and the remaining $850,000 in Escrow relating to the Third Tranche Debentures will be returned to the Investors without deduction or interest. There can be no assurance that the Company will satisfy the Third Closing Obligations. The Company believes that its failure to meet the Third Closing Obligations would have a material adverse impact on the Company.

 

Maximum Offering

 

In the event all of the terms and conditions for issuance of all of the Debentures have been met and in the event that all of the Debentures are eventually converted to Common Stock at the Conversion Prices in the Debentures (as amended), the Company will have issued a minimum of 6,188,888 shares of Common Stock upon conversion of all of the Debentures or a maximum of 6,601,010 shares of Common Stock upon conversion of all of the Debentures, depending on the Valuation required for the Third Tranche Debentures. Assuming a third closing, the gross proceeds to the Company from the sale of the Debentures will be $2,700,000 before deduction of commissions and expenses.

 

The following elements of the Debenture agreement remain unchanged and are as follows:

 

Escrow Agent

 

The proceeds from this offering were placed in an escrow account at Continental Stock Transfer & Trust Company, which is serving as the Escrow Agent.

 

Maturity Date and Interest Rate of Debentures

 

The maturity date of the Debentures shall be six years from the issue date of each of the Debentures. The Debentures may not be prepaid without the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever. The maturity date may be extended upon the written consent of the Holder, which consent may be withheld for any reason or no reason whatsoever.

 

Any interest due on the Debentures shall be computed based on a 365 day year and, at the option of the Company, be payable in cash or in Common Stock on March 1 of each year. If paid in Common Stock, the number of shares of Common Stock payable shall be computed by dividing the interest due by the average closing price of the Common Stock for the thirty consecutive business days immediately prior to the payment date.

 

Collateral for Debentures

 

The payment obligations under the Debentures will be secured by a lien on the Company’s Mississippi property (the “Investors Lien”). The Investors Lien will be pari passu with a lien that has been placed on

 

F-10



 

the Property in favor of the President of the Company, the Vice President, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). The President of the Company will serve as Lien Agent for the Executives Lien.

 

Anti-Dilution Provision

 

The conversion rights on each Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the conversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:

 

1.               The issuance of any of the other Debentures in the Offering or the issuance of shares of Common Stock upon conversion of any of the Debentures in the Offering;

 

2.               The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company prior to the Issue Date of the First Tranche Debentures in the Offering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.

 

The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).

 

Piggyback Registration Rights

 

The Investors received “piggyback” registration rights with respect to the common stock underlying the Debentures, on all registrations of equity securities of the Company under the Securities Act of 1933 for sale to the public.

 

Commissions and Expenses of the Offering

 

No commission or other remuneration was paid to any officer or director of the Company in connection with any sale of the Debentures. The Company agreed to pay Henley & Company, LLC (“Henley”), a commission of 6% of the gross proceeds to the Company from the sale of the Debentures, to reimburse Henley for related expenses up to a total of $75,000, and to issue warrants to purchase up to 75,000 shares of the Company’s Common Stock as described below.

 

The Company’s agreement with Henley provides that commissions due will be paid when, as, and if proceeds of the Offering are released to the Company. Following the First Closing, Henley received commissions of $60,000 and reimbursement for legal fees and expenses of $55,000. Henley was also issued a three year warrant to purchase 25,000 shares of common stock at $0.30 per share. The Company recorded deferred financing costs in the amount of $16,210 in the first quarter of 2014 based on the valuation of this warrant using the Black-Scholes option pricing model. In addition, following the Second Closing, Henley received commissions of $51,000 and reimbursement for legal fees and expenses of $10,000. Henley was issued an additional three year warrant to purchase 25,000 shares of common stock at $ 0.45 per share. The Company recorded additional deferred financing costs in the amount of $8,890 in the fourth quarter of 2014 based on the valuation of this warrant using the Black-Scholes option pricing model. Henley is also entitled to receive, upon the Third Closing, assuming it occurs, a commission of 6% of the proceeds received by the Company at such Closing, a three year warrant to purchase 25,000 shares

 

F-11



 

of Common Stock at $0.55 or $0.75 per share (depending on the Valuation) and reimbursement of its related expenses up to a maximum of $10,000. For periods after September 3, 2014 (the last trading date of the Company’s stock before revocation of its registration), the Company obtained a valuation of its stock price from an independent valuation expert.

 

In determining the fair value of each warrant granted, the Black-Scholes option-pricing model, consistent with the provisions of Financial Accounting Standards Board Accounting Standard Codification (“ASC”) Topic 718, was used. The valuations were determined using the weighted-average assumptions of 0% dividend yield, expected volatility of 139.49% at March 31, 2014 and 130.39% at December 31, 2014, and risk-free interest rates of 0.9% at March 31, 2014 and 1.1% at December 31, 2014.

 

The Investors in the offering of the Debentures were “accredited investors” as defined in Rule 501 of Regulation D promulgated under Securities Act of 1933, as amended (the “Securities Act”). The offering was made in reliance on the exemption from registration afforded under Section 4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities Act.

 

As of March 31, 2015, the Company had $458,039 of operating cash on hand and current accounts payable and accrued expenses totaling $3,290,445. In addition, a Line of Credit in the amount of $1,000,000 obtained in October 2008 was payable in November 2012. Also, Convertible Notes issued via two Private Placements offered in 2010 totaling $962,500 in aggregate at December 31, 2014, had become payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, none of the aforementioned debt obligations have been satisfied and the Company is in default of the repayment terms of the notes.

 

As of March 31, 2015, the Company had received $1,850,000 of proceeds from the closing of the First and Second Tranche Convertible Debentures and had expended approximately $1,392,000 of those proceeds for the payments of placement fees, costs associated with gaming site approval and working capital as summarized in the chart below.

 

 

 

 

 

Jan —Mar

 

 

 

Description of Expenditures

 

2014

 

2015

 

Total

 

 

 

 

 

 

 

 

 

Private Placement related fees, commissions and expenses

 

$

185,785

 

$

 

$

185,785

 

Payment to the President per the Private Placement applied to past due office rents

 

100,000

 

 

100,000

 

Accounting, audit and legal fees

 

75,000

 

128,070

 

203,070

 

Payroll paid to the Chairman and President and related taxes

 

319,409

 

142,652

 

462,061

 

Office rents paid to the President

 

40,806

 

18,136

 

58,942

 

Mississippi Property taxes and property related fees and expenses

 

58,258

 

64,291

 

122,549

 

State Franchise taxes, fines and penalties and registered agent fees

 

22,435

 

4,860

 

27,295

 

Mississippi property development consulting fees, engineering and survey costs and other fees and expenses

 

55,114

 

 

55,114

 

Feasibility Study

 

15,000

 

 

15,000

 

Appraisal Fee

 

12,500

 

 

12,500

 

Repayment of advance from a Director

 

10,000

 

 

10,000

 

Repayment of Advance from a Shareholder

 

25,000

 

 

25,000

 

Stock transfer and escrow fees

 

14,125

 

2,711

 

16,836

 

Director and Officer liability and other insurance premiums

 

13,339

 

9,536

 

22,875

 

Other operating expenses

 

60,100

 

14,901

 

75,001

 

 

 

 

 

 

 

 

 

Total

 

$

1,006,871

 

$

385,157

 

$

1,392,028

 

 

F-12



 

In order to complete the requirements for a third closing and obtain the remaining $850,000 currently remaining in escrow, the Company is required to meet the Third Closing Obligations enumerated above. The Company does not have an estimate of the cost required to complete these items at this time.

 

Note 3. Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the full year. The interim financial information should be read in conjunction with information included in the 2014 year-end financial statements attached to this filing as Exhibit 99.1.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all short term highly liquid investments with a maturity of three months or less to be cash equivalents.

 

Concentrated Credit Risk

 

The Company maintains its cash and cash equivalents with one institution which exceeded federally insured limits throughout the year. At March 31, 2015, the Company had cash on deposit of approximately $208,000 in excess of the federal insured limit of $250,000.

 

Land Held for Development

 

Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.

 

Land development costs, which have been capitalized, consist of the following:

 

Land under development

 

$

4,934,323

 

Licenses

 

77,000

 

Engineering and costs associated with permitting

 

464,774

 

 

 

 

 

 

 

$

5,476,097

 

 

F-13



 

Fair Value Measurements

 

The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable input that reflects management’s own assumptions.

 

The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and for the year ended December 31, 2014:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Beginning balance

 

$

 3,754,233

 

$

 

 

 

 

 

 

 

Total decrease in unrealized appreciation (depreciation) included in net assets

 

(1,353,280

)

1,904,233

 

 

 

 

 

 

 

Purchases, other settlements and issuances, net

 

 

1,850,000

 

 

 

 

 

 

 

Ending balance

 

$

 2,400,953

 

$

 3,754,233

 

 

Sensitivity Analysis to Changes in Level 3 Assumptions

 

Significant inputs include the expected dates when required conditions are met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability while in the delisted mode and reversed when the Company becomes publicly listed as projected by management. In addition, use of different range of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.

 

Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short term nature.

 

The convertible debentures and derivative liability approximate fair value based on Level 3 inputs, as further discussed in Note 6.

 

F-14



 

Long-Lived Assets

 

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed as of March 31, 2015.

 

Employee Stock Ownership Plan

 

The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. Deborah A. Vitale is the sole Trustee of the Trust. Compensation expense was measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations.

 

As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:

 

(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid; and (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account or be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.

 

In 2011, the Company elected to temporarily suspend contributions to the Plan, in accordance with the loan pledge agreement between the Company and the ESOP Trust. In each successive year, the Plan returned the 79,545 shares, which would have been allocated to employees annually, to treasury.

 

Net Earnings (Loss) per Common Share

 

Basic earnings/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Fully diluted earnings per share are calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. The dilutive securities below do not include 5,055,555 potentially Convertible Debentures since the requirements for possible conversion have not yet, and may never be, met.

 

The table below summarizes the components of potential dilutive securities at March 31, 2015 and 2014.

 

 

 

March 31,

 

March 31,

 

Description

 

2015

 

2014

 

 

 

 

 

 

 

Convertible Preferred Stock

 

260,000

 

260,000

 

Options to Purchase Common Shares

 

3,440,000

 

3,440,000

 

Private Placement Warrants

 

2,436,500

 

3,011,500

 

Convertible Promissory Notes

 

1,925,000

 

1,925,000

 

 

 

 

 

 

 

Total

 

8,061,500

 

8,636,500

 

 

F-15



 

Segment Information

 

Operating segments are components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

The Company currently operates solely in one segment, development of land, which relates to planned future operations.

 

Note 4 . Accounts Payable and Accrued Expenses

 

The table below outlines the elements included in accounts payable and accrued expenses at March 31, 2015 and December 31, 2014:

 

 

 

March 31,

 

December 31,

 

Description

 

2015

 

2014

 

 

 

 

 

 

 

Accrued payroll due officers

 

1,280,719

 

1,288,136

 

Accrued interest due officers

 

295,965

 

270,166

 

Accrued interest

 

813,333

 

756,405

 

Accrued dividends

 

381,000

 

355,600

 

Other accounts payable and accrued expenses

 

519,428

 

634,172

 

 

 

 

 

 

 

Total accounts payable and accrued expenses

 

3,290,445

 

3,304,479

 

 

Included in other accounts payable and accrued expenses are accrued director fees at March 31, 2015 and December 31, 2014 of $150,000 and $131,250, respectively, and rents payable to the President of the Company in the amounts of $60,568 and $62,062 at March 31, 2015 and December 31, 2014, respectively.

 

Note 5. Notes Payable

 

Line of Credit

 

On October 23, 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9% per annum originally payable quarterly based on the pro rata number of days outstanding. All funds originally advanced under the facility were due and payable by November 1, 2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase 50,000 shares of common stock of the Company at $1.75 per share. In addition, the lender received an option to purchase a maximum of 250,000 additional shares of common stock of the Company at $1.75 per share. The options expire following repayment in full by the Company of the amount borrowed.

 

As of December 31, 2009, the Company had borrowed all of the $1,000,000 available to it under the Line of Credit. In addition, the Company and the lender had verbally agreed that payment of all interest accrued subsequent to June 30, 2009 would be deferred until the date payment in full is due. The lender is now deceased and it is unclear if his estate will honor that verbal agreement. If it is not honored, the Company could be considered to be in default for non-payment of interest due on the note which totaled $515,860 at March 31, 2015. Interest on this debt incurred prior to June 30, 2009 has been paid in full. The Company was unable to satisfy the principal obligation of $1,000,000 by the due date of November

 

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1, 2012 or any interest which accrued on the obligation after June 30, 2009 and is in default under the repayment terms of the note.

 

Convertible Notes and Warrants

 

Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 with interest at 12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Note is convertible into 50,000 shares of common stock of the Company immediately upon issuance at the option of the investor. Interest on the notes is payable either in cash or common stock at the option of the Company. The Company ultimately accepted subscriptions totaling $450,000 from unrelated subscribers and an additional $25,000 for one Unit purchased by a Director of the Company. The offering of these Units expired on June 29, 2010 pursuant to the terms of the Private Placement Memorandum.

 

Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000 together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The Promissory Notes bear interest at 9% per annum and are convertible into 50,000 shares of common stock of the Company. Interest on the notes is payable in either cash or common stock at the option of the Company. The Company accepted subscriptions totaling $212,500 from unrelated accredited investors in 2010 and accepted an additional $300,000 of subscriptions from unrelated accredited investors in 2011. The Company paid a finders commission of $25,000 to an unrelated third party during the nine months ended September 30, 2011 before the offering terminated June 29, 2011. On July 2, 2011, the Company redeemed a note in the principal amount of $25,000 by issuing 50,000 shares of common stock.

 

The Convertible Notes issued via the Private Placements discussed above total $962,500 in aggregate and became due and payable beginning in March 2012 and extending at various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes.

 

The table below summarizes the Company’s notes payable at March 31, 2015 and December 31, 2014:

 

 

 

Gross Amount

 

Loan Facility

 

Owed

 

 

 

 

 

Line of Credit

 

$

 1,000,000

 

 

 

 

 

Private Placements:

 

 

 

March 1, 2010

 

475,000

 

October 25, 2010

 

487,500

 

 

 

 

 

Total Private Placements

 

962,500

 

 

 

 

 

Total Note Payable

 

$

 1,962,500

 

 

Note 6. Convertible Debentures and Derivative Liability

 

Pursuant to a Private Placement Agreement dated February 14, 2014, the terms of which are more fully described in Note 2 to these condensed consolidated financial statements, the Company had various Convertible Debentures with maturity dates of six years from issuance and a coupon rate of 4% per annum issued and outstanding at March 31, 2015 and 2014. The Debentures are convertible from the date of issuance, subject to certain Company milestones being met, into fully paid non-assessable common

 

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shares of the Company. The notes have an anti-dilution provision providing for a full ratchet reset of the conversion price.

 

For purposes of determining the proper accounting treatment and valuation of the instruments, the Company applied the provisions set forth in ASC Topic 820, Fair Value in Financial Instruments and ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities. Since the Notes issued have derivative features, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. In addition, the valuation is required to be conducted for each reporting period the instrument was in existence.

 

As previously noted, the Company’s stock registration was revoked effective September 4, 2014. Therefore the Company engaged an independent valuation expert to determine the fair value of its shares of common stock at September 30, 2014, December 31, 2014 and March 31, 2015. For periods after September 3, 2014, the fair value was estimated by adjusting the most recent market price by changes in the underlying market cap due to borrowings and continuing losses and applying a discount for a lack of marketability while in the delisted mode and reversed when the Company becomes publicly listed as projected by management. Monte Carlo models were developed to value the derivative liability within the Notes using historical volatility rate of 172%, discount bond rates based on the expected remaining term of each instrument ranging from 5.78% - 9.85% and expected conversion requirements being met by June 30, 2015.

 

The estimated fair value for the derivative liability relating to each Debenture at March 31, 2015 and December 31, 2014 is as follows:

 

 

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Tranche 1

 

$

1,335,713

 

$

 2,014,733

 

Tranche 2

 

1,065,240

 

1,739,500

 

 

 

 

 

 

 

Derivative Liability

 

$

2,400,953

 

$

 3,754,233

 

 

At the initial valuation date of each Tranche, a portion of the derivative liability was allocated to the Convertible Debentures as debt discount, with the remainder being recorded as other income/expense. At March 31, 2014, the initial valuation of Tranche 1 Debentures, $1,000,000 was allocated to debt discount and at December 31, 2014, the initial valuation of Tranche 2 Debentures, $850,000 was allocated to debt discount. The debt discount is subsequently amortized to expense using an effective interest methodology. Amortization of debt discount amounted to $17,642 for the Tranche 1 and Tranche 2 Convertible Debentures and $218 for the non-convertible Debenture for the three months ended March 31, 2015. The Company recorded a decrease in the fair value of the derivative liability of $1,353,280 for the three months ended March 31, 2015.

 

In the event the Company fails to meet the conditions for conversion of the Debentures, the First Tranche Convertible Debentures which total $950,000 would be due on March 31, 2020 and the Second Tranche Debentures which total $850,000 would be due December 31, 2020. The sole remaining non-convertible Debenture in the amount of $50,000 is due March 31, 2020.

 

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Note 7. Related Party Transactions

 

The President of the Company, a current Director of the Company, is owed deferred salary in the amount of $1,084,579 and the Vice President, a current Director of the Company, is owed deferred salary in the amount of $121,140 as of March 31, 2015. On October 12, 2012 the Board of Directors approved a motion to pay these individuals interest on their deferred compensation retroactive to the outstanding amounts due beginning in 2010 through the date of actual payment. Interest accrues at 9% beginning with the date each periodic payroll amount was originally scheduled to be paid. Accrued interest on this arrangement for the three months ended March 31, 2015 and 2014 amounted to $25,800 and $24,148, respectively.

 

Effective September 1, 2011, the Company entered into a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance, real estate taxes, expenses and utilities. Rent expense associated with this lease amounted to $17,586 and $19,029 for the three months ended March 31, 2015 and 2014, respectively. The President received direct cash payments totaling $18,136 for rents in the first three months of 2015 and no direct cash payments for the first three months of 2014.

 

Effective January 1, 2013, the directors of the Company will be compensated at a rate of $15,000 per annum. Each Director will be eligible for an annual payment in the amount of $15,000 as long as they remain a Director through December 31 of the applicable year, absent death or incapacitation. The annual payment to new directors will be prorated based upon months served in their initial year as a Director.

 

The Company has been unable to pay directors’ fees to date. As of March 31, 2015 and 2014 a total of $150,000 and $75,000, respectively, was due and owing to the Company’s directors. Directors have previously been compensated and may, in the future, be compensated for their services with Common Stock or options to purchase Common Stock of the Company. Directors are reimbursed for expenses incurred in attending meetings. Directors may be paid a consulting fee for services performed outside the scope of their directorship.

 

On January 10, 2014, a Director of the Company advanced $10,000 to the Company for capital needed by the Company prior to the first closing of the Private Placement dated February 14, 2014. On April 2, 2014, the Company repaid the Director in full for the advance.

 

On March 31, 2014, in conjunction with the Company’s offer of $3,000,000 in Collateralized Convertible Debentures, the Company accepted a subscription in the amount of $150,000 from a Director and Chairman of the Board of Directors of the Company effective March 31, 2014. On the same date, the Company accepted a subscription in the amount of $150,000 from another Director and Vice President of the Company. On December 31, 2014, that Director rejected the amended terms offered by the Company for the Second and Third Tranches of the Collateralized Convertible Debentures and was refunded $100,000 from funds held in Escrow under that agreement.

 

Company Directors

 

Effective March 31, 2014, the President, Chief Executive Officer, Treasurer, Chief Financial Officer, Interim Secretary and Chairman of the Board of Directors of the Company, resigned as Chairman of the Board of Directors.

 

Effective March 31, 2014, the Company appointed a new Director of the Company who was then appointed Chairman of the Board of Directors of the Company and President and Chief Executive Officer of Casino World, Inc., a subsidiary of the Company.

 

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Note 8. Commitments and Contingencies

 

Leases

 

Effective September 1, 2011, the Company entered into a month-to-month lease with Deborah A. Vitale, President and CEO of the Company for office space in a building owned by Ms. Vitale in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534 and payment of associated costs of insurance real estate taxes, expenses and utilities. On April 20, 2015, Ms. Vitale notified the Company that she is terminating the lease with the Company effective June 1, 2015.

 

Rental expenses for this facility totaled $17,586 and $18,587 for the three months ended March 31, 2015 and 2014, respectively.

 

The Company is not liable for future minimum lease payments.

 

Management Agreement

 

On June 19, 1993, two subsidiaries of Diamondhead Casino Corporation, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. Management of the Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.

 

Related Parties

 

The Company has an agreement with a Director pursuant to which he will be paid a bonus in the event of any recovery received from litigation against BP relating to the oil spill. This Director will receive ten percent of any amounts received by the Company, after deduction of attorney fees and expenses relating to the litigation.

 

Other

 

The Company’s obligations under the Collateralized Convertible Senior Debentures will be secured by a lien on the Company’s Mississippi property (the “Investors Lien”). On March 31, 2014, the Company issued $1 million of First Tranche Collateralized Convertible Senior Debentures and on December 31, 2014 the Company issued $850,000 of Second Tranche Collateralized Convertible Senior Debentures. Thus, liens were placed on the Property in favor of the Investors for $1,850,000. The Investors Lien is in pari passu with a lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000 (the “Executives Lien”). Ms. Vitale will serve as Lien Agent for the Executives Lien.

 

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The Company is currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the years ended December 31, 2010, 2011, 2012 and 2013. The Company did not have the funds to pay professionals to prepare and file these documents and forms when due. Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by both the Department of Labor and the Internal Revenue Service on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $23,768 and $14,130 in penalties for the three months ended March 31, 2015 and 2014, respectively, based on the current delinquent filings. In addition, the Company expects that cumulative penalties for all delinquent ESOP filings could total $166,370 through March 31, 2015. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor and the Internal Revenue Service with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.

 

Note. 9 Pending and Threatened Litigation

 

College Health & Investment, L.P. v. Diamondhead Casino Corporation

 

On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principle amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff seeks payment of principle of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower’s right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. The matter is pending.

 

College Health & Investment, L.P. v. Diamondhead Casino Corporation

 

On February 13, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint Pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn, seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company’s annual stockholders’ meetings. The plaintiff sought costs and expenses, including reasonable attorneys’ fees.

 

College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell

 

On March 14, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff’s General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The defendants believe that plaintiff’s claims are without merit and intend to vigorously defend this lawsuit. The plaintiff sought injunctive relief, but no monetary damages other than attorney’s fees.

 

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