UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
Or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File No: 0-17529
DIAMONDHEAD CASINO CORPORATION
| Delaware (State of Incorporation) | 59-2935476 (I.R.S. EIN) |
150-153rd Avenue, Suite 202, Madeira Beach, Florida 33708
(Address of principal executive offices)
Registrant’s telephone number, including area code: 727/393-2885
Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate the number of shares outstanding of each of the Issuer’s classes of common equity as of the latest practicable date: Number of shares outstanding as of November 8, 2004: 29,691,772.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of Management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The Company has presented the financial statements contained in this report as if the Company were to be able to continue as a going concern. However, as described in Note 1 to the financial statements, certain conditions indicate that the Company may not be able to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form-10QSB and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form-10KSB for the year ended December 31, 2003.
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DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
| Three Months Ended | ||||||||
| September 30 | ||||||||
| 2004 | 2003 | |||||||
| Revenues: | ||||||||
| Dock Lease Income | $ | 39,252 | $ | 106,581 | ||||
| Interest Earned on Invested Cash | 903 | 2,664 | ||||||
| Other | 90 | 217 | ||||||
| 40,245 | 109,462 | |||||||
| Costs and Expenses: | ||||||||
| General and Administrative | 162,311 | 204,662 | ||||||
| Depreciation and Amortization | 3,542 | 3,955 | ||||||
| Interest | 21,791 | 22,197 | ||||||
| Other | 25,805 | 30,100 | ||||||
| 213,449 | 260,914 | |||||||
| Net Gain on Sale of Asset | 79,359 | — | ||||||
| Net Loss | (93,845 | ) | (151,452 | ) | ||||
| Preferred Stock Dividends | (26,840 | ) | (26,840 | ) | ||||
| Net Loss Applicable to Common Stock | $ | (120,685 | ) | $ | (178,292 | ) | ||
| Loss Per Share | ||||||||
| Basic and Diluted | $ | (.004 | ) | $ | (.006 | ) | ||
| Weighted Average Number of Common Shares Outstanding | 29,658,445 | 29,462,454 | ||||||
See accompanying notes to condensed consolidated financial statements.
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DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
| Nine Months Ended | ||||||||
| September 30 | ||||||||
| 2004 | 2003 | |||||||
| Revenues: | ||||||||
| Dock Lease Income | $ | 117,756 | $ | 259,463 | ||||
| Interest Earned on Invested Cash | 3,242 | 9,867 | ||||||
| Other | 6,271 | 1,599 | ||||||
| 127,269 | 270,929 | |||||||
| Costs and Expenses: | ||||||||
| General and Administrative | 519,402 | 623,573 | ||||||
| Depreciation and Amortization | 11,302 | 11,475 | ||||||
| Interest | 65,302 | 67,664 | ||||||
| Other | 74,804 | 118,596 | ||||||
| 670,810 | 821,308 | |||||||
| Net Gain on Sale of Asset | 79,359 | — | ||||||
| Net Loss | (464,182 | ) | (550,379 | ) | ||||
| Preferred Stock Dividends | (80,520 | ) | (80,520 | ) | ||||
| Net Loss Applicable to Common Stock | $ | (544,702 | ) | $ | (630,899 | ) | ||
| Loss Per Share | ||||||||
| Basic and Diluted | $ | (.018 | ) | $ | (.021 | ) | ||
| Weighted Average Number of Common Shares Outstanding | 29,621,705 | 29,410,833 | ||||||
See accompanying notes to condensed consolidated financial statements.
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DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
| September 30, 2004 | ||||
ASSETS | ||||
| Current Assets: | ||||
| Cash and Cash Equivalents | $ | 562,790 | ||
| Accounts Receivable | 6,311 | |||
| Other Current Assets | 35,128 | |||
| Total Current Assets | 604,229 | |||
| Equipment and Fixtures, Less Accumulated Depreciation | 7,357 | |||
| Land Held for Development -Dockside Gaming | 5,440,665 | |||
| Long Term Receivables and Other | 26,514 | |||
| $ | 6,078,765 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current Liabilities: | ||||
| Accounts Payable and Accrued Liabilities | $ | 339,606 | ||
| Current Maturities of Long-Term Debt | 1,008,726 | |||
| Deferred Dock Lease Income | 28,000 | |||
| Total Current Liabilities | 1,376,332 | |||
| Stockholders’ Equity: | ||||
| Preferred Stock, $.01 par value; | ||||
| Shares Authorized: 5,000,000 | ||||
| Shares Outstanding: 2,122,000 | ||||
| Aggregate Liquidation Preference ($2,591,080) | 21,220 | |||
| Common Stock, $.001 par value; | ||||
| Shares Authorized: 50,000,000 | ||||
| Shares Issued: 34,143,478 | 34,144 | |||
| Shares Outstanding: 29,691,772 | ||||
| Additional Paid-In-Capital: | 26,479,545 | |||
| Unearned ESOP Shares | (4,773,748 | ) | ||
| Deficit | (16,868,572 | ) | ||
| Treasury Stock, at Cost, 1,250,000 Shares | (190,156 | ) | ||
| Total Stockholders’ Equity | 4,702,433 | |||
| $ | 6,078,765 | |||
See accompanying notes to condensed consolidated financial statements.
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DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2004 | 2003 | |||||||
| Operating Activities: | ||||||||
| Net Loss | $ | (464,182 | ) | $ | (550,379 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and Amortization | 11,302 | 11,475 | ||||||
| Net Gain on Sale of Assets | (79,359 | ) | — | |||||
| Release of ESOP Shares | 37,983 | 37,585 | ||||||
| (Increase) decrease in: | ||||||||
| Accounts Receivable | — | 3,645 | ||||||
| Other Current Assets | 32,893 | 98,625 | ||||||
| Increase (decrease) in: | ||||||||
| Accounts Payable and Accrued Liabilities | 99,660 | 30,916 | ||||||
| Deferred Dock Lease Income | — | 51,790 | ||||||
| Cash used in Operating Activities: | (361,703 | ) | (316,343 | ) | ||||
| Investing Activities: | ||||||||
| Proceeds from Sale of Assets | 156,802 | — | ||||||
| Purchase of Equipment | — | (4,214 | ) | |||||
| Land Development | (20,265 | ) | (255,000 | ) | ||||
| Cash provided by / (used) in Investing Activities | 136,537 | (259,214 | ) | |||||
| Financing Activities: | ||||||||
| Payment of Notes and Long-Term Debt | (5,084 | ) | (26,619 | ) | ||||
| Preferred Stock Dividends | (45,000 | ) | (45,000 | ) | ||||
| Cash used in financing activities: | (50,084 | ) | (71,619 | ) | ||||
| Net decrease in cash and cash equivalents | (275,250 | ) | (647,176 | ) | ||||
| Cash and cash equivalents, beginning of period | 838,040 | 1,692,803 | ||||||
| Cash and cash equivalents, end of period | $ | 562,790 | $ | 1,045,627 | ||||
See accompanying notes to condensed consolidated financial statements.
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DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
Note 1. Going Concern
The Company has prepared the accompanying financial statements assuming that it will continue as a going concern. Certain conditions indicate that the Company may not be able to continue as a going concern. As reflected in the accompanying financial statements, the Company incurred a loss applicable to common stock of $544,702 for the nine months ended September 30, 2004. The Company will incur additional losses in the future.
Management of the Company has analyzed future uses of cash in excess of incoming revenue for the twelve month period following September 30, 2004, and determined that, in the absence of additional financing, the Company will incur expenses or require cash usage for capital purposes that would exhaust all available cash within that period. The analysis assumed that the Company would continue to incur ongoing costs and expenses and that approximately $335,000 may be required to complete an environmental impact statement relating to the Company’s Diamondhead, Mississippi property. This analysis further assumes that the Company will not be making payments to the Florida Department of Revenue in the approximate amount of $126,000 during the forecast period, which was previously made pursuant to fifteen settlement agreements reached on behalf of five subsidiaries of the Company relating to the audit period February 1, 1989 through June 30, 1994. The analysis does assume that the Company will be making payments pursuant to the above-referenced settlements only on behalf of its subsidiary, Europasky Corporation, in the total amount of $96,677 during this period, which includes a required balloon payment in the amount of $88,945 after May 2005. The remaining four subsidiaries obligated to make the remainder of said payments are no longer in operation and have no assets from which to satisfy their obligations under these settlement agreements. The parent corporation did not guarantee the payments due on behalf of its subsidiaries and the Company ceased making these payments, except as to Europasky Corporation, as of January 2004. There can be no assurance that the Florida Department of Revenue will not attempt to collect the amounts due on behalf of the four subsidiaries, including balloon payments totaling approximately $875,000 due after May 2005.
The Company is currently considering various methods under which it could raise sufficient funds for future use. These include, but are not limited to, bridge financing, sale of equity or debt securities, a mortgage of its Diamondhead, Mississippi property, and/or a sale of assets. In fact, on August 26, 2004, the Company sold its two office condominium units located at 150-153rd Avenue in Madeira Beach, Florida, Suite 202, to an unrelated Florida corporation, for a total sales price of $164,000. In addition, on August 1, 2003, Casino World, Inc., a wholly owned subsidiary of the Company, entered into an agreement with CB Richard Ellis, Inc. (“CBRE”) to serve as its exclusive agent to secure debt and equity financing for the Company’s Mississippi project.On April 13, 2004, the Company announced that CBRE had completed a feasibility study on the proposed Diamondhead casino project and had recommended to the Company that it secure a mortgage on the property to sustain the Company during the process of obtaining various permits and approvals. The Company is currently in the process of researching ways to raise capital. However, there can be no assurance that additional capital will be available at all, or at an acceptable cost, or on a timely basis.
In the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it could have a significant adverse impact on the Company’s ability to ultimately
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develop the Diamondhead, Mississippi property. Due to the uncertainty of the outcome, the accompanying financial statements do not reflect any adjustments which may occur as a result of the above-discussed conditions.
There can be no assurance that the necessary regulatory permits and approvals required to develop the Diamondhead, Mississippi property can be obtained or that financing required to do so can be obtained. At the present time, the Company does not have the financial resources to develop its proposed casino resort. There can be no assurance that the Company can successfully develop its Diamondhead, Mississippi property or that if developed, the operation will be successful.
Note 2. Earnings (Loss) per Share
Net loss per common share is based on the net loss after preferred stock dividends divided by the weighted average number of common shares outstanding during each period. Common shares outstanding include issued shares, less shares held in treasury and less unallocated and uncommitted shares held by the ESOP trust.
The computation of the net loss per common share does not include shares of common stock that could be issued pursuant to outstanding stock purchase options or warrants or convertible preferred stock as their effect would be antidilutive to the Company’s net loss per share.
| Common Shares outstanding includes: | ||||
| Issued Shares | 34,143,478 | |||
| Less: Treasury Shares | (1,250,000 | ) | ||
| Unallocated, uncommitted ESOP Shares | (3,201,706 | ) | ||
| Outstanding Shares | 29,691,772 | |||
Note 3. Legal Proceedings
William Poulos, et al. v. Caesars World, Inc. et al. (including Europa Cruises of Florida 1, Inc. and Europa Cruises of Florida 2, Inc.)(Case No. 02-80069)(United States Court of Appeals for the Ninth Circuit (Appeal from the United States District Court, District of Nevada) (Case No. CV-S-94-1126-RLH-(RJJ)
Class Certification Denied/Decision Affirmed on Appeal
On or about November 29, 1994, William Poulos filed a class action lawsuit on behalf of himself and all others similarly situated against various defendants, including Europa Cruises of Florida 1, Inc. and Europa Cruises of Florida 2, Inc., two subsidiaries of the Company, in the United States District Court for the Middle District of Florida, Orlando Division (Case No. 94-1259-CIV-ORL-22). The suit was filed against the owners, operators and distributors of cruise ship casinos which utilized casino video poker machines and electronic slot machines. The Plaintiff alleged violation of the Federal Civil RICO statute, common law fraud and deceit, unjust enrichment and negligent misrepresentation. The plaintiff filed a similar action against most major, land-based casino operators in the United States. The plaintiff contended that the defendant owners and operators of casinos, including cruise ship casinos, along with the distributors and manufacturers of video poker machines and electronic slot machines, engaged in a course of fraudulent and misleading conduct intended to induce people to play their machines based on a false understanding that the machines operate in a truly random fashion. The plaintiff alleged that these machines
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actually follow fixed, preordained sequences that are not random, but rather are both predictable and subject to manipulation by defendants and others. The plaintiff sought damages in excess of $1 billion dollars against all defendants. The case against the Europa subsidiaries was transferred to the United States District Court for the District of Nevada, Southern Division. The Company shared the cost of litigation in this matter with the other defendants. On June 26, 2002, the trial Court denied the plaintiffs’ Motion for Class Certification. The plaintiffs’ appealed. On August 10, 2004, the United States Court of Appeals for the Ninth Circuit affirmed the lower court’s decision. While the plaintiffs are free to pursue their individual cases, the two subsidiaries of the Company that were named as defendants in this case are no longer operating and have no assets and no ability to satisfy any judgment that might be levied against them. The Company does not expect to incur any further expenses or fees relating to this matter.
Liberis v. Steven M. Turner, Deborah A. Vitale, William A. Herold, Dr. Ernst Walter, Sharon Petty, Charles “Kip” Reddien, Serco International Limited, Casinos Austria Maritime Corporation (CAMC), Austroinvest International Limited, Bertha Gersh, as Administrator of the Estate of Victor Gersh, Europa Cruises Corporation, Peter Mueller, Steven B. Solomon, and John Does A-Z (Circuit Court in and for Pinellas County, Florida) (Civil Action No. 98-007120-CI-008)
Case Decided
On or about October 30, 1998, Charles S. Liberis, the founder of the Company, a former President, Chief Operating Officer and Chairman of the Board of Directors of the Company, and his former spouse, Ginger Liberis, filed suit in the Circuit Court in and for Pinellas County, Florida for fraud and conspiracy, intentional interference with advantageous business relationships, intentional breach of duty to facilitate stock transfers, conspiracy, negligence-failure to facilitate stock transfers, defamation, conspiracy to defame, and intentional infliction of emotional distress. The Company and the defendant-directors filed motions for summary judgment in the case. The Court entered Final Summary Judgment in favor of the Company and the director-defendants on February 9, 2004. The case is now on appeal.
Note 4. Stock- Based Compensation
Statement of Financial Accounting Standards No. 123, “Accounting for Stock–Based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, require that the Company provide pro forma information regarding net loss and net loss per share as if compensation cost related to the Company’s issuance of stock options to employees and Directors had been determined in accordance with the fair value method. The Company estimates the fair value of each stock option at the grant date using the Black-Scholes option-pricing model with an expected life of five years, no dividend yield percent, and the following assumptions:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Expected Volatility | 71.25 | % | 83.61 | % | 71.25 | % | 83.61 | % | ||||||||
| Risk-Free Interest Rate | 3.66 | % | 3.04% - 3.23 | % | 3.66 | % | 2.54% - 3.23 | % | ||||||||
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The following options were issued by the Company for the periods being reported.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Options Granted | 75,000 | 600,000 | 75,000 | 1,350,000 | ||||||||||||
| Exercise Price | $ | .72 | $ | .75 | $ | .72 | $ | .30-$.75 | ||||||||
Pro forma information regarding net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| Net Loss Applicable to Common Stock: | ||||||||||||||||
| As Reported | $ | (120,685 | ) | $ | (178,292 | ) | $ | (544,702 | ) | $ | (630,899 | ) | ||||
| Fair value based compensation | (30,037 | ) | (228,624 | ) | (30,037 | ) | (379,830 | ) | ||||||||
| Pro Forma | $ | (150,722 | ) | $ | (406,916 | ) | $ | (574,739 | ) | $ | (1,010,729 | ) | ||||
| Net Loss Per Common Share: | ||||||||||||||||
| As Reported | $ | (.004 | ) | $ | (.006 | ) | $ | (.018 | ) | $ | (.021 | ) | ||||
| Pro Forma | $ | (.005 | ) | $ | (.014 | ) | $ | (.019 | ) | $ | (.034 | ) | ||||
Note 5. Other Costs and Expenses
Other costs and expenses consisted of the following:
| For the three months ended September 30: | 2004 | 2003 | ||||||
| ESOP Provision | $ | 11,932 | $ | 17,500 | ||||
| Real Estate and Tangible Taxes | 13,873 | 12,600 | ||||||
| $ | 25,805 | $ | 30,100 | |||||
| For the nine months ended September 30: | 2004 | 2003 | ||||||
| ESOP Provision | $ | 37,983 | $ | 37,585 | ||||
| Real Estate and Tangible Taxes | 36,821 | 38,011 | ||||||
| Redemption of Stock Options Issued to Former Directors and Employee | — | 43,000 | ||||||
| $ | 74,804 | $ | 118,596 | |||||
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Note 6. Net Gain on Sale of Asset
On August 26, 2004, the Company sold its two office condominium units located at 150-153rd Avenue in Madeira Beach, Florida, Suite 202, to South Beaches Real Estate Professionals, Inc., an unrelated Florida corporation, for a total sales price of $164,000. The net proceeds to the Company, after deducting for commissions and expenses of sale, were $156,802. The Company recorded a net gain on the sale of the asset in the amount of $79,359 during the quarter ended September 30, 2004.
The Company was headquartered in the two office condominiums which were sold. The Company, as part of the transaction, entered into a Commercial Lease agreement with the purchaser, pursuant to which it leased back one of the offices sold for a two year term beginning September 1, 2004, at an annual rent of $4,800. The Company has the right to terminate the lease upon ninety days written notice to the purchaser. All overhead expenses associated with this lease, including utilities, insurance and repairs, are the responsibility of the purchaser.
Item 2. Management’s Discussion and Analysis of Financial Condition and Financial Results
Financial Results for the Three Months Ended September 30, 2004
The Company’s business plan calls for the construction and development of a destination casino resort on property owned by the Company on the Bay of St. Louis in Diamondhead, Mississippi. In the opinion of management, this project holds the greatest potential for achieving maximum shareholder value. The Company’s management, financial resources, and assets will be primarily devoted to the development of this goal.
On April 13, 2004, the Company announced that CB Richard Ellis, Inc, (“CBRE”) the Company’s exclusive provider of financial services, had completed a feasibility study for the proposed Diamondhead casino resort and concluded that the site would generate approximately $134 million in annual gaming revenues. Based on this evaluation, CBRE recommended that the Company proceed without a joint venture partner to obtain the permits and approvals required for construction.
To achieve that end, CBRE has recommended that the Company obtain a mortgage on the Diamondhead property to procure the funds necessary to sustain the Company during the permitting and approval process. CBRE will join the Company during the permitting and approval process and attend hearings and meetings to address and satisfy any concerns regarding project viability and financing. However, there can be no assurance that financing will be obtained and that if developed, the Diamondhead casino resort will be successful.
The Company obtained original site approval to locate its casino in the Bay of St. Louis at the far east end of its property. The Company is currently engaged in the process of obtaining informal approval from the federal, state and local authorities responsible for permits and approvals to locate its casino in the Bay of St. Louis west of its original location, approximately midway between the east and west boundaries of the property. The relocation will require the Company to obtain amendments to its existing permits and
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approvals or to obtain new permits and approvals from the federal, state and local authorities responsible for permits and approvals required for the project. There can be no assurance that such permits and approvals can be obtained.
Revenues
The Company earned revenues totaling $40,245 for the three months ended September 30, 2004 as compared to $109,462 for the same period one year ago. Revenues for both periods were primarily derived from dock lease income. In 2004, the Company earned $39,252 in dock lease income from the VTM Management, Inc. sublease on the Madeira Beach, Florida dock, while in the prior year the Company earned $67,329 in dock lease income from the Big “M” Casino lease assignment of its Ft. Myers, Florida dock and an additional $39,252 in dock lease income from the VTM Management, Inc. sublease which commenced in May 2003.
Costs and Expenses
Costs and expenses incurred for the three months ended September 30, 2004 totaled $213,449, of which $162,311 were administrative in nature. Total expenses in 2004 included non-cash ESOP charges of $11,932. For the same period in 2003, costs and expenses incurred totaled $260,914, of which $204,662 were administrative in nature. Total expenses in 2003 included non-cash ESOP charges of $17,500. The decrease in administrative expenses in the amount of $42,351 is primarily due to higher insurance costs incurred in the prior year.
Financial Results for the Nine Months Ended September 30, 2004
Revenues
The Company earned revenues totaling $127,269 for the nine months ended September 30, 2004 as compared to $270,929 for the same period one year ago. Revenues for both periods were primarily derived from dock lease income. In 2004, the Company earned $117,756 in dock lease income from the VTM Management, Inc. sublease on the Madeira Beach, Florida dock, while in the prior year the Company earned $201,978 in dock lease income from the Big “M” Casino lease assignment of its Ft. Myers, Florida dock and an additional $57,485 in dock lease income from the VTM Management, Inc. sublease which commenced in May 2003.
Costs and Expenses
Costs and expenses incurred for the nine months ended September 30, 2004 totaled $670,810, of which $519,402 were administrative in nature. Total expenses in 2004 included non-cash ESOP charges of $37,983. For the same period in 2003, costs and expenses incurred totaled $821,308, of which $623,573 were administrative in nature. Total expenses in 2003 included non-cash ESOP charges of $37,585. The decrease in administrative expenses in the amount of $104,171 is primarily due to higher compensation and insurance costs incurred in the prior year.
Liquidity and Capital Resources
In the first nine months of 2004, the Company was able to meet its ongoing costs and expenses through the use of cash on hand. During the period, the Company’s cash on hand decreased $275,250. The decrease in cash over the nine month period is net of $361,703 used to fund operating activities, offset by $156,802 in
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proceeds derived from the sale of the Company’s condominium units in Madeira Beach, Florida. The cash balance at September 30, 2004 was $562,790.
As more fully discussed in Part 1, Note 1 to the financial statements accompanying this report, the Company will need to raise additional capital for future use to obtain permits and approvals for development of its Diamondhead, Mississippi property. The Company is currently considering various methods under which it could raise sufficient funds for future use. These include, but are not limited to, bridge financing, sale of equity or debt securities, a mortgage of its Diamondhead, Mississippi property, and/or a sale of assets. In addition to the Company selling the two office condominiums that it owned in Madeira Beach, Florida, both the President and Vice President of the Company have temporarily deferred their salaries since late July in an effort to alleviate current pressures on cash flow. Both Officers can claim the amount deferred at any time.
In the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it could have a significant adverse impact on the Company’s ability to ultimately develop the Diamondhead, Mississippi property. Due to the uncertainty of the outcome, the accompanying financial statements do not reflect any adjustments which may occur as a result of the above-discussed conditions.
There can be no assurance that the necessary regulatory permits and approvals required to develop the Diamondhead, Mississippi property can be obtained or that financing required to do so can be obtained. At the present time, the Company does not have the financial resources to develop its proposed casino resort. There can be no assurance that the Company can successfully develop its Diamondhead, Mississippi property or that, if developed, the operation will be successful.
Capital Expenditure Requirements
In 2002, the Company retained EDAW, Inc., to draft an Environmental Impact Statement (EIS) for its Diamondhead, Mississippi property at a base contract price of $500,000, of which $330,000 was incurred, of which $260,000 has been paid in prior years. The Company has temporarily halted the study while consideration is given to moving the location of the casino on the property. In addition, the Company will be required to expend additional substantial funds for other costs associated with the design and development of the Diamondhead property.
On October 23, 2001, Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company, entered into a three year Option Agreement to purchase property adjacent to the Company’s Diamondhead, Mississippi site, which property was the subject of a prior easement. The terms of the Option Agreement called for the Company to pay $10,000 upon the signing of the agreement and, beginning on January 2, 2003, to make quarterly payments of $2,500 through October 1, 2004. In addition, the Company obtained the right to purchase the property at a price of $420,000. The option to purchase the property will expire on December 31, 2004.
Critical Accounting Policy
The Company currently carries the value of the Diamondhead, Mississippi property on its balance sheet at cost, in the amount of $5,440,665 and has examined that valuation for impairment. In the opinion of management, the carrying value is not in excess of the ultimate recovery value of the property. The Diamondhead, Mississippi property was last appraised on or about August 4, 2003 by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was
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predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. There can be no assurance that the necessary regulatory permits and approvals required to develop the property can be obtained or that financing required to do so can be obtained. As of September 30, 2004 and as of the present time, the Company does not have the financial resources to develop the property. There can be no assurance that the Company can successfully develop the property or that if developed, the operation will be successful.
Item 3. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of the Company have made an evaluation of the disclosure controls and procedures relating to the quarterly report on Form 10QSB for the period ended September 30, 2004, as filed with the Securities and Exchange Commission, and have judged such controls and procedures to be effective as of September 30, 2004 (the evaluation date).
Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedure controls will detect or uncover all failures of persons within the Company to report material information otherwise required to be set forth in the Company’s reports.
There have not been any significant changes in the internal controls of the Company or other factors that could significantly affect internal controls relating to the Company since the evaluation date.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 to the condensed consolidated financial statements.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
On July 20, 2004, the Mississippi Commission on Marine Resources voted to grant Casino World, Inc., a subsidiary of the Company, a two-year extension of its current coastal wetlands permit which is required for the Company’s Diamondhead, Mississippi project. The permit was extended to August 2006. In the event the Company decides to move its casino location from a location in the Bay of St. Louis at the far east end of its property to a location in the Bay of St. Louis west of its original location, approximately midway between the east and west boundaries of the property, the Company will have to obtain amendments to its existing permits and approvals or obtain new permits and approvals from the federal, state and local authorities responsible for permits and approvals required for the project. There can be no assurance that such permits and approvals can be obtained.
Contract with CB Richard Ellis, Inc.
On August 1, 2003, Casino World, Inc., a wholly owned subsidiary of the Company, entered into a one year agreement with CB Richard Ellis, Inc. Under the terms of the agreement, CB Richard Ellis, Inc. would serve as exclusive agent to secure debt and equity financing for the Company’s Diamondhead,
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Mississippi project. The agreement, subject to certain exclusions, was contingent on performance and did not require the Company to advance or pay costs or expenses.
At a regularly scheduled meeting of the Board of Directors held on July 13, 2004, the Board voted to renew the agreement with CB Richard Ellis, Inc. for an additional year beginning August 1, 2004.
Options
On July 1, 2004, 50,000 options to purchase common stock previously awarded to a key employee, and 25,000 options to purchase common stock previously awarded to an honorary director, expired. On July 13, 2004, the Board of Directors awarded 50,000 options to purchase common stock to the same key employee, and 25,000 options to purchase common stock to the same honorary Director at an exercise price of $.72 per common share for a period of five years.
Item 6. Exhibits and Reports on Form 8-K
None.
Exhibits 31.1 and 31.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company pursuant to Rule 13A – 14 of the Securities and Exchange Commission Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
Exhibits 32.1 and 32.2
Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| DIAMONDHEAD CASINO CORPORATION | ||||
| DATE: November 12, 2004 | /s/ Deborah A. Vitale | |||
| By: Deborah A. Vitale | ||||
| President | ||||
| /s/ Robert L. Zimmerman | ||||
| By: Robert L. Zimmerman | ||||
| Chief Financial Officer | ||||
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