DHCC Diamondhead Casino Corporation (PK)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

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

(Exact name of registrant as specified in charter)

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

1301 Seminole Boulevard, Suite 142, Largo, Florida 33770
(Address of principal executive offices)

Registrant’s telephone number, including area code: 727/674-0055

     Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

     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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

     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 August 1, 2008: 33,746,987.

 

 

TABLE OF CONTENTS

PART I:		FINANCIAL INFORMATION
ITEM 1:		Financial Statements
		Condensed Consolidated Statements of Loss (Unaudited) for the Three Months Ended June 30, 2008 and June 30, 2007			1
		Condensed Consolidated Statements of Loss (Unaudited) for the Six Months Ended June 30, 2008 and June 30, 2007			2
		Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007			3
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and June 30, 2007			4
		Notes to Condensed Consolidated Financial Statements			5-8
ITEM 2:		Management’s Discussion and Analysis of Financial Condition and Financial Results			8-13
ITEM 3:		Quantitative and Qualitative Disclosures about Market Risk			13
ITEM 4:		Controls and Procedures			13
PART II:		OTHER INFORMATION
ITEM 1:		Legal Proceedings			13
ITEM 1A:		Risk Factors			13-15
ITEM 2:		Unregistered Sales of Equity Securities and Use of Proceeds			15
ITEM 3:		Default Upon Senior Securities			15
ITEM 4:		Submission of Matters to a Vote of Security Holders			15
ITEM 5:		Other Information			15
ITEM 6:		Exhibits			15
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)

		Three Months Ended
		June 30
		2008				2007
Costs and Expenses:
General and Administrative		$	232,553			$	251,475
Other			50,083				66,930
			282,636				318,405
Other Income (Expense)
Interest Earned On Invested Cash			1,211				7,391
Interest Expense			(1,550	)			—
			(339	)			7,391
Net Loss			(282,975	)			(311,014	)
Preferred Stock Dividends			(25,400	)			(26,840	)
Net Loss Applicable to Common Stockholders		$	(308,375	)		$	(337,854	)
Net Loss per Common Share Applicable to Common Stockholders
Basic and Diluted		$	(.009	)		$	(.010	)
Weighted Average Number of Common Shares Outstanding,
Basic and Diluted			33,702,558				33,414,852

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)

		Six Months Ended
		June 30
		2008				2007
Costs and Expenses:
General and Administrative		$	439,945			$	511,091
Stock-based Compensation			2,072,927				—
Other			100,268				128,948
			2,613,140				640,039
Other Income (Expense)
Interest Earned On Invested Cash			3,386				15,514
Interest Expense			(1,792	)			—
			1,594				15,514
Net Loss			(2,611,546	)			(624,525	)
Preferred Stock Dividends			(52,240	)			(53,680	)
Net Loss Applicable to Common Stockholders		$	(2,663,786	)		$	(678,205	)
Net Loss per Common Share Applicable to Common Stockholders
Basic and Diluted		$	(.079	)		$	(.020	)
Weighted Average Number of Common Shares Outstanding,
Basic and Diluted			33,596,361				33,299,396

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		(Unaudited)
		June 30, 2008				December 31, 2007
ASSETS
Current Assets:
Cash		$	418,812			$	739,831
Other Current Assets			7,987				17,050
Total Current Assets			426,799				756,881
Equipment and Fixtures, Less Accumulated Depreciation			105				225
Land Held for Development			5,409,913				5,409,913
Long Term Receivable and Other			26,514				26,514
		$	5,863,331			$	6,193,533
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Note payable to Director		$	55,000			$	—
Accounts Payable and Accrued Liabilities			138,032				201,034
Total Current Liabilities			193,032				201.034
Contingencies			—				—
Stockholders’ Equity:
Preferred Stock: $.01 par value; shares authorized: 5,000,000, outstanding: 2,086,000 at June 30, 2008; 2,122,000 at December 31, 2007: (aggregate liquidation preference $2,519,080 at June 30, 2008 and $2,591,080 at December 31, 2007)			20,860				21,220
Common Stock: $.001 par value; shares authorized: 50,000,000, issued: 36,693,573 at June 30, 2008 and 36,477,066 at December 31, 2007, outstanding: 33,739,815 at June 30, 2008 and 33,483,535 at December 31, 2007			36,694				36,477
Additional Paid-In-Capital			33,453,994				31,171,566
Unearned ESOP Shares			(4,328,989	)			(4,388,289	)
Accumulated Deficit			(23,504,601	)			(20,840,816	)
Treasury Stock, at Cost, 50,346 Shares			(7,659	)			(7,659	)
Total Stockholders’ Equity			5,670,299				5,992,499
		$	5,863,331			$	6,193,533

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended
		June 30
		2008				2007
Operating Activities:
Net Loss		$	(2,611,546	)		$	(624,525	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization			120				486
Release of ESOP Shares			75,568				105,398
Stock-based compensation			2,072,927				—
Decrease in:
Other Current Assets			9,063				6,147
(Decrease) in:
Accounts Payable and Accrued Liabilities			(73,401	)			(48,857	)
Net cash used in Operating Activities			(527,269	)			(561,351	)
Financing Activities:
Proceeds from issuance of Notes payable to Directors			205,000				—
Payment of Note payable to Director			(25,000	)			—
Proceeds from exercise of options to purchase common stock			56,250				321,650
Payment of Preferred Stock dividends			(30,000	)			(15,000	)
Net cash provided by Financing Activities			206,250				306,650
Net decrease in cash			( 321,019	)			(254,701	)
Cash beginning of period			739,831				1,419,955
Cash end of period		$	418,812			$	1,165,254
Non-Cash transactions:
Stock issued to satisfy Note payable to Director		$	125,000			$	—
Preferred stock dividends paid with common stock		$	22,240			$	23,680
Conversion of 36,000 shares of preferred stock to common		$	—			$	—

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2008, the Company had an accumulated deficit of $23,504,601 and has experienced continuing net losses and negative cash flows. These condensed consolidated financial statements contain unaudited information as of June 30, 2008 and for the six-month periods ended June 30, 2008 and 2007. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with our audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2007 is derived from our 2007 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2007 Annual Report on Form 10-K. The results of operations for the interim period presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Liquidity

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, in conjunction with one or more partners, through either equity and/or debt financing, to master plan, obtain permits for, and construct a casino resort.

The Company generates no revenues and incurred a net loss applicable to common stockholders of $2,663,786 and $678,205 for the six months ended June 30, 2008 and 2007 respectively. The Company has been dependent over the past two years on raising cash to meet its on-going costs and expenses through the sale of its equity securities. During the six months ended June 30, 2008, the Company received $56,250 from the exercise of an option to purchase 75,000 shares of common stock by a Director of the Company. In addition, the Company raised $205,000 through unsecured borrowing pursuant to the terms of two promissory notes issued to two other Directors of the Company. At June 30, 2008, the Company had cash on hand totaling $418,812 which management does not believe is sufficient to meet currently budgeted on-going costs and expenses through the next twelve months. In addition, management expects legal fees and expenses to increase in future months in excess of currently budgeted amounts for a variety of reasons relating to a potential joint venture partnership, increased use of outside securities and corporate counsel for advice and guidance, and for the provision of certain legal services previously performed by the Company’s President. It is management’s belief that these circumstances may hinder the Company’s ability to continue as a going concern.

On June 23, 2008, the Company signed a non-binding Letter of Intent with Casinos Austria International Holding, GMBH (“CAI”). The Company agreed that it would not enter into any other agreement with respect to the development of a casino resort with any other person or entity for a period of ninety days following the execution of the Agreement.

At June 30, 2008, the Company does not have the financial resources to develop a casino resort. There can be no assurance that the Company can successfully develop any of its Diamondhead, Mississippi property, and in the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it may have a significant adverse impact on the Company’s ability to ultimately develop the property.

Note 3. Net Loss per Common Share

Net loss per common share applicable to common stockholders is based on the net loss applicable to common stockholders divided by the weighted average number of common shares outstanding during each period. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury.

Basic net loss per share applicable to common stockholders is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is calculated by using the weighted average number of common shares outstanding plus other potentially dilutive securities. As of June 30, 2008 and 2007, dilutive securities included 3,125,000 and 3,336,000 respectively of potential, additional common shares , consisting of stock purchase options and convertible preferred stock. The foregoing potentially dilutive securities are excluded from diluted net loss per share applicable to common stockholders as their effect would be antidilutive.

		June 30, 2008				December 31, 2007
Common Shares outstanding includes:
Issued Shares			36,693,573				36,477,066
Less: Treasury Shares			(50,346	)			(50,346	)
Unallocated, uncommitted ESOP Shares			(2,903,412	)			(2,943,185	)
Outstanding Shares			33,739,815				33,483,535

Note 4. Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States. The statement highlights the fact that the entity, as opposed to its’ auditors, are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The statement becomes effective 60 days following the Securities and Exchange Commission’s approval by the Public Company Accounting Oversight Board approval of amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”

In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on its consolidated financial statements.

Note 5. Fair Value Measurements

In the first quarter of 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements. SFAS No. 157 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 statement 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.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Upon adoption of SFAS 159, we did not elect the SFAS 159 option for our existing financial assets and liabilities and, therefore, adoption of SFAS 159 did not have any impact on our condensed consolidated financial statements.

The Company chose not to elect the fair value option as prescribed by FASB SFAS No. 159, “The Fair Value Option For Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”, for its financial assets and liabilities that had not been previously carried at fair value. Therefore, the Company’s long term receivable and notes payable to directors are not carried at fair value but are reported at their carrying values.

Note 6. Promissory Notes Due Directors

In March 2008, the Company borrowed $205,000 from two Directors to meet its short term liquidity needs pursuant to the terms of two promissory notes. The first note provides for the repayment of $150,000 to the Vice President of the Company, who is also a Director of the Company. The second note provides for the repayment of $55,000 to a Director of the Company. Both loans are due and payable on or before May 1, 2009 and provide for interest at the rate of 9% per annum. Both loans are unsecured.

On March 28, 2008, the Vice President of the Company, who had previously loaned the Company $150,000 pursuant to a promissory note, exercised an option to purchase 100,000 shares of common stock at an exercise price of $1.25 per share using the amount owed him pursuant to the foregoing promissory note as payment for the exercise price. The remaining balance on this note was retired in the second quarter of 2008 leaving a note in the amount of $55,000 outstanding at June 30, 2008.

Note 7. Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS 123(R) “Share-Based Payments,” 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. As a result of a modification to all outstanding option grants originally issued in 2003, net loss applicable to common stockholders for the six months ended June 30, 2008 was $2,072,927 higher than if the Company had continued to account for stock-based compensation under APB No. 25. The impact on basic and diluted loss per share for the six months ended June 30, 2008 was an increase of $.062 per share. There was no stock-based compensation expense recognized for the six months ended June 30, 2007.

In determining the fair value of each option, the Black-Scholes option-pricing model, consistent with the provisions of SFAS 123(R) and SAB No.107, was used. In the case of a modification, the valuation at the modification date in excess of the valuation at the original grant date is expensed. The valuation was determined using the following weighted-average assumptions: dividend yield of zero, expected volatility ranging from 49.25% to 96.10%, an average expected option life of 5.07 years or the actual life if the option was exercised post modification date, and average risk-free interest rates ranging from 2.31% to 2.82%. All awards were fully vested at June 30, 2008.

Note 8. Contingency

On November 28, 1994, the Florida Department of Revenue issued a Notice of Intent to make Sales and Use Tax Audit Changes to five subsidiaries of the Company for the period February 1, 1989 through June 30, 1994. The total proposed assessments, including estimated penalties and interest, through June 15, 1997, totaled approximately $7.4 million. As of May 2005, the subsidiaries ceased all payments regarding the assessments and the total amount, including accrued interest, due the Florida Department of Revenue amounted to $1,125,752.

The five subsidiaries which were the subjects of the assessment are no longer operating, have no assets, and are unable to make further payments pursuant to their respective Closing Agreements. The parent corporation did not guarantee the payments under these settlement agreements. On May 18, 2006, the Company received correspondence from the Florida Department of Revenue stating that the Department had filed tax warrants with respect to the amounts owed by the subsidiaries in question and had placed these warrants as uncollectible and no further collection efforts would be pursued by the Florida Department of Revenue.

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

This section should be read together with “Management’s Discussion and Analysis of Financial Condition and Plan of Operation” and the Consolidated Financial Statements and related notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as well as the condensed consolidated financial statements for the six months ended June 30, 2008 and accompanying notes included elsewhere in this document.

The Company’s current priority is the development of a casino resort on its 404-acre property located on the Bay of St. Louis 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, the project will be successful.

The Company has had no operations since it ended its gambling cruise ship operations in 2000 and incurred a net loss applicable to common stockholders of $2,663,786 and $678,205 for the six months ended June 30, 2008 and 2007 respectively. The increased loss was primarily attributable to a charge for stock-based compensation in the amount of $2,072,927 as a result of extending the terms of outstanding stock options during the first quarter of 2008.

Over the past two years, the Company has been dependent on raising cash through the sale of its equity securities to meet its on-going costs and expenses. The Company generates no revenues, expects to continue to incur losses form its on-going costs and expenses, and at June 30, 2008 had an accumulated deficit of $23,504,601. During the six months ended June 30, 2008, the Company received cash in the amount of $56,250 from the exercise of an option to purchase 75,000 shares of common stock by a Director of the Company and raised an additional $205,000 through unsecured borrowing pursuant to the terms of two promissory notes issued to two other Directors of the Company. At June 30, 2008, the Company had cash on hand totaling $418,812 which management does not believe is sufficient to meet currently budgeted on-going costs and expenses through the next twelve months. In addition, management expects legal fees and expenses to increase in future months in excess of currently budgeted amounts for a variety of reasons relating to a potential joint venture partnership, increased use of outside securities and corporate counsel for advice and guidance, and for the provision of certain legal services previously performed by the Company’s President. It is management’s belief that these circumstances may hinder the Company’s ability to continue as a going concern.

On June 23, 2008, the Company announced it had signed a non-binding Letter of Intent with Casinos Austria International Holding, GMBH (“CAI”). The Company agreed that it would not enter into any other agreement with respect to the development of a casino resort with any other person or entity for a period of ninety days following the execution of the Agreement.

There can be no assurance that the Company will be able to reach any agreement with respect to the development of the Diamondhead, Mississippi property. The development of this property is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. The Company may be affected by some or all of these factors and other risks and uncertainties, many of which are beyond the Company’s control.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management’s current plans and beliefs or estimates of future results or trends. Forward-looking statements also involve risks and uncertainties, including, but not limited to, the risks and uncertainties described in Part 2, Item 1A of this report, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict.

The reader should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we will not update these forward-looking statements, even if our situation changes in the future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-looking statements.

Off Balance Sheet Arrangements:

Non-Binding Letter of Intent

On June 23, 2008, the Company signed a non-binding Letter of Intent with Casinos Austria International Holding, GMBH (“CAI”). The Company agreed that it would not enter into any other agreement with respect to the development of a casino resort with any other person or entity for a period of ninety days following the execution of the Agreement.

Transaction Fee

The Registrant has agreed to pay an unrelated third party a transaction fee contingent on the consummation of a definitive joint venture agreement with CAI.

The transaction fee is defined as a percentage of aggregate gross third party contributions consisting of the total value of all cash, notes, securities, assets and other property directly or indirectly paid, payable, contributed or to be contributed, transferred, invested or committed to the Company or the Joint Venture by one or more potential investors (not including the Company) plus the gross proceeds of any public offering or private placement of securities of the Company or the Joint Venture and the total value of any bank financing or other project financing of the Company or Joint Venture as a result of the unrelated third party’s efforts in connection with the potential transaction with CAI. Unless otherwise renegotiated in regard to the potential joint venture with CAI, the percentage fee is based on a sliding scale of aggregate gross third party contributions calculated as follows:

Less than or equal to $50 million		3% of such amount
Greater than $50 million and less than or equal to $100 million		$1.5 million
Greater than $100 million		$1.5 million; plus
next $100 million		1.5% of such amount; plus
next $200 million		1.00 % of such amount; plus
in excess of $400 million		0.75 % of such amount

Payment of the transaction fee is contingent on execution of a definitive agreement and payment of the aggregate gross third party contribution to the Company and/or the Joint Venture formed for the transaction.

Permits

On October 17, 2005, Mississippi passed new legislation which allows casinos in certain statutorily-described-areas to be built on land up to 800 feet from the mean high water line of certain bodies of water, including Bay St. Louis. Given the fact that the Company intends to take advantage of the new law and construct its casino resort on land rather than in, on, or above the water, the extent to which various permits, authorizations, and approvals, as well as studies and assessments in support thereof, will be required is unknown at this point. The Company believes that permitting for the project and plans for ultimate development will require significant capital expenditures for engineering, architectural, accounting, and legal services. The amount ultimately required is unknown at this time, but the Company does not have sufficient funds required for this purpose.

The development of the Diamondhead, Mississippi property requires the Company to obtain permits and approvals from various federal, state, and local agencies, boards and commissions . The regulatory

environment relating to these permits and approvals is uncertain and subject to constant change. There can be no assurance that all permits and approvals can be obtained, or that if obtained, they will be renewed. Since Mississippi’s new law was passed, the Company has applied for and received the requisite zoning required from Hancock County, but has not applied for any other permits or approvals.

Critical Accounting Policies:

Impairment of Long-Lived Assets

In accordance with generally accepted accounting principles, the Company currently carries the Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has tested this carrying value for impairment. In the opinion of management, the carrying value is not in excess of the estimated market value of the property or the anticipated cash flows to be generated from 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 predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. In addition, the Company rejected an offer to purchase the entire 404 acre site for $100 million in July 2007 as not being in the best interest of the shareholders.

Management believes that use of the property as a gaming site represents the highest and best use of the property and provides for the greatest potential for shareholder value. In the event the Company was unable to obtain all of the permits required to develop a casino resort, the property could be used for other commercial or residential purposes.

Stock Based Compensation Expense

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards modified or granted to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. In accordance with the modified prospective transition method, the Company’s condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under FASB 123(R) for the six months ended June 30, 2008 was $2,072,927 which consisted of stock-based compensation expense relating to modifications of prior non-qualified stock option awards. There was no stock-based compensation expense related to employee equity awards and employee stock purchases recognized during the six months ended June 30, 2007.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant, or modification of a grant, using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s condensed consolidated statement of loss. Prior to the adoption of SFAS 123(R), the Company accounted for employee equity awards and employee stock purchases using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards

No.123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s condensed consolidated statement of loss because the exercise price of the Company’s stock options granted to employees and directors was equal to or less than the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Since all outstanding option contracts are fully vested, no forfeitures have been estimated.

The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise history.

Fair Value Measurements

In the first quarter of 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements. SFAS 157 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 statement 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.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Upon adoption of SFAS 159, we did not elect the SFAS 159 option for our existing financial assets and liabilities and, therefore, adoption of SFAS 159 did not have any impact on our condensed consolidated financial statements.

The Company chose not to elect the fair value option as prescribed by FASB SFAS No. 159, The Fair Value Option For Financial Assets and Financial Liabilities — Including an Amendment of FASB

Statement No. 115, for its financial assets and liabilities that had not been previously carried at fair value. Therefore, the Company’s long term receivable and notes payable to directors are not carried at fair value but are reported at their carrying values.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company currently is not subject to any trading or non-trading market risk-sensitive instruments. The notes payable to Directors listed on the Company’s balance sheet are at a fixed interest rate and, therefore, not market risk-sensitive.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Security Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Security Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of June 30, 2008, the Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company, have been detected.

There were no changes in the internal control over financial reporting during the period covered by this report that materially affected, or are reasonably expected to materially affect, the internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company’s property in Diamondhead, Mississippi is the only asset of material value held by the Company. The Company is entirely dependent on the successful development of and/or sale or lease of part or all of this property to generate future cash flow. The successful development of the property will require substantial financial resources. The Company does not have the financial resources to develop the property or any portion thereof. To date, the Company has not found a partner(s) with whom to develop the property on terms that are acceptable to the Company.

The ultimate development of the property is subject to risks and uncertainties which include, but are not

limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. In addition, the State of Mississippi could vote to prohibit gambling which would have an enormous, adverse effect on the value of the Company’s Diamondhead property, the development of the property, and any gaming operation that might be in operation at the time any such prohibition was instituted.

On June 23, 2008, the Company signed a non-binding Letter of Intent with Casinos Austria International Holding, GMBH (“CAI”). The Company agreed that it would not enter into any other agreement with respect to the development of a casino resort with any other person or entity for a period of ninety days following the execution of the Agreement. The Letter of Intent is not a binding agreement nor does it create a joint venture between the parties nor does it impose an enforceable duty or obligation on the parties to enter into a joint venture agreement. There can be no assurance that at the completion of the due diligence period a mutually acceptable joint venture agreement will be signed.

The design, construction, and on-time opening of a casino resort are subject to risks and uncertainties associated with cost overruns, contract-related contingencies, developer, contractor or subcontractor failures to perform, costs increases and availability of materials, supplies, and equipment, labor shortages, strikes, walkouts and weather-related and other construction delays. The occurrence of a natural disaster could disrupt operations on the property for elongated periods of time. Any such occurrence could also alter the market for the project temporarily or permanently, having an adverse effect on the value of the property and the business of the Company.

The gaming industry is characterized by intense competition. Many companies, with which the Company will compete, are substantially larger and have significantly greater resources than the Company. Furthermore, it is likely that other competitors will emerge in the future. Assuming the Company is successful in constructing a casino resort, the success of the project will be subject to risks and uncertainties, including but not limited to those relating to local, national, and worldwide competition, including competition with Native American casinos which enjoy significant tax advantages. The Company will also be subject to operational risks, including but not limited to those relating to operations in general, insurance coverage problems unique to the area in which the property is located, weather-related problems including hurricanes and floods and labor-related problems unique to the area. The operation will also be subject to risks relating to security, licensing and suitability findings unique to the gaming industry. In addition, the market in which the Company will operate is evolving and uncertain due to Hurricane Katrina. Moreover, while the Company previously operated gambling ships, the Company has never operated a hotel or land-based casino. The Company’s proposed operations are subject to all of the risks inherent in the establishment of a new business enterprise, including the absence of an operating history.

The Company incurs ongoing expenses but has no current revenue and no revenue stream with which to pay ongoing expenses. The Company will not have any revenue stream unless the Company is able to successfully develop its Diamondhead property or generate cash prior to development of the property or the sale of parts or all of the property. The Company’s inability to raise cash to pay its expenses in the future could adversely affect its ability to continue in the future. It also could give rise to disclosures in the Company’s financial reporting which the investing public would consider adverse and, therefore, have a negative impact on the stock price of the Company. The market price of the Company’s common stock may be highly volatile. Announcements by the Company and its competitors may lead to wide swings in the market price of the common stock.

While the Company is not currently engaged in litigation, the Company is always subject to risks associated with contract-related, employee-related, environmental-related and other litigation. Any such

litigation would likely be expensive and time-consuming.

The foregoing are not intended to encompass and do not encompass every risk or uncertainty associated with investment in the Company. The Company may be affected by some or all of the foregoing and other risks and uncertainties, many of which are beyond the Company’s control.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 17, 2008, a Director of the Company exercised an option to purchase 75,000 common shares at an exercise price of $.75 per share by tendering $56,250 to the Company.

On March 28, 2008, the Vice President of the Company who had previously loaned the Company $150,000 pursuant to a promissory note, exercised an option to purchase 100,000 shares of common stock at an exercise price of $1.25 per share using the amount owed him pursuant to the foregoing promissory note as payment for the exercise price.

Item. 3. Default Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

A complete index of exhibits previously filed by the Registrant can be accessed under Item 13 in the Registrant’s Form 10-K for the year ending December 31, 2007 and is incorporated herein by reference.

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.

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.

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