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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
___X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-22290
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CENTURY CASINOS, INC.
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1271317
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
157 East Warren Ave., Cripple Creek, Colorado 80813
---------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(719) 689-9100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common stock, $0.01 par value, 13,660,500 shares outstanding as of October
24, 2003.
-1-
CENTURY CASINOS, INC.
FORM 10-Q
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Earnings for the Three Months Ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Earnings for the Nine Months Ended
September 30, 2003 and 2002 5
Condensed Consolidated Statements of Comprehensive Earnings for the Three Months Ended
September 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Earnings for the Nine Months Ended
September 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
Item 4. Controls and Procedures 52
PART II OTHER INFORMATION 53
Item 1. Legal Proceedings 53
Item 6. Exhibits and Reports on Form 8-K 53
SIGNATURES 53
-2-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollar amounts in thousands, except for share information)
- --------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
ASSETS
Current Assets:
Cash and cash equivalents $ 3,893 $ 4,582
Restricted cash 575 491
Accounts receivable 335 133
Prepaid expenses and other 729 516
Deferred taxes 42 48
------------ ------------
Total current assets 5,574 5,770
Property and Equipment, net 36,243 33,965
Goodwill, net 8,051 7,899
Casino License Costs, net 1,601 1,298
Deferred Taxes 839 1,078
Other Assets 1,160 1,133
------------ ------------
Total $ 53,468 $ 51,143
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,001 $ 1,664
Accounts payable and accrued liabilities 2,022 2,309
Accrued payroll 1,008 1,098
Taxes payable 1,049 747
------------ ------------
Total current liabilities 6,080 5,818
Long-Term Debt, less current portion 15,365 16,531
Other Non-current Liabilities 446 788
Minority Interest - 903
Shareholders' Equity:
Preferred stock; $.01 par value; 20,000,000 shares
authorized; no shares issued or outstanding
Common stock; $.01 par value; 50,000,000 shares authorized;
14,485,776 shares issued;
13,660,500 and 13,580,864 shares outstanding, respectively 145 145
Additional paid-in capital 21,537 21,874
Accumulated other comprehensive income (loss) 1,424 (1,052)
Retained earnings 10,346 7,926
------------ ------------
33,452 28,893
Treasury stock - 825,276 and 904,912 shares at cost,
respectively (1,875) (1,790)
------------ ------------
Total shareholders' equity 31,577 27,103
------------ ------------
Total $ 53,468 $ 51,143
============ ============
See notes to condensed consolidated financial statements.
-3-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollar amounts in thousands, except for share information)
- --------------------------------------------------------------------------------
For The Three Months Ended September 30,
2003 2002
Operating Revenue:
Casino $ 8,525 $ 8,235
Hotel, food and beverage 932 722
Other 106 122
------------ ------------
9,563 9,079
Less promotional allowances 1,285 1,194
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Net operating revenue 8,278 7,885
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Operating Costs and Expenses:
Casino 3,132 2,633
Hotel, food and beverage 691 409
General and administrative 2,004 1,824
Property write-down and other write-offs - 1,122
Depreciation 675 616
------------ ------------
Total operating costs and expenses 6,502 6,604
------------ ------------
Earnings from Operations 1,776 1,281
Interest expense (512) (480)
Other income, net 113 32
------------ ------------
Earnings before Income Taxes and Minority Interest 1,377 833
Provision for income taxes 463 317
------------ ------------
Earnings before Minority Interest 914 516
Minority interest in subsidiary earnings - (63)
------------ ------------
Net Earnings $ 914 $ 453
============ ============
Earnings Per Share:
Basic $ 0.07 $ 0.03
============ ============
Diluted $ 0.06 $ 0.03
============ ============
See notes to condensed consolidated financial statements.
-4-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollar amounts in thousands, except for share information)
- --------------------------------------------------------------------------------
For The Nine Months Ended September 30,
2003 2002
Operating Revenue:
Casino $ 23,670 $ 23,257
Hotel, food and beverage 2,570 1,884
Other 401 415
------------ ------------
26,641 25,556
Less promotional allowances 3,429 3,350
------------ ------------
Net operating revenue 23,212 22,206
------------ ------------
Operating Costs and Expenses:
Casino 8,498 7,306
Hotel, food and beverage 1,841 1,055
General and administrative 5,746 5,548
Property write-down and other write-offs - 1,122
Depreciation 1,986 1,766
------------ ------------
Total operating costs and expenses 18,071 16,797
------------ ------------
Earnings from Operations 5,141 5,409
Interest expense (1,564) (1,409)
Other income, net 242 90
------------ ------------
Earnings before Income Taxes and Minority Interest 3,819 4,090
Provision for income taxes 1,391 1,548
------------ ------------
Earnings before Minority Interest 2,428 2,542
Minority interest in subsidiary earnings (8) (61)
------------ ------------
Net Earnings $ 2,420 $ 2,481
============ ============
Earnings Per Share:
Basic $ 0.18 $ 0.18
============ ============
Diluted $ 0.16 $ 0.16
============ ============
See notes to condensed consolidated financial statements.
-5-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (Unaudited)
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
For The Three Months Ended September 30,
2003 2002
Net Earnings $ 914 $ 453
Foreign currency translation adjustments 951 (94)
Change in fair value of interest rate swaps, net of income taxes 97 8
------------ ------------
Comprehensive Earnings $ 1,962 $ 367
============ ============
For The Nine Months Ended September 30,
2003 2002
Net Earnings $ 2,420 $ 2,481
Foreign currency translation adjustments 2,261 689
Change in fair value of interest rate swaps, net of income taxes 215 1
------------ ------------
Comprehensive Earnings $ 4,896 $ 3,171
============ ============
See notes to condensed consolidated financial statements.
-6-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
For The Nine Months Ended September 30,
2003 2002
Cash Flows from Operating Activities:
Net earnings $ 2,420 $ 2,481
Adjustments to reconcile net earnings to net cash provided by
operating activities
Write-down of nonoperating casino and land
held for sale - 447
Write-off of receivables and advances, including interest - 702
Depreciation 1,986 1,766
Amortization of deferred financing costs 84 67
Gain on disposition of assets (59) (27)
Deferred tax expense (benefit) 126 (58)
Minority interest in subsidiary earnings 8 61
Other (8) (9)
Changes in operating assets and liabilities
Receivables (185) (302)
Prepaid expenses and other assets (236) (106)
Accounts payable and accrued liabilities (341) 23
Accrued payroll (138) 262
Taxes payable 205 (316)
------------ ------------
Net cash provided by operating activities 3,862 4,991
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,769) (3,770)
Acquisition of subsidiary, net of $664 in cash acquired (1,259) -
Restricted cash (increase) decrease 49 (10)
Proceeds received from disposition of assets 258 176
------------ ------------
Net cash used in investing activities (2,721) (3,604)
------------ ------------
(continued)
-7-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
For The Nine Months Ended September 30,
2003 2002
Cash Flows from Financing Activities:
Proceeds from borrowings $ 21,710 $ 15,439
Principal repayments (23,442) (16,459)
Proceeds from exercise of options 8 -
Purchases of treasury stock (431) (205)
Deferred financing costs - (112)
------------ ------------
Net cash used in financing activities (2,155) (1,337)
Effect of exchange rate changes on cash 325 48
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (689) 98
Cash and Cash Equivalents at Beginning of Period 4,582 3,031
------------ ------------
Cash and Cash Equivalents at End of Period $ 3,893 $ 3,129
============ ============
Supplemental Disclosure of Noncash Financing Activities:
In January 2003, the Company, through its majority owned subsidiary CCA,
purchased the remaining 35% interest in CCAL for a total of $2.6 million, of
which $1.3 million was used to purchase a loan from the previous minority
shareholder, Caledon Overberg Investments (Proprietary) Limited ("COIL"), and is
included in principal repayments above, $1.0 million was applied to the minority
shareholder liability and $0.3 million increased the carrying value of the land
in Caledon.
In the second quarter of 2003, James Forbes, a director of the Company, in
accordance with the Company's Employee's Equity Incentive Plan ("EEIP"),
exercised all 618,000 of his outstanding options, carrying an average strike
price of $1.306. The shares were issued out of treasury stock and payment for
the options was made by transferring 357,080 shares of common stock that the
director has owned since 1994 to the Company at a per share price of $2.26
established at the close of market on April 16, 2003.
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $46 in 2003 and $57 in 2002 $ 1,544 $ 1,434
============ ============
Income taxes paid $ 700 $ 1,725
============ ============
See notes to condensed consolidated financial statements.
-8-
CENTURY CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except for share information)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Century Casinos, Inc. ("CCI", the "Company") is an international gaming company.
Wholly-owned subsidiaries of CCI include Century Casinos Management, Inc.
("CCM"), Century Casinos Nevada, Inc. ("CCN", a dormant subsidiary), Century
Resorts Limited ("CRL"), Century Management u. Beteiligungs GmbH ("CMB") and
WMCK-Venture Corp. ("WMCK"). Wholly-owned subsidiaries of WMCK include
WMCK-Acquisition Corp. ("ACQ") and Century Casinos Cripple Creek, Inc. ("CCC").
CRL owns 55% of Century Resorts Alberta Inc. ("CRA"). Century Casinos Africa
(Pty) Ltd. ("CCA"), a 96.5% owned subsidiary of CCI, owns 100% of Century
Casinos Caledon (Pty) Ltd. ("CCAL"), 55% of Century Casinos West Rand (Pty) Ltd.
("CCWR") and 50% of Rhino Resort Ltd. ("RRL", a dormant subsidiary). The Company
owns and/or manages casino operations in the United States, South Africa, the
Czech Republic, and international waters as follows:
WMCK owns and operates Womacks Casino and Hotel ("Womacks"), a
limited-stakes gaming casino in Cripple Creek, Colorado. Womacks is one of
the largest gaming facilities in Cripple Creek and is currently the core
operation of the Company. The facility has 614 slot machines, six limited
stakes gaming tables, 21 hotel rooms and a restaurant.
CCA owns and operates The Caledon Casino, Hotel and Spa near Cape Town,
South Africa. The resort has 275 slot machines and eight gaming tables, a
92-room hotel, mineral hot springs and spa facility, 3 restaurants, 2 bars,
and conference facilities.
CCM manages Casino Millennium ("CM") located within a five-star hotel in
Prague, Czech Republic. The Company and another entity have each agreed to
purchase a 50% ownership interest in Casino Millennium a.s. In December
2002, the Company paid $236 towards a 10% ownership interest, which was
subject to the repayment of a CM loan by Strabag AG, the Company's proposed
partner, which was repaid in April 2003. The balance of the acquisition is
expected to be completed in 2003 by contributing assets of the casino
currently owned by the Company and certain pre-operating costs paid by the
Company with a combined value of $827.
CCI serves as concessionaire of small casinos on seven luxury cruise
vessels. The Company has a total of approximately 283 gaming positions on
the six combined shipboard casinos currently in operation. On March 28,
2003 the Company entered into a casino concession agreement with Oceania
Cruises to operate shipboard casinos, with approximately 70 gaming
positions each, on two luxury cruise ships. On April 19, 2003, the Company
successfully opened its casino aboard the Insignia, a 684 passenger luxury
cruise ship operated by Oceania. The vessel was taken out of service after
it completed its cruise schedule to various destinations in the western
Mediterranean as of September 26th, 2003 and is expected to resume
operations in May 2004. The Silver Wind, a cruise ship operated by
Silversea Cruises, which was taken out of service following the events of
September 11, 2001, resumed operations on May 23, 2003. On June 26, 2003,
the Company successfully opened its casino aboard the Regatta, another 684
passenger luxury cruise ship operated by Oceania.
The Company regularly pursues additional gaming opportunities internationally
and in the United States.
-9-
On October 20, 2003 the Company announced that judgment had been handed down in
the High Court of South Africa compelling the Gauteng Gambling Board to award a
casino license to Silverstar Development Limited ("Silverstar") for the western
periphery of metropolitan Johannesburg in terms of its original 1997
application. CCA, through its majority-owned subsidiary, Century Casinos West
Rand (Pty) Ltd., remains contracted to Silverstar by a resort management
agreement and retains a right of long standing to take up a minority equity
interest in the venture although its final level of equity interest remains to
be determined. Pursuant to its 1997 application, the Silverstar project provides
for up to 1,350 slot machines and 50 gaming tables in a phased development that
includes a hotel and other entertainment, dining, and recreational activities
with a first phase of 950 slot machines and 30 gaming tables. The proposed 400
million Rand ($57.5 million) hotel/casino resort development is located in the
greater Johannesburg area of South Africa known as the West Rand.
In January 2000, CCI entered into a brokerage agreement with Novomatic AG in
which CCI received an option to purchase seven eighths of the shares that
Novomatic AG purchased in Silverstar. The agreement was subsequently amended in
July 2003 giving Novomatic AG a put option under which Novomatic AG can require
that CCI buy seven eighths of its shares in Silverstar and giving CCI a call
option under which CCI can require Novomatic AG to sell seven eighths of its
shares in Silverstar to CCI. The price of the option, which cannot be quantified
at this time, will be 75% of the fair market value as determined at the time of
the exercise. If the transaction were to be completed, CCI would acquire a 7%
interest in Silverstar from Novomatic AG.
On September 25, 2003 the Company formed CRL for the purpose of managing all of
the Company's foreign and offshore operations. CRL will maintain offices in
Mauritius, an independent island republic in the western Indian Ocean. Forming
the management company in Mauritius will provide favorable tax benefits to the
Company. Taxable income, mostly management fees and interest earned by the
Mauritius company would be taxed at an effective rate of 3%.
On September 30, 2003, the Company subscribed to 55% of the outstanding shares
of Century Resorts Alberta Inc. ("CRA"), formed in conjunction with its
application for a gaming license in Edmonton, Alberta, Canada, at a price of 1
Canadian dollar per share. A total of 100 shares have been authorized and
issued. The proposed project, The Celebrations Casino and Hotel, is planned to
include a casino, food and beverage amenities, a dinner theater, and a 40-room
hotel. CRA is owned by CRL, a wholly owned subsidiary of Century Casinos, Inc.
and by 746306 Alberta Ltd, the owners of the 7.25 acre property and existing
hotel which will be developed into the Celebrations project, should a license be
awarded and all other approvals and funding be obtained. The Celebrations Casino
and Hotel Project proposed by CRA is valued at 16.5 million Canadian dollars
($12.2 million), including the contribution of the existing hotel and property,
valued at 2.5 million Canadian dollars ($1.9 million). CRL also entered into a
long term agreement to manage the casino if a gaming license is awarded. The
Celebrations Casino and Hotel project is one of six applications submitted to
the Alberta Gaming and Liquor Commission ("AGLC") for an additional casino
facility license in the greater Edmonton area.
-10-
Historical transactions that are denominated in a foreign currency are
translated and presented at the United States exchange rate in effect on the
date of the transaction. Commitments that are denominated in a foreign currency
and all balance sheet accounts other than shareholders' equity are translated
and presented based on the exchange rate at the end of the reported periods. The
exchange rates used to translate balances at the end of the reported periods are
as follows:
September 30, 2003 December 31, 2002 September 30, 2002
South African Rand 6.9537 8.5755 10.5230
Euros 0.8583 0.9536 1.0123
Certain reclassifications have been made to the 2002 financial information in
order to conform to the 2003 presentation.
The accompanying condensed consolidated financial statements and related notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial reporting and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The accompanying
consolidated financial statements include the accounts of CCI and its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The financial statements of all foreign
subsidiaries consolidated herein have been converted to US GAAP for financial
statement presentation purposes. Accordingly the consolidated financial
statements are presented in accordance with US GAAP. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for fair presentation of financial position, results of operations and cash
flows have been included. These condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002. The results of operations for the period ended September 30, 2003 are
not necessarily indicative of the operating results for the full year.
-11-
2. CHANGE IN ACCOUNTING PRINCIPLES AND RECENTLY ISSUED STANDARDS
In 2002 the Company adopted Statement of Financial Accounting Standards No. 148
(SFAS 148), "Accounting for Stock-Based Compensation-Transition and Disclosure"
which amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS 148 also provides
alternative methods of transition for a voluntary change to fair value based
methods of accounting which have not been adopted at this time. SFAS 123
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation for employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock. The Company values
stock-based compensation granted to non-employees at fair value.
At September 30, 2003, the Company has one stock-based employee compensation
plan. The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. No stock-based compensation
cost is reflected in net earnings, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation",
to stock-based employee compensation.
-12-
For the three months ended September 30,
2003 2002
Net earnings, as reported $ 914 $ 453
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects 1 3
------------ ------------
Pro forma net earnings $ 913 $ 450
============ ============
Earnings per share
Basic As reported $ 0.07 $ 0.03
Pro forma $ 0.07 $ 0.03
Diluted As reported $ 0.06 $ 0.03
Pro forma $ 0.06 $ 0.03
For the nine months ended September 30,
2003 2002
Net earnings, as reported $ 2,420 $ 2,481
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects 3 7
------------ ------------
Pro forma net earnings $ 2,417 $ 2,474
============ ============
Earnings per share
Basic As reported $ 0.18 $ 0.18
Pro forma $ 0.18 $ 0.18
Diluted As reported $ 0.16 $ 0.16
Pro forma $ 0.16 $ 0.16
On April 30, 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149, among other things, clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component that
warrants special reporting in the statement of cash flows.
-13-
On May 15, 2003 FASB issued Statement No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
requires certain financial instruments, including mandatorily redeemable
preferred and common stocks, to be presented as liabilities. The Company does
not believe either SFAS No. 149 or No. 150 will have an effect on the Company's
financial statements.
Additionally, the Company has reviewed recently issued, but not yet effective,
accounting pronouncements and does not believe that any such pronouncements will
have a material impact on its financial statements.
3. INCOME TAXES
The income tax provisions are based on estimated full-year earnings for
financial reporting purposes, adjusted for permanent differences.
4. EARNINGS PER SHARE
Basic and diluted earnings per share for the three months ended September 30,
2003 and 2002 were computed as follows:
For the Three Months Ended September 30,
2003 2002
Basic Earnings Per Share:
Net earnings $ 914 $ 453
============ ============
Weighted average common shares 13,660,500 13,664,605
============ ============
Basic earnings per share $ 0.07 $ 0.03
============ ============
Diluted Earnings Per Share:
Net earnings, as reported $ 914 $ 453
============ ============
Weighted average common shares 13,660,500 13,664,605
Effect of dilutive securities:
Stock options and warrants 1,050,117 1,435,047
------------ ------------
Dilutive potential common shares 14,710,617 15,099,652
============ ============
Diluted earnings per share $ 0.06 $ 0.03
============ ============
There were no exclusions from the computation of diluted earnings per share.
-14-
Basic and diluted earnings per share for the nine months ended September 30,
2003 and 2002 were computed as follows:
For the Nine Months Ended September 30,
2003 2002
Basic Earnings Per Share:
Net earnings $ 2,420 $ 2,481
============ ============
Weighted average common shares 13,623,304 13,707,085
============ ============
Basic earnings per share $ 0.18 $ 0.18
============ ============
Diluted Earnings Per Share:
Net earnings, as reported $ 2,420 $ 2,481
============ ============
Weighted average common shares 13,623,304 13,707,085
Effect of dilutive securities:
Stock options and warrants 1,062,136 1,511,765
------------ ------------
Dilutive potential common shares 14,685,440 15,218,850
============ ============
Diluted earnings per share $ 0.16 $ 0.16
============ ============
Excluded from computation of diluted earnings per share
due to antidilutive effect:
Options and warrants to purchase common shares 10,000 -
Weighted average exercise price $ 2.28 $ -
5. CRIPPLE CREEK, COLORADO
Womacks has completed its 6,022 square foot expansion, approximately half of
which is providing additional space for gaming and the other half increasing the
"back of house" area. On April 19, 2003 construction was completed on the gaming
space added to Womacks. In conjunction with the expansion, the main floor of
Womacks and the mezzanine section were re-carpeted and significant changes were
made to the floor layout, providing our customers with an attractive and more
comfortable area in which to play. Altogether we have added a total of
approximately 3,000 square feet of gaming area since September of 2002. Most
importantly, having spanned the alley behind the existing property, Womacks will
be able to continue building out the casino to the rear of the property on a
single level at a later date. The total construction cost, excluding new slot
machines, was approximately $2.1 million.
6. CALEDON, SOUTH AFRICA
The casino opened on October 11, 2000 and currently operates 275 slot machines
and 8 gaming tables. In addition to the casino, hotel and spa, CCAL owns
approximately 600 acres of land, which may be used for future expansion.
-15-
In January 2003, CCA purchased the remaining 35% interest in CCAL, becoming the
sole owner of all of the common stock of CCAL. The Company paid 21.5 million
Rand or $2.6 million, based on the conversion rate at January 10, 2003. In
accordance with FASB Statement No. 141, "Business Combinations", the cost of
acquisition was allocated to the assets acquired and the liabilities assumed
based on fair values at the date of acquisition. The assets and liabilities of
CCAL, which were carried in the Company's consolidated financial statements at
the date of acquisition, had fair values which approximated their carrying
value, with the exception of land to which $341 of the acquisition price was
allocated. Simultaneous with the transaction, the Hotel Management Agreement
between CCAL and Fortes King Hospitality (Pty) Limited ("FKH") was cancelled and
CCA assumed the management of the hotel. Financing for the transaction was
provided by the RCF (Note 8).
Caledon has completed a number of capital improvement projects. They include
improvements to the landscaping and converting an existing bar to a restaurant
to provide alternative food choices and 24 hour service. In the fourth quarter
of 2003, the Company expects to complete an approximate 6,000 square foot
equestrian center and finish enlarging the hotel restaurant facilities to
accommodate the increasing conference demands, and updating approximately 68 of
the current 92 hotel rooms. The Company also expects to complete the enlargement
of the smoking area in the casino in 2003 by approximately 800 square feet due
to market demand. This will result in a corresponding reduction in the amount of
space allocated to non-smoking.
Subsequent to September 30, 2003 Caledon introduced a prive ("private") area for
high rollers that is expected to have a positive impact on future revenues.
7. PRAGUE, CZECH REPUBLIC
In January 2000, the Company entered into a memorandum of agreement to either
acquire a 50% ownership interest in CM or to form a new joint venture with B.H.
Centrum a.s., which joint venture would acquire all of the assets of CM. The
Company and Strabag AG have each agreed to purchase a 50% ownership interest.
The documentation for this transaction has been submitted, as required, to the
Ministry of Finance of the Czech Republic for approval, which has been obtained.
The first step in acquiring a 50% ownership interest was taken in December 2002
with the payment of $236 in cash, giving the Company a 10% ownership in CM. As
of September 30, 2003 and December 31, 2002, the initial payment of $236 is
classified in other assets on the Company's consolidated balance sheet. The
Company will carry the investment at cost until such time that its investment is
at least 20%, but not more than 50%, at which time the Company will include its
percentage of the equity earnings or loss in CM in its consolidated balance
sheet, consolidated statement of earnings and consolidated statement of cash
flows. The balance of the acquisition is expected to be completed in 2003 by
contributing assets leased to CM and certain pre-operating costs paid by the
Company with a combined value of $827. Should we acquire a 51% or greater
interest in CM, we would expect to consolidate the financial statements of the
subsidiary. In addition, we will continue to evaluate the professional
literature on this matter in the event our ownership percentage or other factors
change, including the requirements of FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities".
In August 2002, Prague, Czech Republic experienced a devastating flood
throughout the city. Although the Casino Millennium property was not damaged,
public access to the city in the vicinity of the casino was severely limited and
has negatively effected the casino operation. Effective September 1, 2002,
management fees and interest due to the Company will not be accrued until a
certainty of cash flow is attained for Casino Millennium, but instead will be
-16-
recorded as received. In April 2003, Casino Millennium remitted $8 in management
fees. Management fee income for the three months ended September 30, 2003 and
2002 was $0 and $31, respectively. Management fee income for the nine months
ended September 30, 2003 and 2002 was $8 and $138, respectively.
8. LONG-TERM DEBT
The principal balance outstanding under the Wells Fargo Bank Revolving Line of
Credit Facility ("RCF") as of September 30, 2003 was $11,914 compared to $11,500
at December 31, 2002. The amount available under the RCF as of September 30,
2003 was $11,919, net of amounts outstanding as of that date, compared to
$14,500 at December 31, 2002. The loan agreement includes certain restrictive
covenants on financial ratios of WMCK. The Company is in compliance with the
covenants as of September 30, 2003. Interest rates at September 30, 2003 were
4.0% for $414 outstanding under prime based provisions of the loan agreement and
3.41% for $11,500 outstanding under LIBOR based provisions of the loan
agreement.
The fair value of the Company's interest rate swap derivatives as of September
30, 2003 and December 31, 2002 of $446 and $788, respectively, is reported as a
liability in the consolidated balance sheets. The net gain on the interest rate
swaps of $97 and $8, net of deferred income tax expense of $58 and $5 for the
three months ended September 30, 2003 and 2002 has been reported in accumulated
other comprehensive income (loss) in the shareholders' equity section of the
accompanying September 30, 2003 and December 31, 2002 condensed consolidated
balance sheets, respectively. The net gain on the interest rate swaps of $215
and $1, net of deferred income tax expense of $127 and $0 for the first nine
months of 2003 and 2002, has been reported in accumulated other comprehensive
income (loss) in the shareholders' equity sections of the accompanying September
30, 2003 and December 31, 2002 condensed consolidated balance sheets,
respectively. Net additional interest expense to the Company under the swap
agreements was $155 and $133 for the three months ended September 30, 2003 and
2002, respectively, and $445 and $388 for the nine months ended September 30,
2003 and 2002. Including the impact of the swaps and the amortization of the
deferred financing cost, the effective rate on the borrowings under the RCF was
9.21% and 9.53% for the nine months ended September 30, 2003 and 2002,
respectively.
In April 2000, CCAL entered into a loan agreement with PSG Investment Bank
Limited ("PSGIB"), which provided for a principal loan of approximately $6,200,
based on an exchange rate of 7.6613 rand per dollar at the time the funds were
advanced, to finance development of the Caledon project. The outstanding balance
and interest rate as of September 30, 2003 and December 31, 2002 was $4,290 and
$4,179, respectively and 17.05% in both years. In April 2001, CCAL entered into
an addendum to the loan agreement in which PSGIB provided CCAL with a standby
facility in the amount of approximately $560, based on an exchange rate of
8.0315 rand per dollar at the time. The outstanding balance and interest rate on
the standby facility with PSGIB as of September 30, 2003 and December 31, 2002
was $427 and $418, respectively and 15.1% in both years. Under the original
terms of the agreement CCAL made its first principal payment in December 2001,
based on a repayment schedule that required semi-annual installments continuing
over a five-year period. On March 26, 2002 CCAL and PSGIB entered into an
amended agreement that changed the repayment schedule to require quarterly
installments beginning on March 31, 2002 and continuing over the remaining term
of the original five-year agreement. The amendment also changed the requirements
for the sinking fund. The original agreement required CCAL to have on deposit a
"sinking fund" in the amount equal to the next semi-annual principal and
interest payment. The amended
-17-
agreement changes the periodic payments from semi-annual to quarterly and
requires a minimum deposit in the sinking fund equal to four million Rand
(approximately $575). In addition, one third of the next quarterly principal and
interest payment must be deposited on the last day of each month into the fund
and used for the next quarterly installment. The loan agreement includes certain
restrictive covenants for CCAL. CCAL is in compliance with the covenants as of
September 30, 2003. PSGIB was acquired by ABSA Bank (ABSA) in March 2003. There
have been no changes in the terms or conditions of the current loan, as amended,
with PSGIB.
An unsecured note payable, in the amount of $380, to a founding shareholder
bears interest at 6%, payable quarterly. The note holder, at his option, may
elect to receive any or all of the unpaid principal by notifying CCI on or
before April 1 of any year. Payment of the principal amount so specified would
be required by the Company on or before January 1 of the following year. The
entire outstanding principal is otherwise due and payable on April 1, 2004.
Accordingly, the note is classified as current in the accompanying condensed
consolidated balance sheet as of September 30, 2003 and December 31, 2002.
In January 2003 CCA purchased the remaining 35% interest in CCAL and paid off
the outstanding note agreement with its former minority partner, Caledon
Overberg Investments (Proprietary) Limited ("COIL"), valued at $1,280 as of
December 31, 2002.
The remaining amount of $355 and $438 in debt, as of September 30, 2003 and
December 31, 2002, respectively, consists of capital leases for various
equipment.
The consolidated weighted average interest rate on all borrowings was 10.55% and
9.95% for the nine months ended September 30, 2003 and 2002, respectively.
9. SHAREHOLDERS' EQUITY
During the first nine months of 2003, the Company repurchased 59,100 shares of
its common stock on the open market at an average per share price of $2.24.
The Company re-issued 10,000 shares of treasury stock in January 2003 when one
of its directors exercised his options.
On April 16, 2003, in accordance with the Company's Employees' Equity Incentive
Plan ("EEIP"), then-director, James Forbes, elected to exercise all 618,000 of
his outstanding options, carrying an average strike price of $1.306. The shares
were issued out of treasury and payment for the options was made by transferring
357,080 shares of common stock that the director has owned since 1994 to the
Company at a per share price of $2.26 established at the close of the market on
April 16, 2003. Additionally, on June 9, 2003 the Company repurchased 132,184
shares from the director at the per share price of $2.26, established at the
close of market on April 16, 2003. The net effect of these transactions reduced
treasury shares by 128,736 and increased the outstanding shares by 128,736.
As of September 30, 2003, the Company held 825,276 shares in treasury at an
average price per share of $2.27. Subsequent to September 30, 2003, the Company
has not purchased any additional shares of its common stock on the open market.
In connection with the granting of a gaming license to CCAL by the Western Cape
Gambling and Racing Board in April 2000, CCAL issued a total of 200 preference
shares, 100 shares each to two minority shareholders each of whom have one seat
on the board of directors of CCAL, neither of whom are officers, directors or
affiliates of Century Casinos, Inc. The preference shares are not cumulative,
nor are they redeemable. The preference shares entitle the holders of said
shares to dividends of 20% of the after-tax profits directly attributable to the
-18-
CCAL casino business subject to working capital and capital expenditure
requirements and CCAL loan obligations and liabilities as determined by the
directors of CCAL. Should the casino business be sold or otherwise dissolved,
the preference shareholders are entitled to 20% of any surplus directly
attributable to the CCAL casino business, net of all liabilities attributable to
the CCAL casino business. As of September 30, 2003, no dividend has been
declared for the preference shareholders.
In June 2003, the Company's EEIP was amended to permit the exchange of
non-statutory options for restricted stock awards ("RSA's") at the rate of one
RSA for one non-statutory option. As of September 30, 2003, no RSA's have been
issued.
10. SEGMENT INFORMATION
The Company is managed in four segments; Colorado, South Africa, Cruise Ships,
and Corporate operations. The operating results of the Colorado segment are
those of WMCK-Venture Corp. and subsidiaries which own Womacks Hotel and Casino
("Womacks") in Cripple Creek, Colorado. The operating results of the South
African segment are those of Century Casinos Africa (Pty) Limited and its
subsidiaries, primarily Century Casinos Caledon (Pty) Limited which owns the
Caledon Casino, Hotel and Spa.
Cruise Ship operations include the revenue and expense of the seven combined
shipboard operations for which the Company has casino concession agreements.
Corporate operations include, among other items, the revenue and expense of
corporate gaming projects for which the Company has secured long term management
contracts.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is not
considered a measure of performance recognized as an accounting principle
generally accepted in the United States of America. Management believes that
EBITDA is a valuable measure of the relative performance amongst its operating
segments. The gaming industry commonly uses EBITDA as a method of arriving at
the economic value of a casino operation. It is also used by our lending
institutions to gauge operating performance. Management uses EBITDA to compare
the relative operating performance of separate operating units by eliminating
the interest income, interest expense, income tax expense, and depreciation and
amortization expense associated with the varying levels of capital expenditures
for infrastructure required to generate revenue, and the oftentimes high cost of
acquiring existing operations.
-19-
Segment information as of, and for the three months ended September 30, 2003 and
2002 is presented below.
================================ ============================ ========================== =============================
Colorado South Africa Cruise Ships
================================ ============================ ========================== =============================
For the Three Months Ended 2003 2002 2003 2002 2003 2002
September 30,
================================ ============== ============= ============ ============= ============== ==============
Operating revenue $ 6,100 $ 6,909 $ 2,866 $ 1,846 $ 597 $ 293
Promotional allowances $ (1,066) $ (1,091) $ (219) $ (103) $ - $ -
Net operating revenue $ 5,034 $ 5,818 $ 2,647 $ 1,743 $ 597 $ 293
Operating expenses (excluding
property write-downs, other
write-offs and depreciation) $ 3,117 $ 3,169 $ 1,962 $ 1,133 $ 365 $ 176
Property write-downs and other
write-offs $ - $ - $ - $ 377 $ - $ -
Depreciation $ 334 $ 332 $ 275 $ 228 $ 24 $ 14
Earnings (loss) from operations $ 1,583 $ 2,317 $ 410 $ 5 $ 208 $ 103
Interest income $ 3 $ 4 $ 46 $ 27 $ - $ -
Interest expense,
including debt issuance cost $ 364 $ 358 $ 228 $ 202 $ - $ -
Other income (expense), net $ 55 $ - $ (2) $ 25 $ 10 $ -
Earnings (loss) before income
taxes and minority interest $ 1,277 $ 1,963 $ 226 $ (145) $ 218 $ 103
Income tax expense(benefit) $ 486 $ 903 $ 84 $ (47) $ 83 $ 38
Minority interest expense $ - $ - $ - $ 63 $ - $ -
Net earnings (loss) $ 791 $ 1,060 $ 142 $ (161) $ 135 $ 65
======================================================================================================================
Reconciliation to EBITDA:
======================================================================================================================
Net earnings (loss) $ 791 $ 1,060 $ 142 $ (161) $ 135 $ 65
Interest income $ (3) $ (4) $ (46) $ (27) $ - $ -
Interest expense $ 364 $ 358 $ 228 $ 202 $ - $ -
Income taxes $ 486 $ 903 $ 84 $ (47) $ 83 $ 38
Depreciation $ 334 $ 332 $ 275 $ 228 $ 24 $ 14
EBITDA $ 1,972 $ 2,649 $ 683 $ 195 $ 242 $ 117
================================ ==== ================================================================================
-20-
================================ =========================== ========================== =============================
Corporate and Other Inter-segment Elimination Consolidated
================================ =========================== ========================== =============================
For the Three Months Ended 2003 2002 2003 2002 2003 2002
September 30,
================================ ============= ============= ============ ============= ============== ==============
Operating revenue $ - $ 31 $ - $ - $ 9,563 $ 9,079
Promotional allowances $ - $ - $ - $ - $ (1,285) $ (1,194)
Net operating revenue $ - $ 31 $ - $ - $ 8,278 $ 7,885
Operating expenses (excluding
property write-downs, other
write-offs and depreciation) $ 383 $ 388 $ - $ - $ 5,827 $ 4,866
Property write-downs and other
write-offs $ - $ 745 $ - $ - $ - $ 1,122
Depreciation $ 42 $ 42 $ - $ - $ 675 $ 616
Earnings (loss) from operations $ (425) $ (1,144) $ - $ - $ 1,776 $ 1,281
Interest income $ 85 $ 61 $ (85) $ (85) $ 49 $ 7
Interest expense,
including debt issuance cost $ 5 $ 5 $ (85) $ (85) $ 512 $ 480
Other income, net $ 1 $ - $ - $ - $ 64 $ 25
Earnings (loss) before income
taxes and minority interest $ (344) $ (1,088) $ - $ - $ 1,377 $ 833
Income tax expense(benefit) $ (190) $ (577) $ - $ - $ 463 $ 317
Minority interest expense $ - $ - $ - $ - $ - $ 63
Net earnings (loss) $ (154) $ (511) $ - $ - $ 914 $ 453
=====================================================================================================================
Reconciliation to EBITDA:
=====================================================================================================================
Net earnings (loss) $ (154) $ (511) $ - $ - $ 914 $ 453
Interest income $ (85) $ (61) $ 85 $ 85 $ (49) $ (7)
Interest expense $ 5 $ 5 $ (85) $ (85) $ 512 $ 480
Income taxes $ (190) $ (577) $ - $ - $ 463 $ 317
Depreciation $ 42 $ 42 $ - $ - $ 675 $ 616
EBITDA $ (382) $ (1,102) $ - $ - $ 2,515 $ 1,859
=====================================================================================================================
-21-
Segment information as of, and for the nine months ended September 30, 2003 and
2002 is presented below.
================================ =========================== ========================== =============================
Colorado South Africa Cruise Ships
================================ =========================== ========================== =============================
As of and for the Nine Months 2003 2002 2003 2002 2003 2002
Ended September 30,
================================ ============== ============ ============ ============= ============== ==============
Property and equipment, net $ 21,402 $ 21,373 $ 13,451 $ 9,203 $ 336 $ 215
Total assets $ 31,600 $ 32,366 $ 18,551 $ 12,446 $ 873 $ 446
=====================================================================================================================
=====================================================================================================================
Operating revenue $ 17,188 $ 19,545 $ 8,160 $ 5,275 $ 1,285 $ 598
Promotional allowances $ (2,942) $ (3,028) $ (487) $ (322) $ - $ -
Net operating revenue $ 14,246 $ 16,517 $ 7,673 $ 4,953 $ 1,285 $ 598
Operating expenses (excluding
property write-downs, other
write-offs and depreciation) $ 8,588 $ 8,909 $ 5,534 $ 3,465 $ 849 $ 384
Property write-downs and other
write-offs $ - $ - $ - $ 377 $ - $ -
Depreciation $ 1,033 $ 999 $ 771 $ 575 $ 56 $ 42
Earnings from operations $ 4,625 $ 6,609 $ 1,368 $ 536 $ 380 $ 172
Interest income $ 10 $ 12 $ 153 $ 69 $ - $ -
Interest expense,
including debt issuance cost $ 1,108 $ 1,049 $ 695 $ 599 $ - $ -
Other income (expense), net $ 55 $ 2 $ (2) $ 25 $ 15 $ -
Earnings before income taxes
and minority interest $ 3,582 $ 5,574 $ 824 $ 31 $ 395 $ 172
Income tax expense(benefit) $ 1,362 $ 2,564 $ 318 $ 38 $ 150 $ 64
Minority interest benefit $ - $ - $ (8) $ (61) $ - $ -
Net earnings (loss) $ 2,220 $ 3,010 $ 498 $ (68) $ 245 $ 108
=====================================================================================================================
Reconciliation to EBITDA:
=====================================================================================================================
Net earnings (loss) $ 2,220 $ 3,010 $ 498 $ (68) $ 245 $ 108
Interest income $ (10) $ (12) $ (153) $ (69) $ - $ -
Interest expense $ 1,108 $ 1,049 $ 695 $ 599 $ - $ -
Income taxes $ 1,362 $ 2,564 $ 318 $ 38 $ 150 $ 64
Depreciation $ 1,033 $ 999 $ 771 $ 575 $ 56 $ 42
EBITDA $ 5,713 $ 7,610 $ 2,129 $ 1,075 $ 451 $ 214
=====================================================================================================================
-22-
================================ ============================ ========================== ============================
Corporate and Other Inter-segment Elimination Consolidated
================================ ============================ ========================== ============================
As of and for the Nine Months 2003 2002 2003 2002 2003 2002
Ended September 30,
================================ ============== ============= ============ ============= ============== =============
Property and equipment, net $ 1,054 $ 1,171 $ - $ - $ 36,243 $ 31,962
Total assets $ 2,444 $ 2,325 $ - $ - $ 53,468 $ 47,583
=====================================================================================================================
=====================================================================================================================
Operating revenue $ 8 $ 138 $ - $ - $ 26,641 $ 25,556
Promotional allowances $ - $ - $ - $ - $ (3,429) $ (3,350)
Net operating revenue $ 8 $ 138 $ - $ - $ 23,212 $ 22,206
Operating expenses (excluding
property write-downs, other
write-offs and depreciation) $ 1,114 $ 1,151 $ - $ - $ 16,085 $ 13,909
Property write-downs and other
write-offs $ - $ 745 $ - $ - $ - $ 1,122
Depreciation $ 126 $ 150 $ - $ - $ 1,986 $ 1,766
Earnings (loss) from operations $ (1,232) $ (1,908) $ - $ - $ 5,141 $ 5,409
Interest income $ 257 $ 239 $ (256) $ (256) $ 164 $ 64
Interest expense,
including debt issuance cost $ 17 $ 17 $ (256) $ (256) $ 1,564 $ 1,409
Other income (expense), net $ 10 $ (1) $ - $ - $ 78 $ 26
Earnings (loss) before income
taxes and minority interest $ (982) $ (1,687) $ - $ - $ 3,819 $ 4,090
Income tax expense(benefit) $ (439) $ (1,118) $ - $ - $ 1,391 $ 1,548
Minority interest benefit $ - $ - $ - $ - $ (8) $ (61)
Net earnings (loss) $ (543) $ (569) $ - $ - $ 2,420 $ 2,481
=====================================================================================================================
Reconciliation to EBITDA:
=====================================================================================================================
Net earnings (loss) $ (543) $ (569) $ - $ - $ 2,420 $ 2,481
Interest income $ (257) $ (239) $ 256 $ 256 $ (164) $ (64)
Interest expense $ 17 $ 17 $ (256) $ (256) $ 1,564 $ 1,409
Income taxes $ (439) $ (1,118) $ - $ - $ 1,391 $ 1,548
Depreciation $ 126 $ 150 $ - $ - $ 1,986 $ 1,766
EBITDA $ (1,096) $ (1,759) $ - $ - $ 7,197 $ 7,140
=====================================================================================================================
-23-
11. OTHER INCOME, NET
Other income, net, consists of the following:
For the Three Months Ended September 30,
2003 2002
Interest income $ 49 $ 7
Gain on disposition of assets 53 25
Foreign currency exchange gains 11 -
------------ ------------
$ 113 $ 32
============ ============
For the Nine Months Ended September 30,
2003 2002
Interest income $ 164 $ 64
Gain on disposition of assets 59 27
Foreign currency exchange gains 19 -
Other - (1)
------------ ------------
$ 242 $ 90
============== ============
-24-
12. PROPERTY WRITE-DOWN AND OTHER WRITE-OFFS
Property write-down and other write-offs consist of the following:
For the Three Months Ended September 30,
2003 2002
Write down non-operating casino property and land held for
sale in Nevada $ - $ 447
Write off receivables and advances related to a casino
acquisition project and casino properties under management - 675
------------ ------------
$ - $ 1,122
============ ============
For the Nine Months Ended September 30,
2003 2002
Write down non-operating casino property and land held for
sale in Nevada $ - $ 447
Write off receivables and advances related to a casino
acquisition project and casino properties under management - 675
------------ ------------
$ - $ 1,122
============ ============
13. PROMOTIONAL ALLOWANCES
Promotional allowances presented in the condensed consolidated statement of
earnings for the three months ended September 30, 2003 and September 30, 2002
include the following:
For the Three Months Ended September 30,
2003 2002
Food & Beverage and Hotel Comps $ 379 $ 345
Free Plays or Coupons 537 447
Player Points 369 402
------------ ------------
Total Promotional Allowances $ 1,285 $ 1,194
============ ============
-25-
Promotional allowances presented in the condensed consolidated statement of
earnings for the nine months ended September 30, 2003 and September 30, 2002
include the following:
For the Nine Months Ended September 30,
2003 2002
Food & Beverage and Hotel Comps $ 1,013 $ 977
Free Plays or Coupons 1,356 1,252
Player Points 1,060 1,121
------------ ------------
Total Promotional Allowances $ 3,429 $ 3,350
============ ============
We issue free play or coupons for the purpose of generating future revenue. The
coupons are valid for a limited number of days (generally not exceeding 7 days).
The net win from the coupons is expected to exceed the value of the coupons
issued. The cost of the coupons redeemed is applied against the revenue
generated on the day of the redemption.
Members of the casinos' players clubs earn points as a percentage of coin-in.
The cost of the points is offset against the revenue in the period that the
revenue generated the points. The value of the unused or unredeemed points is
included in the accounts payable and accrued liabilities on our consolidated
balance sheet.
14. TRANSACTIONS WITH RELATED PARTIES
The Company has entered into compensation agreements with certain members of the
Board of Directors. Specifically, the Company has entered into separate
management agreements with Flyfish Casino Consulting AG, a management company
controlled by Erwin Haitzmann and with Focus Casino Consulting AG, a management
company controlled by Peter Hoetzinger, to secure the services of each director,
respectively.
Effective May 1, 2003, James Forbes, resigned as a member of the Company's Board
of Directors, but will continue as a member of the Board of Directors of Century
Casinos Caledon Proprietary Limited, and will focus his attention on the project
in Johannesburg, in the Gauteng province of South Africa, pursuant to the terms
of a consulting agreement between Century Casinos Inc. and Respond Limited, a
management company controlled by James Forbes. Under the terms of the Agreement
of Termination of Management Agreement Incorporating New Consulting Agreement
("Agreement") dated May 1, 2003, the Company's obligation to make monthly
payments of $10 to Respond Limited ceases on December 31, 2003. In the event
that the Company becomes a party to the project in Johannesburg, Respond Limited
could receive additional payments in accordance with sections 2.f and 2.g of the
Agreement, filed as Exhibit 10.128 in the Registrant's filing on Form 10-Q for
the period ended March 31, 2003. In addition, the Company and James Forbes
completed a series of stock transactions which are fully described in Note 9.
-26-
CENTURY CASINOS, INC. AND SUBSIDIARIES
(Dollar amounts in thousands, except for share information, or as noted)
- --------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward-Looking Statements, Business Environment and Risk Factors
Forward-Looking Statements, Business Environment Information contained in the
following discussion of results of operations and financial condition of the
Company contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
words such as "may", "will", "expect", "anticipate", "estimate", or "continue",
or variations thereon or comparable terminology. In addition, all statements
other than statements of historical facts that address activities, events or
developments that the Company expects, believes or anticipates, will or may
occur in the future, and other such matters, are forward-looking statements.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors, which are beyond the Company's control. These include, among other
factors, the competitive environment in which the Company operates, the
Company's present dependence upon the Cripple Creek, Colorado gaming market,
changes in the rates of gaming-specific taxes, shifting public attitudes toward
the socioeconomic costs and benefits of gaming, actions of regulatory bodies,
dependence upon key personnel, the speculative nature of gaming projects the
Company may pursue, risks associated with expansion, and other uncertain
business conditions that may affect the Company's business.
The Company cautions the reader that a number of important factors discussed
herein, and in other reports filed with the Securities and Exchange Commission,
could affect the Company's actual results and cause actual results to differ
materially from those discussed in forward-looking statements.
-27-
Results of Operations
Three Months Ended September 30, 2003 vs. 2002
Colorado
The operating results of the Colorado segment are those of WMCK-Venture Corp.
and subsidiaries which own Womacks Hotel and Casino ("Womacks") in Cripple
Creek, Colorado. Womacks' results of operations for the three months ended
September 30, 2003 and 2002 are as follows:
For the three months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino $ 5,694 $ 6,531 $ (837) -12.8%
Hotel, food and beverage 375 345 30 8.7%
Other 31 33 (2) -6.1%
---------------- -----------------
6,100 6,909 (809) -11.7%
Less promotional allowances 1,066 1,091 (25) -2.3%
---------------- -----------------
Net operating revenue 5,034 5,818 (784) -13.5%
---------------- -----------------
Costs and Expenses
Casino 1,830 1,924 (94) -4.9%
Hotel, food and beverage 118 94 24 25.5%
General and administrative 1,169 1,151 18 1.6%
Depreciation 334 332 2 0.6%
---------------- -----------------
3,451 3,501 (50) -1.4%
---------------- -----------------
Earnings from operations 1,583 2,317 (734) -31.7%
Interest expense (364) (358) 6 1.7%
Other income, net 58 4 54 1350.0%
---------------- -----------------
Earnings before income taxes 1,277 1,963 (686) -34.9%
Income tax expense 486 903 (417) -46.2%
---------------- -----------------
Net Earnings $ 791 $ 1,060 $ (269) -25.4%
================ =================
Overall operating results were impacted by the casino results detailed below.
-28-
Casino Margin and Market Data
For the three months ended September 30, 2003 2002 % Change
Casino revenue $ 5,694 $ 6,531 -12.8%
Casino promotional allowances $ 779 $ 798 -2.4%
Casino revenue, net $ 4,915 $ 5,733 -14.3%
Casino expense $ 1,830 $ 1,924 -4.9%
Casino margin $ 3,085 $ 3,809 -19.0%
Casino margin as a % of casino revenue, net 62.8% 66.4%
Market share of the Cripple Creek AGP 14.3% 16.2%
Average number of slot machines 610 642
Market share of Cripple Creek gaming devices 14.5% 15.3%
Average slot machine win per day 99 dollars 108 dollars
Cripple Creek average slot machine win per day 101 dollars 102 dollars
When comparing 2003 to 2002, there was a 0.61% decrease in the Cripple
Creek market. The casino has expanded the use of both radio and TV
advertising in its efforts to compete for the limited pool of entertainment
dollars. However, the covered parking garages provided by two of its
competitors have provided them with a large amount of close proximity
parking. A large amount of close proximity parking is an advantage,
heretofore held by Womacks. Both competitors also have a larger number of
hotel rooms, providing them with an advantage especially during inclement
weather and the peak tourist season. The combined net impact of these
factors has contributed to the net decrease in Womacks' revenues for the
period. The Company has not yet decided on the next phase of expansion, but
owns all of the vacant property adjacent to the casino and is able to
expand once it feels comfortable that the additional cost of the expansion
will improve net earnings.
Womacks charges a portion of the food and beverage expense allocable to the
customer comps to casino expense, thereby increasing the hotel, food and
beverage margin and decreasing the casino margin. For the three months
ended September 30, 2003 and 2002, the amount charged was $243 and $262,
respectively.
Even though every attempt has been made to control cost during a period in
which the casino has seen a decline in revenue, the relative percentage of
personnel cost, device fees and the cost of participation machines to net
casino revenue contributed significantly to the erosion in the casino
margin.
During the three months ended September 30, 2003, Womacks leased
approximately 37 slot machines, compared to 42 in the three months ended
September 30, 2002, from manufacturers, on which it pays a fee calculated
as a percentage of the net win. All of the leases have short term
commitment periods not exceeding three months and are classified as
operating leases. The leases can be cancelled with no more than 30 days
written notice. On a portion of the leases, the manufacturer is guaranteed
a minimum fee per day that can range from 15 dollars to 35 dollars for the
duration of the lease. In most instances, the branded games that are being
introduced to the market are not available for purchase. For financial
reporting purposes, the net win on the slot machines is included in our
revenue and the amount due to the manufacturer is recorded as an expense,
in the period during which the revenue is earned, as casino operating cost.
Management makes its decisions to introduce these machines based on the
consumer demand for the product. The amount paid under these agreements was
$102 and $99 for the quarters ended September 30, 2003 and 2002,
respectively.
-29-
Management continues to focus on the marketing of the casino through the
expansion of the successful Gold Club.
Hotel, Food and Beverage Margin
For the three months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue $ 375 $ 345 8.7%
Hotel, food and beverage expense $ 118 $ 94 25.5%
Hotel, food and beverage margin $ 257 $ 251 2.4%
Hotel, food and beverage margin as a % of hotel, food
and beverage revenue 68.5% 72.8%
In the third quarter of 2002 Womacks introduced Bob's Grill on the first
floor of the casino and operated the Gold Mine restaurant on a limited
schedule. Relocation of the restaurant to the first floor increased its
visibility. In February 2003, we doubled the capacity of Bob's Grill and
limited the use of the former Gold Mine restaurant, which is located on the
second floor, to weekend and holiday buffets.
Womacks charges a portion of the food and beverage expense allocable to the
customer comps to casino expense, thereby increasing the hotel, food and
beverage margin and decreasing the casino margin. When the restaurant is
more efficient, as it was in the most recent quarter, the amount of the
allocated expense will decrease even if the amount of the customer comps
were to remain the same. For the three months ended September 30, 2003 and
2002, the amount charged was $243 and $262, respectively.
All of the revenue generated by the hotel operations is derived from comps
to better players.
Other
Reductions in general and administrative costs have been offset by Womacks'
contributions to the campaign organized by Colorado's gaming industry
against the proposed introduction of video lottery terminals ("VLT's")(see
"Liquidity and Capital Resources"). Womacks' contribution to the campaign
totaled $76 in the third quarter of 2003.
The increase in interest expense, including debt issuance cost, to $364 in
2003 from $358 in 2002, is attributable to the increase in the average
balance of the RCF to $12.7 million in the third quarter of 2003 from $11.9
million in the third quarter of 2002. The major factor for the increase in
the average balance of the RCF is the $2.6 million borrowed in January 2003
to fund the purchase of the remaining 35% interest in CCAL by the Company.
Since the second quarter of 2000 the Company has borrowed a total of $9.5
million under the RCF to fund its projects in South Africa. The interest on
this amount has resulted in a charge of approximately $272 and $198 to the
Company's Colorado operations for the third quarter of 2003 and 2002,
respectively. The weighted-average interest rate on the borrowings under
the RCF, including effects of the swap agreements, has marginally decreased
to 9.29% in 2003 from 9.60% in 2002.
The Colorado segment recognized income tax expense of $486 in 2003 versus
$903 in 2002, principally the result of a decrease in earnings before
income taxes.
-30-
South Africa
The operating results of the South African segment are those of Century Casinos
Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon
(Pty) Limited, which owns the Caledon Casino, Hotel and Spa. Inter-company
transactions, including management & incentive fees, shareholder's interest and
their related tax effects have been excluded from the Caledon and CCA results
within the South African segment.
Improvement in the Rand versus the dollar when comparing the third quarter of
last year to the current year has had a positive impact on the reported revenues
and a negative impact on expenses.
Operational results in US dollars for the three months ended September 30, 2003
and 2002 are as follows: (See next page for results in Rand)
CALEDON For the three months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino $ 2,256 $ 1,419 $ 837 59.0%
Hotel, food and beverage 557 377 180 47.7%
Other 53 50 3 6.0%
---------------- -----------------
2,866 1,846 1,020 55.3%
Less promotional allowances 219 103 116 112.6%
---------------- -----------------
Net operating revenue 2,647 1,743 904 51.9%
---------------- -----------------
Costs and Expenses
Casino 937 534 403 75.5%
Hotel, food and beverage 573 315 258 81.9%
General and administrative 369 324 45 13.9%
Depreciation 275 228 47 20.6%
---------------- -----------------
2,154 1,401 753 53.7%
---------------- -----------------
Earnings from operations 493 342 151 44.2%
Interest expense (228) (202) 26 12.9%
Other income, net 37 52 (15) -28.8%
---------------- -----------------
Earnings before income taxes 302 192 110 57.3%
Income tax expense 106 73 33 45.2%
---------------- -----------------
Net Earnings $ 196 $ 119 $ 77 64.7%
================ =================
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative $ 83 $ (40) $ 123 307.5%
Write off of advances - 377 (377) -100.0%
---------------- -----------------
83 337 (254) -75.4%
---------------- -----------------
Loss from operations (83) (337) 254 75.4%
Other income, net 7 - 7
---------------- -----------------
Loss before income taxes (76) (337) 261 77.4%
Income tax benefit (22) (120) (98) -81.7%
---------------- -----------------
Net Loss $ (54) $ (217) $ 163 75.1%
================ =================
MINORITY INTEREST EXPENSE $ - $ 63 $ (63) -100.0%
---------------- -----------------
SOUTH AFRICA NET EARNINGS (LOSS) $ 142 $ (161) $ 303 188.2%
================ =================
Average exchange rate (Rand/USD) 7.31 10.38 29.6%
-31-
Operational results in Rand for the three months ended September 30, 2003 and
2002 are as follows:
CALEDON For the three months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino R 16,501 R 14,726 R 1,775 12.1%
Hotel, food and beverage 4,077 3,912 165 4.2%
Other 386 519 (133) -25.6%
---------------- -----------------
20,964 19,157 1,807 9.4%
Less promotional allowances 1,603 1,071 532 49.7%
---------------- -----------------
Net operating revenue 19,361 18,086 1,275 7.0%
---------------- -----------------
Costs and Expenses
Casino 6,860 5,530 1,330 24.1%
Hotel, food and beverage 4,188 3,282 906 27.6%
General and administrative 2,696 3,363 (667) -19.8%
Depreciation 2,011 2,365 (354) -15.0%
---------------- -----------------
15,755 14,540 1,215 8.4%
---------------- -----------------
Earnings from operations 3,606 3,546 60 1.7%
Interest expense (1,666) (2,094) (428) -20.4%
Other income, net 270 540 (270) -50.0%
---------------- -----------------
Earnings before income taxes 2,210 1,992 218 10.9%
Income tax expense 779 758 21 2.8%
---------------- -----------------
Net Earnings R 1,431 R 1,234 R 197 16.0%
================ =================
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative R 611 R (445) R 1,056 237.3%
Write off of advances - 3,984 (3,984) -100.0%
---------------- -----------------
611 3,539 (2,928) -82.7%
---------------- -----------------
Loss from operations (611) (3,539) 2,928 82.7%
Other income, net 53 2 51 2550.0%
---------------- -----------------
Loss before income taxes (558) (3,537) 2,979 84.2%
Income tax benefit (163) (1,262) (1,099) -87.1%
---------------- -----------------
Net Loss R (395) R (2,275) R 1,880 82.6%
================ =================
MINORITY INTEREST EXPENSE R - R 670 R (670) -100.0%
---------------- -----------------
SOUTH AFRICA NET EARNINGS (LOSS) R 1,036 R (1,711) R 2,747 160.5%
================ =================
-32-
Casino Margin (in USD)
For the three months ended September 30, 2003 2002 % Change
Casino revenue $ 2,256 $ 1,419 59.0%
Casino promotional allowances $ 127 $ 51 149.0%
Casino revenue, net $ 2,129 $ 1,368 55.6%
Casino expense $ 937 $ 534 75.5%
Casino margin $ 1,192 $ 834 42.9%
Average exchange rate (Rand/USD) 7.31 10.38 29.6%
Casino Margin and Market Data (in Rand)
For the three months ended September 30, 2003 2002 % Change
Casino revenue R 16,501 R 14,726 12.1%
Casino promotional allowances R 926 R 534 73.4%
Casino revenue, net R 15,575 R 14,192 9.7%
Casino expense R 6,860 R 5,530 24.1%
Casino margin R 8,715 R 8,662 0.6%
Casino margin as a % of casino revenue, net 56.0% 61.0%
Market share of the Western Cape AGP 6.02% 5.99%
Market share of Western Cape gaming devices 10.9% 11.1%
Average number of slot machines 275 250
Average slot machine win per day 598 Rand 601 Rand
Average number of tables 8 8
Average table win per day 1,502 Rand 1,409 Rand
The 9.7% increase in the casino revenue, net is attributable to a number of
factors including an increase in the number of slot machines, the
introduction of cash couponing and other successful marketing efforts. The
introduction of the cash couponing, which is intended to increase customer
traffic and loyalty, accounts for the significant increase in promotional
allowance. Subsequent to the purchase of the remaining 35% interest in
CCAL, the Company is focused on marketing the resort as a unified property,
offering its guests an array of amenities that complement the gaming
experience. These include a 92-room hotel, a variety of dining experiences,
and the historic mineral hot spring & spa. The increase in casino expenses
in excess of the increase in the corresponding revenue is attributable to
the increased cost of marketing the casino, period cost associated with
updating the property, and to the effect of inflation. CCAL competes
against a much larger competitor located in a more populous area of the
Western Cape.
-33-
Hotel, Food and Beverage Margin (in USD)
For the three months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue $ 557 $ 377 47.7%
Hotel, food and beverage expense $ 573 $ 315 81.9%
Hotel, food and beverage margin $ (16) $ 62 -125.8%
Average exchange rate (Rand/USD) 7.31 10.38 29.6%
Hotel, Food and Beverage Margin (in Rand)
For the three months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue R 4,077 R 3,912 4.2%
Hotel, food and beverage expense R 4,188 R 3,282 27.6%
Hotel, food and beverage margin R (111) R 630 -117.6%
Hotel, food and beverage margin as a % of hotel, food
and beverage revenue -2.7% 16.1%
Hotel occupancy was 57% in the third quarter of 2003 compared to 65% in the
same period in 2002. Conference and leisure sales accounted for 4.4% and
3.5% of the change, respectively. Food and beverage revenue has increased
by 18%, primarily due to the increase in the number of theme dinners and
banquets.
CCAL continues to make a number of repairs and improvements to the resort
on an ongoing basis (see Note 6). Additionally, continuing inflationary
pressures in South Africa have driven up base costs such as labor and
supplies. Repair cost increased by 146%, accounting for R206 of the
increase in expenses. Labor cost, including health insurance, laundry and
uniforms, in the quarter has increased by 34%, accounting for R426 of the
increase in expenses. Supply cost in the quarter has increased by 36%,
accounting for R139 of the increase in expenses.
Other
Other revenue principally consists of revenue generated from the resort's
ancillary services, which include the adventure center, spa center, and
conference room rental. Administrative support for South Africa which was
paid by Caledon and CCI in 2002 has been transferred to CCA in 2003,
accounting for a portion of the decrease in Caledon's and Corporate's
general and administrative expenses and the corresponding increase in CCA's
administrative expenses. The negative general and administrative expense
for CCA in 2002 is the result of reclassifying R678 of expenses that were
directly related to the Johannesburg project to write-offs along with all
of the receivables and advances related to the project. The
weighted-average interest rate on the borrowings under the ABSA loan
agreement is 16.9% in the second quarter of 2003 and 2002. Excluding the
effect of fluctuations in the exchange rate, interest expense has decreased
by 20.4%, as the principal balance of the term loans and capitalized leases
are repaid.
-34-
Cruise Ships
Cruise ships' operational results for the three months ended September 30, 2003
and 2002 are as follows:
For the three months ended September 30, Increase
(Decrease) % Change
2003 2002
Operating Revenue
Casino $ 575 $ 285 $ 290 101.8%
Other 22 8 14 175.0%
---------------- ------------------
597 293 304 103.8%
Less promotional allowances - - - -
---------------- ------------------
Net operating revenue 597 293 304 103.8%
---------------- ------------------
Costs and Expenses
Casino 365 175 190 108.6%
General and administrative - 1 (1) 100.0%
Depreciation 24 14 10 71.4%
---------------- ------------------
389 190 199 104.7%
---------------- ------------------
Earnings from operations 208 103 105 101.9%
Other income, net 10 - 10 -
---------------- ------------------
Earnings before income taxes 218 103 115 111.7%
Income tax expense 83 38 45 118.4%
---------------- ------------------
Net Earnings $ 135 $ 65 $ 70 107.7%
================ ==================
Casino Margin
For the three months ended September 30, 2003 2002 % Change
Casino revenues $ 575 $ 285 101.8%
Casino expenses $ 365 $ 175 108.6%
Casino margin $ 210 $ 110 90.9%
Casino margin as a % of casino revenue, net 36.5% 38.6%
In the third quarter of 2003, we operated casinos on a total of seven
ships: four from Silverseas, one on the World of ResidenSea and two on
Oceania Cruises. In the third quarter of 2002 we operated casinos on four
ships: three on Silverseas and one on the World of ResidenSea.
We anticipate we will repeatedly experience severe fluctuations in the
revenue generated on each cruise depending on the number of passengers and
the quality of the players. This is a condition that is beyond the control
of the Company.
Concession fees paid to the ship operators in accordance with the
agreements accounted for $202 and $59 of the total casino expenses incurred
in the three month periods ended September 30, 2003 and 2002, respectively.
-35-
The ability to successfully leverage the ship operations is evident by the
reduction in casino expenses, excluding concession fees, as a percentage of
casino revenue. When comparing the third quarter of 2003 to 2002, casino
expenses, excluding concession fees, dropped to 28.3% of casino revenue
compared to 40.7%.
Corporate & Other
For the three months ended September 30, Increase
(Decrease) % Change
2003 2002
Operating Revenue
Other $ - $ 31 $ (31) -100.0%
---------------- -----------------
- 31 (31) -100.0%
Less promotional allowances - - - -
---------------- -----------------
Net operating revenue - 31 (31) -100.0%
---------------- -----------------
Costs and Expenses
General and administrative 383 388 (5) -1.3%
Property write-down and
other write offs - 745 (745) -100.0%
Depreciation 42 42 - 0.0%
---------------- -----------------
425 1,175 (750) -63.8%
---------------- -----------------
Loss from operations (425) (1,144) (719) -62.8%
Interest expense (5) (5) - 0.0%
Other income, net 86 61 25 41.0%
---------------- -----------------
Loss before income taxes (344) (1,088) (744) -68.4%
Income tax benefit (190) (577) (387) -67.1%
---------------- -----------------
Net Loss $ (154) $ (511) $ (357) -69.9%
================ =================
Net operating revenues consisted of management fees earned from operating
Casino Millennium in Prague, Czech Republic and were $0 and $31 in the
third quarter of 2003 and 2002, respectively. Effective September 1, 2002,
management fees and interest due to the Company from CM will not be accrued
until a certainty of cash flow is attained for Casino Millennium, but
instead will be recorded as received.
Other income, net is primarily derived from interest earned on a $5.7
million note between WMCK-Venture Corp. and CCI. The interest income is
eliminated in consolidation.
Included in the income tax benefit for 2003, is $59 obtained by adjusting
estimated tax provision for year end 2002 to the returns as filed.
-36-
Results of Operations
Nine Months Ended September 30, 2003 vs. 2002
Colorado
The operating results of the Colorado segment are those of WMCK-Venture Corp.
and subsidiaries which own Womacks Hotel and Casino ("Womacks") in Cripple
Creek, Colorado. Womacks' results of operations for the nine months ended
September 30, 2003 and 2002 are as follows:
For the nine months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino $ 16,151 $ 18,567 $ (2,416) -13.0%
Hotel, food and beverage 954 887 67 7.6%
Other 83 91 (8) -8.8%
---------------- -----------------
17,188 19,545 (2,357) -12.1%
Less promotional allowances (2,942) (3,028) (86) -2.8%
---------------- -----------------
Net operating revenue 14,246 16,517 (2,271) -13.7%
---------------- -----------------
Costs and Expenses
Casino 5,043 5,280 (237) -4.5%
Hotel, food and beverage 263 212 51 24.1%
General and administrative 3,282 3,417 (135) -4.0%
Depreciation 1,033 999 34 3.4%
---------------- -----------------
9,621 9,908 (287) -2.9%
---------------- -----------------
Earnings from operations 4,625 6,609 (1,984) -30.0%
Interest expense (1,108) (1,049) 59 5.6%
Other income, net 65 14 51 364.3%
---------------- -----------------
Earnings before income taxes 3,582 5,574 (1,992) -35.7%
Income tax expense 1,362 2,564 (1,202) -46.9%
---------------- -----------------
Net Earnings $ 2,220 $ 3,010 $ (790) -26.2%
================ =================
Overall operating results were impacted by the casino results detailed below.
-37-
Casino Margin and Market Data
For the nine months ended September 30, 2003 2002 % Change
Casino revenue $ 16,151 $ 18,567 -13.0%
Casino promotional allowances $ 2,165 $ 2,251 -3.8%
Casino revenue, net $ 13,986 $ 16,316 -14.3%
Casino expense $ 5,043 $ 5,280 -4.5%
Casino margin $ 8,943 $ 11,036 -19.0%
Casino margin as a % of casino revenue, net 63.9% 67.6%
Market share of the Cripple Creek AGP 14.9% 17.1%
Average number of slot machines 625 623
Market share of Cripple Creek gaming devices 14.8% 14.9%
Average slot machine win per day 93 dollars 107 dollars
Cripple Creek average slot machine win per day 92 dollars 94 dollars
Growth in the Cripple Creek market during the first nine months of 2003
compared to 2002 was limited to 0.01%. When comparing 2003 to 2002,
distractions from major construction in the casino, limited access to the
casino from the adjoining parking lot during the first four months of the
year, and poor weather conditions, particularly in March and April 2003,
had an adverse effect on casino revenue and overall operating results. The
covered parking garages provided by two of our competitors have impacted
the casino, particularly during inclement weather and provides both with a
significant number of close proximity parking places, an advantage
previously held by Womacks. Both competitors also have a large number of
hotel rooms, providing them with an advantage during inclement weather and
the peak tourist season. The Company has not yet decided on the next phase
of expansion, but owns all of the vacant property adjacent to the casino
and is able to expand once it feels comfortable that the additional cost of
the expansion will improve net earnings. In the second quarter of 2003,
Womacks made significant changes to the casino floor layout and reduced the
number of slot machines to its current level, from an average of 691 in the
fourth quarter of 2002 and an average of 666 in the first quarter of 2003.
Womacks charges a portion of the food and beverage expense allocable to the
customer comps to casino expense, thereby increasing the hotel, food and
beverage margin and decreasing the casino margin. For the nine months ended
September 30, 2003 and 2002, the amount charged was $670 and $716,
respectively.
Even though every attempt has been made to control cost during a period in
which we have seen a decline in revenue, the relative percentage of
personnel cost, device fees and participation fees to net casino revenue
contributed significantly to the erosion in the casino margin.
During the nine months ended September 30, 2003, Womacks leased an average
of 44 slot machines, compared to 36 during the first nine months ended
September 30, 2002, from manufacturers, on which it pays a fee calculated
as a percentage of the net win. All of the leases have short term
commitment periods not exceeding nine months and are classified as
operating leases. The leases can be cancelled with no more than 30 days
written notice. On a portion of the leases, the manufacturer is guaranteed
a minimum fee per day that can range from 15 dollars to 35 dollars for the
duration of the lease. In most instances, the branded games that are being
introduced to the market are not available for purchase. For financial
-38-
reporting purposes, the net win on the slot machines is included in our
revenue and the amount due to the manufacturer is recorded as an expense,
in the period during which the revenue is earned, as casino operating cost.
Management makes its decisions to introduce these machines based on the
consumer demand for the product. The amount paid under these agreements was
$318 and $251 for the nine months ended September 30, 2003 and 2002,
respectively.
Management continues to focus on the marketing of the casino through the
expansion of the successful Gold Club. Management continues to place
emphasis on further refining the slot machine mix.
Hotel, Food and Beverage Margin
For the nine months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue $ 954 $ 887 7.6%
Hotel, food and beverage expense $ 263 $ 212 24.1%
Hotel, food and beverage margin $ 691 $ 675 2.4%
Hotel, food and beverage margin as a % of hotel, food
and beverage revenue 72.4% 76.1%
Hotel revenue, included in Hotel, food and beverage revenue, decreased by
2.2%, as a result of lower than expected hotel occupancy rates, operating
at 82% in 2003 compared to 87% in 2002. All of the revenue generated by the
hotel operations is derived from comps to better players.
Food and beverage revenue increased by 10.1% as a result of the visibility
obtained by opening Bob's Grill on the gaming floor. The former Gold Mine
restaurant, which Womacks operated on a full-time basis prior to the
opening of the grill, and is still currently used for buffets and special
events, is located on the second floor of the casino.
Womacks charges a portion of the food and beverage expense allocable to the
customer comps to casino expense, thereby increasing the hotel, food and
beverage margin and decreasing the casino margin. When the restaurant is
more efficient, as it has been so far in 2003, the amount of the allocated
expense will decrease even if the amount of the customer comps were to
remain the same. For the nine months ended September 30, 2003 and 2002, the
amount charged was $670 and $716, respectively.
Other
In the first nine months of 2003 Womacks contributed $107, included in
general and administrative costs, towards the campaign against VLT's in
Colorado.
The increase in interest expense, including debt issuance cost, to $1,108
in 2003 from $1,049 in 2002 is attributable to the increase in the average
balance of the RCF to $13.0 million in the first nine months of 2003 from
$11.9 million in the first nine months of 2002. The major factor for the
increase in the average balance of the RCF is the $2.6 million borrowed in
January 2003 to fund the purchase of the remaining 35% interest in CCAL by
the Company. Since the second quarter of 2000 the Company has borrowed a
total of $9.5 million under the RCF to fund its investments in South
Africa. The interest on the investments has resulted in a charge of
approximately $795 and $570 to the Company's Colorado operations for the
first nine months of the years 2003 and 2002, respectively. The
weighted-average interest rate on the borrowings under the RCF, including
effects of the swap agreements, has decreased to 9.21% in 2003 from 9.53%
in 2002.
-39-
The Colorado segment recognized income tax expense of $1,362 in 2003 versus
$2,564 in 2002, principally the result of a decrease in earnings before
income taxes.
South Africa
The operating results of the South African segment are those of Century Casinos
Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon
(Pty) Limited, which owns the Caledon Casino, Hotel and Spa. Inter-company
transactions, including management & incentive fees, shareholder's interest and
their related tax effects have been excluded from the Caledon and CCA results
within the South African segment.
Improvement in the Rand versus the dollar when comparing the first nine months
of last year to the current year has had a positive impact on the reported
revenues and a negative impact on expenses.
-40-
Operational results in US dollars for the nine months ended September 30, 2003
and 2002 are as follows: (See next page for results in Rand)
CALEDON For the nine months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino $ 6,275 $ 4,126 $ 2,149 52.1%
Hotel, food and beverage 1,616 997 619 62.1%
Other 269 152 117 77.0%
---------------- -----------------
8,160 5,275 2,885 54.7%
Less promotional allowances 487 322 165 51.2%
---------------- -----------------
Net operating revenue 7,673 4,953 2,720 54.9%
---------------- -----------------
Costs and Expenses
Casino 2,609 1,643 966 58.8%
Hotel, food and beverage 1,578 843 735 87.2%
General and administrative 1,077 926 151 16.3%
Depreciation 771 575 196 34.1%
---------------- -----------------
6,035 3,987 2,048 51.4%
---------------- -----------------
Earnings from operations 1,638 966 672 69.6%
Interest expense (695) (599) 96 16.0%
Other income, net 127 90 37 41.1%
---------------- -----------------
Earnings before income taxes 1,070 457 613 134.1%
Income tax expense 387 166 221 133.1%
---------------- -----------------
Net Earnings $ 683 $ 291 $ 392 134.7%
================ =================
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative $ 270 $ 53 $ 217 409.4%
Write off of advances - 377 (377) -100.0%
---------------- -----------------
270 430 (160) -37.2%
---------------- -----------------
Loss from operations (270) (430) 160 37.2%
Other income, net 24 4 20 500.0%
---------------- -----------------
Loss before income taxes (246) (426) 180 42.3%
Income tax benefit (69) (128) (59) -46.1%
---------------- -----------------
Net Loss $ (177) $ (298) $ 121 40.6%
================ =================
MINORITY INTEREST EXPENSE $ 8 $ 61 $ (53) -86.9%
---------------- -----------------
SOUTH AFRICA NET EARNINGS (LOSS) $ 498 $ (68) $ 566 832.4%
================ =================
Average exchange rate (Rand/USD) 7.75 10.76 28.0%
-41-
Operational results in Rand for the nine months ended September 30, 2003 and
2002 are as follows:
CALEDON For the nine months ended September 30, Increase % Change
(Decrease)
2003 2002
Operating Revenue
Casino R 48,400 R 44,279 R 4,121 9.3%
Hotel, food and beverage 12,485 10,682 1,803 16.9%
Other 2,107 1,642 465 28.3%
---------------- ------------------
62,992 56,603 6,389 11.3%
Less promotional allowances 3,721 3,468 253 7.3%
---------------- ------------------
Net operating revenue 59,271 53,135 6,136 11.5%
---------------- ------------------
Costs and Expenses
Casino 20,145 17,661 2,484 14.1%
Hotel, food and beverage 12,191 9,011 3,180 35.3%
General and administrative 8,322 9,922 (1,600) -16.1%
Depreciation 5,950 6,160 (210) -3.4%
---------------- ------------------
46,608 42,754 3,854 9.0%
---------------- ------------------
Earnings from operations 12,663 10,381 2,282 22.0%
Interest expense (5,385) (6,434) (1,049) -16.3%
Other income, net 991 953 38 4.0%
---------------- ------------------
Earnings before income taxes 8,269 4,900 3,369 68.8%
Income tax expense 2,997 1,779 1,218 68.5%
---------------- ------------------
Net Earnings R 5,272 R 3,121 R 2,151 68.9%
================ ==================
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative R 2,083 R 562 R 1,521 270.6%
Write off of advances - 3,984 (3,984) -100.0%
---------------- ------------------
2,083 4,546 (2,463) -54.2%
---------------- ------------------
Loss from operations (2,083) (4,546) 2,463 54.2%
Other income, net 185 44 141 320.5%
---------------- ------------------
Loss before income taxes (1,898) (4,502) 2,604 57.8%
Income tax benefit (549) (1,350) (801) -59.3%
---------------- ------------------
Net Loss R (1,349) R (3,152) R 1,803 57.2%
================ ==================
MINORITY INTEREST EXPENSE R 71 R 652 R (581) -89.1%
---------------- ------------------
SOUTH AFRICA NET EARNINGS (LOSS) R 3,852 R (683) R 4,535 664.0%
================ ==================
-42-
Casino Margin (in USD)
For the nine months ended September 30, 2003 2002 % Change
Casino revenue $ 6,275 $ 4,126 52.1%
Casino promotional allowances $ 251 $ 122 105.7%
Casino revenue, net $ 6,024 $ 4,004 50.4%
Casino expense $ 2,609 $ 1,643 58.8%
Casino margin $ 3,415 $ 2,361 44.6%
Average exchange rate (Rand/USD) 7.75 10.76 28.0%
Casino Margin and Market Data (in Rand)
For the nine months ended September 30, 2003 2002 % Change
Casino revenue R 48,400 R 44,279 9.3%
Casino promotional allowances R 1,905 R 1,293 47.3%
Casino revenue, net R 46,495 R 42,986 8.2%
Casino expense R 20,145 R 17,661 14.1%
Casino margin R 26,350 R 25,325 4.0%
Casino margin as a % of casino revenue, net 56.7% 58.9%
Market share of the Western Cape AGP 6.0% 6.1%
Market share of Western Cape gaming devices 10.9% 11.1%
Average number of slot machines 275 250
Average slot machine win per day 589 Rand 586 Rand
Average number of tables 8 10
Average table win per day 1,716 Rand 1,310 Rand
The 8.2% increase in the casino revenue, net is attributable to the
increased traffic generated by the increase in the number of conference
attendees, the introduction of cash couponing in the second quarter of 2003
and the 10% increase in the number of slots which increased the potential
of the casino. The introduction of the cash couponing, which is intended to
increase customer traffic and loyalty, accounts for the significant
increase in promotional allowances.
Subsequent to the purchase of the remaining 35% interest in CCAL, the
Company is focused on marketing the resort as a unified property, offering
its guests an array of amenities that complement the gaming experience.
These include a 92-room hotel, a variety of dining experiences, and the
historic mineral hot spring & spa. The increase in casino expenses in
excess of the increase in the corresponding revenue is attributable to the
increased cost of marketing the casino, period cost associated with
updating the property, and to the effect of inflation. CCAL competes
against a much larger competitor located in a more populous area of the
Western Cape.
-43-
Hotel, Food and Beverage Margin (in USD)
For the nine months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue $ 1,616 $ 997 62.1%
Hotel, food and beverage expense $ 1,578 $ 843 87.2%
Hotel, food and beverage margin $ 38 $ 154 -75.3%
Average exchange rate (Rand/USD) 7.75 10.76 28.0%
Hotel, Food and Beverage Margin (in Rand)
For the nine months ended September 30, 2003 2002 % Change
Hotel, food and beverage revenue R 12,485 R 10,682 16.9%
Hotel, food and beverage expense R 12,191 R 9,011 35.3%
Hotel, food and beverage margin R 294 R 1,671 -82.4%
Hotel, food and beverage margin as a % of hotel, food
and beverage revenue 2.4% 15.6%
A 42% increase in the number of business conferences attendees at the
resort has been a major factor in the significant increase in hotel, food &
beverage revenue. Food and beverage revenue has increased by 31%, primarily
due to the increase in the number of theme dinners and banquets associated
with the conferences. On a year to date basis, the hotel occupancy rate
remained flat at 57% in both 2003 and 2002. In 2002, Caledon saw a larger
portion of its conference business in the second quarter of the year.
Accordingly, marketing has been more focused in this area in an attempt to
gain additional exposure. CCAL continues to make a number of repairs and
improvements to the resort on an ongoing basis (see Note 6). Additionally,
continuing inflationary pressures in South Africa have driven up base costs
such as labor and supplies. Repair cost has increased by 121%, accounting
for R52 of the increase in expenses. Labor cost allocated to hotel, food
and beverage, including health insurance, laundry and uniforms, in the
quarter has increased by 26%, accounting for R934 of the increase in
expenses. Supply cost has increased by 25%, accounting for R247 of the
increase in expenses.
Other
An insurance claim submitted by the casino for loss of revenue due to water
damage to a number of slot machines accounted for R472 of the increase in
other revenue. Administrative support for South Africa which was paid by
Caledon and CCI in 2002 has been transferred to CCA in 2003, accounting for
a portion of the decrease in Caledon's and Corporate's general and
administrative expenses and the corresponding increase in CCA's
administrative expenses. The weighted-average interest rate on the
borrowings under the ABSA loan agreement is 16.9% in the first nine months
of 2003 and 2002. Excluding the effect of fluctuations in the exchange
rate, interest expense has decreased by 16.3% as the principal balance of
the term loans and capitalized leases are repaid. Other revenue principally
consists of revenue generated from the resort's ancillary services which
include the adventure center, spa center, and conference room rental.
-44-
Cruise Ships
Cruise ships' operational results for the nine months ended September 30,
2003 and 2002 are as follows:
For the nine months ended September 30, Increase
(Decrease) % Change
2003 2002
Operating Revenue
Casino $ 1,244 $ 564 $ 680 120.6%
Other 41 34 7 20.6%
---------------- ------------------
1,285 598 687 114.9%
Less promotional allowances - - - -
---------------- ------------------
Net operating revenue 1,285 598 687 114.9%
---------------- ------------------
Costs and Expenses
Casino 846 383 463 120.9%
General and administrative 3 1 2 200.0%
Depreciation 56 42 14 33.3%
---------------- ------------------
905 426 479 112.4%
---------------- ------------------
Earnings from operations 380 172 208 120.9%
Other income, net 15 - 15 -
---------------- ------------------
Earnings before income taxes 395 172 223 129.7%
Income tax expense 150 64 86 134.4%
---------------- ------------------
Net Earnings $ 245 $ 108 $ 137 126.9%
================ ==================
Casino Margin
For the nine months ended September 30, 2003 2002 % Change
Casino revenues $ 1,244 $ 564 120.6%
Casino expenses $ 846 $ 383 120.9%
Casino margin $ 398 $ 181 119.9%
Casino margin as a % of casino revenue, net 32.0% 32.1%
In the first nine months of 2003, we operated casinos on a total of seven
ships: four from Silversea Cruises, one on the World of ResidenSea and two
on Oceania Cruises. On April 19, 2003, the Company successfully opened its
casino aboard the Insignia, a 684 passenger luxury cruise ship operated by
Oceania Cruises. The Silver Wind, a cruise ship operated by Silversea
Cruises, which was taken out of service following the events of September
11, 2001, resumed operations on May 23, 2003. The casino aboard the
Regatta, another 684 passenger luxury cruise ship operated by Oceania
Cruises, was opened on June 26, 2003.
In the first nine months of 2002 we operated casinos on four ships: three
on Silversea Cruises and one on the World of ResidenSea. The casino on the
ResidenSea opened for business on March 28, 2002.
-45-
We anticipate we will repeatedly experience severe fluctuations in the
revenue generated on each cruise depending on the number of passengers and
the quality of the players. This is a condition that is beyond the control
of the Company.
Concession fees paid to the ship operators in accordance with the
agreements accounted for $414 and $87 of the total casino expenses incurred
in first nine months ended September 30, 2003 and 2002, respectively.
The increase in casino operating expenses relates to the increase in number
of casinos operated on cruise ships and to start up costs of casinos aboard
two Oceania cruise ships, i.e. travel and additional staff cost, plus the
cost to re-establish the casino on the Silver Wind. Notwithstanding these
costs, casino expenses, excluding the concession fees, have dropped to
34.7% of casino revenue in 2003, compared to 52.5% in 2002, indicating that
the Company is able to successfully leverage its ship resources at their
current levels.
Corporate & Other
For the nine months ended September 30, Increase
(Decrease) % Change
2003 2002
Operating Revenue
Other $ 8 $ 138 $ (130) -94.2%
---------------- -----------------
8 138 (130) -94.2%
Less promotional allowances - - - -
---------------- -----------------
Net operating revenue 8 138 (130) -94.2%
---------------- -----------------
Costs and Expenses
General and administrative 1,114 1,151 (37) -3.2%
Property write-down and
other write offs - 745 (745) -100.0%
Depreciation 126 150 (24) -16.0%
---------------- -----------------
1,240 2,046 (806) -39.4%
---------------- -----------------
Loss from operations (1,232) (1,908) (676) 35.4%
Interest expense (17) (17) - 0.0%
Other income, net 267 238 29 12.2%
---------------- -----------------
Loss before income taxes (982) (1,687) (705) -41.8%
Income tax benefit (439) (1,118) (679) -60.7%
---------------- -----------------
Net Loss $ (543) $ (569) $ (26) -4.6%
================ =================
Net operating revenue consisted of management fees earned from operating
Casino Millennium in Prague, Czech Republic and were $8 and $138 in the
first nine months of 2003 and 2002, respectively. Effective September 1,
2002, management fees and interest due to the Company from CM will not be
accrued until a certainty of cash flow is attained for Casino Millennium,
but instead will be recorded as received. In April 2003, Casino Millennium
remitted $8 in management fees.
Other income is primarily derived from interest earned on a $5.7 million
note between WMCK-Venture Corp. and CCI. The interest income is eliminated
in consolidation.
Included in the income tax benefit for 2003, is $59 obtained by adjusting
estimated tax provision for year end 2002 to the returns as filed.
-46-
Liquidity and Capital Resources
Cash and cash equivalents totaled $3,893 plus restricted cash of $575 at
September 30, 2003, and the Company had deficit working capital of $506.
Additional liquidity may be provided by the Company's revolving credit facility
("RCF") with Wells Fargo Bank, under which the Company had a total commitment of
$26,000 ($23,833 net of the quarterly reduction) and unused borrowing capacity
of $11,919 at September 30, 2003.
For the nine months ended September 30, 2003, cash provided by operating
activities was $3,862 compared with $4,991 in the prior-year period. Please
refer to management's discussion of the results of operations.
Cash used in investing activities of $2,721 for the first nine months of 2003,
consisted of: $674 towards the expansion of the Womacks casino at the rear of
the property that was completed in the second quarter of 2003, providing a
larger, more player friendly gaming space and the ability to increase Womacks'
slot machine capacity; $488 for additional improvements to the property in
Caledon, South Africa, including $61 additional capitalized building costs
related to the original construction; $1,259 towards the purchase of the
remaining 35% interest in Century Casinos Caledon (Pty) Limited, $918 of which
was applied against the minority shareholder liability and $341 of which
increased the carrying value of the land in Caledon; $179 principally for
outfitting the two new casinos aboard the luxury cruise ships operated by
Oceania and to finish re-outfitting the Silver Wind; $428 due to expenditures
for other long-lived assets, less $258 in proceeds from the disposition of
assets; and a decrease of $49 in restricted cash. Cash used in investing
activities of $3,604 for the first nine months of 2002, consisted of $1,400
towards the purchase and improvements of the Palace Hotel and property, $842
towards the expansion of the Womacks casino at the rear of the property that was
recently completed and now provides additional gaming space, $135 towards the
construction of a restaurant & grill on the first floor of Womacks casino, $390
for additional improvements to the property in Caledon, South Africa, $460,
primarily for land purchased for the proposed casino development in
Johannesburg, South Africa, $10 towards an increase in restricted cash and the
balance of $367 due to expenditures for other long-lived assets.
Cash used in financing activities of $2,155 for the first nine months of 2003
consisted of net borrowings of $414 under the RCF with Wells Fargo plus $8 in
proceeds from the exercise of stock options, less net repayments of $880 under
the loan agreement with ABSA, $1,259 to acquire a loan to CCAL held by the
minority shareholder, Caledon Overberg Investments (Proprietary) Limited
("COIL"); $132 towards the repurchase of Company's stock on the open market at
cost; $299 towards the purchase of 132,184 shares of common stock from a
director, James Forbes, at a per share price of $2.26; and other net repayments
of $7. Cash used in financing activities of $1,337 for the first nine months of
2002 consisted of net repayments of $263 under the RCF with Wells Fargo, plus
net repayments of $712 under the loan agreement with ABSA, additional deferred
financing charges incurred by the Caledon Casino, Hotel and Spa, with a cost of
$19, additional deferred financing charges incurred by the Company to amend the
RCF, with a cost of $88, the repurchase of company's stock, on the open market,
with a cost of $205 and other net repayments of $50.
The Company entered into an amended RCF with Wells Fargo Bank in August 2002
which provides us with a total commitment of $26,000. Under the terms of the
agreement, the maturity date of the borrowing commitment was extended to August
2007 and the funds available under the RCF are reduced by $722 each quarter
beginning with the first quarter of 2003. The Company has the flexibility to use
the funds for various business projects and investments.
The Company has a 20-year agreement with Casino Millennium a.s., a Czech
company, to operate a casino in the five-star Marriott Hotel, in Prague, Czech
Republic which began in January 1999. The hotel and casino opened in July 1999.
In January 2000, the Company entered into a memorandum of agreement with B. H.
Centrum, a Czech company which owns the hotel and casino facility, to acquire
the operations of the casino by either a joint acquisition of Casino Millennium
a.s. or the formation of a
-47-
new joint venture. The transaction, when completed, will result in the Company
having a 50% equity interest in Casino Millennium. In December 2002, the
Company, through CMB, paid $236 towards an initial equity investment of 10% in
Casino Millennium, subject to the repayment of a CM loan to a Czech bank by
Strabag AG, which has been repaid. The Company expects to contribute gaming
equipment and certain pre-operating costs, valued at $827, in exchange for the
additional 40% interest in Casino Millennium. The balance of the transaction is
expected to be completed in 2003, subject to certain contingencies and contract
conditions.
In January 2000, CCI entered into a brokerage agreement with Novomatic AG in
which CCI received an option to purchase seven eighths of the shares that
Novomatic AG purchased in Silverstar at a price equal to 85% of their fair
market value at the time of exercise. The agreement was subsequently amended in
July 2003 giving Novomatic AG a put option under which Novomatic AG can require
that CCI buy seven eighths of its shares in Silverstar and giving CCI a call
option under which CCI can require Novomatic AG to sell seven eighths of its
shares in Silverstar to CCI. The price of the option, which cannot be quantified
at this time, will be 75% of the fair market value as determined at the time of
the exercise. If the transaction were to be completed, CCI would acquire a 7%
interest in Silverstar from Novomatic AG.
CRA has submitted an application to the Alberta Gaming and Liquor Commission
("AGLC") for an additional casino facility license in the greater Edmonton area.
The proposed project, The Celebrations Casino and Hotel, is planned to include a
casino, food and beverage amenities, a dinner theater, and a 40-room hotel. CRA
is owned by CRL, a wholly owned subsidiary of Century Casinos, Inc. and by
746306 Alberta Ltd, the owners of the 7.25 acre property and existing hotel
which will be developed into the Celebrations project, should a license be
awarded and all other approvals and funding be obtained. The Celebrations Casino
and Hotel Project proposed by CRA is valued at 16.5 million Canadian dollars
($12.2 million), including the contribution of the existing hotel and property,
valued at 2.5 million Canadian dollars ($1.9 million).
A November 2003 ballot issue in Colorado, if approved, would permit the
installation of at least 500 video lottery terminals "VLT's" at each of the five
racetracks throughout Colorado, two of which are located in Colorado Springs and
Pueblo, the dominant markets for Cripple Creek. The VLT's are almost identical
to slot machines. The Colorado gaming industry has organized to oppose the
introduction of VLT's at the racetracks. Management is unable to speculate on
the outcome of the November 2003 ballot issue which, if approved by the voters,
could be expected to have a negative impact on the Company's Cripple Creek
gaming revenues.
The Company's Board of Directors has approved a discretionary program to
repurchase up to $5,000 of the Company's outstanding common stock. The Board
believes that the Company's stock is undervalued in the trading market in
relation to both its present operations and its future prospects. During the
first nine months of 2003, the Company repurchased 59,100 shares of its common
stock on the open market, excluding 489,264 shares purchased from one of its
directors. Through September 30, 2003, the Company had repurchased 2,559,004
shares of its common stock at a total cost of approximately $3,768.
Critical Accounting Policies
In accordance with recent Securities and Exchange Commission guidance, those
material accounting policies that we believe are the most critical to an
investor's understanding of the Company's financial results and condition and/or
require complex management judgment have been expanded and are discussed below.
-48-
Consolidation - The accompanying consolidated financial statements include the
accounts of CCI and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. The financial
statements of all foreign subsidiaries consolidated herein have been converted
to US GAAP for financial statement presentation purposes. Accordingly, the
consolidated financial statements are presented in accordance with US GAAP.
Revenue Recognition - Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses. Management and
consulting fees are recognized as revenue as services are provided. The
incremental amount of unpaid progressive jackpot is recorded as a liability and
a reduction of casino revenue in the period during which the progressive jackpot
increases.
Goodwill and Other Intangible Assets - The Company's goodwill results from the
acquisitions of casino and hotel operations.
Effective January 1, 2002 the Company adopted Financial Accounting Standards
Board (the "FASB") SFAS No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 142 addresses the methods used to capitalize, amortize and to assess
impairment of intangible assets, including goodwill resulting from business
combinations accounted for under the purchase method. Effective with the
adoption of SFAS No. 142, the Company no longer amortizes goodwill and other
intangible assets with indefinite useful lives, principally deferred casino
license costs. In evaluating the Company's capitalized casino license cost
related to CCAL, which comprises principally all of its other intangible assets,
management considered all of the criteria set forth in SFAS No. 142 in
determining its useful life. Of particular significance in that evaluation was
the existing regulatory provision for annual renewal of the license at minimal
cost and the current practice of the Western Cape Gambling and Racing Board
("Board") of granting such renewals as long as all applicable laws are complied
with, as well as compliance with the original conditions of the casino operator
license as set forth by the Board. Among other things, the Company also
evaluated the following criteria; 1) the high value of the assets it has placed
in service and the significant barrier that a high initial investment poses to
potential competitors, 2) the future potential of the resort property, 3) the
unique attraction of the resort property, 4) the dependence of the hotel and
other amenities of the resort property upon the casino operation, and 5) the
intentions of the Company to operate the casino indefinitely. Based on that
evaluation, the Company has deemed the casino license costs to have an
indefinite life as of January 1, 2002. Included in assets at September 30, 2003
is unamortized goodwill of approximately $8,051 and unamortized casino license
costs of approximately $1,601. The Company will continue to assess goodwill and
other intangibles for impairment at least annually. Management has not
identified any impairment indicators with respect to the casino license or
goodwill during the three and nine months ended September 30, 2003.
-49-
Impairment of Long-Lived Assets - The Company reviews long-lived assets for
possible impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. If there is an indication of
impairment, which is estimated as the difference between anticipated
undiscounted future cash flows and carrying value, the carrying amount of the
asset is written down to its estimated fair value by a charge to operations.
Fair value is estimated based on the present value of estimated future cash
flows using a discount rate commensurate with the risk involved. Estimates of
future cash flows are inherently subjective and are based on management's best
assessment of expected future conditions. During 2001, FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". While SFAS No. 144 retains many of the
provisions of SFAS No. 121 it provides guidance on estimating future cash flows
to test recoverability, among other things. The adoption of SFAS No. 144 did not
have a material impact on the Company's financial statements.
The carrying value of the non-operating property held for sale in Wells Nevada,
is subject to periodic evaluation. The property has been listed for sale since
April 1998. In 2001 we attempted to reach agreement with an interested
third-party that would have recouped our investment through a long-term lease
agreement that contained a purchase option, which enabled us to conclude that
the carrying value was still reasonable. We could not reach an agreement and, as
the result of no further activity, reduced the value of the property to its
estimated fair value in 2002, which heretofore was supported by an independent
appraisal performed in January 2000.
Foreign Exchange - Current period transactions affecting the profit and loss of
operations conducted in foreign currencies are valued at the average exchange
rate for the period in which they are incurred. Except for equity transactions
and balances denominated in U.S. dollars, the balance sheet is translated based
on the exchange rate at the end of the period.
* * * * * * * * * * * * * * * *
-50-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk principally related to changes in interest rates
and foreign currency exchange rates. To mitigate some of these risks, we utilize
derivative financial instruments to hedge these exposures. We do not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on information available at September
30, 2003. Actual results may differ materially.
Interest Rate Sensitivity
The Company is subject to interest rate risk on the outstanding borrowing under
a Revolving Line of Credit Facility with Wells Fargo Bank. Interest on the
agreement is variable based on the interest rate option selected by the Company,
whereby the interest on the outstanding debt is subject to fluctuations in the
prime interest rate as set by Wells Fargo, or LIBOR.
In order to minimize the risk of increases in the prime rate or LIBOR the
Company has entered into two interest-rate swap agreements on a total of $11.5
million notional amount of debt. In 1998, the Company entered into a five-year
interest rate swap agreement which matured on October 1, 2003 on $7.5 million
notional amount of debt under the RCF, whereby the Company pays a LIBOR-based
fixed rate of 5.55% and receives a LIBOR-based floating rate reset quarterly
based on a three-month rate. In May 2000, the Company entered into a second
five-year interest rate swap agreement which matures on July 1, 2005 on $4.0
million notional amount of debt under the RCF, whereby the Company pays a
LIBOR-based fixed rate of 7.95% and receives a LIBOR-based floating rate reset
quarterly based on a three-month rate. Generally, the swap arrangement is
advantageous to the Company to the extent that interest rates increase in the
future and disadvantageous to the extent that they decrease. Therefore, by
entering into the interest rate swap agreements, we have a cash flow risk when
interest rates drop. For example, each hypothetical 100 basis points decrease in
the three month LIBOR rate below the fixed rate paid by the Company less the
applicable margin results in an increased use of $115 in cash on an annual
basis. With the expiration of the swap agreement on the $7.5 million notional
amount of debt on October 1, 2003, the same hypothetical 100 basis point
increase results in an increased use of $40 in cash on an annual basis. The
Company has not entered into any new swap agreements subsequent to October 1,
2003.
Foreign Currency Exchange Risk
The majority of our revenue, expense, and capital purchasing activities are
transacted in U.S. dollars. However, since a portion of our operations are
conducted outside of the U.S., we enter into transactions in other currencies,
primarily the South African Rand.
Fluctuations in the Rand affect the value of the Company's investment in The
Caledon Casino, Hotel and Spa. A hypothetical devaluation of 10% in the dollar
vs. the Rand based on the exchange rate as of September 30, 2003 would reduce
the value of the Company's investment by approximately $1.4 million.
* * * * * * * * * * * * * * * * * * * *
-51-
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including its
principal executive officer and principal financial officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (which are designed to ensure that information required
to be disclosed in the reports submitted under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
SEC's rules and forms). Based on their evaluation, the Company's principal
executive officer and principal financial officer have concluded that these
controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses,
and therefore there were no corrective actions taken.
* * * * * * * * * * * * * * * * * * * *
-52-
PART II
OTHER INFORMATION
Item 1. - Legal Proceedings
The Company is not a party to, nor is it aware of, any pending or
threatened litigation which, in management's opinion, could have a
material adverse effect on the Company's financial position or results
of operations.
Items 2 to 5 - None
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed herewith:
31.1 Certification Pursuant to Securities Exchange Act Rule
13a-15(f) and 15d-15(f), Chairman of the Board and Chief
Executive Officer.
31.2 Certification Pursuant to Securities Exchange Act Rule
13a-15(f) and 15d-15(f), Vice-Chairman and President.
31.3 Certification Pursuant to Securities Exchange Act Rule
13a-15(f) and 15d-15(f), Chief Accounting Officer.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Chairman of the Board and Chief Executive
Officer.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Vice-Chairman and President.
32.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Chief Accounting Officer.
(b) Reports on Form 8-K:
On August 14, 2003 the Registrant filed a Current Report on Form
8-K in which it announced it had posted to its website a
presentation of the Review of Financial Results of Operations and
Financial Condition as of and for the period ended June 30, 2003,
as a complementary presentation of its Second Quarter 2003 Form
10-Q and Earnings Release.
SIGNATURES:
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CENTURY CASINOS, INC.
/s/ Larry Hannappel
- ---------------------------
Larry Hannappel
Chief Accounting Officer and duly authorized officer
Date: October 29, 2003