Back to GetFilings.com
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 March 31, 2004
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
------------
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, 13,681,900 shares outstanding as of April
30, 2004.
-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 March 31, 3
2004 and December, 2003
Condensed Consolidated Statements of Earnings for the Three
Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Comprehensive Earnings
for the Three Months Ended March 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 37
PART II OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 38
-2-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Dollar amounts in thousands, except for share information March 31, 2004 December 31, 2003
--------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,034 $ 4,729
Restricted cash 634 598
Receivables, net 284 269
Prepaid expenses 399 441
Inventories 110 131
Other current assets 28 28
Deferred income taxes 74 111
--------------- ---------------
Total current assets 5,563 6,307
Property and Equipment, net 38,820 36,796
Goodwill, net 8,687 8,088
Casino License Acquisition Costs, net 1,859 1,760
Deferred Income Taxes 718 666
Equity Investment in Casino Millennium 65 -
Other Assets 1,058 1,200
--------------- ---------------
Total $ 56,770 $ 54,817
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,403 $ 2,136
Accounts payable and accrued liabilities 3,511 1,979
Accrued payroll 796 1,268
Taxes payable 1,417 1,088
--------------- ---------------
Total current liabilities 8,127 6,471
Long-Term Debt, less current portion 13,511 14,913
Other Non-current Liabilities 327 371
Minority Interest 29 14
Commitments and Contingencies - -
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;
13,681,900 and 13,680,500 shares outstanding, respectively 145 145
Additional paid-in capital 21,528 21,529
Accumulated other comprehensive earnings 2,856 2,034
Retained earnings 12,076 11,172
--------------- ---------------
36,605 34,880
Treasury stock - 803,876 and 805,276 shares at cost,
respectively (1,829) (1,832)
--------------- ---------------
Total shareholders' equity 34,776 33,048
--------------- ---------------
Total $ 56,770 $ 54,817
=============== ===============
See notes to condensed consolidated financial statements.
-3-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
- --------------------------------------------------------------------------------
For The Three Months Ended March 31,
Dollar amounts in thousands, except for share information 2004 2003
---- ----
Operating Revenue:
Casino $ 8,066 $ 7,520
Hotel, food and beverage 974 821
Other 169 121
----------------- -----------------
9,209 8,462
Less promotional allowances 1,079 1,081
----------------- -----------------
Net operating revenue 8,130 7,381
----------------- -----------------
Operating Costs and Expenses:
Casino 3,056 2,649
Hotel, food and beverage 678 569
General and administrative 2,049 1,817
Depreciation 651 648
----------------- -----------------
Total operating costs and expenses 6,434 5,683
----------------- -----------------
Earnings from Operations 1,696 1,698
Non-operating Income (expense)
Interest expense (422) (527)
Other income, net 81 58
----------------- -----------------
Non-operating income (expense), net (341) (469)
----------------- -----------------
Earnings before Income Taxes and Minority Interest 1,355 1,229
Provision for income taxes 443 466
----------------- -----------------
Earnings before Minority Interest 912 763
Minority interest in subsidiary earnings (15) (8)
Equity in earnings of unconsolidated subsidiaries 7 -
================= =================
Net Earnings $ 904 $ 755
================= =================
Earnings Per Share:
Basic $ 0.07 $ 0.06
================= =================
Diluted $ 0.06 $ 0.05
================= =================
See notes to condensed consolidated financial statements.
-4-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (Unaudited)
- --------------------------------------------------------------------------------
For The Three Months Ended March 31,
Dollar amounts in thousands 2004 2003
---- ----
Net Earnings $ 904 $ 755
Foreign currency translation adjustments 795 555
Change in fair value of interest rate swaps, net of income taxes 27 31
------------------ ------------------
Comprehensive Earnings $ 1,726 $ 1,341
================== ==================
See notes to condensed consolidated financial statements.
-5-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
For The Three Months Ended March 31,
Dollar amounts in thousands 2004 2003
---- ----
Cash Flows from Operating Activities:
Net earnings $ 904 $ 755
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation 651 648
Amortization of deferred financing costs 29 28
Deferred tax expense (benefit) (23) 16
Minority interest in subsidiary earnings 15 8
Equity earnings in unconsolidated subsidiary earnings (7) -
Gain of disposition of real estate option (35) -
Other (4) (3)
Changes in operating assets and liabilities
Receivables (11) 16
Prepaid expenses and other assets - 19
Accounts payable and accrued liabilities (48) (442)
Accrued payroll (487) (710)
Taxes payable 273 468
------------------ ------------------
Net cash provided by operating activities 1,257 809
------------------ ------------------
Cash Flows from Investing Activities:
Purchases of property and equipment (940) (533)
Acquisition of subsidiary, net of $664 in cash acquired - (1,259)
Restricted cash decrease - 3
Proceeds from disposition of assets 202 -
------------------ ------------------
Net cash used in investing activities (738) (1,789)
------------------ ------------------
(continued)
-6-
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended March 31,
Dollar amounts in thousands 2004 2003
---- ----
Cash Flows from Financing Activities:
Proceeds from borrowings $ 6,380 $ 6,999
Principal repayments (7,711) (6,424)
Proceeds from exercise of options 2 7
Purchases of treasury stock - (31)
Other - 2
------------------ ------------------
Net cash (used in) provided by financing activities (1,329) 553
------------------ ------------------
Effect of exchange rate changes on cash 115 120
------------------ ------------------
Decrease in Cash and Cash Equivalents (695) (307)
Cash and Cash Equivalents at Beginning of Period 4,729 4,582
------------------ ------------------
Cash and Cash Equivalents at End of Period $ 4,034 $ 4,275
================== ==================
Supplemental Disclosure of Noncash Financing Activities:
See Note 1 for a summary of the Company's subsidiaries and the abbreviations
used in this section.
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 January 2004, the Company, through its wholly owned Austrian subsidiary CMB,
purchased an additional 40% interest in CM, bringing its total interest to 50%,
by contributing gaming equipment with a net book value of $0.60 million in
exchange for 2,400 additional shares. The contribution of the gaming equipment,
along with a cash contribution made in December 2002 which was accounted for by
CMB on a cost basis in Euro and had a value of $0.29 million on January 3, 2004,
brought the Company's total investment in CM to $0.89 million, of which $0.26
million was allocated to a shareholder loan acquired as part of the transaction.
The difference between the cost and the equity of CM, of $0.57 million, has been
recorded as goodwill.
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $0 in 2004 and $10 in 2003 $ 400 $ 568
================== ==================
Income taxes paid $ - $ -
================== ==================
See notes to condensed consolidated financial statements.
-7-
CENTURY CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Century Casinos, Inc. ("CCI", the "Company") is an international
gaming company. The Company owns and/or manages casino operations in the
United States, South Africa, the Czech Republic and international waters as
follows:
-----------------------------------------------------------------------------------
Parent/Subsidiary Relationship Abbreviation Parent Ownership
Percentage
-----------------------------------------------------------------------------------
Century Casinos, Inc. CCI n/a n/a
-----------------------------------------------------------------------------------
WMCK Venture Corp. WMCK CCI 100%
-----------------------------------------------------------------------------------
WMCK-Acquisition Corp. ACQ WMCK 100%
-----------------------------------------------------------------------------------
Century Casinos Cripple Creek Inc. CCC WMCK 100%
-----------------------------------------------------------------------------------
Century Casinos Africa (Pty) Ltd. CCA CCI 96.5%
-----------------------------------------------------------------------------------
Century Casinos Caledon (Pty) Ltd. CCAL CCA 100%
-----------------------------------------------------------------------------------
Century Casinos West Rand (Pty) Ltd. CCWR CCA 55%
-----------------------------------------------------------------------------------
Rhino Resort Ltd. RRL CCA 50%
-----------------------------------------------------------------------------------
Century Resorts International Limited CRI CCI 100%
-----------------------------------------------------------------------------------
Century Resorts Alberta, Inc. CRA CRI 55%
-----------------------------------------------------------------------------------
Century Resorts Limited CRL CCI 100%
-----------------------------------------------------------------------------------
Century Casinos Management, Inc. CCM CCI 100%
-----------------------------------------------------------------------------------
Century Casinos Nevada, Inc. CCN CCI 100%
-----------------------------------------------------------------------------------
Century Management u. Beteiligungs GmbH CMB CCI 100%
-----------------------------------------------------------------------------------
Casino Millennium a.s. CM CMB 50%
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
-8-
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 625
slot machines, 6 limited stakes gaming tables, 21 hotel rooms and
1 restaurant.
CCA owns and operates The Caledon Hotel, Spa & Casino near Cape
Town, South Africa. The resort has 275 slot machines and 8 gaming
tables, a 92-room hotel, mineral hot springs and spa facility, 3
restaurants, 2 bars, conference facilities and equestrian center.
CMB acquired a 10% equity interest in Casino Millennium located
within a five-star hotel in Prague, Czech Republic through a
$0.24 million cash contribution in December 2002. In January
2004, the Company, through CMB, acquired an additional 40% of
Casino Millennium, bringing its total ownership to 50%. The
investment by the Company for the incremental 40% stake amounted
to $0.60 million and was paid by contributing gaming equipment.
Casino Millennium has 38 slot machines and 15 gaming tables.
CRI serves as concessionaire of small casinos on seven luxury
cruise vessels and provides technical casino services to Casino
Millennium. The Company has a total of 166 slot machines and 27
table games, or approximately 355 gaming positions on the seven
combined shipboard casinos currently in operation. The cruise
vessel Insignia was taken out of service after it completed its
cruise schedule to various destinations in the western
Mediterranean as of September 26, 2003 and resumed operations on
March 29, 2004. The Silver Cloud returned to service on March 27,
2004 following five months of periodic maintenance. Subsequent to
March 31, 2004, the Company opened a casino aboard the Nautica, a
cruise ship operated by Oceania Cruises. The casino is equipped
with 42 slot machines and three gaming tables and expanded the
Company's cruise ship segment to a total of eight casinos.
CRL was formed for the purpose of managing and providing
technical casino services to some of the Company's foreign and
offshore operations.
CCI serves as a holding company, providing corporate and
administrative services to its subsidiaries.
The Company regularly pursues additional gaming opportunities
internationally and in the United States.
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 ("GGB") to award a casino license to Silverstar Development
Limited ("Silverstar") for the western periphery of metropolitan
Johannesburg in terms of its original 1997 application. On November 11,
2003, the Company announced that the GGB's subsequent application for leave
to appeal the October 20 judgment had been denied by the High Court. On
December 3, 2003, the Company announced that the GGB served notice that it
had petitioned the South African Supreme Court of Appeal requesting a
further appeal against the judgment of the High Court. On February 5, 2004,
the Supreme Court of Appeal of South Africa overturned the ruling of the
High Court and granted the GGB's request for leave to appeal. Silverstar
informed the Company that it does not have any indication with regard to
the timing of the appeals process.
-9-
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 ($63.40 million) hotel/casino
resort development would be 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. Silverstar has no value
until a gaming license is issued. 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 some of the Company's foreign and offshore operations. In February
2004, the Company formed CRI for the purposes of providing technical casino
services to Casino Millennium, managing casinos on the cruise ships and
other foreign operations. Subsequent to the filing of the Company's annual
report of Form 10-K, changes were made to the proposed organizational
structure. When completed, CCI will own 96.5% of CRL. The remaining
minority interest in CRL will be held by certain officers of the Company.
These minority shareholders will give up their 3.5% ownership in CCA for
their 3.5% ownership in CRL. CRL will own 100% of CCA. The Company believes
that CRL and CRI will provide favorable tax benefits for the Company.
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 CRI
(previously named CRL), a wholly-owned subsidiary of the Company and by
746306 Alberta Ltd, the owners of the 7.25 acre property and existing hotel
which will be developed into the Celebrations project, if a license is
awarded and all other approvals and funding are obtained. The Celebrations
Casino and Hotel Project proposed by CRA is estimated to cost 16.50 million
Canadian dollars ($12.3 million), including the 2.50 million Canadian
dollars ($1.9 million) contribution of the existing hotel and property by
746306 Alberta Ltd. CRI also entered into a long-term agreement to manage
the casino if a gaming license is awarded. On April 19, 2004, the Company
announced that CRA had been selected as the only one of six applicants to
move to step seven of eight steps of the casino licensing process in
Edmonton, Alberta, Canada. This is not an approval or a guarantee that the
CRA will be issued a casino facility license. Step seven is the
"Investigation stage of the Casino Facility Application Process" which is a
thorough due diligence investigation of the applicant and the key persons
associated with the selected proposal. Although the Company cannot predict
how long the due diligence process will take, if step seven is successfully
completed the eighth step will be a recommendation to the Board of the
Alberta Gaming and Liquor Commission ("AGLC"), by the evaluating committee,
regarding issuance of a casino facility license.
-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. 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. The exchange rates
used to translate balances at the end of the reported periods are as
follows:
March 31, 2004 December 31, 2003 March 31, 2003
South African Rand 6.3095 6.6858 7.8952
Euros 0.8135 0.7938 0.9173
Czech Koruna 26.6959 25.6634 n/a
Canadian Dollars 1.3440 1.2924 n/a
Certain reclassifications have been made to the 2003 financial
information in order to conform to the 2004 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 ("US GAAP") 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 condensed 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, 2003. The results of operations
for the period ended March 31, 2004 are not necessarily indicative of the
operating results for the full year.
-11-
2. STOCK BASED COMPENSATION
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 by the Company 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 March 31, 2004, the Company had one stock-based employee
compensation plan. The plan expired in April 2004. At this time, the
Company does not intend to propose a new employee equity incentive plan.
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
SFAS No. 123 to stock-based employee compensation.
For the three months ended March 31,
Dollar amounts in thousands, except for share information
2004 2003
---- ----
Net earnings, as reported $ 904 $ 755
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects 269 1
------------ --------------
Pro forma net earnings $ 635 $ 754
============ ==============
Earnings per share
Basic As reported $ 0.07 $ 0.06
Pro forma $ 0.05 $ 0.06
Diluted As reported $ 0.06 $ 0.05
Pro forma $ 0.04 $ 0.05
-12-
3. CHANGE IN ACCOUNTING PRINCIPLES AND RECENTLY ISSUED STANDARDS
In December 2003, FASB revised Interpretation No. 46, "Consolidation
of Variable Interest Entities". FIN 46(R) addresses consolidation issues by
business enterprises of variable interest entities in which 1) the equity
interest at risk is not sufficient to finance its activities without
additional subordinated financial support, 2) the equity investors lack one
or more essential characteristics of a controlling financial interest or 3)
the equity investors have voting rights that are not proportionate to their
economic interest. The Company adopted FIN 46(R) on January 1, 2004. The
Company has determined that CM (Note 8) is a variable interest entity (VIE)
as defined by FIN 46 (R). The Company has also determined that it is not
the primary beneficiary as defined by FIN 46 (R) and has, therefore,
accounted for the Company's 50% interest in CM on the equity basis. A
primary beneficiary is the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both as
defined in FIN 46(R). Under the equity method of accounting, the Company
has recognized the difference between the investment and the underlying
cost of the equity as goodwill and reported its percentage of the earnings
in CM as equity in earnings of unconsolidated subsidiaries.
Additionally, the Company has reviewed all 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.
4. INCOME TAXES
The income tax provisions are based on estimated full-year earnings
for financial reporting purposes adjusted for permanent differences.
-13-
5. EARNINGS PER SHARE
Basic and diluted earnings per share for the three months ended March
31, 2004 and 2003 were computed as follows:
For the Three Months Ended March 31,
Dollar amounts in thousands, except for share information 2004 2003
---- ----
Basic Earnings Per Share:
Net earnings $ 904 $ 755
================= ==============
Weighted average common shares 13,681,438 13,579,411
================= ==============
Basic earnings per share $ 0.07 $ 0.06
Diluted Earnings Per Share:
Net earnings, as reported $ 904 $ 755
================= ==============
Weighted average common shares 13,681,438 13,579,411
Effect of dilutive securities:
Stock options and warrants 1,334,123 1,124,382
---------------- ----------------
Dilutive potential common shares 15,015,561 14,703,793
================= ==============
Diluted earnings per share $ 0.06 $ 0.05
================= ==============
Excluded from computation of diluted earnings per share
Due to antidilutive effect:
Options and warrants to purchase common shares 60,000 15,000
Weighted average exercise price $ 3.26 $ 2.27
6. CRIPPLE CREEK, COLORADO
In April 2003, the Company completed construction of a 6,022 square
foot expansion and added a total of 5,000 square feet of gaming space to
Womacks. 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. In January 2004,
the Company sold a purchase option agreement for a property located in
Cripple Creek across Bennett Ave. from Womacks that it had held since 1999,
which would have expired on March 31, 2004, to an unrelated party for a sum
of $0.20 million. As a result of the transaction, the Company recognized a
pre-tax gain of $34.7 thousand in 2004, which is included in other income,
net.
-14-
7. CALEDON, SOUTH AFRICA
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 $2.53 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 $0.34 million 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 Wells Fargo Bank revolving line of credit ("RCF").
In addition to the casino license, hotel and spa, CCAL owns approximately
600 acres of land, which may be used for future expansion.
8. PRAGUE, CZECH REPUBLIC
In January 1999, the Company, through CCM, entered into a 20-year
agreement with Casino Millennium a.s., a Czech company ("CM"), and with
B.H. Centrum a.s., a Czech subsidiary of Bau Holding AG, to operate a
casino in the five-star Marriott Hotel in Prague, Czech Republic. During
2001, Bau Holding AG changed its name to Strabag AG. The Company provided
technical casino services in exchange for 10% of the casino's gross
revenue, and provided gaming equipment for 45% of the casino's net profit.
The hotel and casino opened in July 1999.
In December 2002 the Company through CMB acquired a 10% ownership
interest in CM with the payment of $0.24 million in cash. Effective January
3, 2004, the Company, through CMB, acquired an additional 40% of CM by
contributing gaming equipment with a net book value of $0.60 million. The
contribution of the gaming equipment, along with the cash contribution
which was previously accounted for by CMB on a cost basis in Euro and had a
value of $0.29 million on January 3, 2004 brought the Company's total
investment in CM to $0.89 million. The Company allocated $0.26 million to a
shareholder loan acquired as part of the transaction. CM issued 2,400
additional shares for the contribution of the gaming equipment towards the
Company's additional 40% investment in CM. The difference of $0.57 million
between the cost and the equity in CM has been recorded as goodwill. In
addition to the 50% ownership, the Company retains its rights under the
1999 casino services agreement which, as amended in October 2003, requires
CM to make monthly payments of Euro 7,250 to CRI.
CM had approximately $2.5 million in assets as of March 31, 2004 and
reported earnings for the quarter ended March 31, 2004 of approximately $14
thousand, after expensing casino services fees paid to the Company.
-15-
The Company's estimated maximum exposure to losses at March 31, 2004
consists of the following (Dollar amounts in thousands):
Equity investment in Casino Millennium $ 65
Goodwill 548
Note receivable 251
Other receivables 199
-------------
Total $ 1,063
=============
Casino services fee income for the three months ended March 31, 2004
and 2003 was $27.0 thousand and $0, respectively.
9. GOODWILL (Dollar amounts in thousands):
Balance as of December 31, 2003 $ 8,088
Goodwill recorded in the acquisition of an
additional 40% interest in Casino Millennium,
as valued on January 3, 2004 565
Effect of exchange rate on goodwill 34
-------------
Balance as of March 31, 2004 $ 8,687
=============
10. LONG-TERM DEBT
The principal balance outstanding under the Wells Fargo Bank Revolving
Line of Credit Facility ("RCF") as of March 31, 2004 was $10.68 million
compared to $11.76 million at December 31, 2003. The amount available under
the RCF as of March 31, 2004 was $11.71 million, net of amounts outstanding
as of that date, compared to $11.35 million at December 31, 2003. The loan
agreement includes certain restrictive covenants on financial ratios of
WMCK. The Company is in compliance with the covenants as of March 31, 2004.
The interest rate at March 31, 2004 was 3.47% for $10.0 million outstanding
under LIBOR based provisions of the loan agreement. The remaining balance
of the outstanding debt is subject to interest under the prime based
provisions of the loan agreement at a rate of 4.0%.
The fair value of the Company's interest rate swap derivatives as of
March 31, 2004 and December 31, 2003 of $0.33 million and $0.37 million,
respectively, is reported as an other non-current liability in the
condensed consolidated balance sheets. The net gain on the interest rate
swaps of $27.6 thousand, net of deferred income tax expense of $16.4
thousand for the first three months of 2004, has been reported in
accumulated other comprehensive earnings in the shareholders' equity
section of the accompanying March 31, 2004 condensed consolidated balance
sheet. Net additional interest expense to the Company under the swap
agreements was $67.9 thousand and $0.14 million for the three months ended
March 31, 2004 and 2003, respectively.Including the impact of the swaps and
the amortization of the deferred financing cost, the effective rate on the
borrowings under the RCF was 7.07% and 9.13% for the three months ended
March 31, 2004 and 2003, respectively.
In April 2000, CCAL entered into a loan agreement with PSG Investment
Bank Limited ("PSGIB"), which was subsequently acquired by ABSA Bank
("ABSA"), which provided for a principal loan of approximately $6.20
million (based on an exchange rate of 7.6613 rand per dollar at the time
the funds were advanced) to fund development of the Caledon project. The
outstanding balance and interest rate as of March 31, 2004 and December 31,
2003 was $4.03
-16-
million and $4.14 million, respectively and 17.05% in both years. The
outstanding balance and interest rate on the standby facility with PSGIB as
of March 31, 2004 and December 31, 2003 was $0.40 million and $0.41
million, respectively and 15.1% in both years. The agreement requires
quarterly installments over the remaining term of the loan. The agreement
requires a minimum deposit in the sinking fund equal to four million Rand
(approximately $0.63 million) at the end of each quarter. 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 March
31, 2004.
An unsecured note payable, in the amount of $0.38 million, to a
founding shareholder bears interest at 6%, payable quarterly. The entire
outstanding principal was due and payable on April 1, 2004. Accordingly,
the note is classified as current in the accompanying condensed
consolidated balance sheets as of March 31, 2004 and December 31, 2003. The
entire outstanding principal was paid on April 1, 2004.
An unsecured note payable, in the amount of $90 thousand, to a former
director bears interest at 0% and is classified as current in the
accompanying condensed consolidated balance sheet as of March 31, 2004.
The remaining amount of $0.34 million in debt, as of March 31, 2004,
consists of capital leases.
The consolidated weighted average interest rate on all borrowings was
9.31% and 10.63% for the three months ended March 31, 2004 and 2003,
respectively.
11. SHAREHOLDERS' EQUITY
During the first quarter of 2004, the Company did not purchase any
shares of its common stock on the open market. The Company issued 1,400
shares of treasury stock in February 2004 for employee option exercises.
Subsequent to March 31, 2004, the Company has not purchased shares of its
common stock on the open market.
In January 2004, 60,000 options were issued to the Company's outside
directors with an exercise price of $3.26.
In March 2004, 1,352,710 options were granted by the independent
members of the Company's Incentive Plan Committee to eight officers and
employees of the Company with an exercise price of $2.93. The Employee
Equity Incentive Plan expired in April 2004. At this time, the Company does
not intend to propose a new employee equity incentive plan.
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 the shares to dividends of 20% of
the after-tax profits directly attributable to the 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 March 31, 2004, no dividend has been declared for
the preference shareholders.
-17-
12. 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 own the Caledon Hotel, Spa &
Casino.
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 service 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.
Reclassification adjustments for 2003 have been made to the Colorado
and Corporate segment presentations for corporate bonuses that were charged
to Colorado but are attributable to the consolidated results of operation,
the interest on debt incurred to fund the purchase of the Company's
acquisitions and the repurchase of the Company's common stock, and the
related tax effects. There is no effect on the consolidated results.
-18-
===================================================================================================
Dollar amounts in thousands Colorado South Africa Cruise Ships
===================================================================================================
As of and for the Three Months 2004 2003 2004 2003 2004 2003
-------------------------------
Ended March 31,
==================================================================================================
Property and equipment, net $ 23,174 $ 21,671 $ 14,743 $ 11,977 $ 446 $ 212
==================================================================================================
Total assets $ 32,659 $ 32,448 $ 21,072 $ 16,459 $ 745 $ 418
==================================================================================================
Net operating revenue $ 4,345 $ 4,644 $ 3,320 $ 2,407 $ 438 $ 330
==================================================================================================
Operating expenses (excluding
depreciation) $ 2,563 $ 2,597 $ 2,200 $ 1,710 $ 329 $ 214
==================================================================================================
Depreciation $ 305 $ 352 $ 321 $ 239 $ 17 $ 15
==================================================================================================
Earnings from operations $ 1,477 $ 1,695 $ 799 $ 458 $ 92 $ 101
==================================================================================================
Interest income $ 2 $ 3 $ 39 $ 53 $ - $ -
==================================================================================================
Interest expense,
including debt issuance cost (1) $ (32) $ 24 $ 214 $ 236 $ - $ -
==================================================================================================
Other income, net $ 35 $ - $ - $ - $ - $ -
==================================================================================================
Earnings (loss) before income taxes
and minority interest $ 1,546 $ 1,674 $ 624 $ 275 $ 92 $ 101
==================================================================================================
Income tax expense (benefit) $ 587 $ 636 $ 208 $ 111 $ 3 $ 38
==================================================================================================
Minority interest expense $ - $ - $ - $ (8) $ - $ -
==================================================================================================
Equity in earnings of unconsolidated
subsidiaries $ - $ - $ - $ - $ - $ -
==================================================================================================
Net earnings (loss) $ 959 $ 1,038 $ 416 $ 156 $ 89 $ 63
==================================================================================================
Reconciliation to EBITDA:
==================================================================================================
Net earnings (loss) (US GAAP) $ 959 $ 1,038 $ 416 $ 156 $ 89 $ 63
==================================================================================================
Interest income $ (2) $ (3) $ (39) $ (53) $ - $ -
==================================================================================================
Interest expense (1) $ (32) $ 24 $ 214 $ 236 $ - $ -
==================================================================================================
Income taxes $ 587 $ 636 $ 208 $ 111 $ 3 $ 38
==================================================================================================
Depreciation $ 305 $ 352 $ 321 $ 239 $ 17 $ 15
==================================================================================================
EBITDA $ 1,817 $ 2,047 $ 1,120 $ 689 $ 109 $ 116
==================================================================================================
(1) The Company has not repaid the funds advanced for the Company's
acquisitions or the repurchase of the Company's common stock, therefore
the debt and accumulated interest allocated to the Corporate & Other
segment exceeded the total outstanding borrowing under the RCF in the
Colorado segment.
-19-
================================================================================================================
Dollar amounts in thousands Corporate and Other Inter-segment Elimination Consolidated
================================================================================================================
As of and for the Three Months 2004 2003 2004 2003 2004 2003
-------------------------------
Ended March 31,
================================================================================================================
Property and equipment, net $ 457 $ 1,156 $ - $ - $ 38,820 $ 35,016
================================================================================================================
Total assets $ 2,294 $ 2,726 $ - $ - $ 56,770 $ 52,051
================================================================================================================
Net operating revenue $ 27 $ - $ - $ - $ 8,130 $ 7,381
================================================================================================================
Operating expenses (excluding
depreciation) $ 691 $ 514 $ - $ - $ 5,783 $ 5,035
================================================================================================================
Depreciation $ 8 $ 42 $ - $ - $ 651 $ 648
================================================================================================================
Earnings from operations $ (672) $ (556) $ - $ - $ 1,696 $ 1,698
================================================================================================================
Interest income $ 90 $ 86 $ (85) $ (85) $ 46 $ 57
================================================================================================================
Interest expense, $ 325 $ 352 $ (85) $ (85) $ 422 $ 527
including debt issuance cost
================================================================================================================
Other income, net $ - $ 1 $ - $ - $ 35 $ 1
================================================================================================================
Earnings (loss) before income taxes
and minority interest $ (907) $ (821) $ - $ - $ 1,355 $ 1,229
================================================================================================================
Income tax expense (benefit) $ (355) $ (319) $ - $ - $ 443 $ 466
================================================================================================================
Minority interest expense $ (15) $ - $ - $ - $ (15) $ (8)
================================================================================================================
Equity in earnings of
unconsolidated subsidiaries $ 7 $ - $ - $ - $ 7 $ -
================================================================================================================
Net earnings (loss) $ (560) $ (502) $ - $ - $ 904 $ 755
================================================================================================================
Reconciliation to EBITDA:
================================================================================================================
Net earnings (loss) (US GAAP) $ (560) $ (502) $ $ - $ 904 $ 755
================================================================================================================
Interest income $ (90) $ (86) $ 85 $ 85 $ (46) $ (57)
================================================================================================================
Interest expense $ 325 $ 352 $ (85) $ (85) $ 422 $ 527
================================================================================================================
Income taxes $ (355) $ (319) $ - $ - $ 443 $ 466
================================================================================================================
Depreciation $ 8 $ 42 $ - $ - $ 651 $ 648
================================================================================================================
EBITDA $ (672) $ (513) $ - $ - $ 2,374 $ 2,339
================================================================================================================
-20-
13. OTHER INCOME, NET
Other income, net, consists of the following:
For the Three Months Ended March 31,
Dollar amounts in thousands 2004 2003
---- ----
Interest income $ 46 $ 57
Gain on sale of real estate option (1) 35 -
Foreign currency exchange gains - 1
---------------- -----------------
$ 81 $ 58
================ =================
(1) In January 2004, the Company sold a purchase option agreement for
a property located in Cripple Creek across Bennett Ave. from Womacks
that it had held since 1999, which would have expired on March 31,
2004, to an unrelated party for a sum of $0.2 million. As a result of
the transaction, the Company recognized a pre-tax gain of $34.7
thousand in 2004.
14. PROMOTIONAL ALLOWANCES
Promotional allowances presented in the condensed consolidated
statements of earnings for the period ended March 31, 2004 and March
31, 2003 include the following:
For the Three Months Ended March 31,
Dollar amounts in thousands 2004 2003
---- -----
Food & Beverage and Hotel Comps $ 373 $ 327
Free Plays or Coupons 379 401
Player Points 327 353
---------------- -----------------
Total Promotional Allowances $ 1,079 $ 1,081
================ =================
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 condensed consolidated balance sheets.
-21-
CENTURY CASINOS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
Forward-Looking Statements, Business Environment and Risk Factors
Forward-looking statements and 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 condensed 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.
-22-
Results of Operations
Three Months Ended March 31, 2004 vs. 2003
- ------------------------------------------
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 own the Caledon Hotel, Spa & Casino.
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 service
contracts.
Consolidated Results of Operations
The Company reported net operating revenue of $8.1 million and $7.4 million
for the quarters ended March 31, 2004 and 2003, respectively. Casino revenue for
the quarters ended March 31, 2004 and 2003, was $8.07 million compared to $7.52
million, respectively. Casino expense was $3.06 million and $2.65 million for
the quarters ended March 31, 2004 and 2003, respectively. General and
administrative expense was $2.05 million for the quarter ended March 31, 2004
compared to $1.82 million in the quarter ended March 31, 2003. Depreciation
expense was $0.65 million in both quarters ended March 31, 2004 and 2003.
Total Company earnings from operations were $1.70 million for both quarters
ended March 31, 2004 and 2003.
Tax expense for the quarters ended March 31, 2004 and 2003 were $0.44
million, and $0.47 million, respectively.
The Company's net earnings for the quarters ended March 31, 2004 and 2003
were $0.90 million or $0.07 per share, and $0.76 million or $0.06 per share in
2003, respectively.
A discussion by business segment follows below.
-23-
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 quarters ended
March 31, 2004 and 2003 were as follows:
For the three months ended March 31, Increase % of Change
(Decrease)
Dollar amounts in thousands 2004 2003
---- ----
Operating Revenue
Casino $ 4,875 $ 5,293 $ (418) -7.9%
Hotel, food and beverage 324 296 28 9.5%
Other (including promotional allowances) (854) (945) 91 9.6%
---------------- -----------------
Net operating revenue 4,345 4,644 (299) -6.4%
---------------- -----------------
Costs and Expenses
Casino 1,626 1,641 (15) -0.9%
Hotel, food and beverage 88 69 19 27.5%
General and administrative 849 887 (38) -4.3%
Depreciation 305 352 (47) -13.4%
---------------- -----------------
2,868 2,949 (81) -2.7%
---------------- -----------------
Earnings from operations 1,477 1,695 (218) -12.9%
Interest (expense) 32 (24) 56 233.3%
Other income, net 37 3 34 1,133.3%
---------------- -----------------
Earnings before income taxes 1,546 1,674 (128) -7.6%
Income tax expense 587 636 (49) -7.7%
---------------- -----------------
Net Earnings $ 959 $ 1,038 $ (79) -7.6%
================ =================
Excluded from the above results are corporate bonuses that were previously
charged to Womacks, but which are attributable to the consolidated results of
operations, the interest on debt incurred to fund the purchase of the Company's
acquisitions and the repurchase of the Company's common stock and related tax
effects. Reclassifications have been made to the 2003 financial information in
order to conform to the 2004 presentation.
-24-
Overall operating results were impacted by the casino results detailed
below.
Market Data
------------------------------------------------------------------------------
For the three months ended March 31, 2004 2003
---- ----
------------------------------------------------------------------------------
Market share of the Cripple Creek market 14.32% 16.14%
------------------------------------------------------------------------------
Average number of slot machines 618 666
------------------------------------------------------------------------------
Market share of Cripple Creek gaming devices 14.36% 15.70%
------------------------------------------------------------------------------
Average slot machine win per day 85 dollars 87 dollars
------------------------------------------------------------------------------
Cripple Creek average slot machine win per day 85 dollars 85 dollars
------------------------------------------------------------------------------
Womacks' market share is 1.8 percentage points lower than a year ago. The
covered parking garages provided by two competitors gives them somewhat of an
advantage during the winter months. In recent months, the Company has committed
approximately $3 million to upgrade the product mix on the gaming floor, improve
the player tracking system and introduce cashless gaming machines. These ongoing
improvements are expected to add to the customer experience and further improve
customer service.
During this period, the relative percentage of personnel cost, device fees
and the cost of participation machines to net operating revenue contributed to
the erosion in earnings from operations. Management continues to evaluate these
overhead costs to insure a good cost benefit relationship is maintained.
During the three months ended March 31, 2004, Womacks leased approximately
an average of 43 slot machines 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 $0.10 million and $0.12 million for the quarters ended
March 31, 2004 and 2003, respectively.
Management continues to focus on marketing the casino through its Gold Club
in which patrons can earn rewards, that can be redeemed for discounted or free
meals, rooms, cash and other prizes, as well as through increased TV and radio
advertising. Management continues to place emphasis on further refining the
product mix, upgrading both the interior of the facilities, as well as the slot
machine mix.
-25-
Hotel, Food and Beverage
Hotel revenue, included in hotel, food and beverage revenue, increased by
7.8%, as a result of higher hotel occupancy rate to 92.1% from 89.0% in 2004 and
2003. All of the revenue generated by the hotel operations is derived from comps
to better players and is included in promotional allowances.
In the first quarter of 2004 food and beverage revenue increased 9.9% when
compared to the same period in 2003. In the first quarter of 2003, the Gold Mine
restaurant was closed and Bob's Grill was expanded in order to provide better
service on the gaming floor and improve accessibility. The cost of food and
beverage promotional allowances, which are included in casino costs, increased
to $0.24 million in the first quarter of 2004 from $0.22 million in the first
quarter of 2003.
Other
The Company allocated $0.32 million in interest expense to the Corporate &
Other segment during the first quarter of 2004. Interest expense on the amounts
advanced, but not repaid, to fund the Company's acquisitions and the repurchase
of the Company's common stock is calculated using the effective rate on all
borrowings under the RCF. The Company reduces the interest expense incurred by
WMCK under the RCF by the amount of interest allocated to the Corporate & Other
segment. The Company has not repaid the funds advanced for the Company's
acquisitions or the repurchase of the Company's common stock, and therefore the
debt and accumulated interest allocated to the Corporate & Other segment
exceeded the total outstanding borrowing. As a result Womacks reported a net of
$32.8 thousand in interest income and debt issuance cost. During the same period
in 2003, Womacks reported interest expense and debt issuance cost, of $23.4
thousand, net of $0.35 million in interest expense allocated to the Corporate &
Other segment. Such decrease is attributable to the decrease in the
weighted-average interest rate on the borrowings under the RCF, including
effects of swap agreements, to 7.07% from 9.13% and a reduction in the average
outstanding balance under the RCF to $11.15 million in the first quarter of 2004
from $12.9 million in the first quarter of 2003.
In January 2004, the Company sold a purchase option agreement that it had
held since 1999, which would have expired on March 31, 2004, to an unrelated
party for a sum of $0.20 million. As a result of the transaction, the Company
recognized a pre-tax gain of $34.7 thousand in 2004, which is included in Other
income, net.
The Colorado segment recognized income tax expense of $0.59 million in the
first quarter of 2004 versus $0.64 million in the first quarter of 2003,
principally the result of a decrease in earnings before income taxes.
-26-
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 Hotel, Spa & Casino.
Improvement in the Rand versus the dollar when comparing the first quarter
of 2003 to the first quarter of the 2004 has had a positive impact on the
reported revenues and a negative impact on expenses.
Operating results in U.S. dollars for the three months ended March 31, 2004
and 2003 were as follows: (See next page for results in Rand)
CALEDON
For the three months ended March 31, Increase % of
(Decrease) Change
Dollar amounts in thousands 2004 2003
---- ----
Operating Revenue
Casino $ 2,778 $ 1,904 $ 874 45.9%
Hotel, food and beverage 650 525 125 23.8%
Other (including promotional
allowances (108) (22) (86) -390.9%
---------------- -----------------
Net operating revenue 3,320 2,407 913 37.9%
---------------- -----------------
Costs and Expenses
Casino 1,101 794 307 38.7%
Hotel, food and beverage 590 500 90 18.0%
General and administrative 473 330 143 43.3%
Depreciation 321 239 82 34.3%
---------------- -----------------
2,485 1,863 622 33.4%
---------------- -----------------
Earnings from operations 835 544 291 53.5%
Interest expense (214) (236) (22) -9.3%
Other income, net 36 45 (9) -20.0%
---------------- -----------------
Earnings before income taxes 657 353 304 86.1%
Income tax expense 216 132 84 63.6%
---------------- -----------------
Net Earnings $ 441 $ 221 $ 220 99.6%
================ =================
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative $ 36 $ 86 $ (50) -58.1%
---------------- ----------------
Loss from operations (36) (86) (50) -58.1%
Other income, net 3 8 (5) -62.5%
---------------- ----------------
Loss before income taxes (33) (78) (45) -57.7%
Income tax benefit 8 21 (13) -61.9%
---------------- ----------------
Net Loss $ (25) $ (57) $ (32) -56.1%
================ ================
MINORITY INTEREST EXPENSE $ - $ 8 $ (8) -100.0%
---------------- ----------------
SOUTH AFRICA NET EARNINGS $ 416 $ 156 $ 260 166.7%
================ ================
- ------------------------------------------------------------------------------------------------------
Average exchange rate (Rand/USD) 6.72 8.26 18.6%
- ------------------------------------------------------------------------------------------------------
-27-
Operating results in Rand for the three months ended March 31, 2004 and 2003 are
as follows:
CALEDON
For the three months ended March 31, Increase % of
(Decrease) Change
Rand amounts in thousands 2004 2003
---- ----
Operating Revenue
Casino R 18,672 R 15,723 R 2,949 18.8%
Hotel, food and beverage 4,361 4,324 37 0.9%
Other (including promotional
allowances (737) (181) (556) -307.2%
---------------- ---------------
Net operating revenue 22,296 19,866 2,430 12.2%
---------------- ---------------
Costs and Expenses
Casino 7,397 6,569 828 12.6%
Hotel, food and beverage 3,967 4,135 (168) -4.1%
General and administrative 3,184 2,734 450 16.5%
Depreciation 2,155 1,974 181 9.2%
---------------- ---------------
16,703 15,412 1,291 8.4%
---------------- ---------------
Earnings from operations 5,593 4,454 1,139 25.6%
Interest expense (1,439) (1,950) (511) -26.2%
Other income, net 242 376 (134) -35.6%
---------------- ---------------
Earnings before income taxes 4,396 2,880 1,516 52.6%
Income tax expense 1,439 1,078 361 33.5%
---------------- ---------------
Net Earnings R 2,957 R 1,802 R 1,155 64.1%
================ ===============
CENTURY CASINOS AFRICA
Costs and Expenses
General and administrative R 240 R 705 R (465) -66.0%
---------------- ---------------
Loss from operations (240) (705) (465) -66.0%
Other income, net 22 66 (44) -66.7%
---------------- ---------------
Loss before income taxes (218) (639) (421) -65.9%
Income tax benefit 55 191 (136) -71.2%
---------------- ---------------
Net Loss R (163) R (448) R (285) -63.6%
================ ===============
MINORITY INTEREST EXPENSE BENEFIT R - R 71 R (71) -100.0%
---------------- ---------------
SOUTH AFRICA NET EARNINGS R 2,794 R 1,283 R 1,511 117.8%
================ ===============
-28-
Casino Market Data (in Rand)
------------------------------------------------------------------------
For the three months ended March 31, 2004 2003
---- ----
------------------------------------------------------------------------
Market share of the Western Cape market 5.85% 6.07%
------------------------------------------------------------------------
Market share of Western Cape gaming devices 10.8% 10.5%
------------------------------------------------------------------------
Average number of slot machines 275 275
------------------------------------------------------------------------
Average slot machine win per day 694 Rand 597 Rand
------------------------------------------------------------------------
Average number of tables 8 8
------------------------------------------------------------------------
Average table win per day 1,779 Rand 1,702 Rand
------------------------------------------------------------------------
The results discussed below are based on the Rand to eliminate the effect
of fluctuations in foreign currency exchange rates.
The 18.8% increase in the casino revenue is attributable to the successful
marketing efforts, e.g. introduction of cash couponing, an expanded smoking
section and improved employee and management training. The Company markets an
array of amenities at the resort to its guests as a complement to the gaming
experience. These currently include a 92-room hotel, a variety of dining
experiences, the historic mineral hot spring and spa, the outdoor experience (a
team building facility) and the equestrian center.
The 0.56 million Rand change in other revenue (including promotional
allowances) is attributable to the introduction of cash couponing in the second
quarter of 2003 and to the expanded use of player points to attract customers.
Hotel, Food and Beverage
Conferences and trade shows held at the resort play a significant role in
the operation of the hotel. Management is attempting to gain additional exposure
in this area through marketing efforts. A number of repairs in the hotel
infrastructure, including electrical and plumbing, were undertaken in 2003 in
order to increase the quality of the facility. Management has taken measures to
offset the inflationary pressures in South Africa which have driven up base
costs such as labor, supplies and utilities.
Hotel revenue decreased 12.4% in the first quarter of 2004 compared to the
first quarter of 2003. The average hotel occupancy rate in the first quarter of
2004 was 53% compared to 58% in the first quarter of 2003. Conference sales
decreased 21.3%, while leisure sales improved 10.3%.
Food and beverage revenue increased 11.8% in the first quarter of 2004
compared to the first quarter of 2003, primarily as a result of changes in food
and beverage facilities layout, operating hours and a general price increase.
Other
Interest expense, including debt issuance cost, decreased 26.2% as the
principal balance of the term loans and capitalized leases are repaid. The
weighted-average interest rate on the borrowings under the ABSA loan agreement
was 16.9% in the first three months of 2004 and 2003.
-29-
Cruise Ships
Cruise ships' operating results for the periods ended March 31, 2004
and 2003 were as follows:
For the three months ended March 31, Increase
(Decrease) % Change
---------- -----------
Dollar amounts in thousands 2004 2003
---- ----
Operating Revenue
Casino $ 413 $ 323 90 27.9%
Other 25 7 18 257.1%
---------------- ----------------
Net operating revenue 438 330 108 32.7%
---------------- ----------------
Costs and Expenses
Casino 329 214 115 53.7%
Depreciation 17 15 2 13.3%
---------------- ----------------
346 229 117 51.1%
---------------- ----------------
Earnings from operations 92 101 (9) -8.9%
Other income, net - -
---------------- ----------------
Earnings before income taxes 92 101 (9) -8.9%
Income tax expense 3 38 (35) -92.1%
---------------- ----------------
Net Earnings $ 89 $ 63 26 41.3%
================ ================
In the first quarter of 2004, the Company operated casinos on a total of
seven ships: four on Silverseas, one on the World of ResidenSea and two on
Oceania Cruises, compared to a total of four ships during the same period in
2003. Two ships, the Silver Cloud and the Insignia, resumed operations late in
the first quarter of 2004 and only contributed marginally to the results. The
Silver Cloud, a cruise ship operated by Silverseas cruises, resumed its
operations on March 27, 2004 following five months of periodic maintenance. The
Insignia, a cruise ship operated by Oceania Cruises, resumed its operations on
March 29, 2004 following its five-month inaugural voyage, which ended in
September 2003.
Subsequent to March 31, 2004, the Company opened a casino aboard the
Nautica, a cruise ship operated by Oceania Cruises. This casino opening expanded
the cruise ship segment to a total of eight casinos, with a total of 446 gaming
positions.
We experience severe fluctuations in the revenue generated on each cruise
depending on the quality of the players. This is a condition that we do not
control.
Concession fees paid to the ship operators in accordance with the
agreements accounted for $0.17 million and $0.12 million of the total casino
expenses incurred in first three months ended March 31, 2004 and 2003,
respectively.
The decrease in income tax expense is attributable to the assignment of the
concession agreements from CCI to CRI as of October 1, 2003. The income assigned
to CCI was taxed at a U.S. effective rate of approximately 38%. The income
assigned to CRI, the Company's wholly owned subsidiary in Mauritius, is taxed at
an effective rate of 3%.
-30-
Corporate & Other
For the three months ended March 31, Increase
(Decrease) % Change
----------- ----------
Dollar amounts in thousands 2004 2003
---- ----
Operating Revenue
Other $ 27 $ - $ 27 n/a
---------------- -----------------
Net Operating Revenue 27 - 27 n/a
Costs and Expenses
General and administrative 691 514 177 34.4%
Depreciation 8 42 (34) -81.0%
---------------- -----------------
699 556 143 25.7%
---------------- -----------------
Loss from operations (672) (556) 116 20.9%
Interest expense (325) (352) (27) -7.7%
Other income, net 90 87 3 3.4%
---------------- -----------------
Loss before income taxes and minority (907) (821) 86 10.5%
interest
Income tax benefit (355) (319) 36 11.3%
Minority interest expense (15) - 15 n/a
Equity in earnings of unconsolidated
subsidiaries 7 - 7 n/a
---------------- -----------------
Net Loss $ (560) $ (502) $ 58 11.6%
================ =================
Included in the above results are corporate bonuses that were previously
charged to Womacks, but which are attributable to the consolidated results of
operations, the interest on debt incurred to fund the Company's acquisitions and
the repurchase of the Company's common stock, and related tax effects.
Reclassifications have been made to the 2003 financial information in order to
conform to the 2004 presentation. Additionally, general and administrative
expenses increased quarter over quarter largely due to an increase in the
current year estimate for corporate bonuses based on management's current
estimation of annual results.
The decrease in depreciation expense is attributable to the acquisition of
50% of CM. Effective January 3, 2004, the Company through its wholly-owned
subsidiary, CMB, acquired an additional 40% of CM by contributing gaming
equipment, valued at approximately $0.60 million. The gaming equipment,
previously allocated to and depreciated in the Corporate & Other segment, is
depreciated by CM and therefore affects the equity in earnings of unconsolidated
subsidiaries (see Note 8 to the condensed consolidated financial statements).
Minority interest expense is comprised of $14.6 thousand for the 3.5%
minority interest in the earnings of CCA. Equity in earnings of unconsolidated
subsidiaries is comprised of the Company's 50% interest in CM earnings.
-31-
Liquidity and Capital Resources
Cash and cash equivalents totaled $4.0 million plus restricted cash of
$0.63 million at March 31, 2004, and the Company had deficit working capital of
$2.56 million. 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 million ($22.39 million net of the quarterly reduction)
and unused borrowing capacity of approximately $11.71 million at March 31, 2004.
Under the terms of the RCF, the maturity date of the borrowing commitment is
August 2007 and the funds available under the RCF are reduced by $0.7 million
each quarter beginning with the first quarter of 2003. The Company has the
flexibility to use the funds for various business projects and investments.
For the three months ended March 31, 2004, cash provided by operating
activities was $1.3 million compared with $0.8 million in the prior-year period.
Please refer to management's discussion of the results of operation.
Cash used in investing activities of $0.7 million for the first three
months of 2004 include $0.19 million towards the upgrade of the slot accounting
system, $0.26 million towards new slot games, $48 thousand for new slot stools
and $7 thousand for restaurant equipment at Womacks, $0.2 million in
improvements to the property in Caledon, South Africa, $0.1 million in
expenditures to outfit the cruise ships and $85 thousand in expenditures for
other long-lived assets, less $0.2 million in proceeds from the disposition of
assets. Cash used in investing activities of $1.8 million for the first three
months of 2003 consisted of: $0.2 million towards the expansion of the Womacks
casino at the rear of the property that was completed in the second quarter of
2003 and provided approximately 5,000 square feet of additional gaming space;
$95 thousand for additional improvements to the property in Caledon, South
Africa, principally additional capitalized building costs related to the
original construction; $1.3 million towards the purchase of the remaining 35%
interest in Century Casinos Caledon (Pty) Limited, $1.0 million of which was
applied against the minority shareholder liability and $0.3 million of which
increased the carrying value of the land in Caledon; $79 thousand principally
for outfitting one of the two new casinos aboard the luxury cruise ships
operated by Oceania; and the balance of $0.2 million due to expenditures for
other long lived assets.
Cash used in financing activities of $1.3 million for the first three
months of 2004 consisted of net repayments of $1.1 million under the RCF with
Wells Fargo, net repayments of $0.3 under the loan agreement with ABSA and other
net repayments of $38 thousand, less net borrowing of $90 thousand from a former
director and $2 thousand in proceeds from the exercise of stock options. Cash
from financing activities of $0.6 million for the first three months of 2003
consisted of net borrowings of $2.2 million under the RCF with Wells Fargo plus
$7 thousand in proceeds from the exercise of stock options, less net repayments
of $0.3 million under the loan agreement with ABSA, $1.2 million to acquire a
loan to CCAL held by the minority shareholder, the repurchase of the Company's
stock on the open market, at a cost of $31 thousand, and other net repayments of
$0.1 million.
In January 2000, CCI entered into an 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.
-32-
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 CRI (previously named CRL), a wholly owned
subsidiary of the Company and by 746306 Alberta Ltd, the owners of the 7.25 acre
property and existing hotel which will be developed into the Celebrations
project, if a license is awarded and all other approvals and funding are
obtained. The Celebrations Casino and Hotel Project proposed by CRA is valued at
16.5 million Canadian dollars ($12.3 million), including the contribution of the
existing hotel and property, valued at 2.5 million Canadian dollars ($1.9
million). On April 19, 2004, the Company announced that CRA had been selected as
the only one of six applicants to move to step seven of eight steps of the
casino licensing process in Edmonton, Alberta, Canada. This is not an approval
or a guarantee that the CRA will be issued a casino facility license. Step seven
is the "Investigation stage of the Casino Facility Application Process" which is
a thorough due diligence investigation of the applicant and the key persons
associated with the selected proposal. Although the Company cannot predict how
long the due diligence process will take, once step seven is successfully
completed, the eighth step will be a recommendation to the Board of the AGLC, by
the evaluating committee, regarding issuance of a casino facility license.
In January 2004, the Company signed commitments for gaming equipment and
upgrades to its slot accounting system at Womacks totaling approximately $3.0
million. As of March 31, 2004 the Company has expended or accrued $2.1 million
towards the commitments.
The Company's Board of Directors has approved a discretionary program to
repurchase up to $5 million of the Company's outstanding common stock. During
the first three months of 2004, the Company did not purchase any shares of its
common stock on the open market. Through March 31, 2004, the Company had
repurchased 2,559,004 shares of its common stock at a total cost of
approximately $3.8 million.
Management believes that the Company's cash at March 31, 2004, together
with expected cash flows from operations, its borrowing capacity under the RCF
and its ability to secure additional project financing with competitive terms
will be sufficient to fund its anticipated capital expenditures, pursue
additional business growth opportunities for the foreseeable future, and satisfy
its debt repayment obligations.
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.
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.
-33-
In January 2004, the Company adopted FASB revised Interpretation 46 ("FIN 46
(R)"), "Consolidation of Variable Interest Entities". FIN 46(R) addresses
consolidation issues by business enterprises of variable interest entities in
which 1) the equity interest at risk is not sufficient to finance its activities
without additional subordinated financial support, 2) the equity investors lack
one or more essential characteristics of a controlling financial interest or 3)
the equity investors have voting rights that are not proportionate to their
economic interest. The Company has determined that CM (Note 8) is a variable
interest entity (VIE) as defined by FIN 46 (R). The Company has also determined
that it is not the primary beneficiary as defined by FIN 46 (R) and has,
therefore, accounted for the Company's 50% interest in CM on the equity basis.
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.
SFAS No. 142 "Goodwill and Other Intangible Assets" 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 its evaluation, the Company has deemed the casino license
costs to have an indefinite life. Goodwill recognized in the acquisition of 40%
of the outstanding stock of CM, which has been accounted for on the equity
method, was $0.57 million. Included in assets at March 31, 2004 is unamortized
goodwill of approximately $8.69 million and unamortized casino license costs of
approximately $1.86 million. 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 March 31, 2004.
-34-
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. An appraisal of the property, which was completed
on January 26, 2004, continues to support the net fair value of the assets as
recorded in the Consolidated Balance Sheet as of March 31, 2004.
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.
-35-
CENTURY CASINOS, INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 March 31,
2004. Actual results may differ materially.
Interest Rate Sensitivity
The Company is subject to interest rate risk on the outstanding borrowing
under the RCF 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 one remaining interest-rate swap agreement on a total of $4.0
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 paid a LIBOR-based
fixed rate of 5.55% and received 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. With the expiration of the swap agreement on the $7.5
million notional amount of debt on October 1, 2003, each hypothetical 100 basis
point increase results in an increased use of $40 thousand in cash on an annual
basis. In an environment of falling interest rates, as we have seen in the last
two years, the swap agreements are disadvantageous. Without the swap agreements
the weighted-average interest rate on the RCF for the quarters ended March 31,
2004 and 2003 would have been 4.63% and 4.72%, respectively. The Company has not
entered into any new swap agreements subsequent to March 31, 2004.
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 Hotel, Spa & Casino. A hypothetical devaluation of 10% in the dollar
vs. the rand based on the exchange rate as of March 31, 2004 would reduce the
value of the Company's investment by approximately $1.7 million.
* * * * * * * * * * * * * * * * * * * *
-36-
CENTURY CASINOS, INC. AND SUBSIDIARIES
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) as of the end of the period covered by this report. 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.
* * * * * * * * * * * * * * * * * * * *
-37-
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:
10.131 Adjustment/Amendment No. 3 to Management Agreement by
and between Century Casinos Inc. and Flyfish
Casino Consulting A.G. dated March 29, 2004.
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Chairman of the Board and
Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Vice-Chairman and
President.
31.3 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, 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 March 9, 2004, the Registrant furnished a Current Report on Form
8-K, reporting Item 12, 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
December 31, 2004.
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
Date: May 13, 2004
-38-