CENTURY CASINOS INC /CO/ - Quarter Report: 2006 September (Form 10-Q)
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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Form
10-Q
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___X___
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2006
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OR
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_______
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ____________ to ___________
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Commission
file number
0-22290
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 CENTURY
CASINOS, INC.
(Exact
name of registrant as specified in its charter)
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DELAWARE
(State
or other jurisdiction of incorporation or organization)
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84-1271317
(I.R.S.
Employer Identification No.)
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1263
Lake Plaza Drive Suite A, Colorado Springs, Colorado
80906
(Address
of principal executive offices)
(Zip
Code)
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(719)
527-8300
(Registrant’s
telephone number, including area code)
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Indicate
by
check mark whether the registrant (1) has 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 ___
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Indicate
by
check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer __ Accelerated filer _X_ Non-accelerated filer
__
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Indicate
by
check mark whether the registrant is a shell company (as defined
in Rule
12b-2 of the Exchange Act). Yes___ No _X_
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Indicate
the
number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
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Common
stock, $0.01 par value, 22,980,567 shares outstanding as of
November
9,
2006
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--1--
CENTURY
CASINOS, INC.
FORM
10-Q INDEX
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Page
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PART
I
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FINANCIAL
INFORMATION
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Number
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Item
1.
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Condensed
Consolidated Financial Statements (unaudited)
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Condensed
Consolidated Balance Sheets as of September
30, 2006 and December 31, 2005
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3
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Condensed
Consolidated Statements of Earnings for the Three and Nine Months
Ended
September 30, 2006 and 2005
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4
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Condensed
Consolidated Statements of Comprehensive Earnings for the Three and
Nine
Months Ended September 30, 2006 and 2005
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5
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Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2006 and 2005
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6
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Notes
to Condensed Consolidated Financial Statements
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8
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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22
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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45
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Item
4.
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Controls
and Procedures
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45
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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46
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Item
1A.
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Risk
Factors
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46
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Item
6.
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Exhibits
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46
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SIGNATURES
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47
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--2--
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
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Amounts
in thousands, except for share information
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September
30, 2006
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December
31, 2005
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$
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32,013
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$
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37,167
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Restricted
cash
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1,916
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947
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Receivables,
net
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672
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293
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Prepaid
expenses
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922
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518
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Inventories
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305
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209
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Other
current assets
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706
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927
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Deferred
income taxes - foreign
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214
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72
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Total
current assets
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36,748
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40,133
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Property
and Equipment, net
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114,306
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69,602
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Goodwill
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18,295
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8,662
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Casino
Licences
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2,059
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1,845
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Deferred
Income Taxes - foreign
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456
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380
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Note
Receivable (see Note 1)
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4,790
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-
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Other
Assets
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2,955
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2,941
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Total
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$
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179,609
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$
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123,563
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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Current
Liabilities:
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Current
portion of long-term debt
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$
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6,037
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$
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1,789
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Accounts
payable and accrued liabilities
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9,212
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5,504
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Accrued
payroll
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1,667
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1,149
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Taxes
payable
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1,002
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1,189
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Other
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19
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8
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Total
current liabilities
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17,937
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9,639
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Long-Term
Debt, less current portion
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55,620
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17,934
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Deferred
Income - Sale of Gauteng Interest (see Note 1)
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5,399
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-
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Deferred
Tax Liability - Domestic
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99
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215
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Minority
Interest
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5,563
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4,444
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Commitments
and Contingencies
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Shareholders’
Equity:
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Preferred
stock; $.01 par value; 20,000,000 shares authorized; no shares
issued or
outstanding
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-
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-
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Common
stock; $.01 par value; 50,000,000 shares authorized; 23,168,443
and
22,568,443 shares issued, respectively; 22,980,567
and 22,380,567 shares outstanding,
respectively
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232
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226
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Additional
paid-in capital
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69,667
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68,571
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Accumulated
other comprehensive earnings
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329
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2,568
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Retained
earnings
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25,188
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20,391
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95,416
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91,756
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Treasury
stock - 187,876 shares at cost
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(425)
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(425)
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Total
shareholders’ equity
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94,991
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91,331
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Total
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$
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179,609
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$
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123,563
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See
notes
to condensed consolidated financial statements.
--3--
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
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For
The Three Months
Ended
September 30,
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For
The Nine Months
Ended
September 30,
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Amounts
in thousands, except for share information
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2006
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2005
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2006
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2005
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Operating
Revenue:
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Casino
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$
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16,261
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$
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9,784
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$
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36,667
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$
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27,572
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Hotel,
food and beverage
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1,627
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1,242
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3,981
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3,411
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Other
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298
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186
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758
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557
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18,186
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11,212
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41,406
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31,540
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Less
promotional allowances
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1,208
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1,182
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3,093
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3,374
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Net
operating revenue
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16,978
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10,030
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38,313
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28,166
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Operating
Costs and Expenses:
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Casino
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6,922
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3,749
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15,005
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10,751
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Hotel,
food and beverage
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1,399
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729
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2,800
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2,084
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General
and administrative
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5,118
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2,760
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12,667
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8,235
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Property
write-downs and other write-offs, net
of recoveries
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(420)
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-
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(405)
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(30)
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Depreciation
and amortization
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1,293
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847
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2,998
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2,637
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Total
operating costs and expenses
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14,312
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8,085
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33,065
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23,677
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Loss
from unconsolidated subsidiary
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-
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-
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-
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(109)
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Earnings
from Operations
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2,666
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1,945
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5,248
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4,380
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Non-Operating
Income (Expense):
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Interest
income
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156
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34
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595
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122
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Interest
expense
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(1,320)
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(652)
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(1,777)
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(1,620)
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Other
(expense) income, net
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(19)
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(3)
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300
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2
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||||
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Non-operating
items from unconsolidated subsidiary
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-
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-
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-
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(4)
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Non-operating
(expense), net
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(1,183)
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(621)
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(882)
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(1,500)
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Earnings
before Income Taxes and Minority Interest
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1,483
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1,324
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4,366
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2,880
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(Benefit)
Provision for income taxes
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(67)
|
492
|
394
|
638
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||||
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Earnings
before Minority Interest
|
1,550
|
832
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3,972
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2,242
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Minority
interest in subsidiary losses
|
301
|
449
|
900
|
555
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Net
Earnings
|
$
|
1,851
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$
|
1,281
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$
|
4,872
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$
|
2,797
|
|
Earnings
Per Share:
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||||||||
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Basic
|
$
|
0.08
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$
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0.09
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$
|
0.21
|
$
|
0.20
|
|
Diluted
|
$
|
0.08
|
$
|
0.08
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$
|
0.20
|
$
|
0.17
|
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
September 30,
|
For
The Nine Months
Ended
September 30,
|
|||||||
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Amounts
in thousands
|
2006
|
2005
|
2006
|
2005
|
||||
|
Net
Earnings
|
$
|
1,851
|
$
|
1,281
|
$
|
4,872
|
$
|
2,797
|
|
Foreign
currency translation adjustments
|
(1,830)
|
1,087
|
(2,239)
|
(1,853)
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|
Change
in fair value of interest rate swaps,
net of income taxes |
-
|
31
|
-
|
64
|
||||
|
Comprehensive
Earnings
|
$
|
21
|
$
|
2,399
|
$
|
2,633
|
$
|
1,008
|
See
notes
to condensed consolidated financial statements.
--5--
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
For
The Nine Months
Ended
September 30,
|
||||
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Cash
Flows from Operating Activities:
|
||||
|
Net
earnings
|
$
|
4,872
|
$
|
2,797
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||
|
Depreciation
and amortization
|
2,998
|
2,637
|
||
|
Amortization
of share-based compensation
|
280
|
-
|
||
|
Amortization
of deferred financing costs
|
104
|
128
|
||
|
Deferred
tax expense
|
(410)
|
(806)
|
||
|
Minority
interest in subsidiary losses
|
(900)
|
(555)
|
||
|
Loss
from unconsolidated subsidiary
|
-
|
113
|
||
|
Loss
(gain) on sale of fixed assets
|
26
|
(55)
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||
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Other
|
(15)
|
-
|
||
|
Changes
in operating assets and liabilities:
|
||||
|
Receivables
|
(392)
|
(154)
|
||
|
Prepaid
expenses and other assets
|
(5)
|
(486)
|
||
|
Accounts
payable and accrued liabilities
|
(820)
|
1,405
|
||
|
Accrued
payroll
|
427
|
(177)
|
||
|
Excess
tax benefits from stock-based payment arrangements
|
(376)
|
-
|
||
|
Taxes
payable
|
(271)
|
258
|
||
|
Net
cash provided by operating activities
|
5,518
|
5,105
|
||
|
Cash
Flows from Investing Activities:
|
||||
|
Purchases
of property and equipment
|
(41,943)
|
(10,655)
|
||
|
Purchase
of minority shareholder interest in subsidiary
|
(5,135)
|
-
|
||
|
Note
receivable (see Note 1)
|
(4,751)
|
-
|
||
|
Deferred
income - Sale of Gauteng interest (see Note 1)
|
5,399
|
-
|
||
|
Cash
contribution of $2.4 million towards interest in subsidiary,
less net cash acquired of $1.7 million |
-
|
(753)
|
||
|
Cash
contribution of $0.7 million towards interest in Casino
Millennium,
less net cash acquired of $0.4 million |
(278)
|
-
|
||
|
Cash
contribution of $6.7 million towards interest in Newcastle,
less net cash acquired of $1.5 million |
(5,122)
|
-
|
||
|
Proceeds
from disposition of assets
|
88
|
101
|
||
|
Net
cash used in investing activities
|
(51,742)
|
(11,307)
|
||
(continued)
--6--
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
For
the Nine Months
Ended
September 30,
|
||||
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Cash
Flows from Financing Activities:
|
||||
|
Proceeds
from borrowings
|
$
|
64,898
|
$
|
45,625
|
|
Principal
repayments
|
(24,730)
|
(32,067)
|
||
|
Excess
tax benefits from stock-based payment arrangements
|
376
|
-
|
||
|
Deferred
financing charges
|
(51)
|
(455)
|
||
|
Decrease
in restricted cash
|
-
|
604
|
||
|
Proceeds
from exercise of options
|
450
|
2,313
|
||
|
Dividend
paid to Caledon preference shareholder
|
(75)
|
-
|
||
|
Net
cash provided by financing activities
|
40,868
|
16,020
|
||
|
Effect
of Exchange Rate Changes on Cash
|
202
|
(543)
|
||
|
(Decrease)
Increase in
Cash and Cash Equivalents
|
(5,154)
|
9,275
|
||
|
Cash
and Cash Equivalents at Beginning of Period
|
37,167
|
8,411
|
||
|
Cash
and Cash Equivalents at End of Period
|
$
|
32,013
|
$
|
17,686
|
Supplemental
Disclosure of Cash Flow Information:
|
Amounts
in Thousands
|
For
the Nine Months
Ended
September 30,
|
|||
|
2006
|
2005
|
|||
|
Interest
paid
|
$
|
2,631
|
$
|
1,462
|
|
Income
taxes paid
|
$
|
662
|
$
|
716
|
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” or the “Company”) is an international casino entertainment
company that owns and operates Womacks Casino and Hotel in Cripple Creek,
Colorado; owns and operates the Casino Millennium (“CM”) in the Marriott Hotel
in Prague, Czech Republic; operates the casinos aboard the Silver Wind, Silver
Cloud, The World of ResidenSea, and three of the vessels of Oceania Cruises;
owns a 65% interest in, and has a management contract for, the Century Casino
& Hotel in Central City, Colorado; and owns and has begun construction on a
casino and hotel development in Edmonton, Alberta, Canada. Through its
subsidiary Century Casinos Africa (Pty) Limited (“CCA”), CCI owns and operates
The Caledon Hotel, Spa & Casino (“Caledon”) near Cape Town, South Africa and
owns 60% of, and provides technical casino services to, Century Casino Newcastle
located in Newcastle, South Africa. The Company continues to pursue other
international projects in various stages of development.
On
June
13, 2006, the Company, through its wholly owned subsidiary, Century Casinos
Europe GmbH (“CCE”), entered into an agreement to acquire 100% of all of the
issued and outstanding shares of G5 Sp. z o.o. (“G5”) for approximately $3.7
million (€2.9 million). G5 owns 33.3% of all shares issued by Casinos Poland
Ltd. Casinos Poland owns seven casinos and one slot arcade throughout Poland
and
generated net revenues of approximately $41.2 million in 2005. In connection
with the purchase, CCE loaned G5 approximately $4.8 million (PLN 15.0 million)
to repay existing loans between G5 and its creditors. The loan is secured by
the
outstanding shares of G5. Interest payments, calculated at the 1-month LIBOR
rate plus 2% per annum, are payable annually. The loan matures on June 21,
2011.
After the transaction closes, this loan will become an intercompany loan between
G5 and CCE, which will eliminate in consolidation. The loan is reported as
a
note receivable on the condensed consolidated balance sheet as of September
30,
2006. The transaction is expected to close during the fourth quarter of 2006,
subject to due diligence.
The
Company had a 50% ownership interest in CM prior to April 13, 2006 and accounted
for this investment under the equity method. On April 13, 2006, CCE purchased
the remaining 50% of CM for approximately $0.7 million, which included a
security deposit for CM’s casino license in the amount of $0.4 million (CZK 10.0
million), the assumption of loans previously granted to CM by the former partner
and the purchase price for the former partner’s 50% equity interest.
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 condensed consolidated financial
statements include the accounts of CCI and its majority-owned subsidiaries.
All
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. Certain information
and footnote disclosures normally included in financial statements prepared
in
accordance with US GAAP have been condensed or omitted. Certain
reclassifications have been made to the 2005 financial information in order
to
conform to the 2006 presentation.
In
the
opinion of management, all adjustments 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 consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005. The results of operations for the period ended
September 30, 2006 are not necessarily indicative of the operating results
for
the full year.
--8--
Projects
under Development:
Newcastle,
South Africa -
On
April
1, 2006, CCA completed the purchase of a 60% controlling interest in Balele
Leisure (Pty) Ltd. (“Balele”), which owns the Monte Vista Casino (now known as
Century Casino Newcastle) in Newcastle, South Africa, for approximately $9.3
million (ZAR 57.5 million). The current casino is in a temporary facility that
has 200 slot machines and seven gaming tables. Construction of a new permanent
facility has begun and is expected to cost approximately
$9.1 million (ZAR 70 million), excluding value added taxes.
Of
the
estimated $9.1 million in overall construction costs, $1.1 million (ZAR 8.0
million) was financed from cash on hand, $6.5 million (ZAR 50.0 million) will
be
financed through external financing, and $1.5 million (ZAR 12.0 million) will
be
provided by CCA as a shareholder loan. CCA expects the new facility to be
operational by the end of the fourth quarter of 2006. The
initial gaming mix in the permanent facility is expected to be 250 slot machines
and seven gaming tables. An additional $0.3 million (ZAR 2.5 million) will
be
payable to the minority shareholders if the casino revenue during the first
12
months of operation at the new location exceeds $12.3 million (ZAR 95.0
million). CCA has also entered into a long-term agreement to manage Balele’s
entire casino, resort and hotel operations.
In
connection with CCA’s purchase of its equity interest in Balele, a sale of
shares agreement (the “Share Agreement”) was entered into on October 18, 2005
between CCA and a group of Balele shareholders (the “Sellers”). As a condition
to the Share Agreement, the Sellers provided a warranty to CCA that the Sellers
would be able to sell the facility that houses the current casino for
approximately $1.9 million (ZAR 12 million) within 60 days of closing. The
Sellers informed CCA that they will not be able to sell the facility for ZAR
12.0 million. As a result, the purchase price for the 60% interest in Balele
has
been reduced by this amount, resulting in an overall purchase price of $7.4
million (ZAR 45.5 million). The Company has consolidated the results of Balele,
now known as Century Casino Newcastle (Pty) Ltd (“CNEW”), in its financial
statements as of April 1, 2006.
Edmonton,
Alberta, Canada
- On
February 24, 2005, the Company’s wholly owned subsidiary, Century
Resorts International Limited (“CRI”), acquired a 56.4% interest in Century
Resorts Alberta, Inc. (“CRA”) for approximately $2.4 million. A local partner,
746306 Alberta, Ltd., contributed a 7.25-acre parcel of land and an
existing 40 room hotel for the remaining 43.6% interest. On January 12, 2006,
CRI purchased the remaining 43.6% interest in CRA for approximately $6.3 million
(CAD 7.3 million). CRI paid approximately $5.1 million (CAD 5.8 million) at
closing with the remainder payable on the first anniversary of the opening
of
the casino. The Company recorded approximately $4.3 million of goodwill
associated with this purchase. Excluding the costs to purchase the minority
shareholder’s interest, the $31.2 million (CAD 35.8 million) development is
expected to include a casino with 600 gaming machines, 31 gaming tables, food
and beverage amenities, a dinner theater, a 300 space underground parking
facility, approximately 600 surface parking spaces and a 26-room hotel. Of
the
$31.2 million in overall project costs, CRI contributed $2.4 million (CAD 3.0
million) for its interest in CRA, $17.9 million (CAD 20.0 million) will be
financed through external financing, $9.0 million (CAD 10.5 million) has been
provided by us as a shareholder loan, and the balance of $1.9 million (CAD
2.3
million) is the net value of the former minority partner’s contribution. On
September 23, 2005, CRA agreed to the terms of a $17.9 million (CAD 20.0
million) credit facility with Canadian Western Bank for the development of
the
casino property. On December 17, 2004, the Alberta Gaming and Liquor
Commission granted approval to begin construction of the casino property. As
is
customary, the issuance of the license does not occur until completion of
construction and after all federal and provincial legislation, regulation and
policies, and municipal requirements, permits, licenses and/or authorizations
have been met.
Gauteng,
South Africa
- In
December 2004, as part of an option agreement by Gold Reef Casino Resorts
Limited, Akani Leisure Investments Proprietary Limited (“Akani Group”), Silver
Star Development Limited, Century Casinos, Inc., Century Resorts Limited and
Century Casinos West Rand (Proprietary) Limited, the Company
--9--
granted
the Akani Group an option to purchase its remaining interest towards a casino
development project in Gauteng, South Africa. CCI’s interest in the project
included a 30-year casino and resort management agreement (“Resort Management
Agreement”), as well as certain rights to buy equity stakes in Silver Star
Development Limited, the company licensed for the casino development project.
On
September 28, 2006, the Akani Group exercised the option for a cash payment
in
the amount of approximately $5.7 million (ZAR 43.3 million).
Should
the Akani Group not obtain approval of this transaction from the Gauteng
Gambling Board (“GGB”) by June 30, 2007, the Resort Management Agreement with
CCI will be reinstated at a reduced scope of services and fees. If such GGB
approval is not obtained by September 30, 2007, CCI will have its interests
in
the project restored for approximately $5.3 million (ZAR 40.3 million). As
a
result of this contingency, $5.3 million (ZAR 40.3 million) has been recorded
as
deferred income on the September 30, 2006 condensed consolidated balance sheet.
The remaining $0.4 million (ZAR 3.0 million), which relates to the recovery
of a
previously written off loan, has been recorded as property write-downs and
other
write-offs, net of recoveries on the condensed consolidated statement of
earnings for the three- and nine-month periods ended September 30,
2006.
*****
Presentation
of Foreign Currency Amounts -
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:
|
|
September
30, 2006
|
December
31, 2005
|
September
30, 2005
|
|
Canadian
Dollars (CAD)
|
1.1153
|
1.1659
|
1.1611
|
|
Czech
Koruna (CZK)
|
22.3190
|
24.5810
|
24.5220
|
|
Euros
(€)
|
0.7882
|
0.8446
|
0.8292
|
|
Polish
Zloty (PLN)
|
3.1311
|
N/A
|
N/A
|
|
South
African Rand (ZAR)
|
7.7451
|
6.3399
|
6.3518
|
Source:
Pacific Exchange Rate Service
2. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 provides
interpretive guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of
providing a materiality assessment. SAB 108 is effective for companies with
fiscal years ending after November 15, 2006. The Company does not believe that
the adoption of SAB 108 will have a material impact on its consolidated
financial statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statement No. 87, 88, 106 and 132(R).” SFAS 158 requires
balance sheet recognition of the funded status for all pension and
postretirement benefit plans. The impact of the initial adjustment will be
recorded as an adjustment to the ending balance
--10--
of
other
comprehensive income. Subsequent changes in funded status will also be
recognized as a component of other comprehensive income to the extent they
have
not yet been recognized as a component of net periodic benefit cost. SFAS 158
is
effective for fiscal years ending after December 15, 2006. The Company has
not
completed an assessment of the impact of the adoption of SFAS 158 on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosure regarding fair value measurements. This statement applies to other
accounting pronouncements that require or permit fair value measurements for
which the FASB has previously concluded in those announcements that fair value
is the relevant measurement attribute. Accordingly, this statement does not
require any new fair value measurements. The effective date of SFAS 157 is
for
fiscal years beginning after November 15, 2007. The Company has not completed
an
assessment of the impact of the adoption of SFAS 157 on its consolidated
financial statements.
On
July
13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”), which sets
forth a specific recognition threshold and measurement method for financial
statement recognition and measurement of a tax position taken or expected to
be
taken on a tax return. The effective date of FIN 48 is for fiscal years
beginning after December 15, 2006. The Company has not completed an assessment
of the impact of FIN 48 on its consolidated financial statements.
On
April
13, 2006, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-6, "Determining
the Variability to be Considered When Applying FASB Interpretation No. 46(R)."
The FSP addresses the approach to determine the variability to consider when
applying FIN 46(R), and includes several illustrative examples of how the
variability should be considered. The variability that is considered in applying
Interpretation 46(R) may affect (a) the determination as to whether the entity
is a variable interest entity (VIE), (b) the determination of which interests
are variable interests in the entity, (c) if necessary, the calculation of
expected losses and residual returns of the entity, and (d) the determination
of
which party is the primary beneficiary of the VIE. Thus, determining the
variability to be considered is necessary to apply the provisions of
Interpretation 46(R).
The
Company will apply the guidance in FSP FIN 46(R)-6 prospectively to all entities
(including newly created entities) with which that enterprise first becomes
involved and to all entities previously required to be analyzed under FIN 46(R)
when a reconsideration event has occurred beginning the first day of the first
reporting period beginning after June 15, 2006. The adoption of FSP FIN 46(R)-6
has not had an impact on the Company’s current financial position, results of
operations or cash flows.
3. STOCK-BASED
COMPENSATION
Prior
to
January 1, 2006, the Company accounted for stock options under the recognition
and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued
to Employees,” and related interpretations. Effective January 1, 2006, the
Company adopted the provisions of SFAS No. 123 (Revised 2004), “Share-Based
Payments” (“SFAS 123R”), and selected the modified prospective method to
initially report stock-based compensation amounts in the consolidated financial
statements. The Company is currently using the Black-Scholes option pricing
model to determine the fair value of all option grants. The Company did not
grant any options during the nine month periods ended September 30, 2006 and
2005.
The
Board
of Directors of the Company adopted an Employees’ Equity Incentive Plan (the
“EEIP”) in April 1994, which expired in April 2004. The EEIP continues to be
administered for previously issued and outstanding options. Stockholders of
the
Company approved a new equity incentive plan (the “2005 Plan”) at the 2005
annual meeting of stockholders. The 2005 Plan provides for the grant of awards
to eligible individuals in the form of stock, restricted stock, stock options,
performance units or
--11--
other
stock-based awards, all as defined in the 2005 Plan. The 2005 Plan provides
for
the issuance of up to 2,000,000 shares of common stock to eligible individuals
through the various forms of awards permitted. The 2005 Plan limits the number
of options that can be awarded to an eligible individual to 200,000 per year.
Stock options may not be issued at an option price lower than fair market value
at the date of grant. All stock options must have an exercise period not to
exceed ten years. Through September 30, 2006, only incentive stock option
awards, for which the option price was not less than the fair market value
at
the date of grant, or non-statutory options, which may be granted at any option
price (as permitted under the EEIP), have been granted under the EEIP and 2005
Plan. Options granted to date have one-year, two-year or four-year vesting
periods. Through September 30, 2006, all outstanding options have been issued
at
market value as of the date of the grant. The Company’s Incentive Plan Committee
or, in the case of the 2005 Plan, any other committee as delegated by the Board
of Directors, has the power and discretion to, among other things, prescribe
the
terms and conditions for the exercise of, or modification of, any outstanding
awards in the event of merger, acquisition or any other form of acquisition
other than a reorganization of the Company under the United States Bankruptcy
Code or liquidation of the Company. Both plans also allow limited
transferability of any non-statutory stock options to legal entities that are
100% - owned or controlled by the optionee or to the optionee’s family trust. As
of September 30, 2006, there were 1,376,210 options outstanding to employees
of
the Company, of which 1,351,210 options were issued under the EEIP and 25,000
options have been issued under the 2005 Plan.
The
following table summarizes employee option activity under the EEIP and 2005
Plan
as of September 30, 2006 and changes during the period then ended:
|
|
Weighted-Average
|
|
|
Shares
|
Exercise
Price
|
|
|
Employee
Stock Options:
|
||
|
Outstanding
at January 1, 2006
|
1,986,210
|
$
2.33
|
|
Granted
|
-
|
-
|
|
Exercised
|
(600,000)
|
0.75
|
|
Cancelled
or forfeited
|
(10,000)
|
7.68
|
|
Outstanding
at September 30, 2006
|
1,376,210
|
$
2.98
|
|
Options
exercisable at September 30, 2006
|
424,613
|
$
2.83
|
Summarized
information regarding all employee options outstanding at September 30, 2006
is
as follows:
|
|
Weighted-
|
|
|
|
|
|
|
Number
|
Average
|
Number
|
|
Aggregate
|
|
Exercise
|
Outstanding
at
|
Remaining
|
Exercisable
at
|
|
Intrinsic
|
|
Price
|
September
30, 2006
|
Term
in Years
|
September
30, 2006
|
|
Value
|
|
$0.75
|
10,000
|
1.0
|
10,000
|
|
$
91,900
|
|
$1.50
|
7,500
|
0.4
|
7,500
|
|
$
63,300
|
|
$1.75
|
10,000
|
4.5
|
10,000
|
|
$
81,900
|
|
$2.93
|
1,323,710
|
7.4
|
397,113
|
|
$
9,279,207
|
|
$7.68
|
25,000
|
9.1
|
-
|
|
$
56,500
|
|
|
1,376,210
|
7.3
|
424,613
|
|
$
9,572,807
|
--12--
The
aggregate intrinsic value represents the difference between the Company’s
closing stock price of $9.94 as of September 29, 2006 and the exercise price
multiplied by the number of options outstanding as of that date.
As
of
September 30, 2006, there were an additional 80,000 options outstanding to
directors of the Company with a weighted average exercise price of $2.98.
For
the
three and nine months ended September 30, 2006, the Company recorded $0.1
million (less than $0.1 million, net of taxes) and $0.3 million ($0.2 million,
net of taxes), respectively, for stock-based compensation expense related to
stock option grants made in prior years that vested during these periods. The
amounts are included in general and administrative expense. The impact to both
basic and diluted earnings per share for the third quarter was less than $0.01.
The impact to both basic and diluted earnings per share for the nine months
ended September 30, 2006 was $0.01. There was no capitalized stock-based
compensation expense.
At
September 30, 2006, there is $0.2 million of total unrecognized compensation
expense related to unvested stock options remaining to be recognized. Of this
total, $0.1 million will be recognized over the remainder of 2006 and $0.1
million will be recognized in subsequent years through 2009.
Prior
to
the adoption of SFAS 123R, we presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the Condensed Consolidated
Statement of Cash Flows. SFAS 123R requires that cash flows from the exercise
of
stock options resulting from tax benefits in excess of recognized cumulative
compensation cost (excess tax benefits) be classified as financing cash flows.
For the nine months ended September 30, 2006, $0.4 million of such excess tax
benefits were classified as financing cash flows.
In
accordance with the modified prospective transition method, the Company’s
financial statements for prior periods have not been restated to reflect
compensation expense associated with recognizing stock-based compensation under
the fair value method. The Company did not record stock-based compensation
expense related to employee stock options during the three and nine months
ended
September 30, 2005; however, pro forma stock-based compensation expense for
the
three and nine months ended September 30, 2005 was as follows:
|
Amounts
in thousands, except for share information
|
For
the Three
Months
Ended
September 30, 2005 |
For
the Nine
Months
Ended
September 30, 2005 |
|||
|
Net
earnings, as reported
|
$
|
1,281
|
$
|
2,796
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
127
|
381
|
|||
|
Pro
forma net earnings
|
$
|
1,154
|
$
|
2,415
|
|
|
Earnings
per share
|
|||||
|
Basic:
|
As
reported
|
$
|
0.09
|
$
|
0.20
|
|
Pro
forma
|
$
|
0.08
|
$
|
0.17
|
|
|
Diluted:
|
As
reported
|
$
|
0.08
|
$
|
0.17
|
|
Pro
forma
|
$
|
0.07
|
$
|
0.15
|
|
On
May 5, 2006, the Company issued 600,000 shares of its common stock for stock
options exercised in cash at an exercise price of $0.75 per
share.
--13--
4. INVESTMENT
IN NEWCASTLE
The
following pro forma operating information for the three and nine months ended
September 30, 2006 and 2005 has been prepared as if the acquisition of our
60%
interest in CNEW (see Note 1) had been consummated as of January 1, 2005. The
information does not purport to be indicative of what the operating results
of
the Company would have been had the acquisition been consummated on January
1,
2005.
Pro
forma
results are as follows:
|
For
The Three Months
Ended
September 30,
|
For
The Nine Months
Ended
September 30,
|
|||||||
|
Amounts
in thousands, except for share information
|
2006
|
2005
|
2006
|
2005
|
||||
|
Net
Operating Revenue
|
$
|
16,978
|
$
|
11,946
|
$
|
40,384
|
$
|
33,668
|
|
Operating
Costs and Expenses:
|
||||||||
|
Operating
expenses
|
13,019
|
8,534
|
32,167
|
25,107
|
||||
|
Depreciation
and amortization
|
1,293
|
959
|
3,116
|
3,042
|
||||
|
Total
operating costs and expenses
|
14,312
|
9,493
|
35,283
|
28,149
|
||||
|
Earnings
from Operations
|
2,666
|
2,453
|
5,101
|
5,519
|
||||
|
Other
(expense), net
|
(1,183)
|
(623)
|
(849)
|
(1,469)
|
||||
|
Earnings
before Income Taxes and Minority Interest
|
1,483
|
1,830
|
4,252
|
4,050
|
||||
|
(Benefit)
provision for income taxes
|
(67)
|
604
|
338
|
881
|
||||
|
Earnings
before Minority Interest
|
1,550
|
1,226
|
3,914
|
3,169
|
||||
|
Minority
interest in subsidiary losses
|
301
|
326
|
962
|
288
|
||||
|
Net
Earnings
|
$
|
1,851
|
$
|
1,552
|
$
|
4,876
|
$
|
3,457
|
|
Earnings
Per Share:
|
||||||||
|
Basic
|
$
|
0.08
|
$
|
0.11
|
$
|
0.21
|
$
|
0.25
|
|
Diluted
|
$
|
0.08
|
$
|
0.09
|
$
|
0.20
|
$
|
0.21
|
5. PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net at September 30, 2006 and December 31, 2005 consisted of
the
following:
|
Amounts
shown in thousands:
|
September
30,
|
December
31,
|
||
|
2006
|
2005
|
|||
|
Buildings
and improvements
|
$
|
52,628
|
$
|
28,828
|
|
Gaming
equipment
|
23,831
|
13,976
|
||
|
Furniture
and office equipment
|
8,453
|
5,075
|
||
|
Other
equipment
|
4,270
|
2,553
|
||
|
89,182
|
50,432
|
|||
|
Less
accumulated depreciation
|
(26,292)
|
(21,869)
|
||
|
62,890
|
28,563
|
|||
|
Land
|
24,129
|
22,432
|
||
|
Capital
projects in process
|
26,921
|
18,218
|
||
|
Non-operating
casino and land
|
366
|
389
|
||
|
Property
and equipment, net
|
$
|
114,306
|
$
|
69,602
|
--14--
The
Company has capitalized $1.8 million of interest towards our various
construction projects during the first nine months of 2006.
6. GOODWILL
Changes
in the carrying amount of goodwill for the nine months ended September 30,
2006
are as follows:
|
Amounts
shown in thousands
|
Cripple
Creek, CO
|
Caledon,
South Africa
|
Newcastle,
South Africa
|
Edmonton,
Canada
|
Casino
Millennium
|
Total
|
||
|
Balance
as of January 1, 2006
|
$
|
7,232
|
902
|
-
|
-
|
528
|
$
|
8,662
|
|
Purchase
of remaining 43.6% interest in CRA
|
-
|
-
|
-
|
4,342
|
-
|
4,342
|
||
|
Purchase
of remaining 50.0% interest in Casino Millennium
|
-
|
-
|
-
|
-
|
(345)
|
(345)
|
||
|
Purchase
of 60% interest in Newcastle
|
-
|
-
|
7,322
|
-
|
-
|
7,322
|
||
|
Effect
of foreign currency translation
|
-
|
(164)
|
(1,563)
|
-
|
41
|
(1,686)
|
||
|
Balance
as of September 30, 2006
|
$
|
7,232
|
738
|
5,759
|
4,342
|
224
|
$
|
18,295
|
7. LONG-TERM
DEBT
Long-term
debt as of September 30, 2006 and December 31, 2005 consisted of the
following:
|
Amounts
shown in thousands:
|
September
30,
|
December
31,
|
||
|
2006
|
2005
|
|||
|
Revolving
Credit Facility - Cripple Creek
|
$
|
4,556
|
$
|
481
|
|
Construction
Term Loan - Central City
|
34,495
|
8,931
|
||
|
Construction
Term Loan - Edmonton
|
11,199
|
-
|
||
|
Construction
Term Loan - Newcastle
|
2,055
|
-
|
||
|
Term
Loan - Caledon
|
6,470
|
9,091
|
||
|
Notes
payable
|
2,248
|
1,135
|
||
|
Capital
leases and other
|
634
|
85
|
||
|
Total
long-term debt
|
61,657
|
19,723
|
||
|
Less
current portion
|
(6,037)
|
(1,789)
|
||
|
Long-term
portion
|
$
|
55,620
|
$
|
17,934
|
Revolving
Credit Facility - Cripple Creek
On
December 6, 2005, the Company entered into a fifth amendment of the Revolving
Credit Facility with Wells Fargo Bank permitting the Company to make capital
contributions to Womacks for a specified period that can be used to repay the
outstanding obligations under the Womacks Revolving Credit Facility, and
subsequently permitting Womacks to make cash distributions to the Company up
to
the amount of the Company’s capital contributions ($14.5 million as of December
31, 2005) made during the specified period. During the first quarter of 2006,
the Company borrowed approximately $5.1 million, of which $4.5 million
represents a capital distribution, under the revolving credit facility to fund
the buyout of the minority interest at CRA (see Note 1).
--15--
On
October 31, 2006, the Company entered into a sixth amendment of the Revolving
Credit Facility with Wells Fargo Bank extending the maturity date of the
Revolving Credit Facility to December 31, 2007.
Construction
Term Loan - Central City
On
June 28, 2006, the Company entered into a first amendment with Wells Fargo
Bank
to the Credit Agreement dated November 18, 2005. The amendment reduces the
interest rate to the greater of (i) 6.5% per annum or (ii) the Prime Rate plus
2.0% per annum (which currently equates to 10.25%) and a service fee of 0.5%
on
the total outstanding balance, payable monthly. This amendment also reduces
the
prepayment fee on the Credit Agreement to 9.3%, decreasing to 2.3% in the 17th
full quarter after the date the loan converts from a construction loan to a
term
loan (July 11, 2006) through maturity. As consideration for this amendment,
CCI
has provided a guarantee to the lenders of all of the borrower’s obligations
under the Existing Credit Agreement.
Effective
December 31, 2006, CC Tollgate LLC (“CTL”) will be required to be in compliance
with certain financial covenants pertaining to this loan, the most significant
being Total Leverage Ratio, Senior Leverage Ratio, Adjusted Fixed Charge
Coverage and Minimum Annualized EBITDAM. It is probable that CTL will not be
in
compliance with these covenants. Prior to December 31, 2006, CTL plans to seek
a
waiver from its lenders related to these covenants or possibly seek an amendment
to the Credit Agreement. There can be no assurance that the CTL’s lenders will
grant CTL any waiver or agree to any amendment which might become necessary.
If
CTL failed to meet any of its debt covenants and CTL’s lenders did not grant a
waiver or amend the facility, the lenders would have the right to declare an
event of default and seek remedies, including the acceleration of all
outstanding amounts due under this agreement and a demand for repayment by
CCI
under its guarantee of the loan. There can be no assurances that the Company
would be successful in obtaining alternative sources of funding to repay this
obligation should this event occur.
Construction
Term Loan - Newcastle
On
July 20, 2006, CNEW entered into a loan agreement with Nedbank Limited
(“Nedbank”). Pursuant to this loan agreement, Nedbank will extend temporary
financing and available credit to CNEW, in the form of a construction loan,
for
the total amount of $6.5 million (ZAR 50.0 million). The net proceeds from
this
financing are being used by CNEW for the construction of a new casino and hotel
in Newcastle, South Africa. Subsequent to the completion of construction, the
construction loan will convert to a term loan agreement, payable in monthly
installments of approximately $0.1 million (ZAR 1.1 million), and will mature
five years from the date the construction loan converts to a term loan. The
financing bears interest at South Africa’s prime interest rate less 1.5%
(which equates to 10.0% as of September 30, 2006) and is secured by the
pledge of 100% of the total outstanding common stock of CNEW.
Notes
Payable
An
unsecured note payable in the amount of $1.0 million to a minority interest
holder in CC Tollgate LLC (“CTL”) is payable in two equal installments. The
first payment will occur on July 11, 2007, with the second payment due six
months later. The note bears interest at 8%. As of September 30, 2006, $0.5
million of the note has been classified as a current liability, with the
remaining $0.5 million classified as a long-term liability, in the accompanying
condensed consolidated balance sheet.
In
December 2004, the Company issued a second unsecured note payable in the amount
of $0.1 million to a minority interest holder in CTL, payable on the first
anniversary of the opening date of the casino (July 11, 2007). This amount
has
been recorded as a current liability on the September 30, 2006 condensed
consolidated balance sheet.
--16--
In
conjunction with the buyout of the minority interest in CRA (see Note 1), an
unsecured note payable in the amount of $1.2 million ($1.4 million Canadian)
is
payable on the earlier of (1) the 10th
business day following the first anniversary of the opening date of the casino
project in Edmonton, Alberta, Canada or (2) the date that the Company transfers
all of its shares in CRA to any other party other than an affiliate of the
Company. The note is non-interest bearing; however, if CRI defaults on the
payment of the note, the note bears interest at 12% per annum from the date
of
default. The Company, using an imputed interest rate of 12%, has recorded this
note at its net present value of $1.1 million. The note is classified as
long-term in the accompanying condensed consolidated balance sheet.
Capital
Leases and Other
As
mentioned in Note 1, CCA completed the purchase of a 60% controlling interest
in
CNEW on April 1, 2006 for approximately $7.4 million (ZAR 45.5 million). To
date, the Company has paid $6.7 million (ZAR 40.5 million) towards the purchase.
The remaining $0.7 million (ZAR 5.0 million), which is payable one year from
the
opening of the new casino facility, has been recorded at its net present value
of $0.6 million (ZAR 4.6 million), using an imputed interest rate of 9.0%,
and
is classified as long-term debt on the September 30, 2006 condensed consolidated
balance sheet.
As
of September 30, 2006 and December 31, 2005, the Company was in compliance
with
all covenants related to its borrowings.
The
consolidated weighted average interest rate on all borrowings for Century
Casinos, Inc. and subsidiaries was 11.4% and 8.7% for the nine months ended
September 30, 2006 and 2005, respectively, excluding the amortization of
deferred financing charges. Construction financing for the Central City,
Colorado project, at a weighted average interest rate of 13.4%, accounted for
approximately 53% of the average outstanding debt during the nine month period
ended September 30, 2006. Repayment of high interest rate debt in South Africa
helped limit the increase in the consolidated weighted average interest rate
for
the nine months ended September 30, 2006.
8.
SEGMENT
INFORMATION
The
Company views each casino property as an operating segment and all such
operating segments have been aggregated into one reporting segment. Each casino
property derives its revenues primarily from casino operations, room rentals
and
food and beverage sales.
|
Property,
Plant and Equipment
|
Total
Assets
|
|||||||
|
Amounts
in thousands
|
September
30,
2006
|
December
31,
2005
|
September
30,
2006
|
December
31,
2005
|
||||
|
Cripple
Creek (Colorado, USA)
|
$
|
22,217
|
$
|
23,206
|
$
|
32,425
|
$
|
33,151
|
|
Central
City (Colorado, USA)
|
44,758
|
21,105
|
50,368
|
23,219
|
||||
|
Edmonton
(Alberta, Canada)
|
24,774
|
8,750
|
28,900
|
9,654
|
||||
|
Caledon
(South Africa)
|
13,373
|
15,205
|
16,619
|
19,584
|
||||
|
Newcastle
(South Africa)
|
7,036
|
-
|
14,454
|
-
|
||||
|
Casino
Millennium (Czech Republic)
|
589
|
-
|
2,331
|
-
|
||||
|
Cruise
Ships (International)
|
862
|
854
|
1,657
|
1,629
|
||||
|
Corporate
|
697
|
482
|
32,855
|
36,326
|
||||
|
Total
|
$
|
114,306
|
$
|
69,602
|
$
|
179,609
|
$
|
123,563
|
--17--
|
Net
Operating Revenue
|
||||||||
|
Amounts
in thousands
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
|||||
|
Cripple
Creek (Colorado, USA)
|
$
|
4,730
|
$
|
4,984
|
$
|
12,534
|
$
|
13,249
|
|
Central
City (Colorado, USA)
|
4,688
|
-
|
4,688
|
6
|
||||
|
Edmonton
(Alberta, Canada)
|
1
|
-
|
3
|
37
|
||||
|
Caledon
(South Africa)
|
4,350
|
4,158
|
13,783
|
12,524
|
||||
|
Newcastle
(South Africa)
|
1,891
|
-
|
3,941
|
-
|
||||
|
Casino
Millennium (Czech Republic)
|
561
|
-
|
956
|
-
|
||||
|
Cruise
Ships (International)
|
757
|
866
|
2,396
|
2,294
|
||||
|
Corporate
and other
|
-
|
22
|
12
|
56
|
||||
|
Total
|
$
|
16,978
|
$
|
10,030
|
$
|
38,313
|
$
|
28,166
|
|
Net
Earnings
|
||||||||
|
Amounts
in thousands
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
|||||
|
Cripple
Creek (Colorado, USA)
|
$
|
966
|
$
|
1,101
|
$
|
2,135
|
$
|
2,428
|
|
Central
City (Colorado, USA)
|
(405)
|
364
|
(655)
|
364
|
||||
|
Edmonton
(Alberta, Canada)
|
(199)
|
(44)
|
(263)
|
(83)
|
||||
|
Caledon
(South Africa)
|
990
|
596
|
2,872
|
2,059
|
||||
|
Newcastle
(South Africa)
|
297
|
-
|
567
|
-
|
||||
|
Casino
Millennium (Czech Republic)
|
22
|
-
|
(9)
|
-
|
||||
|
Cruise
Ships (International)
|
152
|
272
|
439
|
652
|
||||
|
Corporate
and other
|
28
|
(1,008)
|
(214)
|
(2,623)
|
||||
|
Total
|
$
|
1,851
|
$
|
1,281
|
$
|
4,872
|
$
|
2,797
|
9. PROMOTIONAL
ALLOWANCES
Promotional
allowances presented in the condensed consolidated statements of earnings for
the three- and nine-month periods ended September 30, 2006 and 2005 include
the
following:
|
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||
|
Amounts
in thousands
|
2006
|
2005
|
2006
|
2005
|
||||
|
Food
& Beverage and Hotel
|
$
|
558
|
$
|
372
|
$
|
1,129
|
$
|
1,055
|
|
Free
Plays or Coupons
|
348
|
398
|
1,006
|
1,246
|
||||
|
Player
Points
|
302
|
412
|
958
|
1,073
|
||||
|
Total
Promotional Allowances
|
$
|
1,208
|
$
|
1,182
|
$
|
3,093
|
$
|
3,374
|
--18--
10. INCOME
TAXES
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes adjusted for permanent differences. The provision for income
tax expense consists of the following:
|
For
the Three Months
Ended September 30, |
For
the Nine Months
Ended
September 30,
|
|||||||
|
Amounts
in thousands
|
2006
|
2005
|
2006
|
2005
|
||||
|
Provision
for federal income taxes
|
$
|
(438)
|
$
|
309
|
$
|
(649)
|
$
|
121
|
|
Provision
for state income taxes
|
(71)
|
34
|
(101)
|
7
|
||||
|
Provision
for foreign income taxes
|
442
|
149
|
1,144
|
510
|
||||
|
Total
Provision for income taxes
|
$
|
(67)
|
$
|
492
|
$
|
394
|
$
|
638
|
Reconciliation
of federal income tax statutory rate and the Company’s effective tax rate is as
follows:
|
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||
|
2006
|
2005
|
2006
|
2005
|
|||||
|
Federal
income tax statutory rate
|
34.0%
|
34.0%
|
34.0%
|
34.0%
|
||||
|
Foreign
income taxes
|
(60.5%)
|
(30.3%)
|
(52.7%)
|
(40.7%)
|
||||
|
State
income tax (net of federal benefit)
|
(0.1%)
|
(0.5%)
|
0.9%
|
0.7%
|
||||
|
Losses
assigned to minority partner
|
10.2%
|
11.5%
|
9.8%
|
6.9%
|
||||
|
Permanent
and other items
|
11.9%
|
22.5%
|
17.0%
|
21.3%
|
||||
|
Total
provision for income taxes
|
(4.5%)
|
37.2%
|
9.0%
|
22.2%
|
||||
The
Company consolidates the results of CC Tollgate LLC (“CTL”) in which it holds a
65% majority interest. No provision for income tax on the losses allocated
to
the minority partner are included in the condensed consolidated statements
of
earnings for the three and nine months ended September 30, 2006 and
2005.
--19--
11. EARNINGS
PER SHARE
Basic
and
diluted earnings per share for the three and nine months ended September 30,
2006 and 2005 were computed as follows:
|
Amounts
in thousands,except
for share information
|
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
||||||
|
2006
|
2005
|
2006
|
2005
|
|||||
|
Basic
Earnings Per Share:
|
||||||||
|
Net
earnings
|
$
|
1,851
|
$
|
1,281
|
$
|
4,872
|
$
|
2,797
|
|
Weighted
average common shares
|
22,980,567
|
14,663,683
|
22,705,842
|
14,055,531
|
||||
|
Basic
earnings per share
|
$
|
0.08
|
$
|
0.09
|
$
|
0.21
|
$
|
0.20
|
|
Diluted
Earnings Per Share:
|
||||||||
|
Net
earnings
|
$
|
1,851
|
$
|
1,281
|
$
|
4,872
|
$
|
2,797
|
|
Weighted
average common shares
|
22,980,567
|
14,663,683
|
22,705,842
|
14,055,531
|
||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options and warrants
|
967,290
|
1,851,264
|
1,200,070
|
2,395,205
|
||||
|
Dilutive
potential common shares
|
23,947,857
|
16,514,947
|
23,905,912
|
16,450,736
|
||||
|
Diluted
earnings per share
|
$
|
0.08
|
$
|
0.08
|
$
|
0.20
|
$
|
0.17
|
Dilutive
potential common shares includes the impact of unexercised stock options using
the treasury stock method. For the nine months ended September 30, 2006, 25,000
stock options were excluded from the dilutive potential common shares
calculation as their inclusion would be anti-dilutive. For the remaining periods
presented, all outstanding options and warrants to purchase shares of the
Company’s common stock have been included in the computation of diluted earnings
per share.
12. SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The
Company has approximately $4.6 million of accrued construction liabilities
relating to its projects in Central City, Colorado and Edmonton, Alberta, Canada
as of September 30, 2006. The Company has offset the total purchases of property
and equipment for the nine months ended September 30, 2006 by this
amount.
As
mentioned in Note 1, CCE purchased the remaining 50% interest in CM on April
13,
2006 for approximately $0.7 million. The following table summarizes the
preliminary estimated fair values of the assets acquired and liabilities assumed
at the date of acquisition:
|
Amounts
in thousands
|
||
|
Cash
|
$
|
402
|
|
Restricted
cash
|
845
|
|
|
Accounts
receivable
|
153
|
|
|
Property
and equipment, net
|
594
|
|
|
Goodwill
|
(345)
|
|
|
Other
assets, including intercompany debt assumed
|
196
|
|
|
Accounts
payable and accrued liabilities
|
(132)
|
|
|
Accrued
payroll
|
(9)
|
|
|
Taxes
payable
|
(343)
|
|
|
Long-term
debt
|
(681)
|
|
|
Cash
paid
|
$
|
680
|
--20--
The
purchase price allocation for CM was completed in June 2006. The final
allocation of the purchase price increased goodwill and reduced the value of
the
Company’s tangible assets by an immaterial amount. The assets acquired and
liabilities assumed are reported in the condensed consolidated balance
sheet.
As
mentioned in Note 1, CCA completed the purchase of a 60% controlling interest
in
CNEW on April 1, 2006 for approximately $7.4 million (ZAR 45.5 million). To
date, the Company has paid $6.7 million (ZAR 40.5 million) towards the purchase.
The following table summarizes the preliminary estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition:
|
Amounts
in thousands
|
||
|
Cash
|
$
|
1,530
|
|
Accounts
receivable
|
33
|
|
|
Prepaid
expenses
|
91
|
|
|
Inventory
|
74
|
|
|
Other
current assets
|
295
|
|
|
Property
and equipment, net
|
3,620
|
|
|
Goodwill
|
7,322
|
|
|
Casino
licenses
|
766
|
|
|
Accounts
payable and accrued liabilities
|
(800)
|
|
|
Accrued
payroll
|
(183)
|
|
|
Taxes
payable
|
(446)
|
|
|
Long-term
debt
|
(733)
|
|
|
Amount
credited to minority partner
|
(4,917)
|
|
|
Cash
paid
|
$
|
6,652
|
The
assets acquired and liabilities assumed are reported in the condensed
consolidated balance sheet.
On
February 24, 2005, CRI purchased a 56.4% equity interest in CRA for the purpose
of operating the proposed casino and hotel by contributing $2.4 million in
cash
to CRA. The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of acquisition:
|
Amounts
in thousands
|
||
|
Cash
|
$
|
1,679
|
|
Property
and equipment, net
|
2,631
|
|
|
Amount
credited to minority partner
|
(1,878)
|
|
|
Cash
paid
|
$
|
2,432
|
On
January 12, 2006, CRI purchased the remaining 43.6% equity interest in CRA.
In
conjunction with this acquisition, CRI assumed the following
liabilities:
|
Amounts
in thousands
|
||
|
Fair
value of minority interest acquired
|
$
|
1,818
|
|
Goodwill
|
4,342
|
|
|
Long-term
debt
|
(1,025)
|
|
|
Cash
paid
|
$
|
5,135
|
The
assets acquired and liabilities assumed are reported in the condensed
consolidated balance sheet. CRA is a new entity and pro forma information is
not
applicable.
--21--
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS
OF OPERATIONS
Forward-Looking
Statements, Business Environment and Risk Factors
This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. In addition,
Century Casinos, Inc. (the “Company”) may make other written and oral
communications from time to time that contain such statements. Forward-looking
statements include statements as to industry trends and future expectations
of
the Company and other matters that do not relate strictly to historical facts
and are based on certain assumptions by management. These statements are often
identified by the use of words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar
expressions or variations. These statements are based on the beliefs and
assumptions of the management of the Company based on information currently
available to management. Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements include, among others, the risks
described in the section entitled “Risk Factors” under Item 1A in our Annual
Report on Form 10-K filed on March 9, 2006, Part II - Item 1A of our Quarterly
Report on Form 10-Q filed on August 9, 2006 and Item 1A of Part II of this
report. We caution the reader to carefully consider such factors. Furthermore,
such forward-looking statements speak only as of the date on which such
statements are made. We undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such
statements.
This
report includes amounts translated into U.S. dollars from certain foreign
currencies. For a description of the currency conversion methodology and
exchange rates used for certain transactions, see Note 1 to the condensed
consolidated financial statements included elsewhere in this
report.
References
in this item to “we,” “our,” or “us” are to the Company and its subsidiaries on
a consolidated basis unless the context otherwise requires.
AVAILABLE
INFORMATION
All
reports filed by the Company with the SEC are available free of charge via
EDGAR
through the SEC website at www.sec.gov.
In
addition, the public may read and copy materials filed by the Company with
the
SEC at the SEC’s public reference room located at 450 Fifth St., N.W.,
Washington, D.C. 20549. The Company also provides copies of its Forms 8-K,
10-K,
10-Q, Proxy Statement and Annual Report at no charge to investors upon request
and makes electronic copies of its most recently filed reports available through
its website at www.centurycasinos.com
as soon
as reasonably practicable after filing such material with the SEC.
ADJUSTED
EBITDA
The
following discussion includes a pro forma measurement of net earnings that
we
define as earnings before interest, taxes, depreciation, amortization and
minority interest (“Adjusted EBITDA”). Adjusted EBITDA is not considered a
measure of performance recognized under US GAAP. Management believes that
adjusted EBITDA is a valuable measure of the relative non-US GAAP performance
among its operating segments. The gaming industry commonly uses adjusted EBITDA
as a method of arriving at the economic value of a casino operation. Management
uses adjusted EBITDA to compare the relative operating performance of separate
operating units by eliminating the interest income, interest expense, income
tax
expense, depreciation expense, amortization expense and minority interest
associated with the varying levels of capital expenditures for infrastructure
required to generate revenue, and the often high cost of acquiring existing
operations. Our lending institutions use EBITDA (Earnings before interest,
taxes, depreciation and amortization) to gauge operating performance. Other
companies may not define or calculate adjusted EBITDA in the same manner as
we
do.
--22--
The
following table shows adjusted EBITDA by property. For a reconciliation of
net
earnings to adjusted EBITDA, please refer to the individual property’s
discussion in the following Management’s Discussion and Analysis.
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Adjusted
EBITDA
|
||||||||
|
Cripple
Creek, Colorado
|
$
|
2,067
|
$
|
2,057
|
$
|
4,947
|
$
|
4,991
|
|
Caledon,
South Africa
|
1,821
|
1,598
|
5,629
|
4,878
|
||||
|
Newcastle,
South Africa
|
607
|
-
|
1,293
|
-
|
||||
|
Central
City, Colorado
|
634
|
(17)
|
(104)
|
(75)
|
||||
|
Edmonton,
Canada
|
(184)
|
(133)
|
(281)
|
(181)
|
||||
|
All
other operating segments
|
281
|
316
|
706
|
769
|
||||
|
Corporate
|
(1,286)
|
(1,032)
|
(3,644)
|
(3,367)
|
||||
|
Total
Adjusted EBITDA
|
$
|
3,940
|
$
|
2,789
|
$
|
8,546
|
$
|
7,015
|
OVERVIEW
The
executive officers of our Company review operating results, assess performance
and make decisions related to the allocation of resources on a
property-by-property basis. We therefore believe that each property is an
operating segment and that it is appropriate to aggregate and present the
operations of our Company as one reportable segment. In order to provide more
detail than would be possible on a consolidated basis, our properties have
been
grouped as follows to facilitate discussion of our operating
results:
Cripple
Creek, Colorado
includes
the operating results of WMCK Venture Corp. (“WMCK”) and subsidiaries, which own
Womacks Casino and Hotel (“Womacks”) in Cripple Creek, Colorado.
Caledon,
South Africa
includes
the operating results of Century Casinos Caledon (Pty) Ltd. (“CCAL”), which
operates the Caledon Hotel, Spa and Casino, and its related food service
operation.
Newcastle,
South Africa
includes
the operating results of Century Casino Newcastle (Pty) Ltd. (“CNEW”), formerly
known as Balele
Leisure (Pty) Ltd. (“Balele”),
which
owns and operates Century Casino Newcastle in Newcastle, South Africa and its
related food service operation. CNEW is in the process of developing a new
permanent facility in Newcastle, South Africa, which will replace the operations
of the current casino.
Central
City, Colorado
includes
the operating results of Century Casinos Tollgate, Inc., which owns a majority
interest in and operates a casino and hotel in Central City,
Colorado.
Edmonton,
Canada
includes
the financial results of Century Resorts Alberta, Inc., which is in the final
stages of developing a casino and hotel in Edmonton, Alberta,
Canada.
All
Other Operating Segments
includes
the revenues and expenses of the shipboard operations for which the Company
has
casino concession agreements and, subsequent to April 13, 2006, the operating
results of Casino Millennium (“CM”) located in Prague, Czech
Republic.
--23--
Corporate
operations include, among other items, the expenses associated with being a
public company, including Sarbanes-Oxley Act compliance, and general corporate
overhead expenses. In addition, reclassification and eliminating entries are
recorded in this segment.
CONSOLIDATED
RESULTS OF OPERATIONS
We
reported net operating revenue of $17.0 million and $10.0 million for the three
months ended September 30, 2006 and 2005, respectively, and $38.3 million and
$28.2 million for the nine months ended September 30, 2006 and 2005,
respectively. Casino revenue was $16.3 million and $9.8 million for the three
months ended September 30, 2006 and 2005, respectively, and was $36.7 million
and $27.6 million for the nine months ended September 30, 2006 and 2005,
respectively. Casino expense was $6.9 million and $3.7 million for the three
months ended September 30, 2006 and 2005, respectively, and $15.0 million and
$10.8 million for the nine months ended September 30, 2006 and 2005,
respectively. General and administrative expense was $5.1 million for the three
months ended September 30, 2006 and $2.8 million for the three months ended
September 30, 2005. General and administrative expense was $12.7 million for
the
nine months ended September 30, 2006 and $8.2 million for the nine months ended
September 30, 2005. Depreciation and amortization expense was $1.3 million
and
$0.8 million for the three months ended September 30, 2006 and 2005,
respectively, and $3.0 million and $2.6 million for the nine months ended
September 30, 2006 and 2005, respectively.
Total
earnings from operations were $2.7 million and $1.9 million for the three months
ended September 30, 2006 and 2005, respectively, and $5.2 million and $4.4
million for the nine months ended September 30, 2006 and 2005,
respectively.
We
recognized an income tax benefit of less than $0.1 million and income tax
expense of $0.5 million for the three months ended September 30, 2006 and 2005,
respectively. Income tax expense was $0.4 million and $0.6 million for the
nine
months ended September 30, 2006 and 2005, respectively.
Our
net
earnings were $1.9 million, or $0.08 per basic share, and $1.3 million, or
$0.09
per basic share, for the three months ended September 30, 2006 and 2005,
respectively. Net earnings were $4.9 million, or $0.21 per basic share, and
$2.8
million, or $0.20 per basic share, for the nine months ended September 30,
2006
and 2005, respectively.
The
most
significant impacts on reported earnings for the three months ended September
30, 2006 were:
· Our
new
casinos in Central City, Colorado and Newcastle, South Africa contributed $6.6
million towards the total increase of $6.9 million in net operating revenue
and
contributed $5.8 million towards the total increase of $6.2 million in net
operating expenses;
· In
conjunction with the sale of our interest in a casino project located in
Gauteng, South Africa, we recovered approximately $0.4 million of previously
written off loans; and
· Net
interest charges increased $0.6 million primarily due to the interest charges
on
bank debt that funded the construction of the Central City, Colorado casino
that
opened in July 2006.
The
most
significant impacts on reported earnings for the nine months ended September
30, 2006 were:
· Our
new
casinos in Central City, Colorado and Newcastle, South Africa contributed $8.6
million towards the total increase of $10.1 million in net operating revenue
and
contributed $8.0 million towards the total increase of $9.4 million in net
operating expenses;
· We
incurred an additional $0.3 million in pre-opening losses towards the
construction of a casino in Edmonton, Alberta, Canada; and
· We
allocated losses of $1.3 million to our minority interest partner in Central
City, Colorado, offset by an allocation of income of $0.2 million to our
minority interest partner in Newcastle, South Africa.
--24--
A
discussion by property follows below.
CRIPPLE
CREEK, COLORADO
Cripple
Creek’s results of operations for the three and nine months ended September 30,
2006 and 2005 are as follows:
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Casino
|
$
|
5,126
|
$
|
5,414
|
$
|
13,768
|
$
|
14,675
|
|
Hotel,
food and beverage
|
400
|
440
|
1,043
|
1,151
|
||||
|
Other
(net of promotional allowances)
|
(796)
|
(870)
|
(2,277)
|
(2,577)
|
||||
|
Net
operating revenue
|
4,730
|
4,984
|
12,534
|
13,249
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
1,435
|
1,790
|
4,227
|
5,039
|
||||
|
Hotel,
food and beverage
|
207
|
219
|
439
|
509
|
||||
|
General
and administrative
|
1,021
|
918
|
2,921
|
2,710
|
||||
|
Depreciation
and amortization
|
399
|
417
|
1,211
|
1,290
|
||||
|
3,062
|
3,344
|
8,798
|
9,548
|
|||||
|
Earnings
from operations
|
1,668
|
1,640
|
3,736
|
3,701
|
||||
|
Interest
income
|
6
|
2
|
12
|
8
|
||||
|
Interest
(expense)
|
(223)
|
(366)
|
(664)
|
(1,082)
|
||||
|
Interest
expense on non-Cripple Creek debt allocated to Corporate
|
120
|
500
|
358
|
1,289
|
||||
|
Other
(expense), net
|
-
|
-
|
-
|
-
|
||||
|
Earnings
before income taxes
|
1,571
|
1,776
|
3,442
|
3,916
|
||||
|
Income
tax expense
|
605
|
675
|
1,307
|
1,488
|
||||
|
Net
Earnings
|
$
|
966
|
$
|
1,101
|
$
|
2,135
|
$
|
2,428
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
earnings
|
$
|
966
|
$
|
1,101
|
$
|
2,135
|
$
|
2,428
|
|
Minority
interest
|
-
|
-
|
-
|
-
|
||||
|
Interest
income
|
(6)
|
(2)
|
(12)
|
(8)
|
||||
|
Interest
expense (including amounts allocated to Corporate)
|
103
|
(134)
|
306
|
(207)
|
||||
|
Income
tax expense
|
605
|
675
|
1,307
|
1,488
|
||||
|
Depreciation
and amortization
|
399
|
417
|
1,211
|
1,290
|
||||
|
Adjusted
EBITDA
|
$
|
2,067
|
$
|
2,057
|
$
|
4,947
|
$
|
4,991
|
--25--
Casino
Market Data
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
2006
|
2005
|
2006
|
2005
|
|||||
|
Market
share of the Cripple Creek gaming revenue
|
12.0%
|
12.8%
|
11.6%
|
12.8%
|
||||
|
Average
number of slot machines
|
585
|
608
|
584
|
625
|
||||
|
Market
share of Cripple Creek gaming devices
|
12.4%
|
12.9%
|
12.3%
|
13.1%
|
||||
|
Average
slot machine win per day
|
$
94
|
$
95
|
$
85
|
$
85
|
||||
|
Cripple
Creek average slot machine win per day
|
$
96
|
$
95
|
$
89
|
$
87
|
||||
Three
months ended September 30, 2006 vs 2005
The
Womacks casino is one of the largest gaming facilities in Cripple Creek.
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, or cash and other prizes. Management uses points and coupons
to
attract customers with the expectation of increasing gaming revenue, while
monitoring and adjusting the programs as necessary. Based on management’s
ongoing evaluation of the comp policies at the casino, the cost of points and
coupons is in line with management’s expectations and prior year results.
Additionally, management continues to focus its efforts on customer service,
including the introduction of more Ticket in/Ticket out (“TITO”) slot machines
on the floor. As of September 30, 2006, approximately 63.0% of the floor has
been converted to TITO compared to 40.6% at September 30, 2005. There were
a
number of changes made in key management positions at Womacks during the third
quarter of 2006. The changes are expected to bring fresh ideas to help
strengthen Womacks in a highly competitive market.
Casino
revenue was 5.3% lower than during the same period last year, and net operating
revenue decreased by 5.1% as a result of increased competition in this market.
Womacks’ market share of gaming devices dropped by 3.9% as we eliminated poor
performing slot machines during the first half of 2006. Gaming revenue in the
Cripple Creek market, as a whole, experienced minimal growth, closing 0.8%
higher than during the same period last year.
Casino
expense decreased by 19.8%, or $0.4 million. A significant portion of this
decrease is related to management’s decision to remove poor performing slot
machines from the floor, resulting in decreases in the cost of device fees
and
participation fees. Because of the investment in new games in the last several
years, the casino was able to reduce the cost of slot conversions or game
replacements. The casino also reduced the cost of ineffective promotions while
continuing to concentrate its efforts on improving customer service. As a result
of this ability to control casino costs, casino operating margins (net of
promotional allowances) increased to 66.9% for the three months ended September
30, 2006, compared to 60.2% for the three months ended September 30,
2005.
Net
interest expense is impacted by amounts advanced to the Corporate segment to
fund the Company’s acquisitions. Whenever the advances to Corporate exceed the
outstanding borrowing, Cripple Creek reports net negative interest expense.
Cripple
Creek’s effective tax rate has remained stable at approximately
38%.
Nine
months ended September 30, 2006 vs 2005
Casino
revenue reflects the level of competition in the Cripple Creek market. Casino
revenue was down by 6.2% for the first nine months of 2006 compared to the
same
period in 2005, primarily due to the increased competition. Gaming revenue
in
the Cripple Creek market as a whole was 1.9% higher than during the same period
last year.
For
the
reasons set forth in the discussion of the three month period, management has
been able to improve the casino operating margins (net of promotional
allowances) from 58.3% for the first nine months of 2005 to 63.2% for the first
nine months of 2006.
Net
interest expense is impacted by amounts advanced to Corporate to fund the
Company’s acquisitions. Whenever the advances to Corporate exceed the
outstanding borrowing, Cripple Creek reports net negative interest expense.
The
amount allocated to Corporate was reduced by $0.9 million due to the Company’s
repayment of approximately $14.5 million of Cripple Creek debt in the fourth
quarter of 2005.
Cripple
Creek’s effective tax rate has remained stable at approximately
38%.
--26--
CALEDON,
SOUTH AFRICA
The
Caledon Hotel, Spa and Casino (the “Caledon”) is one of four casinos currently
operating in the Western Cape Province, which has a population of approximately
four million. A fifth and final casino, as permitted in the Western Cape under
the Gaming Act, is scheduled to open in November 2006. To compete with these
casinos, the Caledon emphasizes its marketing efforts on an array of amenities
available to guests of the resort as a complement to the gaming experience.
The
resort currently operates three restaurants, three bars, a conference facility,
a mineral spa, a treatment center and the “Outdoor Experience” (a team building
facility). The Caledon also owns approximately 600 acres of vacant land that
it
is subdividing. The Company intends to develop an 18 hole signature golf course
estate on the transferred property with approximately 450 residential homes
and
to link this property to an existing nine-hole municipal golf course by adding
another nine holes surrounded with resort housing elements.
Operating
results in U.S. dollars for the three and nine months ended September 30, 2006
and 2005 were as follows:
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Casino
|
$
|
3,728
|
$
|
3,589
|
$
|
11,732
|
$
|
10,790
|
|
Hotel,
food and beverage
|
676
|
802
|
2,182
|
2,260
|
||||
|
Other
(net of promotional allowances)
|
(54)
|
(233)
|
(131)
|
(526)
|
||||
|
Net
operating revenue
|
4,350
|
4,158
|
13,783
|
12,524
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
1,416
|
1,409
|
4,434
|
4,187
|
||||
|
Hotel,
food and beverage
|
443
|
510
|
1,437
|
1,575
|
||||
|
General
and administrative
|
696
|
641
|
2,277
|
1,884
|
||||
|
Property
write-downs and other write-offs,
net of recoveries |
(26)
|
-
|
(26)
|
-
|
||||
|
Depreciation
and amortization
|
279
|
374
|
882
|
1,206
|
||||
|
2,808
|
2,934
|
9,004
|
8,852
|
|||||
|
Earnings
from operations
|
1,542
|
1,224
|
4,779
|
3,672
|
||||
|
Interest
income
|
5
|
6
|
13
|
39
|
||||
|
Interest
(expense)
|
(182)
|
(313)
|
(590)
|
(622)
|
||||
|
Other
(expense), net
|
-
|
-
|
(32)
|
-
|
||||
|
Earnings
before income taxes
|
1,365
|
917
|
4,170
|
3,089
|
||||
|
Income
tax expense
|
375
|
321
|
1,298
|
1,030
|
||||
|
Net
Earnings
|
$
|
990
|
$
|
596
|
$
|
2,872
|
$
|
2,059
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
earnings
|
$
|
990
|
$
|
596
|
$
|
2,872
|
$
|
2,059
|
|
Minority
interest
|
-
|
-
|
-
|
-
|
||||
|
Interest
income
|
(5)
|
(6)
|
(13)
|
(39)
|
||||
|
Interest
expense
|
182
|
313
|
590
|
622
|
||||
|
Income
tax expense
|
375
|
321
|
1,298
|
1,030
|
||||
|
Depreciation
and amortization
|
279
|
374
|
882
|
1,206
|
||||
|
Adjusted
EBITDA
|
$
|
1,821
|
$
|
1,598
|
$
|
5,629
|
$
|
4,878
|
|
Average
exchange rate (ZAR/USD)
|
7.18
|
6.50
|
6.57
|
6.27
|
--27--
Operating
results in Rand for the three and nine months ended September 30, 2006 and
2005
are as follows:
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Casino
|
ZAR
|
26,773
|
ZAR
|
23,322
|
ZAR
|
77,041
|
ZAR
|
67,404
|
|
Hotel,
food and beverage
|
4,873
|
5,208
|
14,337
|
14,125
|
||||
|
Other
(net of promotional allowances)
|
(382)
|
(1,510)
|
(875)
|
(3,346)
|
||||
|
Net
operating revenue
|
31,264
|
27,020
|
90,503
|
78,183
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
10,174
|
9,140
|
29,189
|
26,204
|
||||
|
Hotel,
food and beverage
|
3,144
|
3,334
|
9,368
|
9,853
|
||||
|
General
and administrative
|
5,010
|
4,174
|
14,994
|
11,856
|
||||
|
Property
write-downs and other write-offs,
net of recoveries |
(214)
|
-
|
(214)
|
-
|
||||
|
Depreciation
and amortization
|
2,010
|
2,435
|
5,779
|
7,599
|
||||
|
20,124
|
19,083
|
59,116
|
55,512
|
|||||
|
Earnings
from operations
|
11,140
|
7,937
|
31,387
|
22,671
|
||||
|
Interest
income
|
40
|
43
|
90
|
241
|
||||
|
Interest
(expense)
|
(1,309)
|
(2,046)
|
(3,883)
|
(3,937)
|
||||
|
Other
(expense), net
|
2
|
-
|
(208)
|
-
|
||||
|
Earnings
before income taxes
|
9,873
|
5,934
|
27,386
|
18,975
|
||||
|
Income
tax expense
|
2,715
|
2,078
|
8,506
|
6,361
|
||||
|
Net
Earnings
|
ZAR
|
7,158
|
ZAR
|
3,856
|
ZAR
|
18,880
|
ZAR
|
12,614
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
earnings
|
ZAR
|
7,158
|
ZAR
|
3,856
|
ZAR
|
18,880
|
ZAR
|
12,614
|
|
Minority
interest
|
-
|
-
|
-
|
-
|
||||
|
Interest
income
|
(40)
|
(43)
|
(90)
|
(241)
|
||||
|
Interest
expense
|
1,309
|
2,046
|
3,883
|
3,937
|
||||
|
Income
tax expense
|
2,715
|
2,078
|
8,506
|
6,361
|
||||
|
Depreciation
and amortization
|
2,010
|
2,435
|
5,779
|
7,599
|
||||
|
Adjusted
EBITDA
|
ZAR
|
13,152
|
ZAR
|
10,372
|
ZAR
|
36,958
|
ZAR
|
30,270
|
Casino
Market Data (in Rand)
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||
|
2006
|
2005
|
2006
|
2005
|
|
|
Market
share of the Western Cape gaming revenue
|
5.7%
|
5.6%
|
5.9%
|
5.6%
|
|
Market
share of Western Cape gaming devices
|
12.4%
|
11.3%
|
12.9%
|
11.4%
|
|
Average
number of slot machines
|
348
|
300
|
349
|
300
|
|
Average
slot machine win per day
|
ZAR
782
|
ZAR
777
|
ZAR
754
|
ZAR
766
|
|
Average
number of tables
|
6
|
9
|
7
|
9
|
|
Average
table win per day
|
ZAR
3,127
|
ZAR
2,085
|
ZAR
2,783
|
ZAR
1,821
|
--28--
Three
months ended September 30, 2006 vs 2005
The
results discussed below are based on the Rand to eliminate the effect of
fluctuations in foreign currency exchange rates.
Casino
revenue increased 15.0% from the third quarter of 2005 to the third quarter
of
2006, a period in which total table win was flat. The 16.0% increase in the
average number of slots machines available contributed to the increase in casino
revenue over the same prior year period. Casino expenses increased 11.3% from
the third quarter of 2005 to the third quarter of 2006, but reflect management’s
ability to leverage the increase in revenues.
The
ZAR
0.3 million decrease in hotel, food and beverage revenue was due to a slight
decrease in the hotel occupancy rate from 45.2% for the third quarter of 2005
to
44.1% for the third quarter of 2006.
Other
operating revenue (net of promotional allowances) principally consists of
promotional allowances and revenue generated from the resort’s ancillary
services. The improvement in the net negative impact of other operating revenue
(net of promotional allowances) is due to additional revenues generated by
ancillary services provided by the resort and a revision of the casino’s
complementary policy.
The
ZAR
0.8 million increase in Caledon’s general and administrative expenses is
primarily the result of a write-off of ZAR 0.5 million in cash vault
discrepancies which management has been investigating, continued maintenance
expenditures and an increase in gaming and value added taxes.
The
ZAR
0.2 million decrease in property write-downs and other write-offs, is due to
the
settlement of a business interruption insurance claim related to a road closure
in the second quarter of 2005 for ZAR 0.2 million more that the original
estimate.
Depreciation
expense decreased ZAR 0.4 million, primarily because computer equipment with
a
three year estimated life became fully depreciated by the end of
2005.
Interest
expense for CCAL decreased 36.0%, or ZAR 0.7 million. In an effort to reduce
overall interest charges to the casino and increase our borrowing capacity,
Caledon paid off its existing loan with ABSA bank in July 2005 with proceeds
from a new ZAR 60 million term loan from Nedbank Limited. CCAL incurred a
prepayment fee of ZAR 1.2 million for the early repayment of high interest
debt
in July 2005. This has been offset by an increase in interest charges of ZAR
0.5
million due to an increase in the average debt balance (excluding intercompany
debt) for Caledon from ZAR 40.0 million for the three months ended September
30,
2005 to ZAR 51.0 million for the same period in 2006.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore,
the
tax provision will vary from period to period. The marginal tax rate on income
in South Africa is currently 29%. CCAL’s effective tax rate for the three months
ended September 30, 2006 was 28% compared to 35% in the same 2005
period.
Nine
months ended September 30, 2006 vs 2005
The
results discussed below are based on the Rand to eliminate the effect of
fluctuations in foreign currency exchange rates.
Casino
revenue increased 14.3% in the first nine months of 2006 compared to the same
period in 2005, which includes an increase of 18.9% in total table win. In
addition, the 16.3% increase in the average number of slot machines available
contributed to the increase in casino revenue over the same prior year period.
Casino expenses increased 11.4% in the first nine months of 2006 compared to
the
same period in 2005, but reflect management’s ability to leverage the increase
in revenues.
--29--
Other
operating revenue (net of promotional allowances) principally consists of
promotional allowances and revenue generated from the resort’s ancillary
services. The improvement in the net negative impact of other operating revenue
(net of promotional allowances) is due to additional revenues generated by
ancillary services provided by the resort and a revision of the casino’s
complementary policy.
The
ZAR
3.1 million increase in Caledon’s general and administrative expenses is
primarily the result of a write-off of ZAR 0.5 million in cash vault
discrepancies which management has been investigating, the outsourcing of
security service contracts, continued maintenance expenditures and an increase
in gaming and value added taxes.
The
ZAR
0.2 million decrease in property write-downs and other write-offs, net of
recoveries is due to the settlement of a business interruption claim insurance
claim related to a road closure in the second quarter of 2005 for ZAR 0.2
million more that the original estimate.
Depreciation
expense decreased ZAR 1.8 million, primarily because computer equipment with
a
three year estimated life became fully depreciated by the end of
2005.
Excluding
the ZAR 1.2 million charge incurred by the Company for the early repayment
of
the ABSA bank loan in July 2005, interest expense for CCAL increased 41.9%,
or
ZAR 1.1 million, due to an increase in the average debt balance for Caledon
from
ZAR 24.5 million for the nine months ended September 30, 2005 to ZAR 53.9
million for the same period in 2006.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The marginal tax rate on income
in South Africa is currently 29%. Prior to April 1, 2005, the marginal tax
rate
was 30%. CCAL’s effective tax rate for the nine ended September 30, 2006 was 31%
compared to 34% in the same 2005 period.
--30--
NEWCASTLE,
SOUTH AFRICA
Operating
results in U.S. dollars for the three months ended September 30, 2006 and
from April 1, 2006 through September 30, 2006 were as follows:
|
For
the three months
ended
September
30, 2006
|
April
1, 2006 through
September
30, 2006
|
|||
|
(Amounts
in thousands)
|
||||
|
Operating
Revenue
|
||||
|
Casino
|
$
|
1,719
|
$
|
3,579
|
|
Hotel,
food and beverage
|
113
|
311
|
||
|
Other
(net of promotional allowances)
|
59
|
51
|
||
|
Net
operating revenue
|
1,891
|
3,941
|
||
|
Costs
and Expenses
|
||||
|
Casino
|
685
|
1,403
|
||
|
Hotel,
food and beverage
|
47
|
205
|
||
|
General
and administrative
|
552
|
1,040
|
||
|
Depreciation
and amortization
|
38
|
144
|
||
|
1,322
|
2,792
|
|||
|
Earnings
from operations
|
569
|
1,149
|
||
|
Interest
income
|
-
|
-
|
||
|
Interest
(expense)
|
-
|
(8)
|
||
|
Other
(expense), net
|
-
|
-
|
||
|
Earnings
before income taxes and minority interest
|
569
|
1,141
|
||
|
Income
tax expense
|
183
|
356
|
||
|
Earnings
before minority interest
|
386
|
785
|
||
|
Minority
Interest
|
89
|
218
|
||
|
Net
Earnings
|
$
|
297
|
$
|
567
|
|
Reconciliation
to Adjusted EBITDA:
|
||||
|
Net
earnings
|
$
|
297
|
$
|
567
|
|
Minority
interest
|
89
|
218
|
||
|
Interest
income
|
-
|
-
|
||
|
Interest
expense
|
-
|
8
|
||
|
Income
tax expense
|
183
|
356
|
||
|
Depreciation
and amortization
|
38
|
144
|
||
|
Adjusted
EBITDA
|
$
|
607
|
$
|
1,293
|
|
Average
exchange rate (ZAR/USD)
|
7.18
|
6.57
|
--31--
Operating
results in Rand for the three months ended September 30, 2006 and from April
1,
2006 through September 30, 2006 were as follows:
|
For
the three months
ended
September
30, 2006
|
April
1, 2006 through
September
30, 2006
|
|||
|
(Amounts
in thousands)
|
||||
|
Operating
Revenue
|
||||
|
Casino
|
ZAR
|
12,330
|
ZAR
|
24,300
|
|
Hotel,
food and beverage
|
819
|
2,094
|
||
|
Other
(net of promotional allowances)
|
428
|
371
|
||
|
Net
operating revenue
|
13,577
|
26,765
|
||
|
Costs
and Expenses
|
||||
|
Casino
|
4,916
|
9,537
|
||
|
Hotel,
food and beverage
|
342
|
1,355
|
||
|
General
and administrative
|
3,990
|
7,085
|
||
|
Depreciation
and amortization
|
275
|
938
|
||
|
9,523
|
18,915
|
|||
|
Earnings
from operations
|
4,054
|
7,850
|
||
|
Interest
income
|
-
|
-
|
||
|
Interest
(expense)
|
-
|
(61)
|
||
|
Other
(expense), net
|
-
|
-
|
||
|
Earnings
before income taxes and minority interest
|
4,054
|
7,789
|
||
|
Income
tax expense
|
1,316
|
2,447
|
||
|
Earnings
before minority interest
|
2,738
|
5,342
|
||
|
Minority
Interest
|
634
|
1,474
|
||
|
Net
Earnings
|
ZAR
|
2,104
|
ZAR
|
3,868
|
|
Reconciliation
to Adjusted EBITDA:
|
||||
|
Net
earnings
|
ZAR
|
2,104
|
ZAR
|
3,868
|
|
Minority
interest
|
634
|
1,474
|
||
|
Interest
income
|
-
|
-
|
||
|
Interest
expense
|
-
|
61
|
||
|
Income
tax expense
|
1,316
|
2,447
|
||
|
Depreciation
and amortization
|
275
|
938
|
||
|
Adjusted
EBITDA
|
ZAR
|
4,329
|
ZAR
|
8,788
|
--32--
Casino
Market Data (in Rand)
|
For
the three months
ended
September
30, 2006
|
April
1, 2006 through
September
30, 2006
|
|
|
Market
share of the KwaZulu-Natal gaming revenue
|
2.4%
|
2.5%
|
|
Market
share of KwaZulu-Natal gaming devices
|
6.3%
|
6.3%
|
|
Average
number of slot machines
|
200
|
200
|
|
Average
slot machine win per day
|
ZAR
605
|
ZAR
589
|
|
Average
number of tables
|
7
|
7
|
|
Average
table win per day
|
ZAR
1,865
|
ZAR
2,154
|
Three
and six months ended September 30, 2006
We
acquired our ownership interest in Century Casino Newcastle as of April 1,
2006.
Since that time, our efforts have primarily been focused on the construction
of
a new facility. The casino has an exclusive right to operate in the greater
Newcastle area, which has a population of approximately 500,000 people. The
Newcastle casino is approximately 220 miles (approximately 350 kilometers)
from
major metropolitan centers in Durban and Johannesburg and enjoys a regional
exclusivity of approximately 130 miles (approximately 200 kilometers). We
believe that the location for the new casino, which will be much closer to
the
highway that connects Durban and Johannesburg, is a strong improvement from
the
existing location. The new location provides more room for future development
and we believe the facility will be far superior to the existing building.
We
have installed a team of seasoned managers from the Caledon Spa, Hotel and
Casino to oversee the transition of operations.
The
calculation of minority interest is determined prior to the elimination of
intercompany management fees.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore,
the
tax provision will vary from period to period. The marginal tax rate on income
in South Africa is currently 29%. Newcastle’s effective tax rate for the three
months ended September 30, 2006 was 32%. Newcastle’s effective tax rate from
April 1 through September 30, 2006 was 31%.
--33--
CENTRAL
CITY, COLORADO
We
opened
a casino and hotel in Central City, Colorado on July 11, 2006. The facility
includes a 66,000 square foot casino and back of house with available space
for
625 slot machines, eight table games, three of which are player-banked poker
tables, 27 hotel rooms, retail, food and beverage amenities and a 500 space
on-site covered parking garage. Prior to July 11, 2006, operating expenses
for
this segment consisted primarily of pre-opening and non-capitalizable
construction expenditures.
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Casino
|
$
|
4,475
|
$
|
-
|
$
|
4,475
|
$
|
-
|
|
Hotel,
food and beverage
|
432
|
-
|
432
|
-
|
||||
|
Other
(net of promotional allowances)
|
(219)
|
-
|
(219)
|
6
|
||||
|
Net
operating revenue
|
4,688
|
-
|
4,688
|
6
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
2,425
|
-
|
2,468
|
-
|
||||
|
Hotel,
food and beverage
|
661
|
-
|
661
|
-
|
||||
|
General
and administrative
|
968
|
17
|
1,663
|
81
|
||||
|
Depreciation
and amortization
|
451
|
-
|
451
|
-
|
||||
|
4,505
|
17
|
5,243
|
81
|
|||||
|
Income
(loss) from operations
|
183
|
(17)
|
(555)
|
(75)
|
||||
|
Interest
income
|
-
|
-
|
-
|
-
|
||||
|
Interest
(expense)
|
(1,281)
|
(66)
|
(1,766)
|
(145)
|
||||
|
Other
income, net
|
-
|
-
|
-
|
-
|
||||
|
Loss
before income taxes and minority interest
|
(1,098)
|
(83)
|
(2,321)
|
(220)
|
||||
|
Income
tax benefit
|
(247)
|
-
|
(401)
|
-
|
||||
|
Loss
before minority interest
|
(851)
|
(83)
|
(1,920)
|
(220)
|
||||
|
Minority
Interest
|
(446)
|
(447)
|
(1,265)
|
(584)
|
||||
|
Net
(Loss) Earnings
|
$
|
(405)
|
$
|
364
|
$
|
(655)
|
$
|
364
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
(loss) earnings
|
$
|
(405)
|
$
|
364
|
$
|
(655)
|
$
|
364
|
|
Minority
interest
|
(446)
|
(447)
|
(1,265)
|
(584)
|
||||
|
Interest
income
|
-
|
-
|
-
|
-
|
||||
|
Interest
expense
|
1,281
|
66
|
1,766
|
145
|
||||
|
Income
tax expense
|
(247)
|
-
|
(401)
|
-
|
||||
|
Depreciation
and amortization
|
451
|
-
|
451
|
-
|
||||
|
Adjusted
EBITDA
|
$
|
634
|
$
|
(17)
|
$
|
(104)
|
$
|
(75)
|
--34--
|
For
the three months
ended
September 30, 2006
|
||
|
Market
share of the Central City gaming revenue
|
21.1%
|
|
|
Average
number of slot machines
|
488
|
|
|
Market
share of Central City gaming devices
|
22.3%
|
|
|
Average
slot machine win per day
|
$
109
|
|
|
Central
City average slot machine win per day
|
$
115
|
|
Three
months ended September 30, 2006 vs 2005
The
three
months ended September 30, 2006 represents the first quarter that our casino
in
Central City, Colorado was operating. With the exception of certain one time
opening expenses, the costs to operate the casino have been in line with our
expectations. However, revenues are below what we have initially projected.
The
property has been operating with fewer than expected slot machines. Originally
proposed to operate with 625 slots, the property has operated with approximately
400 to 550 slots during its first three months. We are currently reviewing
various strategies to increase revenues and adjusted EBITDA at the property.
The
property had approximately 550 slot machines in operation as of September 30,
2006 and by November 2006 expects to operate with approximately 565 slot
machines. We may add more slot machines in the future. Management
has focused on the development of player club memberships, with results being
better than expected. We now have approximately 33,000 players in our player
club database. Management’s marketing strategy will focus on direct marketing to
the players in our database.Although
revenues have not yet met our expectations, gaming revenue has grown
consistently since opening. A major factor to bring costs in line with current
revenue levels was a reduction in the workforce from a high of 212 employees
at
opening to a current level of 183 employees.
For
the
three months ended September 30, 2006, the significant increase in interest
expense relates to interest that we are incurring based on approximately $34.5
million of outstanding debt. In previous periods, this interest was capitalized
towards the cost of the construction of the casino and hotel.
For
the
three months ended September 30, 2006 and 2005, we incurred $0.1 million and
$0.4 million, respectively, in pre-opening expenses. A majority of these
expenses relate to fees earned by our subsidiary Century Casinos Management,
Inc. in connection with a casino services agreement.
In
April
2006, we began allocating pre-tax losses to the minority partner in proportion
to its ownership percentage. Prior to this date, by agreement all losses were
allocated to the minority partner until its capital account balances were in
the
same proportion as its ownership percentage. The calculation of minority
interest is determined prior to the elimination of intercompany management
fees.
Income
taxes in Central City are provided for on income that will be distributed
to
Century Casinos using an effective tax rate of 38%; therefore, pre-tax income
is
reduced by the minority interest in determining the income subject to tax.
No
provision on the pre-opening losses incurred in 2005 was made as these losses
were allocated to the minority partner.
Nine
months ended September 30, 2006 vs 2005
Prior
to
July 11, 2006, all operating results reflect the cumulative pre-opening cost
associated with the project. Pre-opening costs increased in 2006 for two
reasons. First, we made preparations to open the casino in July 2006 by hiring
and training both managers and staff. Expenses for this training are reflected
in general and administrative expenses for this period. Second, in April 2006,
we began allocating losses to the minority partner in proportion to its
ownership percentage. Prior to this date, by agreement all losses were allocated
to the minority partner until its capital account balances were in the same
proportion as its ownership percentage. As a result of the casino opening on
July 11, 2006, revenues and expenses have increased (please refer to three
month
discussion above).
For
the
nine months ended September 30, 2006, the significant increase in interest
expense relates to interest that we are incurring based on approximately $34.5
million of outstanding debt. In previous periods, this interest was capitalized
towards the cost of the construction of the casino and hotel.
Income
taxes in Central City are provided for on income that will be distributed to
Century Casinos using an effective tax rate of 38%; therefore, pre-tax income
is
reduced by the minority interest in determining the income subject to tax.
No
provision on the pre-opening losses incurred in 2005 was made as these losses
were allocated to the minority partner.
--35--
EDMONTON,
CANADA
We
are developing
a casino and hotel project in Edmonton, Alberta, Canada. The project is expected
to include a casino with 600 gaming machines, 31 gaming tables, food and
beverage amenities, a dinner theater, a 300 space underground parking facility,
approximately 600 surface parking spaces and a 26-room hotel. We expect the
project to cost approximately $31.2 million ($35.8 million Canadian). Our
current expectation is that we will open the casino on November 17, 2006. Upon
completion of construction, CRA expects to receive its gaming license from
the
Alberta Gaming and Liquor Commission (“AGLC”). On December 17, 2004, the AGLC
granted approval to begin construction of the casino property. As is customary,
the issuance of the license does not occur until completion of construction
and
after all federal and provincial legislation, regulation and policies, and
municipal requirements, permits, licenses and/or authorizations have been met.
CRI has entered into a long-term agreement to manage the facility.
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Other
(net of promotional allowances)
|
$
|
1
|
$
|
-
|
$
|
3
|
$
|
37
|
|
Net
operating revenue
|
1
|
-
|
3
|
37
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
8
|
-
|
9
|
-
|
||||
|
Hotel,
food and beverage
|
27
|
-
|
32
|
-
|
||||
|
General
and administrative
|
129
|
131
|
234
|
221
|
||||
|
Depreciation
and amortization
|
6
|
-
|
14
|
-
|
||||
|
170
|
131
|
289
|
221
|
|||||
|
Loss
from operations
|
(169)
|
(131)
|
(286)
|
(184)
|
||||
|
Interest
income
|
4
|
2
|
16
|
7
|
||||
|
Interest
(expense)
|
(101)
|
(9)
|
(110)
|
(36)
|
||||
|
Other
(expense) income, net
|
(21)
|
(2)
|
(9)
|
3
|
||||
|
Loss
before income taxes and minority interest
|
(287)
|
(140)
|
(389)
|
(210)
|
||||
|
Income
tax benefit
|
(88)
|
(68)
|
(126)
|
(68)
|
||||
|
Loss
before minority interest
|
(199)
|
(72)
|
(263)
|
(142)
|
||||
|
Minority
Interest
|
-
|
(28)
|
-
|
(59)
|
||||
|
Net
Loss
|
$
|
(199)
|
$
|
(44)
|
$
|
(263)
|
$
|
(83)
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
loss
|
$
|
(199)
|
$
|
(44)
|
$
|
(263)
|
$
|
(83)
|
|
Minority
interest
|
-
|
(28)
|
-
|
(59)
|
||||
|
Interest
income
|
(4)
|
(2)
|
(16)
|
(7)
|
||||
|
Interest
expense
|
101
|
9
|
110
|
36
|
||||
|
Income
tax (benefit)
|
(88)
|
(68)
|
(126)
|
(68)
|
||||
|
Depreciation
and amortization
|
6
|
-
|
14
|
-
|
||||
|
Adjusted
EBITDA
|
$
|
(184)
|
$
|
(133)
|
$
|
(281)
|
$
|
(181)
|
--36--
Three
months ended September 30, 2006 vs 2005
All
costs
incurred during the periods represent pre-opening expenses. On January 12,
2006,
CRI purchased the minority interest in the Edmonton, Canada project. As a
result, there is no minority interest recorded for the third quarter of 2006.
Nine
months ended September 30, 2006 vs 2005
All
costs
incurred during the periods represent pre-opening expenses. As a result of
the
purchase of the minority interest in the Edmonton, Canada project, no minority
interest is recorded and CRA is now absorbing 100% of the pre-opening
costs.
ALL
OTHER OPERATING SEGMENTS
Cruise
Ships
We
experience fluctuations in the casino revenue generated on each cruise depending
on the number and gaming quality of the passengers, and these fluctuations
may
be extreme. In addition, the cruise ships on which we conduct operations may
be
out of service from time to time for periodic maintenance or based on the
operating schedule of the cruise line. As a result, revenues resulting from
our
cruise ship based operations may fluctuate significantly from period to period.
Additionally, cruise ship earnings are also affected by an increase in
concession fees in proportion to the revenue. For example, the concession fees
paid on revenues generated on the Oceania line of vessels are greater than
those
paid to Silversea.
Our
right
to operate the casinos aboard the Silver Shadow and Silver Whisper, cruise
ships
operated by Silversea Cruises, Ltd. (“Silversea”), terminated at the end of
September 2005 and at the beginning of July 2006, respectively. On March 8,
2006, we received notification from Silversea that our right to operate the
casino aboard the Silver Wind cruise ship will terminate as of May 3, 2007.
In
addition, we also received notification from Silversea purporting to terminate
our right to operate the casino aboard the Silver Cloud cruise ship as of March
30, 2006; however, we believe the purported termination was untimely under
the
terms of our casino concession agreement with Silversea, resulting in a five
year extension of the agreement as to the Silver Cloud. In April 2006, Silversea
commenced an arbitration proceeding with the International Chamber of Commerce
International Court of Arbitration seeking to terminate the concession agreement
as to the Silver Cloud. We have filed an answer denying that the agreement
as to
the Silver Cloud was terminated and seeking to confirm that we have right to
a
five-year extension of the agreement. We have also filed a counterclaim seeking
damages arising from the wrongful termination of the concession agreement.
We
intend to continue operation of our casino aboard the Silver Cloud pending
resolution of the arbitration.
In
accordance with a casino concession agreement, the Company’s service periods
amongst the various Oceania vessels (the Nautica, the Insignia and the Regatta)
will be extended for five year periods, commencing on the date that the Company
installs newer slot machine equipment onto each ship and ending on the fifth
anniversary date thereof.
Casino
Millennium
We
began
consolidating the operating results of CM on April 13, 2006. Prior to this
time,
we were accounting for the results of CM as an equity-method
investment.
--37--
Operating
results for the Company’s remaining properties for the three and nine months
ended September 30, 2006 and 2005 were as follows:
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Casino
|
$
|
1,213
|
$
|
781
|
$
|
3,113
|
$
|
2,107
|
|
Hotel,
food and beverage
|
6
|
-
|
13
|
-
|
||||
|
Other
(net of promotional allowances)
|
99
|
85
|
226
|
187
|
||||
|
Net
operating revenue
|
1,318
|
866
|
3,352
|
2,294
|
||||
|
Costs
and Expenses
|
||||||||
|
Casino
|
953
|
550
|
2,464
|
1,525
|
||||
|
Hotel,
food and beverage
|
14
|
-
|
26
|
-
|
||||
|
General
and administrative
|
71
|
-
|
130
|
-
|
||||
|
Depreciation
and amortization
|
97
|
36
|
246
|
97
|
||||
|
1,135
|
586
|
2,866
|
1,622
|
|||||
|
Earnings
from operations
|
183
|
280
|
486
|
672
|
||||
|
Interest
income
|
4
|
-
|
7
|
-
|
||||
|
Interest
(expense)
|
(9)
|
-
|
(23)
|
-
|
||||
|
Other
(expense), net
|
1
|
-
|
(26)
|
-
|
||||
|
Earnings
before income taxes
|
179
|
280
|
444
|
672
|
||||
|
Income
tax expense
|
5
|
8
|
14
|
20
|
||||
|
Net
Earnings
|
$
|
174
|
$
|
272
|
$
|
430
|
$
|
652
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
earnings
|
$
|
174
|
$
|
272
|
$
|
430
|
$
|
652
|
|
Minority
interest
|
-
|
-
|
-
|
-
|
||||
|
Interest
income
|
(4)
|
-
|
(7)
|
-
|
||||
|
Interest
expense
|
9
|
-
|
23
|
-
|
||||
|
Income
tax expense
|
5
|
8
|
14
|
20
|
||||
|
Depreciation
and amortization
|
97
|
36
|
246
|
97
|
||||
|
Adjusted
EBITDA
|
$
|
281
|
$
|
316
|
$
|
706
|
$
|
769
|
Three
months ended September 30, 2006 vs 2005
Cruise
ship revenue decreased 12.6% for the three months ended September 30, 2006
as
compared to the same period in 2005. We operated casinos aboard six ships for
the three month period ended September 30, 2006 compared to seven ships for
the
three month period ended September 30, 2005. CM accounts for $0.6 million of
the
revenue for the three months ended September 30, 2006.
CM
accounted for $0.4 million of the total increase in casino expenses and for
all
of the increase in general and administrative expenses.
Income
taxes are provided for at the effective tax rates of the jurisdiction in
which
the income is earned. The All Other Operating segment includes operations
that
are taxed in more than one jurisdiction. For the periods reported, the effective
tax rate has remained relatively stable at 3%.
--38--
Nine
months ended September 30, 2006 vs 2005
Cruise
ship revenue increased 13.7% for the nine months ended September 30, 2006 as
compared to the same period in 2005. For all of 2005 and the first six months
of
2006, we operated casinos aboard seven ships. As of July 2006, we are operating
casinos aboard six ships. CM accounted for $1.0 million of the increase in
revenue for the nine months ended September 30, 2006
CM
accounted for $0.7 million of the total increase in casino expenses and for
all
of the increase in general and administrative expenses.
Net
earnings for the cruise ships decreased by $0.2 million for the nine months
ended September 30, 2006 vs 2005.
Income
taxes are provided for at the effective tax rates of the jurisdiction in which
the income is earned. The All Other Operating segment includes operations that
are taxed in more than one jurisdiction. For the periods reported, the effective
tax rate has remained relatively stable at 3%.
--39--
CORPORATE
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||
|
(Amounts
in thousands)
|
2006
|
2005
|
2006
|
2005
|
||||
|
Operating
Revenue
|
||||||||
|
Other
|
$
|
-
|
$
|
22
|
$
|
12
|
$
|
56
|
|
Net
operating revenue
|
-
|
22
|
12
|
56
|
||||
|
Costs
and Expenses
|
||||||||
|
General
and administrative
|
1,681
|
1,053
|
4,402
|
3,339
|
||||
|
Property
write-down and other write-offs,
net of recoveries |
(394)
|
-
|
(379)
|
(30)
|
||||
|
Depreciation
and amortization
|
23
|
20
|
50
|
44
|
||||
|
1,310
|
1,073
|
4,073
|
3,353
|
|||||
|
Loss
from unconsolidated subsidiary
|
-
|
-
|
-
|
(109)
|
||||
|
Loss
from operations
|
(1,310)
|
(1,051)
|
(4,061)
|
(3,406)
|
||||
|
Interest
income
|
137
|
24
|
547
|
68
|
||||
|
Interest
(expense), net
|
476
|
102
|
1,384
|
265
|
||||
|
Interest
expense on non-Cripple Creek debt
allocated to Corporate |
(120)
|
(500)
|
(358)
|
(1,289)
|
||||
|
Other
income (expense), net
|
1
|
(1)
|
367
|
(1)
|
||||
|
Non-operating
items from unconsolidated subsidiary
|
-
|
-
|
-
|
(4)
|
||||
|
Loss
before income taxes and minority interest
|
(816)
|
(1,426)
|
(2,121)
|
(4,367)
|
||||
|
Income
tax benefit
|
(900)
|
(444)
|
(2,054)
|
(1,832)
|
||||
|
Minority
interest
|
56
|
26
|
147
|
88
|
||||
|
Net
Earnings (Loss)
|
$
|
28
|
$
|
(1,008)
|
$
|
(214)
|
$
|
(2,623)
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||||
|
Net
earnings (loss)
|
28
|
(1,008)
|
(214)
|
(2,623)
|
||||
|
Minority
interest
|
56
|
26
|
147
|
88
|
||||
|
Interest
income
|
(137)
|
(24)
|
(547)
|
(68)
|
||||
|
Interest
expense (including amounts allocated from Cripple Creek)
|
(356)
|
398
|
(1,026)
|
1,024
|
||||
|
Income
tax expense
|
(900)
|
(444)
|
(2,054)
|
(1,832)
|
||||
|
Depreciation
and amortization
|
23
|
20
|
50
|
44
|
||||
|
Adjusted
EBITDA
|
$
|
(1,286)
|
$
|
(1,032)
|
$
|
(3,644)
|
$
|
(3,367)
|
--40--
Three
months ended September 30, 2006 vs 2005
Revenue
in the Corporate segment includes fees paid by CM under a technical services
agreement, prior to the acquisition of CM on April 13, 2006. All management
fees
among consolidated subsidiaries are eliminated in the presentation of
results.
General
and administrative expenses increased $0.6 million for the three months ended
September 30, 2006, primarily the result of an increase of $0.1 million in
non-recurring legal charges relating to the Silversea arbitration, corporate
payroll increases of $0.4 million and an increase in travel of $0.1 million
during the three months ended September 30, 2006.
In
conjunction with the sale of our interest in a casino project located in
Gauteng, South Africa, we recovered approximately $0.4 million of previously
written off loans in the three months ended September 30, 2006. This amount
is
recorded as property write-down and other write-offs, net of
recoveries.
The
significant increase in interest income for this segment is directly related
to
the cash reserves we have accumulated resulting from an equity offering we
completed in October 2005 and the cash flows generated by our
operations.
The
net
negative interest expense in the Corporate segment results from the elimination
of the interest on intercompany debt that has been used to finance our
construction projects in Central City, Colorado and Edmonton, Alberta, Canada.
The interest charged to these segments is capitalized as part of the
construction costs and does not appear as interest expense. Caledon’s loan with
Nedbank was the primary source of debt that funded the early stages of
construction in Edmonton and Newcastle.
The
Corporate segment includes earnings and losses sustained by multiple companies
taxed at their respective country’s rates. The mix of earnings and losses
impacts the effective rate reported in the segment. For
the
three months ended September 30, 2006, the tax on net U.S. losses in this
segment exceeds the tax on net non U.S. earnings, which are taxed at
significantly lower rates. The income tax provisions are based on estimated
full-year earnings for financial reporting purposes and are adjusted for
permanent differences. Therefore the tax provision will vary from period to
period.
Nine
months ended September 30, 2006 vs 2005
General
and administrative expenses have increased $1.1 million in the nine months
ended
September 30, 2006 as compared to the nine months ended September 30, 2005.
As
we have increased staff to support the Company’s growth initiatives, corporate
payroll costs have increased $1.0 million in the nine months ended September
30,
2006. In addition, the Company incurred approximately $0.1 million in
non-recurring legal charges relating to the Silversea arbitration during the
nine months ended September 30, 2006.
In
conjunction with the sale of our interest in a casino project located in
Gauteng, South Africa, the Company recovered approximately $0.4 million of
previously written off loans. This amount is recorded as property write-down
and
other write-offs, net of recoveries.
The
net
negative interest expense in the Corporate segment results from the elimination
of the interest on intercompany debt that has been used to finance our
construction projects in Central City, Colorado and Edmonton, Alberta, Canada.
The interest charged to these segments is capitalized as part of the
construction costs and does not appear as interest expense. Caledon’s loan with
Nedbank is the primary source of debt that is funding the intercompany
loans.
We
recognized approximately $0.4 million in foreign currency gains on the exchange
of currency which is included in other income.
The
Corporate segment includes earnings and losses sustained by multiple companies
taxed at their respective country’s rates. The mix of earnings and losses
impacts the effective rate reported in the segment. For
the
nine months ended September 30, 2006, the tax on net U.S. losses in this segment
exceeds the tax on net non U.S. earnings, which are taxed at significantly
lower
rates. The income tax provisions are based on estimated full-year earnings
for
financial reporting purposes and are adjusted for permanent differences.
Therefore the tax provision will vary from period to period.
--41--
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and
cash equivalents totaled $32.0 million at September, 2006, and the Company
had
working capital (current assets minus current liabilities) of $18.8 million.
In
October 2005, under an existing shelf registration, we issued 7,132,667 shares
of common stock, in the form of Austrian Depositary Certificates, through our
underwriter, to retail and institutional investors in the Republic of Austria
and in a private placement to institutional investors in Europe outside of
the
Republic of Austria. Net proceeds from this issuance were approximately $46.2
million. A total of $33.1 million of the proceeds has been used to repay
outstanding debt, to fund the construction of our Edmonton project, to make
a
loan associated with our potential investment in Poland (see next paragraph)
and
for other operating needs. We plan to use the remaining proceeds from this
issuance to make investments in additional gaming projects and for working
capital and other general corporate purposes.
On
June
13, 2006, we entered into an agreement to acquire 100% of all of the issued
and
outstanding shares of G5 Sp. z o.o. (“G5”) for approximately $3.7 million (€2.9
million). In connection with the purchase, we loaned G5 approximately $4.9
million (PLN 15.0 million) to repay existing loans between G5 and its creditors.
The closing of this transaction is subject to due diligence. The funds used
for
this purchase will be from the proceeds obtained from our Austrian Depositary
Certificate offering.
Additional
liquidity at Womacks may be provided by our revolving credit facility with
Wells
Fargo Bank, under which we had an original commitment of $26 million (currently
$18.4 million net of quarterly reductions) and unused borrowing capacity of
approximately $13.9 million as of September 30, 2006. The maturity date of
the
borrowing commitment is August 2007. The
available balance was reduced by $0.7 million on October 1, 2006, and
will be further reduced by $0.7 million at the beginning of each quarter until
maturity in December 2007. Borrowings under the credit facility may be used
for
capital expenditures and working capital at Cripple Creek and corporate
headquarters. Womacks is also permitted to make cash distributions to the
Company up to the amount of the Company’s capital contributions (currently $10.0
million).
On
July
20, 2006, CNEW entered into a loan agreement with Nedbank. Pursuant to this
loan
agreement, Nedbank extended temporary financing and available credit to CNEW,
in
the form of a construction loan, for the total amount of ZAR 50.0 million,
or
$6.5 million. The net proceeds from this financing will be used by CNEW for
the
construction of a new casino and hotel in Newcastle, South Africa. Subsequent
to
the completion of construction, the construction loan will convert to a term
loan agreement, payable in monthly installments of ZAR 1.1 million, or
approximately $0.1 million. The financing bears interest at South Africa’s prime
interest rate less 1.5% (which equates to 10.0% as of September 30, 2006)
and is secured by the pledge of 100% of the total outstanding common stock
of
CNEW. As of September 30, 2006, the principal balance outstanding under this
loan agreement was $2.0 million.
On
November 21, 2005, CC Tollgate, LLC (“CTL”) entered into a $35 million loan
agreement with Wells Fargo Bank and a syndicate of institutional lenders. As
of
September 30, 2006, the principal balance outstanding under the loan agreement
was $34.5 million.
Effective December 31, 2006, CTL will be required to be in compliance with
certain financial covenants pertaining to this loan, the most significant being
Total Leverage Ratio, Senior Leverage Ratio, Adjusted Fixed Charge Coverage
and
Minimum Annualized EBITDAM. It is probable that CTL will not be in compliance
with these covenants. Prior to December 31, 2006, we plan to seek a waiver
from
the lenders related to these covenants or possibly seek an amendment to this
agreement. There can be no assurance that the lenders will grant any waiver
or
agree to any amendment that might be necessary. If CTL failed to meet any of
its
debt covenants and the lenders did not grant a waiver or agree to amend the
facility, the lenders would have the right to declare an event of default and
seek remedies, including the acceleration of all outstanding amounts due under
this agreement or a call for CCI to repay the loan pursuant to its guarantee.
There can be no assurances that we would be successful in obtaining alternative
sources of funding to repay this obligation if required.
--42--
On
September 23, 2005, through our subsidiary CRA, we agreed to terms with Canadian
Western Bank (“CWB”) for a $17.1 million ($20 million Canadian) credit facility
for the development of the Century Casino and Hotel in Edmonton, Alberta,
Canada. The facility is initially structured as a construction loan maturing
within the earlier of 18 months or upon receipt of a certified architectural
completion certificate, certificate of occupancy and casino license. Upon
maturity of the construction loan, CWB will issue a term loan to CRA, maturing
within one to five years at the election of CRA. The loan facility is secured
by
the assets of CRA and guaranteed by the Company. As of September 30, 2006,
the
principal balance outstanding under the credit facility was $11.2
million.
For
the
nine months ended September 30, 2006, cash provided by operating activities
was
$5.5 million compared with $5.1 million provided by operating activities in
the
prior-year period. For a description of the operating activities of the Company,
please refer to the condensed consolidated statements of cash flows and
management’s discussion of the results of operations by segment.
Cash
used
in investing activities of $51.7 million for the first nine months of 2006
consisted of a $5.1 million buyout of our minority partner in CRA; $6.7
million towards the purchase of a 60% interest in Balele (offset by casino
cash
acquired of $1.5 million); $0.7 million buyout of our minority partner in CM
(offset by casino cash acquired of $0.4 million); a $4.8 million loan to G5;
$0.2 million in property improvements and equipment additions at Womacks; $2.1
million in property improvements and additional gaming equipment at Caledon,
South Africa; $3.9 million primarily towards the construction of a new permanent
facility in Newcastle, South Africa; $0.3 million in additions to our corporate
office in Vienna, Austria; $0.2 million in expenditures to upgrade some of
the
cruise ships with new gaming equipment; $22.9 million towards construction
in
Central City, Colorado; and $12.1 million in additional expenditures towards
construction on the property in Edmonton, Alberta, Canada. These outflows were
offset by $5.4 million received from the sale of our interest in a project
located in Gauteng, South Africa. Cash used in investing activities of $11.3
million for the first nine months of 2005 consisted of a $2.4 million
contribution by us towards our investment in CRA, less $1.6 million in net
cash
acquired; $0.3 million in property and equipment additions at Womacks; $1.4
million in capital additions at Caledon, South Africa; $0.4 million in
expenditures to upgrade some of the cruise ships with ticket-out slot machines
and other gaming equipment; $5.8 million towards construction in Central City,
Colorado; and $2.7 million in additional expenditures towards construction
on
the property in Edmonton, Alberta, Canada, less $0.1 million in proceeds from
the disposition of property.
Cash
provided by financing activities of $40.9 million for the first nine months
of
2006 consisted of borrowings of $25.6 million under the CTL construction loan,
borrowings of $11.2 million under the CWB construction loan; borrowings of
$2.1
million under the CNEW construction loan; net borrowings of $4.1 million under
the Womacks revolving credit facility with Wells Fargo; and the recognition
of a
$0.4 million tax benefit related to the exercise of stock options by our Co
Chief Executive Officers. These borrowings were offset by repayments of $1.7
million towards the Caledon term loan, $0.5 million in proceeds from the
exercise of stock options and other net repayments of $0.3 million. Cash
provided by financing activities of $16.0 million for the first nine months
of
2005 consisted of net borrowings of $3.1 million under a credit facility with
Colorado Business Bank, $4.5 million from a private lender and $9.4 million
under the loan agreement with Nedbank. We also received $2.3 million in proceeds
from the exercise of stock options and $0.6 million from the release of
restricted cash associated with the ABSA loan for Caledon. These inflows of
cash
were offset by net repayments of $0.2 million under the revolving credit
facility with Wells Fargo, $3.0 million under the Caledon loan agreement we
entered into with ABSA, other net repayments of $0.2 million and deferred
financing charges of $0.5 million.
Our
Board of Directors has approved a discretionary program to repurchase up to
$5 million of the Company’s outstanding common stock. We have
not
purchased any shares of common stock on the open market in 2005 or
2006.
Since the inception of the program through September 30, 2006, we have
repurchased 2,559,004 shares of our common stock at a total cost of
approximately $3.8 million.
--43--
The
primary source of our future operating cash flows will be from gaming
operations. We will continue to rely on revolving lines of credit and term
loans
with commercial banks or other debt instruments to supplement our working
capital and investing requirements. Excluding the possibility of being unable
to
obtain a covenant waiver for our CTL debt, we believe that our cash at September
30, 2006, together with expected cash flows from operations and borrowing
capacity under the various credit facilities, will be sufficient to fund our
anticipated operating costs and capital expenditures at existing properties
and
to satisfy our current debt repayment obligations. We will continue to evaluate
our planned capital expenditures at each of our existing locations in light
of
the operating performance of the facilities at such locations. From time to
time
we expect to have cash needs for the development of new properties or expansion
of existing properties that exceed our current borrowing capacity and we may
be
required to seek additional financing in the debt or equity markets. We may
be
unable to obtain additional debt or equity financing on acceptable terms. As
a
result, limitations on our capital resources could delay or cause us to abandon
certain plans for the development of new properties or expansion of existing
properties.
--44--
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We
had no
significant changes in our exposure to market risks from that previously
reported in our Annual Report on Form 10-K for the year ended December 31,
2005.
Item
4. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures - Our
management, with the participation of our Co Chief Executive Officers, Senior
Vice President and Chief Accounting Officer, has evaluated the effectiveness
of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), as of the end of the period covered by this report. Based on such
evaluation, our principal executive officers and principal financial officer
have concluded that as of such date, our disclosure controls and procedures
were
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable Securities and
Exchange Commission rules and forms and were effective.
Changes
in Internal Control Over Financial Reporting -
On April
1, 2006 the Company acquired the existing operations of Balele
Leisure (Pty) Ltd.,
which
owns and operates the Monte Vista Casino and Conference Center (now known as
“Century Casino Newcastle”) in Newcastle, South Africa. Commencing April 1,
2006, the financial position, results of operations and cash flows of Century
Casino Newcastle are included in the condensed consolidated financial statements
of Century Casinos, Inc. The Company is in the process of implementing our
internal controls over financial reporting (as such term is defined in Rules
13a-15(e) and 15(d)-15(e) under the Exchange Act) for the acquired business
and
thus has not yet completed an assessment of their effectiveness. As of and
for
the period ending September 30, 2006, Century Casino Newcastle represents 8.0%
of total assets, 4.8% of total liabilities, 10.3% of net operating revenue
and
10.4% of net earnings in the condensed consolidated financial statements of
Century Casinos, Inc.
With
the
exception of the ongoing implementation of internal controls at Century Casino
Newcastle, there has been no change in our internal controls over financial
reporting (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under
the
Exchange Act) during the third quarter of 2006 that has materially affected,
or
is reasonably likely to materially affect, our internal control over financial
reporting.
--45--
PART
II - OTHER INFORMATION
Item
1. - Legal Proceedings
We
are
not a party to, nor are we aware of, any pending or threatened litigation which,
in our management’s opinion, could have a material adverse effect on our
financial position or results of operations.
Item
1A. - Risk Factors
The
information presented below updates and should be read in conjunction with
Part
I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2005. In addition to the other information set forth in the Form
10-K and this report, you should carefully consider the facts discussed in
Part
I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2005, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form
10-K are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition or operating results.
Our
indebtedness imposes restrictive covenants on us, which limits our operating
flexibility.
Our
various credit agreements require us, among other obligations, to maintain
specified financial ratios and satisfy certain financial tests, including
leverage ratios, total fixed charge coverages and minimum annualized EBITDA
(or
a variant thereof). In addition, these agreements restrict our ability to incur
additional indebtedness, repay indebtedness or amend debt instruments, pay
dividends, create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations, make capital expenditures or engage in certain
transactions with subsidiaries and affiliates. There can be no assurances that
the Company or its subsidiaries would be able to obtain a waiver to these
restrictive covenants if necessary. If we fail to comply with the restrictions
contained in these credit agreements, the resulting event of default could
result in a lender accelerating the repayment of all outstanding amounts due
under these agreements. There can be no assurances that the Company would be
successful in obtaining alternative sources of funding to repay these
obligations should this event occur.
Item
6. - Exhibits
(a)
Exhibits - The following exhibits are filed herewith:
|
3.1
|
Certificate
of Incorporation (filed with Proxy Statement in respect of the 1994
Annual
Meeting of Stockholders and incorporated herein by reference) is
hereby
incorporated by reference from Exhibit 3.1 to Century Casinos’ Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1995.
|
|
3.2.2
|
Amended
and Restated Bylaws of Century Casinos, Inc., is hereby incorporated
by
reference from Exhibit 11.14 to Century Casinos’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2002.
|
|
4.4
|
Rights
Agreement, dated as of April 29, 1999, between the Company and the
American Securities Transfer & Trust, Inc., as Rights Agent, is hereby
incorporated by reference from Exhibit 1 to Century Casinos Form
8-A dated
May 7, 1999.
|
|
4.5
|
First
Supplement to Rights Agreement dated April 2000, between Century
Casinos,
Inc. and American Securities Transfer & Trust, Inc., as Rights Agent,
is hereby incorporated by reference from Exhibit A to Century Casinos’
Proxy Statement in respect of the 2000 Annual Meeting of
Stockholders.
|
--46--
|
4.6
|
Second
Supplement to Rights Agreement dated July 2002, between Century Casinos,
Inc. and Computershare Investor Services, Inc. as Rights Agent, is
hereby
incorporated by reference from Exhibit 11.13 to Century Casinos’ Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2002.
|
|
Settlement
Agreement entered into between Gold Reef Resorts Ltd., Akani Leisure
Investments (Pty) Ltd., Akani Leisure (Silverstar Holdings) (Pty)
Ltd.,
Silver Star Development Ltd., Century Resorts Ltd., Century Casinos
West
Rand (Pty) Ltd., Novomatic AG, Century Casinos Africa (Pty) Ltd.,
Century
Casinos., Inc, and Century Casinos Management, Inc.
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chairman
of the Board and Co Chief Executive Officer.
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, Vice
Chairman, Co Chief Executive Officer and President.
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Senior
Vice President.
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chief
Accounting Officer.
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chairman
of the Board and Co Chief Executive Officer.
|
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Vice
Chairman, Co Chief Executive Officer and President.
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Senior
Vice President.
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chief
Accounting Officer.
|
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
Senior
Vice President (Principal Financial Officer)
Date:
November 8, 2006
--47--
CENTURY
CASINOS, INC.
INDEX
TO
EXHIBITS
|
Exhibit
No.
|
Document
|
|
3.1
|
Certificate
of Incorporation (filed with Proxy Statement in respect of the 1994
Annual
Meeting of Stockholders and incorporated herein by reference) is
hereby
incorporated by reference from Exhibit 3.1 to Century Casinos’ Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1995.
|
|
3.2.2
|
Amended
and Restated Bylaws of Century Casinos, Inc., is hereby incorporated
by
reference from Exhibit 11.14 to Century Casinos’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2002.
|
|
4.4
|
Rights
Agreement, dated as of April 29, 1999, between the Company and the
American Securities Transfer & Trust, Inc., as Rights Agent, is hereby
incorporated by reference from Exhibit 1 to Century Casinos Form
8-A dated
May 7, 1999.
|
|
4.5
|
First
Supplement to Rights Agreement dated April 2000, between Century
Casinos,
Inc. and American Securities Transfer & Trust, Inc., as Rights Agent,
is hereby incorporated by reference from Exhibit A to Century Casinos’
Proxy Statement in respect of the 2000 Annual Meeting of
Stockholders.
|
|
4.6
|
Second
Supplement to Rights Agreement dated July 2002, between Century Casinos,
Inc. and Computershare Investor Services, Inc. as Rights Agent, is
hereby
incorporated by reference from Exhibit 11.13 to Century Casinos’ Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2002.
|
|
10.181
|
Settlement
Agreement entered into between Gold Reef Resorts Ltd., Akani Leisure
Investments (Pty) Ltd., Akani Leisure (Silverstar Holdings) (Pty)
Ltd.,
Silver Star Development Ltd., Century Resorts Ltd., Century Casinos
West
Rand (Pty) Ltd., Novomatic AG, Century Casinos Africa (Pty) Ltd.,
Century
Casinos, Inc, and Century Casinos Management, Inc.
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chairman
of the Board and Co Chief Executive Officer.
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Vice
Chairman, Co Chief Executive Officer and President.
|
|
31.3
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Senior
Vice President.
|
|
31.4
|
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 Co Chief Executive Officer.
|
|
32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Vice
Chairman, Co Chief Executive Officer and President.
|
|
32.3
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Senior
Vice President.
|
|
32.4
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chief
Accounting Officer.
|