CENTURY CASINOS INC /CO/ - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
_X_ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December
31, 2006.
OR
___ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from ___________
to
___________
Commission
file number 0-22290
CENTURY
CASINOS, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
84-1271317
|
|
(State
or other jurisdiction of incorporation
|
(I.R.S.
Employer
|
|
or
organization)
|
Identification
No.)
|
1263
Lake Plaza Drive, Suite A, Colorado Springs, Colorado 80906
(Address
of principal executive offices) (Zip Code)
(719)
527-8300
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock, $0.01 Per Share Par Value
|
NASDAQ
Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No
þ
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 þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. þ
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 o
Accelerated
filer þ Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No
þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2006, based upon the closing
price of $10.71 for the Common Stock on the NASDAQ Capital Market on that date,
was $221,990,901.
As
of
March 15, 2007, the registrant had 23,051,067 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: Part
III incorporates by reference from the registrant’s definitive Proxy Statement
for its 2007 Annual Meeting of Stockholders to be filed with the Commission
within 120 days of December 31, 2006.
-1-
INDEX
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Page
|
||
|
Business
|
3 | |
|
Risk
Factors
|
13 | |
|
Unresolved
Staff Comments
|
20 | |
|
Properties
|
20 | |
|
Legal
Proceedings
|
21 | |
|
Submission
of Matters to a Vote of Security Holders
|
21 | |
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
22 | |
|
Selected
Financial Data
|
23 | |
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24 | |
|
Quantitative
and Qualitative Disclosures About Market Risk
|
51 | |
|
Financial
Statements and Supplementary Data
|
51 | |
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
51 | |
|
Controls
and Procedures
|
52 | |
|
Other
Information
|
52 | |
|
Directors,
Executive Officers and Corporate Governance
|
53 | |
|
Executive
Compensation
|
53 | |
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
53 | |
|
Certain
Relationships and Related Transactions, and Director
Independence
|
53 | |
|
Principal
Accountant Fees and Services
|
53 | |
|
Exhibits,
Financial Statement Schedules
|
54 | |
| 60 | ||
-2-
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K and certain information incorporated herein by
reference contain forward-looking statements within the meaning of Section
21E
of the Securities Exchange Act of 1934, or the Exchange Act, and, as such,
may
involve risks and uncertainties. All statements included or incorporated by
reference in this report, other than statements that are purely historical,
are
forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential”
“continue,” or similar terminology. Forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties
that
could cause actual results to differ materially from the results contemplated
by
the forward-looking statements.
The
forward-looking statements in this report are subject to additional risks and
uncertainties further discussed under “Item 1A. Risk Factors” and are based on
information available to us on the filing date of this Annual Report on Form
10-K. We assume no obligation to update any forward-looking statements. Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this report. Readers should also consult the
forward-looking statements and risk factors listed from time to time in our
reports on Forms 10-Q, 8-K, 10-K and in our Annual Report to
Stockholders.
As
used
in this report, the terms “Company,” “we,” “our,” or “us” refer to Century
Casinos, Inc., and each of its consolidated subsidiaries, taken as a whole,
unless the context otherwise indicates.
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 2 to the Consolidated
Financial Statements included elsewhere in this report. The following
information should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in “Item 8 - Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
General
Century
Casinos, Inc. (“CCI”), founded in 1992, is an international casino entertainment
company involved in developing and operating gaming establishments and related
lodging and restaurant facilities. The Company currently owns and operates
the
Womacks Casino and Hotel (“Womacks”) in Cripple Creek, Colorado, the Century
Casino & Hotel in Edmonton, Alberta, Canada, and the Century Casino
Millennium in the Marriott Hotel in Prague, Czech Republic; operates the casinos
aboard the Silver Wind, Silver Cloud, The World of ResidenSea, and the vessels
of Oceania Cruises; owns a 65% interest in, and has a management contract for,
Century Casino & Hotel in Central City, Colorado. Through its subsidiary
Century Casinos Africa (Pty) Limited, it owns and operates The Caledon Hotel,
Spa & Casino (“Caledon”) near Cape Town, South Africa, as well as 60% of,
and provides technical casino services to, Century Casino Newcastle, in
Newcastle, South Africa. Furthermore, the Company’s Austrian subsidiary, Century
Casinos Europe GmbH, entered into an agreement to acquire a 33.3% ownership
interest in Casinos Poland Ltd. The closing of this transaction occurred on
March 12, 2007. We continue to pursue other international projects in various
stages of development.
-3-
Our
goals
are to grow the Company and its profitability. Our strategy for obtaining these
goals focuses on the development and operation of mid-size regional casinos
(i.e. up to 1,500 gaming positions) that cater mostly to the local population.
We believe that mid-size regional casinos offer attractive opportunities for
the
following reasons:
- Due
to
the focus on local customers from the surrounding region, mid-size casinos
generate a high proportion of repeat business;
- Mid-size
casinos are less affected by trends in international travel; and
- Mid-size
casinos have smaller capital expenditure requirements than larger
casinos.
Overview
of Existing Operations
Our
operations are conducted through seven business segments: Cripple Creek,
Colorado; Central City, Colorado; Caledon, South Africa; Newcastle, South
Africa; Edmonton, Canada; All Other Operating Segments (which includes the
results of our shipboard operations and Century Casino Millennium); and
Corporate operations. As of December 31, 2006, we own, operate or manage the
following properties:
Womacks
Casino and Hotel - Cripple Creek, Colorado
Since
1996 we have owned and operated Womacks in Cripple Creek, Colorado through
our
wholly owned subsidiary, WMCK Venture Corporation. Womacks has 559 slot machines
(of which 384 are Ticket In/Ticket out (“TITO”) machines), six limited stakes
gaming tables, 21 hotel rooms, and one restaurant. Womacks has 150 feet of
frontage on Bennett Avenue, the main gaming thoroughfare in Cripple Creek,
and
125 feet of frontage on Second Street, also known as Highway 67.
Management
believes that an integral component in attracting gaming patrons to Cripple
Creek is the availability of adequate, nearby parking. We presently own or
lease
a total of 400 parking spaces. We believe we have sufficient close proximity
parking, but covered parking garages maintained by two of our competitors
provide them with an advantage during inclement weather.
Our
future plans may include upgrading the gaming floor and existing hotel rooms,
increasing the number of hotel rooms, expanding the gaming floor space to the
rear of the property and adding a covered parking garage. Any future upgrades
or
expansion will be dependant on market development.
Century
Casino & Hotel - Central City, Colorado
On
July
11, 2006, we, together with our 35% minority partner, opened our new $48.7
million casino and hotel development, the Century Casino and Hotel, in Central
City, Colorado. The facility has 560 TITO 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. The
casino is located in Central City at the end of the Central City Parkway, a
new
four lane highway connecting I-70, the main east/west interstate in Colorado,
to
Central City.
Our
wholly-owned subsidiary, Century Casino Management, Inc., has entered into
a
casino services agreement to manage the property for a fixed fee.
The
Caledon
Hotel, Spa and Casino - Caledon, South Africa
We
own
and operate the Caledon Hotel, Spa and Casino through our subsidiary Century
Casinos Caledon (Pty) Limited (“CCAL”). The Town of Caledon lies on the N-2
highway - the main thoroughfare between Cape Town and Durban - and is known
for
its wildflower shows, wineries and the natural historic hot springs located
on
the Caledon Hotel, Spa and Casino site. The Caledon Hotel, Spa and Casino has
350 slot machines, 6 table games, 81 hotel rooms and 3
restaurants.
-4-
We
are in
the process of subdividing approximately 450 of the 600 acres of our land,
with
plans to develop an 18 hole signature golf estate on the property with
approximately 450 residential homes. We also plan to link this property to
an
existing nine-hole municipal golf course by adding another nine holes surrounded
by resort housing. We expect that the development of the golf estate will
encourage additional visits to the existing casino operation.
Century
Casino Newcastle - Newcastle, South Africa
On
April
1, 2006, our subsidiary Century Casinos Africa (Pty) Ltd. (“CCA”) completed the
purchase of a 60% controlling interest in Balele Leisure (Pty) Ltd. (“Balele”),
which owns a casino in Newcastle, South Africa, for approximately $9.3 million
(ZAR 57.5 million). Following the purchase, we began the development of a new
casino in Newcastle. In connection with CCA’s purchase of its equity interest in
Balele, a sale of share 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 sell the facility that housed the original temporary
casino for approximately $1.9 million (ZAR 12.0 million) within 60 days of
closing. The Sellers informed CCA that they would not be able to sell the
facility for ZAR 12.0 million. As a result, the purchase price for the 60%
interest in Balele was reduced by this amount, resulting in an overall purchase
price of $7.4 million (ZAR 45.5 million). CCA paid $6.7 million (ZAR 40.5
million) at closing with the remainder payable on the first anniversary of
the
opening of the casino. We consolidated the results of Balele, now known as
Century Casino Newcastle (Pty) Ltd. (“CNEW”), in our financial statements as of
April 1, 2006.
On
December 2, 2006, we opened the new Century Casino and Hotel in Newcastle.
The
greater Newcastle area, with approximately 500,000 people, is situated halfway
between Johannesburg and Durban in the northwestern portion of Kwazulu-Natal,
which is South Africa’s most populated province with over ten million people.
The facility has 250 slot machines, six table games, 40 hotel rooms and one
restaurant. The casino has an exclusive right to operate in the greater
Newcastle area. We believe that the location for the new casino is a strong
improvement from the former location. The new location provides more room for
future development and we believe the facility is far superior to the former
building. We have installed a team of seasoned managers from the Caledon Spa,
Hotel and Casino to oversee the transition of operations.
An
additional $0.4 million (ZAR 2.5 million) will be payable to the minority
shareholders if casino revenues during the first 12 months of operation at
the
new casino exceeds $13.5 million (ZAR 95.0 million).
CCA
has
entered into a casino services agreement to manage the property. The terms
of
the management agreement provide for a payment to CCA based on a percentage
of
CNEW’s total revenues and a percentage of CNEW’s EBITDA (earnings before
interest, tax, depreciation and amortization).
Century
Casino & Hotel - Edmonton, Alberta, Canada
On
February 24, 2005, through our wholly owned subsidiary, Century Resorts
International, we acquired a 56.4% interest in Century Resorts Alberta, Inc.
(“CRA”). CRA was established to develop and operate a casino and hotel
development in Edmonton, Alberta, Canada. On January 12, 2006, we purchased
the
remaining 43.6% interest in CRA for approximately $6.3 million ($7.3 million
Canadian). We paid approximately $5.0 million ($5.8 million Canadian) at closing
with the remainder payable on November 17, 2007.
On
November 17, 2006, CRA opened the casino portion of the $31.2 million (CAD
35.8
million) Century Casino and Hotel in Edmonton. The facility has 600 slot
machines, 31 table games, a dinner theater, a lounge with live music and four
food/beverage outlets. A 26-room hotel will open in March 2007.
-5-
Century
Casino
Millennium - Prague, Czech Republic
The
Century Casino Millennium (“CM”), located in the 293-room Marriott Hotel in
Prague, Czech Republic, opened in July 1999. In December 2002, we acquired
a 10%
interest in the casino, which we subsequently increased to 50% in January 2004.
In April 2006, we 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 Century Casino Millennium has 30 slot machines and 11
table
games.
Cruise
Ships
Silversea
Cruises
- On May
27, 2000, we signed a casino concession agreement with Silversea Cruises, a
luxury, six-star cruise line based in Fort Lauderdale, Florida to provide five
years of casino operation on each Silversea ship. The agreement gave us the
exclusive right to install and operate casinos aboard four Silversea vessels
as
well as any future Silversea vessel. We
operate each shipboard casino for our own account and pay concession fees based
on gross gaming revenue. We currently operate casinos aboard two Silversea
ships, having discontinued operations aboard the other two ships. On March
8,
2006, we received notification from Silversea Cruises that the concession
agreement with the Silver Wind would not be renewed as of May 16, 2007. We
also
received notification that the concession agreement with the Silver Cloud will
not be renewed as of March 30, 2006; however, we believe that we did not receive
timely written notification of Silversea’s intention to discontinue this
agreement on the Silver Cloud, as required by the original concession agreement.
An arbitration proceeding is pending to resolve the issue. We intend to continue
operation of the casino aboard the Silver Cloud until the arbitration proceeding
is completed. Currently, we have a combined total of 30 slot machines and 6
tables aboard the Silver Wind and Silver Cloud.
The
World of ResidenSea
- On
August 30, 2000, we signed a five year casino concession agreement with
ResidenSea Ltd., the operator of The World of ResidenSea, the world’s first
luxury residential resort community at sea continuously circumnavigating the
globe. We have equipped the casino with 20 slot machines and three gaming tables
and operate the casino aboard the vessel, which had its maiden voyage in March
2002. We operate the casino for our own account and pay concession fees based
on
gross gaming revenue. In addition, we have a right of first refusal to install
casinos aboard any new ships built or acquired by ResidenSea during the term
of
the agreement. In January 2007, the casino concession agreement was extended
for
an unlimited period of time, subject to termination under certain
conditions.
Oceania
Cruises
- On
March 28, 2003, we signed a five year casino concession agreement with Oceania
Cruises, Inc., a Miami-based operator in the upper premium segment of the cruise
industry. In October 2005, we extended the agreement until 2012. Under the
agreement with Oceania, we have the exclusive right to install and operate
casinos aboard two 684-passenger cruise vessels, the Insignia and the Regatta,
as well as the exclusive right to become Oceania’s exclusive casino
concessionaire for any new ships that Oceania might bring into service. We
opened a casino aboard the Insignia in April 2003 and aboard the Regatta in
June
2003. In April 2004, we opened a casino aboard an additional Oceania vessel,
the
Nautica. We have a total of 108 slots machines and 15 tables on the Oceania
cruise ships.
Additional
Company Projects
and Other Developments
In
addition to the operations described above, we have a number of potential gaming
projects in various stages of development. Along with the capital needs of
these
potential projects, there are various other risks which, if they materialize,
could have a materially adverse effect on a proposed project or eliminate its
feasibility altogether. For more information on these and other risks related
to
our business, see Item 1A, “Risk Factors”.
-6-
Casinos
Poland - On
June
13, 2006, we entered into an agreement, as subsequently amended, to acquire
all
of the issued and outstanding shares of G5 Sp. z o.o. (“G5”) for approximately
$2.8 million (€2.2 million). G5 owns 33.3% of Casinos Poland Ltd. Casinos Poland
owns seven casinos and one slot arcade in Poland and generated unaudited net
revenues of approximately $53.7 million in 2006. In connection with the
purchase, we loaned G5 approximately $6.2 million (PLN 18.0 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.
The transaction closed on March 12, 2007.
Gauteng,
South Africa
- On
September 28, 2006, we sold our interest in a casino development project located
in Gauteng, South Africa for $5.7 million (ZAR 43.3 million).
Marketing
and
Competition
Our
marketing focuses on local facts and circumstances of the respective market
areas in which we operate. Our primary marketing strategy centers around
attracting new customers and rewarding repeat customers through our player’s
club programs. We maintain a proprietary database of primarily slot machine
customers that allows us to create effective targeted marketing and promotional
programs, cash and merchandise giveaways, coupons, preferred parking, food,
lodging, game tournaments and other special events. These programs are designed
to reward customer loyalty and attract new customers to our properties through
a
multi-tiered reward program that rewards players based on total amount wagered
and frequency of visits. Those who qualify for VIP status receive additional
benefits over regular club membership, such as invitations to exclusive VIP
events. Currently, our player’s club cards allow us to update our database and
track member gaming preferences, maximum, minimum, and total amount wagered
and
frequency of visits. All visitors to our properties are offered the opportunity
to join our player’s club.
Colorado -
Along
with Black Hawk, Cripple Creek and Central City are the only three Colorado
cities, exclusive of an Indian gaming operation in Southwestern Colorado, where
casino gaming is legal. As of December 31, 2006, there were 19 casinos operating
in Cripple Creek and 6 casinos operating in Central City. Cripple Creek and
Central City represented a combined 41% of the gaming devices and generated
a
combined 29% of gaming revenues from these three cities in 2006. Cripple Creek,
located approximately 45 miles southwest of Colorado Springs and Central City,
located approximately 35 miles west of Denver, are historic mining towns dating
back to the late 1800’s that have developed into tourist stops.
Unlike
other regions in which we operate, gaming in Colorado is “limited stakes,” which
restricts any single wager to a maximum of five dollars.
In
Cripple Creek, covered parking garages provided by two of our competitors impact
our casino, particularly during inclement weather, providing both with a
significant number of close proximity parking spaces. Both competitors also
have
a larger number of hotel rooms, providing them with an advantage during
inclement weather and the peak tourist season. In late 2007, a larger casino
is
expected to be opening in Cripple Creek. Management believes this casino will
have approximately 700 slot machines and 10 table games and will provide further
competition to our casino.
As
competition in Cripple Creek is intense,
we
allocate approximately 25% of Womacks gaming revenues to marketing measures.
In
addition to our players club, we also market Womacks through a variety of media
outlets including radio, print and billboard advertising which target Colorado
Springs and Pueblo, the key markets for Cripple Creek. As one of the larger
casinos in Cripple Creek, we are able to provide more choice to the customers
in
the type of slot machines and promotional offers to our
customers.
-7-
We
believe that the casinos likely to be more successful and best able to take
advantage of the market potential of Cripple Creek will be the larger casinos,
such as Womacks, that have reached a certain critical mass. We also continue
to
refine the interior of the facilities and modify the slot machine mix. We have
not yet decided on the next phase of expansion, but we own all of the vacant
property adjacent to the casino and are able to expand if we conclude that
expansion is in our best interest.
The
Century Casino and Hotel in Central City, the newest property in the Central
City/Black Hawk gaming region, has a prime location at the end of the Central
City Parkway and has a 500-space covered parking garage offering free public
parking. Due to our advantageous location, we believe that we will continue
to
be a strong competitor in the Central City market. Our casino competes with
18
casinos currently operating in Black Hawk and 5 casinos in Central City. The
cities of Black Hawk and Central City are adjoining small mountain tourist
towns. Black Hawk, which we believe does not maintain the same rigorous
historical preservation standards as Central City, has been able to successfully
attract major casino industry leaders with significant amounts of marketing
resources.
Our
marketing objective is to create public awareness by positioning the casino
and
hotel as the premier provider of personal service, convenient parking, the
latest gaming products, superior food quality, and an intimate hotel with
attractive, boutique style rooms.
South
Africa
- The
Caledon Hotel, Spa and Casino is one of five casinos currently operating in
the
Western Cape Province, which has a population of approximately four million.
The
Western Cape Gambling and Racing Act, as amended, only permits five casinos
in
the Western Cape. Although the competition is limited by the number of casino
licenses and the casinos are geographically distributed, management believes
that the Caledon Hotel, Spa and Casino faces its most intense competition from
two larger casinos located in Cape Town and Worcester.
In
addition to the casinos, a total of 2,000 Limited Payout Machines (“LPMs”) are
being introduced into the Western Cape province. An approved operator, which
can
have a maximum of five LPMs, will be permitted to operate the devices without
the overhead of a typical casino. They will, however, be subject to central
monitoring. No more than 200 of these devices are expected for the Overberg
region, the market in which Caledon operates.
Our
marketing strategy at the Caledon, in addition to a player’s club, focuses on
an
array of
amenities provided at the resort to our guests as a complement to the gaming
experience. These currently include an 81-room hotel, a variety of dining
experiences, the historic mineral hot spring and spa, as well as the outdoor
experience (a team building facility). We are also in the process of subdividing
approximately 450 out of 600 acres of our land, with plans to develop an 18
hole
signature golf estate on the property with approximately 450 residential homes.
We also plan to link this property to an existing nine-hole municipal golf
course by adding another nine holes surrounded by resort housing.
The
Century Casino & Hotel in Newcastle, South Africa is situated halfway
between Johannesburg and Durban in the northwestern province of Kwazulu Natal,
which is South Africa’s most populated province with over ten million people.
The casino is one of only five casinos in the entire province and enjoys a
regional exclusivity of approximately 130 miles. As a result, the casino is
primarily sustained by locals from surrounding towns. Our marketing strategy
focuses on catering to the local citizenship by offering various retail and
other amenities not available in other local venues.
Edmonton,
Canada -
The
Century Casino and Hotel in Edmonton, Canada has six competitors (five casinos
and one combined racetrack/casino) in the Edmonton market. Our casino is the
only casino in Edmonton that will have both a hotel and dinner theater. The
dinner theater opened in December 2006 and the hotel is scheduled to open in
March 2007. Aside from another casino that is part of a shopping mall, our
casino is the only casino with a heated parking garage. Our main marketing
activity focuses on branding the casino, through various forms of media, as
the
ultimate entertainment destination and a provider of sophisticated, interactive
and intimate gaming experience. We will also provide package offers combining
the casino with the hotel and/or the dinner theater. The casino is located
in a
densely populated area with the closest competing casino approximately 20
minutes away.
-8-
Century
Casino
Millennium and Cruise Ships.
Century
Casino Millennium faces intense competition from a large number of casinos
of
similar size. For the cruise ships, which we operate under concessionaire
agreements, market data is not available. We
rely
on each cruise ship’s marketing efforts to attract customers to our
casino.
Seasonality
Colorado
- Our
casinos in Colorado attract the most customers during the tourist season (i.e.,
from May through September). We expect our customer base from October through
April to remain fairly constant although weather conditions during this period
could have a significant impact on business levels in Colorado.
South
Africa - Our
casino in Caledon attracts the most customers during the holiday season. Caledon
has a comparatively mild climate. Management believes the same trend will apply
to the Century Casino & Hotel in Newcastle.
Edmonton
- We
expect
that our business in Edmonton, Alberta, Canada will be best during the tourist
season (May through September) and December. Management believes the rest of
the
year should remain rather constant due to the hotel and the dinner theater
which
are part of our complex.
Century
Casino Millennium and Cruise Ships - Our
businesses in Prague, Czech Republic and aboard the cruise ships generally
are
not impacted by the time of year. Our revenues for these operations fluctuate
significantly with the quality of the players. Unlike our other land based
operations, Century Casino Millennium derives the majority of its gaming revenue
from live table games. The quality of the player has more of an impact on the
live game results when compared to the income derived from slot machines. 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, thus potentially impacting the timing of our revenues.
Governmental
Regulation and Licensing
The
ownership and operation of casino gaming facilities are subject to extensive
state, local and, for our foreign operations, provincial regulations. We are
required to obtain and maintain gaming licenses in each of the jurisdictions
in
which we conduct gaming. The limitation, conditioning, suspension, revocation
or
non-renewal of gaming licenses, or the failure to reauthorize gaming in certain
jurisdictions would materially adversely affect our gaming operation in that
jurisdiction. In addition, changes in law that restrict or prohibit gaming
operations in any jurisdiction could have a material adverse effect on our
financial position, results of operations and cash flows.
Statutes
and regulations can require us to meet various standards relating to, among
other matters, business licenses, registration of employees, floor plans,
background investigations of licensees and employees, historic preservation,
building, fire and accessibility requirements, payment of gaming taxes, and
regulations concerning equipment, machines, tokens, gaming participants, and
ownership interests. Civil and criminal penalties can be assessed against us
and/or our officers or shareholders to the extent of their individual
participation in, or association with, a violation of any of the state and
local
gaming statutes or regulations. Such laws and regulations apply in all
jurisdictions within the United States in which we may do business. Management
believes that we are in compliance with all applicable gaming and non-gaming
regulations as described below.
-9-
Colorado,
United States
The
ownership and operation of gaming facilities in Colorado are subject to
extensive state and local regulations. Licenses must be obtained from the
Colorado Limited Gaming Control Commission (the “Gaming Commission”) prior to
offering limited gaming to the public in the state of Colorado. In addition,
the
State of Colorado created the Division of Gaming (the “DOG”) within its
Department of Revenue to license, implement, regulate, and supervise the conduct
of limited stakes gaming. The Director of the DOG (“DOG Director”), under the
supervision of the Gaming Commission, has been granted broad powers to ensure
compliance with the laws and regulations. The Gaming Commission, DOG and DOG
Director are collectively referred to as the “Colorado Gaming
Authorities.”
The
laws,
regulations, and internal control minimum procedures of the Colorado Gaming
Authorities seek to maintain public confidence and trust that licensed limited
gaming is conducted honestly and competitively, that the rights of the creditors
of licensees are protected, and that gaming is free from criminal and corruptive
elements. The Colorado Gaming Authorities’ stated policy is that public
confidence and trust can be maintained only by strict regulation of all persons,
locations, practices, associations, and activities related to the operation
of
the licensed gaming establishments and the manufacture and distribution of
gaming devices and equipment.
The
Gaming Commission is empowered to issue five types of gaming and related
licenses. In order to operate a casino, an operator is required to obtain a
retail gaming license. Further, under Colorado gaming regulations, no person
or
entity can have an ownership interest in more than three retail licenses. We
currently operate under the maximum of three retail gaming licenses in Colorado,
which must be renewed each year. In addition, the Gaming Commission has broad
discretion to revoke, suspend, condition, limit or restrict the licensee at
any
time. The failure or inability of Womacks or the Century Casino and Hotel in
Central City, or the failure or inability of others associated with these
casinos, including us and our minority partner in Central City, to maintain
necessary gaming licenses or approvals would have a material adverse effect
on
our operations.
Our
Colorado casinos must meet specified architectural requirements, fire safety
standards and standards for access for disabled persons. Our Colorado casinos
also must not exceed specified gaming square footage limits as a total of each
floor and the full building. Each Colorado casino may operate only between
8:00
a.m. and 2:00 a.m., and may permit only individuals 21 or older to gamble in
the
casino. It may permit slot machines, blackjack and poker, with a maximum single
bet of $5.00. No Colorado casino may provide credit to its gaming patrons.
The
Colorado Constitution permits a gaming tax of up to 40% on adjusted gross gaming
proceeds, and authorizes the Gaming Commission to change the rate annually.
The
current gaming tax is a graduated rate of 0.25% on adjusted gross gaming
proceeds of up to and including $2 million, 2% over $2 million up to and
including $4 million, 4% over $4 million up to and including $5 million, 11%
over $5 million up to and including $10 million, 16% over $10 million up to
and
including $15 million and 20% on adjusted gross gaming proceeds in excess of
$15
million.
Colorado
law requires that every officer, director or stockholder holding a 5% or greater
interest or controlling interest of a publicly traded corporation, or owner
of
an applicant or licensee, shall be a person of good moral character and submit
to and pay the cost of a full background investigation conducted by the Gaming
Commission. Persons found unsuitable by the Gaming Commission may be required
to
immediately terminate any interest in, association or agreement with, or
relationship to, a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant may also jeopardize the licensee’s retail license or applicant’s
license application. However, licenses may be conditioned upon termination
of
any relationship with unsuitable persons.
-10-
The
rules
impose certain additional restrictions and reporting and filing requirements
on
publicly traded entities holding gaming licenses in Colorado. A licensee or
affiliated company or any controlling person of a licensee or affiliated
company, which commences a public offering of voting securities, must notify
the
Gaming Commission with regard to a public offering to be registered with the
Securities and Exchange Commission (“SEC”), no later than ten business days
after the initial filing of a registration statement with the SEC, or, with
regard to any other type of public offering, no later than ten business days
prior to the public use or distribution of any offering document, if: 1) the
licensee, affiliated company or a controlling person thereof, intending to
issue
the voting securities is not a publicly traded corporation; or 2) if the
licensee, affiliated company or controlling person thereof, intending to issue
the voting securities is a publicly traded corporation, and if the proceeds
of
the offering, in whole or in part, are intended to be used: a) to pay for
construction of gaming facilities in Colorado to be owned and operated by the
licensee; b) to acquire any direct or indirect interest in gaming facilities
in
Colorado; c) to finance the operation by the licensee of gaming facilities
in
Colorado; or d) to retire or extend obligations incurred for one or more of
the
purposes set forth in subsections a, b, or c above.
We
may
not issue any voting securities except in accordance with the provisions of
the
Colorado Limited Gaming Act (the “Act”) and the regulations promulgated
thereunder. The issuance of any voting securities in violation of the Act will
be void and the voting securities will be deemed not to be issued and
outstanding. No voting securities may be transferred, except in accordance
with
the provisions of the Act and the regulations promulgated thereunder. Any
transfer in violation of these provisions will be void. If the Gaming Commission
at any time determines that a holder of our voting securities is unsuitable
to
hold the securities, then we may, within sixty (60) days after the finding
of
unsuitability, purchase the voting securities of the unsuitable person at the
lesser of (a) the cash equivalent of such person’s investment, or (b) the
current market price as of the date of the finding of unsuitability, unless
such
voting securities are transferred to a suitable person within sixty (60) days
after the finding of unsuitability. Until our voting securities are owned by
persons found by the Gaming Commission to be suitable to own them, (a) we are
not permitted to pay any dividends or interest with regard to the voting
securities, (b) the holder of such voting securities will not be entitled to
vote and the voting securities will not for any purposes be included in the
voting securities entitled to vote, and (c) we may not pay any remuneration
in
any form to the holder of the voting securities, except in exchange for the
voting securities.
South
Africa
The
gambling industry is governed by the National Gambling Act of 2004 (the “2004
Act”) and legislation enacted by each of the nine South African provinces. The
Provincial License Authorities exercise a range of statutory functions to
control the conduct of gambling and racing, where applicable, in their
respective provinces. The National Gambling Board has an oversight function
and
a range of other responsibilities aimed at meeting the objectives of the 2004
Act.
Our
gaming operations in South Africa are subject to regulation by the Western
Cape
Gambling and Racing Board (for the Caledon) and by the KwaZulu-Natal Gambling
Board (for the Century Casino & Hotel in Newcastle). Statutes and
regulations require us to meet various standards relating to, among other
matters, business licenses, licensing of employees, historic preservation,
building, fire and accessibility requirements, payment of gaming taxes, and
regulations concerning equipment, machines, tokens, gaming participants, and
ownership interests. Civil and criminal penalties can be assessed against us
and/or our officers to the extent of their individual participation in, or
association with, a violation of any of these gaming statutes or
regulations.
-11-
Edmonton,
Alberta, Canada
Gaming
in
Alberta is governed by the provincial government. The Alberta Gaming and Liquor
Commission (“AGLC”) administers and regulates the gaming industry in Alberta.
The AGLC operates in accordance with the Gaming and Liquor Act, the Gaming
and
Liquor Regulation and the Criminal Code of Canada. Generally, the criminal
code
prohibits all gaming in Canada except forms of gaming that it specifically
allows. If the AGLC increased the number of licenses available, applicants
for a
gaming license must submit an application and run through an eight-step approval
process. Following the approval of the board of the AGLC, the applicant may
operate the casino applied for in accordance with federal and provincial
legislation, regulation, and policies as well as the municipal requirements,
permits, licenses and authorization relating to the casino. The AGLC will
monitor the casino operator and his compliance with all requirements. In the
event of a violation of such requirements, civil and criminal charges can be
assessed.
The
AGLC
provides the casino with slot machines and slot technicians. Casino licensees,
such as Century Resorts Alberta, Inc. (“CRA”), are paid a 15% commission based
on slot machine net sales. Net sales are calculated as cash played less cash
won
less the cost to lease the equipment, if applicable. The remaining 85% of net
sales are retained by the AGLC. For all table games excluding Poker and Craps,
we are required to allocate 50% of our net win to a charity designated by the
AGLC. For Poker and Craps, 75% of our net win is allocated to the
charity.
Prague,
Czech Republic
Century
Casino Millennium’s gaming operations are subject to regulation by the Czech
Republic under national legislation. Statutes and regulations require us to
meet
various standards relating to, among other matters, business licenses, building,
fire and accessibility requirements, payment of gaming taxes, and regulations
concerning equipment, machines, tokens, gaming participants, and ownership
interests. Civil and criminal penalties can be assessed against us and/or our
officers to the extent of their individual participation in, or association
with, a violation of any of these gaming statutes or regulations.
Cruise
Ships
The
casinos onboard the cruise ships only operate on international waters.
Therefore, the gaming operations are not regulated by any national or local
regulatory body. However, we follow standardized rules and practices in the
daily operation of the casinos.
Non-Gaming
Regulation
We
are
subject to certain federal, state and local safety and health, employment and
environmental laws, regulations and ordinances that apply to our non-gaming
operations. We have not made, and do not anticipate making material expenditures
with respect to such employment and environmental laws and regulations. However,
the coverage and attendant compliance costs associated with such laws,
regulations and ordinances may result in future additional costs to our
operations.
Rules
and
regulations regarding the service of alcoholic beverages are strict. The loss
or
suspension of a liquor license could significantly impair our operations. Local
building, parking and fire codes and similar regulations could also impact
the
Company's operations and proposed development of its properties.
A
minimum
of 80% of the labor force in Caledon must be comprised of designated persons.
A
designated person is any person of color plus white females. Currently, 87%
of
the labor force in Caledon is comprised of designated persons. The license
holder must undertake to allocate 10% of net profit of the casino, as defined
in
the casino license agreement, to Black Empowerment Partners.
-12-
In
addition, 0.9% of Caledon’s gross gaming revenues less gaming taxes and VAT must
be allocated, by agreement, to the Overberg Community Trust. Caledon is
obligated to allocate a portion of its procurements costs to Black Empowerment
Companies. As of December 31, 2006, Caledon allocated approximately 45% of
its
procurement costs to Black Empowerment companies.
A
minimum
of 70% of the labor force in Newcastle must be comprised of residents from
within the Kwazulu-Natal province. A minimum of 90% of the labor force must
be
residents of South Africa. Management believes that we are in compliance with
these regulations as of December 31, 2006.
Employees
As
of
December 31, 2006, Century had approximately 1,000 full-time
employees.
During busier months, each casino property may supplement its permanent staff
with seasonal employees. No Company employees are represented by a labor
union.
Available
Information
For
more
information about Century Casinos, Inc. please visit us on the Internet at
http://www.cnty.com.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and amendments to these filings are made available free of charge
through the Investor Relations-Corporate section of our website at http://www.cnty.com
as soon
as reasonably practicable after such filing has been made with the SEC. Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and amendments to those reports are also available on the SEC website
at http://www.sec.gov.
None of
the information posted to the Company’s website is incorporated by reference
into this report.
Financial
Information By Segment
See
Part
II, Item 8, “Financial Statements and Supplementary Data” - Note 13 for
additional financial information on segments and geographical
areas.
Factors
That May Affect Future Results
We
face significant competition, and if we are not able to compete successfully
our
results of operations will be harmed.
We
face
intense competition from other casinos in jurisdictions in which we operate.
Many of our competitors are larger and have substantially greater name
recognition, marketing resources and access to lower cost sources of financing
than we do. We seek to compete through promotion of our membership clubs and
other marketing efforts. For example, in South Africa we emphasize Caledon’s
destination resort appeal, players’ club programs, and superior service. Some or
all of these efforts may not be successful, which could hurt our competitive
position. In addition, a majority of the markets in which we operate in are
generally not destination resort areas. The number of casinos in these markets
may exceed demand, which could make it difficult for us to sustain
profitability.
-13-
The
gaming industry is highly fragmented and characterized by a high degree of
competition among a large number of participants. Competitive gaming activities
include casinos, video lottery terminals and other forms of legalized gaming
in
the U.S. and other jurisdictions. Legalized gaming is currently permitted in
various forms throughout much of the world. Other jurisdictions may legalize
gaming or liberalize their gaming rules in the near future. If additional gaming
opportunities become available near our operating facilities, such gaming
opportunities could attract players that might otherwise have visited our
casinos. The resulting loss of revenue at our casinos may have a material
adverse effect on our business, financial condition and results of operations.
We are particularly vulnerable to competition in Colorado. If other gaming
operations were permitted to open closer to Colorado Springs or Denver, our
operations in Cripple Creek and Central City, respectively, could be
substantially harmed, which would have a material adverse effect on us. In
addition, established gaming jurisdictions could award additional gaming
licenses or permit the expansion of existing gaming operations. New or expanded
operations by other entities will increase competition for our gaming operations
and could have a material adverse impact on us. For example, in late 2007,
a
large casino is expected to open in Cripple Creek. Management believes this
casino will have approximately 700 slot machines and 10 table games, further
diluting the Cripple Creek market. The opening of this casino could have a
material adverse impact on our casino operation in Cripple Creek.
We
face extensive regulation and taxation from gaming and other regulatory
authorities, which involve considerable expense and could harm our business.
Licensing
requirements.
As
owners and operators of gaming facilities, we are subject to extensive state,
local, and international provincial regulation. State, local and provincial
authorities require us and our subsidiaries to demonstrate suitability to obtain
and retain various licenses and require that we have registrations, permits
and
approvals to conduct gaming operations. Various regulatory authorities may
for
any reason set forth in applicable legislation, rules and regulations limit,
condition, suspend or revoke a license or registration to conduct gaming
operations or prevent us from owning the securities of any of our gaming
subsidiaries. Like all gaming operators in the jurisdictions in which we operate
or plan to operate, we must periodically apply to renew our gaming licenses
or
registrations and have the suitability of certain of our directors, officers
and
employees approved. We may not be able to obtain such renewals or approvals.
Regulatory authorities may also levy substantial fines against us or seize
our
assets or the assets of our subsidiaries or the people involved in violating
gaming laws or regulations. Any of these events could force us to terminate
operations at an existing gaming facility, either on a temporary or permanent
basis, could result in us being fined or could prohibit us from successfully
completing a project in which we invest. Closing facilities or an inability
to
expand may have a material adverse effect on our business, financial condition
and results of operations.
Gaming
authorities in the U.S. generally can require that any beneficial owner of
our
common stock and other securities, including our Austrian Depositary
Certificates (“ADCs”) or common stock underlying the ADCs, file an application
for a finding of suitability. If a gaming authority requires a record or
beneficial owner of our securities to file a suitability application, the owner
must apply for a finding of suitability within 30 days or at an earlier time
prescribed by the gaming authority. The gaming authority has the power to
investigate an owner's suitability and the owner must pay all costs of the
investigation. If the owner is found unsuitable, then the owner may be required
by law to dispose of our securities. Our certificate of incorporation also
provides us with the right to repurchase shares of our common stock (including
shares of common stock underlying our ADCs) from certain beneficial owners
declared by gaming regulators to be unsuitable holders of our equity securities,
and the price we pay to any such beneficial owner may be below the price such
beneficial owner would otherwise accept for his or her shares of our common
stock.
Potential
changes in regulatory environment.
From
time to time, legislators and special interest groups have proposed legislation
that would expand, restrict or prevent gaming operations or that may otherwise
adversely impact our operations in the jurisdictions in which we operate. Any
expansion of gaming or restriction on or prohibition of our gaming operations
could have a material adverse effect on our operating results. For instance,
in
November 2003, a Colorado ballot issue was proposed that would have permitted
the installation of at least 500 video lottery terminals or “VLTs” at each of
the five racetracks throughout Colorado, two of which are located in Colorado
Springs and Pueblo, the dominant markets for Cripple Creek. If this ballot
issue
had passed, our casino operations in Cripple Creek might have suffered from
reduced player visits and declining revenue. There can be no assurance that
future attempts will not be made to pass similar ballot issues in Colorado
or
other markets in which we operate. In
addition, the Colorado legislature is currently considering legislation that
would ban smoking in casinos. This could
result in fewer customers who smoke visiting our properties in Colorado, which
could adversely affect our results of operations.
-14-
Taxation
and fees. We
believe that the prospect of significant revenue is one of the primary reasons
jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to normal federal,
state, local and provincial income taxes, and such taxes and fees are subject
to
increase at any time. We pay substantial taxes and fees with respect to our
operations. From time to time, federal, state, provincial and local legislators
and officials have proposed changes in tax laws, or in the administration of
such laws, affecting the gaming industry. In addition, worsening economic
conditions could intensify the efforts of state provincial and local governments
to raise revenues through increases in gaming taxes. It is not possible to
determine with certainty the likelihood of changes in tax laws or in the
administration of such laws. Such changes, if adopted, could materially increase
our tax expenses and impair our profitability.
We
intend to develop and operate additional casino properties in the future, and
if
our development efforts are not successful our business may be
harmed.
We
are
required to obtain a gaming license for any additional facility we attempt
to
open (excluding casinos operating on cruise ships in international waters).
We
are
currently licensed to operate gaming facilities in Colorado, the Western Cape
and KwaZulu-Natal provinces of South Africa, Alberta, Canada and the Czech
Republic. While our management believes that we are licensable in any
jurisdiction that allows gaming operations, each licensing process is unique
and
requires a significant amount of funds and management time. The licensing
process in any particular jurisdiction can take significant time and expense
through licensing fees, background investigation costs, fees of counsel and
other associated preparation costs. Moreover, should we proceed with a licensing
approval process with industry partners, such industry partners would be subject
to regulatory review as well. We seek to satisfy ourselves that industry
partners are licensable, but cannot assure that such partners will, in fact,
be
licensable. Additional risks before commencing operations include the time
and
expense incurred and unforeseen difficulties in obtaining suitable sites, liquor
licenses, building permits, materials, competent and able contractors, supplies,
employees, gaming devices and related matters. In addition, certain licenses
include competitive situations where, even if we are licensable, other factors
such as the economic impact of gaming, financial and operational capabilities
of
competitors must be analyzed by regulatory authorities. In
addition, political factors may make the licensing process more difficult in
one
or more jurisdictions. If any of our gaming license applications are denied,
we
may have to write off costs, which could be significant. For instance, in 2005,
we expended substantial funds to develop a riverboat gaming operation in
Franklin County, Iowa. The Iowa Racing and Gaming Commission voted to allow
four
additional licenses, none of which were for projects in Franklin County. As
a
result, we terminated the project and had to write-off costs of approximately
$0.2 million.
Even
if
we receive licenses to open and operate proposed new facilities, commencing
operations at our proposed new casino projects will require substantial
development capital. Development activities involve expenses and risks,
including expenses involved in securing licenses, permits or authorizations
other than those required from gaming regulators, and the risk of potential
cost
over-runs, construction delays, and market deterioration. In addition, our
ability to attract and retain competent management and employees for any new
location is critical to our success. One or more of these risks may result
in
any of our currently proposed properties not being successful. If we are not
able to successfully commence operations at these properties, our results of
operations will be harmed.
-15-
We
may face disruption in integrating and managing facilities we open or acquire
in
the future, which could adversely impact our operations.
We
continually evaluate opportunities to open new properties, some of which are
potentially significant in relation to our size. We expect to continue pursuing
expansion opportunities, and we could face significant challenges in managing
and integrating expanded or combined operations resulting from our expansion
activities. The integration of any new properties we open or acquire in the
future will require the dedication of management resources that may temporarily
divert attention from the day-to-day business of our existing operations, which
may interrupt the activities of those operations and could result in
deteriorating performance from those operations. Management of new properties,
especially in new geographic areas, may require that we increase our managerial
staff, which would increase our expenses.
Difficulties
in managing our worldwide operations may have an adverse impact on our
business.
We
derive
our revenue from operations located on three continents and on cruise ships
operating around the world. Our management is located in the United States,
South Africa and Europe. As a result of long distances, different time zones,
culture, management and language differences, our worldwide operations pose
risks to our business. These factors make it more challenging to manage and
administer a globally-dispersed business, and increase the resources we must
devote to operating under several different regulatory and legislative regimes.
Moreover, economic or political instability in one or more of our markets could
adversely affect our operations in those markets.
A
downturn in general economic conditions may adversely affect our results of
operations.
Our
business operations are subject to changes in international, national and local
economic conditions, including changes in the economy related to future security
alerts in connection with threatened or actual terrorist attacks, such as those
that occurred on September 11, 2001, and related to the war with Iraq, which
may
affect our customers' willingness to travel. Our business is fueled by
discrectionary income. Recessions or downturns in the general economies in
which
we operate could result in fewer customers visiting our properties, which would
adversely affect our results of operations.
We
experience seasonal fluctuations that significantly impact our quarterly
operating results.
Weather
patterns and holidays affect our operations. For example, our Colorado casinos,
which are located in mountain tourist towns, typically experience greater gaming
revenues in the summer tourist season than any other time during the year.
During the year ended December 31, 2006, the net operating revenue attributable
to our Cripple Creek operations fluctuated from a high of $4.7 million in the
third quarter to a low of $3.7 million in the fourth quarter. If we are not
able
to offset these seasonal declines with additional revenue from other sources,
our quarterly results may vary considerably from period to period, which could
cause the price of our common stock or ADCs to be volatile.
Inclement
weather and other conditions could seriously disrupt our business, which may
hamper our financial condition and results of operations.
The
operations of our facilities are subject to disruptions or reduced patronage
as
a result of severe weather conditions. For instance, in August 2002, Prague
experienced a devastating flood throughout the city. Public access to the city
in the vicinity of Century Casino Millennium was severely limited for months
following the disaster and negatively affected casino operations. High winds
and
blizzards limit access to our properties in North America from time to time,
and
hurricanes or severe storms may impact the operations of our cruise ship casino
facilities. In the event weather conditions limit access to our casino
properties or otherwise adversely impact our ability to operate our casinos
at
full capacity, our revenue will suffer, which will negatively impact our
operating results.
-16-
Fluctuations
in currency exchange rates could adversely affect our
business.
Our
facilities in South Africa and Canada represent a significant portion of our
business, and the revenue generated and expenses incurred by these facilities
are generally denominated in South African Rands and Canadian Dollars,
respectively. A decrease in the value of either of these currencies in relation
to the value of the U.S. dollar would decrease the revenue and operating profit
from our foreign operations when translated into U.S. dollars, which would
adversely affect our consolidated results and could cause the price of our
common stock and ADCs to decrease. In addition, we expect to expand our
operations into other countries and, accordingly, we will face similar exchange
rate risk with respect to the costs of doing business in such countries as
a
result of any increases in the value of the U.S. dollar in relation to the
currencies of such countries. Furthermore, we have a significant amount of
cash
denominated in Euros. We do not currently hedge our exposure to fluctuations
of
these foreign currencies, and there is no guarantee that we will be able to
successfully hedge any future foreign currency exposure.
The
loss of key personnel could have a material adverse effect on us.
We
are
highly dependent on the services of Erwin Haitzmann, our Chairman and Co Chief
Executive Officer, Peter Hoetzinger, our Vice Chairman and Co Chief Executive
Officer, and other members of our senior management team. Our ability to retain
key personnel is affected by the competitiveness of our compensation packages
and the other terms and conditions of employment, our continued ability to
compete effectively against other gaming companies and our growth prospects.
The
loss of the services of any of these individuals could have a material adverse
effect on our business, financial condition and results of operations.
The
availability and cost of financing could have an adverse effect on our business.
We
intend
to finance our current and future expansion and renovation projects primarily
with cash flow from operations, borrowings under our bank credit facility and
equity or debt financings. If we are unable to finance our current or future
expansion projects, we will have to adopt one or more alternatives, such as
reducing or delaying planned expansion, development and renovation projects
as
well as capital expenditures, selling assets, restructuring debt, or obtaining
additional equity financing or joint venture partners, or modifying our bank
credit facility. These sources of funds may not be sufficient to finance our
expansion, and other financing may not be available on acceptable terms, in
a
timely manner or at all. In addition, our existing indebtedness contains certain
restrictions on our ability to incur additional indebtedness. If we are unable
to secure additional financing, we could be forced to limit or suspend
expansion, development and renovation projects, which may adversely affect
our
business, financial condition and results of operations.
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
(earnings before interest, taxes, depreciation and amortization, 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.
-17-
Our
casino concessionaire agreements may be terminated at any
time.
In
addition to our land-based casinos, we currently operate casinos on six cruise
ships. We operate the casinos on the cruise ships pursuant to casino
concessionaire agreements with three different cruise ship charter companies.
The contracts with the cruise ship operators provide for cancellation with
a
limited notice period in the event of our default under the respective
agreements. Accordingly, we could lose the revenue stream associated with these
contracts on short notice, which may adversely affect our operating results.
We
may be required in the future to record impairment losses related to the
goodwill we currently carry on our balance sheet.
We
had
$12.3 million of goodwill as of December 31, 2006 and $8.7 million of goodwill
as of December 31, 2005. Accounting rules require that we make certain estimates
and assumptions related to our determinations as to the future recoverability
of
the goodwill we report on our balance sheet. If we were to determine that the
value of the goodwill carried on our balance sheet is impaired, we may be
required to record an impairment charge to write down the value of our goodwill,
which would adversely affect our results during the period in which we recorded
the impairment charge.
Service
of process and enforceability of certain foreign judgments
is limited.
We
are
incorporated in the U.S. and a substantial portion of our assets are located
in
North America and South Africa. In addition, some of our directors and officers
are residents of the U.S. and all or a substantial portion of their assets
are
located in the U.S. As a result, it may be difficult for European investors
who
hold ADCs to effect service of process within Austria upon the Company or such
persons or to enforce judgments
obtained
against them in such courts based on civil liability provisions of the European
securities laws.
Outside
investors own preference shares in our Caledon, South Africa operation, which
may reduce our return on investment from that property.
Century
Resorts Limited (“CRL”) owns 100% of the common equity of CCAL, our South
African subsidiary that owns and operates the Caledon Hotel, Spa and Casino.
Two
unrelated third parties own preference shares that entitle them to a priority
on
distributions in certain circumstances. The preference shares are not
cumulative, nor are they redeemable. The preference shares entitle the holders
of such shares to total dividends of 20% of the after-tax profits of each
financial year directly attributable to the Caledon casino business in that
year, subject to, as determined by the directors of CCAL in their sole and
absolute discretion, any working capital, capital expenditure requirements,
loan
obligations and liabilities attributable to the casino business. These dividend
rights would reduce the return that we would otherwise receive from our
investment in this property. Furthermore, should the casino business be sold
or
otherwise dissolved, the preferred shareholders would be entitled to 20% of
any
surplus directly attributable to the casino business, net of all liabilities
attributable to the casino business.
In
January 2006, CCAL authorized a new class of preferred shares with a lower
dividend rate and liquidation preference than the existing class of preferred
shares, and CCAL is offering the new class of preferred shares for the shares
currently outstanding. As of December 31, 2006, one preference shareholder
exchanged their original preference shares for the new class of preference
shares. The remaining preference shareholder has not elected to exchange their
shares, thus retaining the original preferred shares with a 10% dividend rate
and liquidation preference.
-18-
Risks
Related to our Common Stock and the ADCs
Certain
anti-takeover measures we have adopted may limit our ability to consummate
transactions that some of our security holders might otherwise
support.
We
have a
fair price business combination provision in our certificate of incorporation,
which requires approval of certain business combinations and other transactions
by holders of 80% of our outstanding shares of voting stock. We also have
adopted a stockholder rights plan that allows our stockholders to purchase
significant amounts of our common stock at a discount in the event any third
party acquires a significant ownership interest in us or attempts to acquire
us
without the approval of our Board of Directors. In addition, our certificate
of
incorporation allows our Board of Directors to issue shares of preferred stock
without stockholder approval. These provisions generally have the effect of
requiring that any party seeking to acquire us negotiate with our Board of
Directors in order to structure a business combination with us. This may have
the effect of depressing the price of our common stock, and may similarly
depress the price of the ADCs, due to the possibility that certain transactions
that our stockholders might favor could be precluded by these
provisions.
We
do not anticipate paying cash dividends on our shares of common stock or ADCs
in
the foreseeable future.
We
have
never declared or paid any cash dividends on our shares of common stock. We
intend to retain any future earnings to fund the operation and expansion of
our
business and, therefore, we do not anticipate paying cash dividends on our
shares of common stock, or the ADCs, in the foreseeable future. Our various
credit agreements prohibit us from paying cash dividends on our shares of common
stock if payment of such dividends would cause us to violate financial covenants
stated in the credit agreements.
Our
stock price has been volatile and may decline significantly and unexpectedly.
Our
common stock trades in the U.S. on the NASDAQ Capital Market, which is
characterized by small issuers and a lack of significant trading volumes
relative to other U.S. markets. These factors may result in volatility in the
price of our common stock. For instance, the trading price of our common stock
on the NASDAQ Capital Market varied from a low of $8.31 to a high of $12.11
during 2006. Our common stock also trades on the Vienna Stock Exchange in the
form of ADCs. For a small company such as ours, having listings on two
securities markets could decrease the trading volume on each market to levels
that might increase the volatility of the trading price of our securities.
Increased trading focus of our securities on one trading market could affect
and
significantly decrease the liquidity on the other market, which could make
it
difficult or impossible for an investor to sell our common stock or ADCs on
the
market with declining value.
Future
sales of shares of our common stock may depress the price of our common stock
and dilute the holdings of current investors.
If
we
issue and sell a substantial number of shares of our common stock in the public
market, or investors become concerned that substantial sales might occur, the
market price of our common stock could decrease. If such sales reduce the market
price of our common stock, our ability to raise additional capital in the equity
markets may be adversely affected, and it may be difficult for you to sell
your
shares at a time and price which you deem appropriate. In the event that we
issue additional shares of common stock in the future, including shares that
may
be issued upon exercise of options and other rights granted under our employee
benefit plans, holders of our common stock may experience future
dilution.
-19-
Because
we are a foreign corporation to the Vienna Stock Exchange, the Austrian and
other European takeover regimes do not apply to our
company.
Austrian
takeover law does not apply to foreign corporations listed on the Vienna Stock
Exchange. If an investor proposes to take over our Company, Delaware law
(including laws relating to the enforceability of our stockholder rights plan)
would apply, and neither our stockholders nor our ADC holders could rely on
the
Austrian or any other European takeover regime to apply to such a takeover.
As a
result, if you are a holder of our ADCs you may be forced to sell the ADCs
at a
price that is less than you paid or that is less than you otherwise would
accept.
Investors
whose currency is not denominated in the same currency as to which their common
stock or ADCs are traded will incur exposure to fluctuating exchange
rates.
For
investors whose currency is not denominated in the same currency as to which
their common stock or ADCs are traded, fluctuations in the value of the common
stock or ADCs currency against the investor’s currency will affect the market
value of our shares and the ADCs, expressed in the investor’s currency. In
addition, such fluctuations may also affect the conversion into the investor’s
currency of cash dividends and other distributions paid on our shares and ADCs,
if any, including proceeds received upon a sale or other disposition of our
common stock and ADCs.
None.
Summary
of Property Information
|
Property
|
Casino
Space
Sq
Ft (1)
|
Acreage
|
Number
of
Slot Machines |
Number
of
Table Games |
Number
of
Hotel Rooms |
Number
of
Restaurants |
|
Womacks
|
23,000
|
3.5
|
559
|
6
|
21
|
1
|
|
Century
Casino - Central City
|
28,000
|
1.1
|
560
|
8
|
27
|
2
|
|
Caledon
|
13,660
|
600(2)
|
350
|
6
|
81
|
3
|
|
Century
Casino - Newcastle
|
17,500
|
61
|
250
|
6
|
40
|
1
|
|
Century
Casino - Edmonton
|
35,000
|
7.0
|
600
|
31
|
26(4)
|
3
|
|
Century
Casino Millennium
|
6,200
|
-
|
30
|
11
|
-
|
-
|
|
Cruise
Ships (total of six) (3)
|
5,980
|
-
|
158
|
24
|
-
|
-
|
|
(1)
|
Approximate.
|
|
(2)
|
Of
the 600 available acres, 500 currently remain
undeveloped.
|
|
(3)
|
Operated
under concession agreements.
|
|
(4)
|
The
hotel is scheduled to open in March 2007.
|
Our
casino properties in Colorado, South Africa and Edmonton secure our obligations
under various loan agreements. See “Item 8 - Financial Statements and
Supplementary Data” - Note 6 of the Notes to Consolidated Financial Statements
for further information.
-20-
Additional
Property Information
Womacks
- In
addition to the property described above, we also lease 10 city lots from the
City of Cripple Creek, Colorado for parking. Under the terms of the lease,
which
expires in May 2010, we may purchase the property for $3.3 million, less
cumulative lease payments, at any time during the remainder of the lease
term.
Century
Casino Millennium - We
lease
this property under a 20-year lease agreement that expires in December 2019.
The
casino is located in the 293-room Marriott Hotel in Prague, Czech Republic.
Corporate
Offices -
We
currently lease office spaces for corporate and administrative purposes in
Colorado Springs, Colorado; Vienna, Austria; and Cape Town, South
Africa.
In
the
opinion of management, the space and equipment owned or leased by the Company
are adequate for existing operating needs.
We
are
not a party to, nor are we aware of, any pending or threatened litigation which,
in management’s opinion, could have a material adverse effect on our financial
position or results of operations.
Item
4. Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2006.
-21-
PART
II
Our
common stock began trading on the NASDAQ Capital Market on November 10,
1993.
The
following graph illustrates the cumulative shareholder return of our common
stock during the period beginning December 31, 2001 through December 31, 2006,
and compares it to the cumulative total return on the NASDAQ Capital Market
and
the Dow Jones Gambling Index. The comparison assumes a $100 investment on
December 31, 2001, in our common stock and in each of the foregoing indices
and
assumes reinvestment of dividends, if any. This table is not intended to
forecast future performance of our common stock.
The
following table sets forth the low and high sale price per share quotations
of
our common stock as reported on the NASDAQ Capital Market for the periods
indicated.
|
Quarter
Ended
|
Low
|
High
|
|
March
31, 2005
|
$
7.08
|
$
9.62
|
|
June
30, 2005
|
$
6.25
|
$10.91
|
|
September
30, 2005
|
$
6.02
|
$
7.82
|
|
December
31, 2005
|
$
6.80
|
$
8.96
|
|
March
31, 2006
|
$
8.31
|
$10.86
|
|
June
30, 2006
|
$
9.55
|
$12.11
|
|
September
30, 2006
|
$
9.05
|
$11.73
|
|
December
31, 2006
|
$
9.10
|
$11.89
|
At
December 31, 2006, we had approximately 61 holders of record of our common
stock. We estimate that the number of beneficial owners is approximately 2,680.
In
October 2005, we issued 7.1 million new shares of our common stock, in the
form
of ADCs, to investors in the Republic of Austria and in a private placement
to
institutional investors in other countries in Europe. Each ADC, which is traded
on the Vienna Stock Exchange (“VSE”), is equivalent to one share of our common
stock.
No
dividends have been declared or paid by the Company, and we do not presently
intend to pay dividends. At the present time, we intend to use any earnings
that
may be generated to finance the growth of the Company’s business. Our credit
facilities currently limit the payment of dividends.
Our
Board of Directors has approved a discretionary program to repurchase up to
$5.0 million of the Company’s outstanding common stock. We did
not
purchase
any shares of our common stock on the open market in 2005 or 2006.
The total remaining authorization under the repurchase program was $1.2 million
as of December 31, 2006. The repurchase program has no set expiration or
termination date.
-22-
Item
6. Selected
Financial Data.
The
selected financial data below should be read in conjunction with Part II, Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, and Part II, Item 8, “Financial Statements and Supplementary Data”,
of this Form 10-K.
|
For
the Year Ended December 31,
|
||||||||||
|
Amounts
in thousands, except
for per share information
|
2006(5)
|
2005(4)
|
2004(3)
|
2003(2)
|
2002(1)
|
|||||
|
Results
of Operations:
|
||||||||||
|
Net
Operating Revenue
|
$
|
56,285
|
$
|
37,445
|
$
|
35,765
|
$
|
31,430
|
$
|
29,337
|
|
Net
Earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
$
|
3,246
|
$
|
3,079
|
|
Net
Earnings per Share:
|
||||||||||
|
Basic
|
$
|
0.33
|
$
|
0.28
|
$
|
0.35
|
$
|
0.24
|
$
|
0.23
|
|
Diluted
|
$
|
0.32
|
$
|
0.25
|
$
|
0.30
|
$
|
0.22
|
$
|
0.20
|
|
Balance
Sheet:
|
||||||||||
|
Cash
and Cash Equivalents
|
$
|
34,969
|
$
|
37,167
|
$
|
8,411
|
$
|
4,729
|
$
|
4,582
|
|
Total
Assets
|
$
|
197,860
|
$
|
123,348
|
$
|
71,204
|
$
|
54,817
|
$
|
51,143
|
|
Long-Term
Debt
|
$
|
56,036
|
$
|
17,934
|
$
|
17,970
|
$
|
14,913
|
$
|
16,531
|
|
Total
Liabilities
|
$
|
97,433
|
$
|
32,017
|
$
|
30,825
|
$
|
21,769
|
$
|
24,040
|
|
Total
Shareholders’ Equity
|
$
|
100,427
|
$
|
91,331
|
$
|
40,379
|
$
|
33,048
|
$
|
27,103
|
|
Cash
Dividends Per Common Share
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
(1) In
2002,
we wrote down the value of non-operating casino property and land held
for sale
in Nevada by approximately $0.5 million, we recorded a $0.4 million write-off
for advances made and pre-construction costs incurred in conjunction with
a
project in South Africa and recorded a $0.3 million write-off for unpaid
casino
technical service fees from Century Casino Millennium.
|
(2)
|
In
2003, we, through CCA, acquired the remaining 35% interest in
CCAL.
|
|
(3)
|
In
2004, we recorded a foreign currency gain of $0.4 million recognized
on
the disposition of a subsidiary. The increase in total assets is
primarily
the result of the contribution of $9.2 million in land and buildings
to
the Central City project by the minority partner, approximately $3.0
million in capital improvements at Womacks, including new slot machines
and new slot accounting software and increases in foreign denominated
assets resulting from fluctuations in currency exchange rates.
Approximately $3.5 million was borrowed in 2004 to finance our cash
contribution to the Central City project. A $4.2 million liability
was
created for the minority interest’s share of the
project.
|
|
(4)
|
In
2005, we raised $46.2 million in net proceeds by way of the offering
of
ADCs. As of December 31, 2005, cash and cash equivalents includes
$26.2
million from the ADC offering.
|
|
(5)
|
In
2006, we opened three new casinos. Additional net operating revenues
contributed by these new facilities was approximately $17.1 million.
The
facilities contributed additional total assets of $79.6 million in
2006.
Long-term financing for the construction of three new casino properties
contributed additional long term debt of $49.1 million in 2006. Also
in
2006, we wrote off the remaining $0.4 million of the non-operating
casino
property and land held for sale in Nevada. Finally, in 2006 we sold
an
option towards a casino development project in Johannesburg for
approximately $5.7 million. As a result of the transaction, we recorded
other income of approximately $5.2
million.
|
-23-
The
following discussion should be read in conjunction with “Item 8. Financial
Statements and Supplementary Data” included elsewhere herein. Information
contained in the following discussion of results of operations and financial
condition of the Company contains forward-looking statements within the meaning
of Section 21E of the Exchange Act, and as such, are based on current
expectations and are subject to certain risks and uncertainties. The reader
should not place undue reliance on these forward-looking statements for many
reasons including those risks discussed under Item 1A, “Risk Factors,” and
elsewhere in this document. See “Disclosure Regarding Forward-Looking
Statements” that precedes Part I of this report.
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.
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 year ended December 31,
|
||||||
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Adjusted
EBITDA
|
||||||
|
Cripple
Creek, Colorado
|
$
|
6,104
|
$
|
6,359
|
$
|
6,700
|
|
Central
City, Colorado
|
(256)
|
(103)
|
(8)
|
|||
|
Caledon,
South Africa
|
7,539
|
6,692
|
5,156
|
|||
|
Newcastle,
South Africa
|
1,884
|
-
|
-
|
|||
|
Edmonton,
Canada
|
(1,145)
|
(166)
|
-
|
|||
|
All
other operating segments
|
598
|
1,009
|
933
|
|||
|
Corporate
|
(1,165)
|
(4,588)
|
(2,784)
|
|||
|
Total
Adjusted EBITDA
|
$
|
13,559
|
$
|
9,203
|
$
|
9,997
|
-24-
Consolidated
Results of Operations
Overview
Since
our
inception, we have been primarily engaged in developing and operating gaming
establishments and related lodging and restaurant facilities. We derive revenue
from the net proceeds of our gaming machines and tables, and from hotel and
restaurant facilities.
We
are
managed in seven segments: (i) Cripple Creek, Colorado, representing the
operations of Womacks Casino and Hotel; (ii) Central City, Colorado,
representing the operations of the Century Casino & Hotel; (iii) Caledon,
South Africa, representing the operations of the Caledon Hotel, Spa and Casino,
and its related food service operation; (iv) Newcastle, South Africa,
representing the operations of Century Casino Newcastle and its related food
service operation; (v) Edmonton, Canada, representing the operations of the
Century Casino & Hotel in Edmonton, Alberta, Canada; (vi) All other
operating segments, which includes cruise ship casino operations for several
vessels and, subsequent to April 13, 2006, the operations of Century Casino
Millennium; and (vii) Corporate operations.
Results
of Operations
The
following table sets forth and summarizes our consolidated results of operations
for the years ended December 31, 2006, 2005 and 2004:
|
Amounts
in thousands, except per share information
|
For
the Year Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
||||
|
Net
Operating Revenue
|
$
|
56,285
|
$
|
37,445
|
$
|
35,765
|
|
Operating
Costs and Expenses:
|
||||||
|
Casino
|
23,123
|
14,293
|
13,760
|
|||
|
Hotel,
food and beverage
|
4,926
|
2,776
|
3,134
|
|||
|
General
and administrative
|
19,345
|
11,134
|
9,140
|
|||
|
Impairments
and other write-offs, net of recoveries
|
894
|
(61)
|
(215)
|
|||
|
Depreciation
|
4,747
|
3,349
|
2,993
|
|||
|
Total
operating costs and expenses
|
53,035
|
31,491
|
28,812
|
|||
|
(Loss)
earnings from unconsolidated subsidiary
|
-
|
(109)
|
55
|
|||
|
Earnings
from Operations
|
3,250
|
5,845
|
7,008
|
|||
|
Non-operating
income (expense), net
|
3,190
|
(1,805)
|
(1,423)
|
|||
|
Earnings
before
Income Taxes, Minority Interest and Preferred
Dividends
|
6,440
|
4,040
|
5,585
|
|||
|
Provision
for income taxes
|
134
|
347
|
749
|
|||
|
Earnings
before Minority Interest
and Preferred Dividends
|
6,306
|
3,693
|
4,836
|
|||
|
Minority
interest in subsidiary losses (earnings)
|
1,461
|
788
|
(98)
|
|||
|
Preferred
dividends issued by subsidiary
|
(138)
|
-
|
-
|
|||
|
Net
Earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
|
Earnings
Per Share
|
||||||
|
Basic
|
$
|
0.33
|
$
|
0.28
|
$
|
0.35
|
|
Diluted
|
$
|
0.32
|
$
|
0.25
|
$
|
0.30
|
-25-
Year
ended December 31, 2006 vs December 31, 2005
Our
consolidated operating results for the year ended December 31, 2006 were
significantly impacted by the openings of new casinos in Central City, Colorado
and Edmonton, Alberta, Canada. In addition, on April 1, 2006, we acquired a
casino company in Newcastle, South Africa, where we subsequently began the
development of a new casino . Pre-opening losses related to the development
of
these casinos were $2.2 million for the year ended December 31,
2006.
We
reported net operating revenue of $56.3 million for the year ended December
31,
2006 compared to $37.4 million for the year ended December 31, 2005. The key
driver of the increased revenues was an increase in casino revenues of $18.1
million, or 49.7%, primarily the result of improved operations at our casino
in
Caledon, South Africa and the openings of the new casinos. Hotel, food and
beverage revenue increased $1.5 million, or 34.1%, to $6.1 million during 2006
as compared to 2005, mainly due to the additional casinos.
Promotional
allowances, which are made up of complimentaries, cash points and coupons,
are
rewards we give our loyal customers to encourage them to continue to patronize
our properties. Such awards reduced gross revenues by approximately 9% in 2006
and 10% in 2005.
As
a
result of the additional casinos, casino operating expenses increased $8.8
million, or 61.8%, from 2005 to 2006; hotel, food and beverage expenses
increased $2.2 million, or 77.4%; and general and administrative expenses
increased 73.7%.
During
2006, we recorded an impairment of goodwill of approximately $0.2 million
related to our property in Prague, Czech Republic. In addition, we wrote off
fixed assets of approximately $1.1 million that were deemed to be obsolete
or
not to have strategic value to the Company. These write-offs were offset by
a
collection of previously written off loans of approximately $0.4
million.
The
Company reported net non-operating income of $3.2 million in 2006 compared
to
net non-operating expenses of $1.8 million in 2005. In September 2006, the
Company sold its interest in a casino development project located in Gauteng,
South Africa for $5.7 million (ZAR 43.3 million), less commissions of $0.1
million (ZAR 1.3 million). The Company recorded other income of $5.2 million
(ZAR 39.0 million) as a result of the transaction. Increases in interest income
from 2005 to 2006 relating to interest earned on our cash deposits were offset
by increases in interest expense on our average debt balance from 2005 to
2006.
Income
tax expense was $0.1 million for 2006 compared to $0.3 million in 2005. The
decrease is primarily related to domestic operating losses being taxed at higher
statutory rates than our foreign income.
Year
ended December 31, 2005 vs December 31, 2004
Casino
revenue in 2005 increased $1.8 million, or 5.1%, to $36.4 million as compared
to
2004. These increases are primarily the result of gains made in the South
African market. Hotel, food and beverage revenue increased $0.2 million, or
4.6%, to $4.5 million during 2005 as compared to 2004. The increases in hotel,
food and beverage revenue from 2004 to 2005 are primarily attributable to the
opening of our new casinos, renovations of our restaurant facilities in Cripple
Creek, Colorado and increased theme dinners and banquets at our Caledon, South
Africa property.
Other
revenue decreased by $0.3 million to $0.8 million in 2005 as compared to 2004.
The higher revenue in 2004 is primarily due to a foreign currency gain of $0.4
million recognized on the disposition of a non-operating
subsidiary.
-26-
Promotional
allowances reduced gross revenues by approximately 10% in 2005 as compared
to
11% in 2004.
Casino
operating expenses in 2005 increased $0.5 million, or 3.9%, as compared to
2004
primarily due to revenue growth and currency exchange rate fluctuations in
the
South African segment.
Hotel,
food and beverage expenses were $2.8 million in 2005 and $3.1 million in
2004. The decrease of $0.3 million from 2004 to 2005 resulted from a decrease
in
hotel occupancy in the South African segment.
General
and administrative expenses were $11.1 million in 2005 and $9.1 million in
2004.
The $2.0 million increase in general and administrative expenses in 2005 was
due
primarily to the implementation of Section 404 of the Sarbanes-Oxley Act of
2002
and staff additions to aid in its implementation, coupled with expenditures
associated with the development of the Central City and Edmonton projects.
Depreciation
expense was $3.3 million in 2005 and $3.0 million in 2004. Changes in
depreciation expenses during this time relate to expansion and on-going property
improvement projects.
Our
earnings from operations for the year ended December 31, 2005 were $5.8 million
compared to $7.0 million in 2004. The overall decrease is primarily a result
of
a decrease in earnings in Cripple Creek, Colorado, the increase in expenditures
at the Corporate segment associated with the Sarbanes-Oxley Section 404
implementation, and the addition of expenditures associated with the Central
City, Colorado and Edmonton, Canada development projects.
Net
non-operating expense increased $0.4 million, or 26.8%, in 2005, primarily
due
to increased interest charges resulting from our credit facilities with Wells
Fargo, Canadian Western Bank and the outstanding term loan in Caledon. In
addition, while we were constructing our new casinos in Central City, Colorado
and Edmonton, Canada, interest was being capitalized to the costs of our
projects. Please see Note 6, “Long-term Debt” of the Notes to Consolidated
Financial Statements for further information.
The
decrease in the tax expense in 2005 as compared to 2004 is the result of a
reduction in pre-tax earnings and the tax benefit recognized on the exercise
of
non-statutory stock options in 2005.
A
discussion by business segment follows below.
-27-
Cripple
Creek, Colorado
The
operating results of the Cripple Creek, Colorado segment, primarily the
operations of Womacks, for the years ended December 31, 2006, 2005 and 2004
are
as follows:
|
Dollar
amounts in thousands
|
2006
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Casino
|
$
|
17,860
|
$
|
18,934
|
$
|
19,486
|
|
Hotel,
food and beverage
|
1,331
|
1,472
|
1,544
|
|||
|
Other
(net of promotional allowances)
|
(2,936)
|
(3,295)
|
(3,469)
|
|||
|
Net
operating revenue
|
16,255
|
17,111
|
17,561
|
|||
|
Costs
and expenses
|
||||||
|
Casino
|
5,991
|
6,514
|
6,828
|
|||
|
Hotel,
food and beverage
|
569
|
619
|
586
|
|||
|
General
and administrative
|
3,591
|
3,619
|
3,444
|
|||
|
Impairments
and other write-offs, net of recoveries
|
-
|
-
|
3
|
|||
|
Depreciation
|
1,606
|
1,703
|
1,512
|
|||
|
11,757
|
12,455
|
12,373
|
||||
|
Earnings
from operations
|
4,498
|
4,656
|
5,188
|
|||
|
Interest
income
|
18
|
13
|
12
|
|||
|
Interest
(expense)
|
(879)
|
(1,066)
|
(784)
|
|||
|
Interest
expense on non-Cripple Creek debt allocated to Corporate
|
497
|
1,325
|
907
|
|||
|
Other
(expense), net
|
-
|
-
|
-
|
|||
|
Earnings
before income taxes
|
4,134
|
4,928
|
5,323
|
|||
|
Income
tax expense
|
1,571
|
1,873
|
2,023
|
|||
|
Net
earnings
|
$
|
2,563
|
$
|
3,055
|
$
|
3,300
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
earnings
|
$
|
2,563
|
$
|
3,055
|
$
|
3,300
|
|
Minority
interest
|
-
|
-
|
-
|
|||
|
Interest
income
|
(18)
|
(13)
|
(12)
|
|||
|
Interest
expense (including amounts allocated to Corporate)
|
382
|
(259)
|
(123)
|
|||
|
Income
tax expense
|
1,571
|
1,873
|
2,023
|
|||
|
Depreciation
|
1,606
|
1,703
|
1,512
|
|||
|
Adjusted
EBITDA
|
$
|
6,104
|
$
|
6,359
|
$
|
6,700
|
|
Cripple
Creek Market Data
|
2006
|
2005
|
2004
|
|
Market
share of the Cripple Creek Slot AGP*
|
11.8%
|
12.8%
|
13.4%
|
|
Average
number of slot machines
|
581
|
618
|
649
|
|
Market
share of Cripple Creek gaming devices*
|
12.3%
|
13.0%
|
14.1%
|
|
Average
slot machine win per day
|
$
82
|
$
83
|
$
81
|
|
Cripple
Creek average slot machine win per day*
|
$
86
|
$
84
|
$
85
|
*Source:
Colorado Division of Gaming
-28-
Management
believes that 2006 revenues in Cripple Creek were negatively impacted by a
series of blizzards occurring between October and December. These blizzards
limited the amount of traffic into this market. The Cripple Creek gaming market
grew by 1.4% and casino revenues at Womacks’ decreased 5.7%, primarily due to
continued competition within the market. To reverse this trend, there were
a
number of changes made in key management positions at Womacks during the third
quarter of 2006. The changes are intended to bring fresh ideas to help
strengthen Womacks in a highly competitive market. Management continues to
focus
on the marketing of Womacks through the player’s club. Womacks has continued the
effort to improve the customer experience by converting 384 slot machines,
which
represents more than 65% of the total machines on the floor, to Ticket in/Ticket
(“TITO”) out devices. These ongoing improvements are expected to further improve
customer service. We spent approximately $3.0 million in 2004 to upgrade the
product mix on the gaming floor, improve the player tracking system and
introduce TITO devices. During 2004, Womacks replaced approximately 149 slot
machines and added 20 additional slot machines on the floor.
Casino
expenses decreased 8.0%, or $0.5 million for the year ended December 31, 2006
from the year ended December 31, 2005. Casino expenses decreased 4.6%, or $0.3
million, from 2004 to 2005. These decreases are primarily the result of
decreased casino revenues. In addition, 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 59.9% for 2006, compared to 58.3% in 2005 and 57.4%
in
2004.
In
order
to outfit Womacks with the most popular gaming machines, Womacks leased an
average of 33 slot machines from manufacturers in 2006, compared to an average
of 35 in 2005 and an average of 39 in 2004, on which it pays a fee calculated
as
a percentage of the net win. All of the leases have short term commitment
periods not exceeding three months and are classified as operating leases.
The
leases can be cancelled with no more than 30 days written notice. On a portion
of the leases, the manufacturer is guaranteed a minimum fee per day that can
range from 15 dollars to 35 dollars for the duration of the lease. In most
instances, the machines are branded games that are being introduced to the
market and are not available for purchase. For financial reporting purposes,
the
net win on the slot machines is included in our revenue and the amount due
to
the manufacturer is recorded as casino operating cost in the period during
which
the revenue is earned, as casino operating cost. Management makes its decisions
to introduce these machines based on the consumer demand for the product. The
amount paid under these leases was $0.4 million, $0.5 million and $0.5 million
in 2006, 2005 and 2004, respectively.
Hotel,
Food and Beverage
Hotel,
food and beverage revenue decrease by 9.6% in the year ended December 31, 2006
compared to the year ended December 31, 2005, primarily the result of a 4.5%
decrease in restaurant sales and a 20.0% decrease in hotel occupancy. Hotel
revenue, included in hotel, food and beverage revenue, decreased by 7.6% in
the
year ended December 31, 2005 compared to the year ended December 31, 2004 as
a
result of decrease in the hotel occupancy to 83% from 92% in 2004. Hotel
occupancy decreased due to a restructuring of the player complimentary policy.
All of the revenue generated by the hotel operations is derived from comps
to
frequent players, the value of which is included in promotional
allowances.
Prior
to
July 31, 2005, Womacks operated two restaurants, “Bob’s Grill” and the “Cut
Above Buffet” to provide an alternative to patrons of the casino. The “Cut Above
Buffet” opened in May 2004 and operated on the second floor of the casino. As a
means of attracting new customers, the “Cut Above Buffet” was operated at a
lower food and beverage operating margin than “Bob’s Grill”. Although the “Cut
Above Buffet” attracted new customers the Womacks players club, it was not a
significant stimulus to gaming revenue and was closed on July 30,
2005.
-29-
Other
General
and administrative costs for the year ended December 31, 2006 remained flat
when
compared to general and administrative costs for the year ended December 31,
2005. We are able to control our costs through effective, continued cost control
measures. Comparing 2005 to 2004, Womacks incurred approximately $0.1 million
in
fees in 2005 from consultants that assisted in the implementation of
Sarbanes-Oxley Section 404 controls, but was otherwise able to limit increases
in administrative expenses.
The
$0.1
million decrease in depreciation expense when comparing to 2006 to 2005 results
from certain fixed assets becoming fully depreciated and a decrease in fixed
asset expenditures during 2006. The $0.2 million increase in depreciation
expense when comparing 2005 to 2004 is primarily the result of the addition
of
gaming equipment during 2004.
The
segment allocated $0.5 million, $1.3 million and $0.9 million in interest
expense to the Corporate segment during the years ended December 31, 2006,
2005
and 2004, respectively. Interest expense on the amounts advanced by Womacks,
but
not repaid, to fund the Company’s acquisitions and the repurchase of the
Company’s common stock is calculated using the effective rate on all borrowings
under Womacks’ revolving credit facility.
The
Cripple Creek, Colorado segment recognized income tax expense of $1.6 million
in
2006 versus $1.9 million in 2005 and $2.0 million in 2004, principally the
result of a decrease in earnings before income taxes. The effective tax rate
has
remained stable at 38% over the three year period.
In
late
2007, a larger casino is expected to be opening in Cripple Creek. Management
believes this casino will have approximately 700 slot machines and 10 table
games and will provide further competition to our casino.
-30-
Central
City, Colorado
The
operating results of the Central City, Colorado segment, primarily the
development and the operations of the Century Casino and Hotel in Central City,
for the years ended December 31, 2006, 2005 and 2004 are as
follows:
|
Dollar
amounts in thousands
|
2006*
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Casino
|
$
|
9,388
|
$
|
-
|
$
|
-
|
|
Hotel,
food and beverage
|
809
|
-
|
-
|
|||
|
Other
(net of promotional allowances)
|
(1,580)
|
6
|
-
|
|||
|
Net
operating revenue
|
8,617
|
6
|
-
|
|||
|
Costs
and expenses
|
||||||
|
Casino
|
4,358
|
-
|
-
|
|||
|
Hotel,
food and beverage
|
1,175
|
-
|
-
|
|||
|
General
and administrative
|
2,772
|
109
|
8
|
|||
|
Impairments
and other write-offs, net of recoveries
|
567
|
-
|
-
|
|||
|
Depreciation
|
1,190
|
-
|
-
|
|||
|
10,062
|
109
|
8
|
||||
|
Loss
from operations
|
(1,445)
|
(103)
|
(8)
|
|||
|
Interest
income
|
-
|
-
|
-
|
|||
|
Interest
(expense)
|
(2,368)
|
(296)
|
-
|
|||
|
Other
(expense), net
|
(1)
|
-
|
-
|
|||
|
Loss
before income taxes and minority interest
|
(3,814)
|
(399)
|
(8)
|
|||
|
Income
tax benefit
|
(623)
|
-
|
-
|
|||
|
Loss
before minority interest
|
(3,191)
|
(399)
|
(8)
|
|||
|
Minority
interest
|
2,165
|
857
|
8
|
|||
|
Net
(loss) earnings
|
$
|
(1,026)
|
$
|
458
|
$
|
-
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
(loss) earnings
|
$
|
(1,026)
|
$
|
458
|
$
|
-
|
|
Minority
interest
|
(2,165)
|
(857)
|
(8)
|
|||
|
Interest
income
|
-
|
-
|
-
|
|||
|
Interest
expense
|
2,368
|
296
|
-
|
|||
|
Income
tax benefit
|
(623)
|
-
|
-
|
|||
|
Depreciation
|
1,190
|
-
|
-
|
|||
|
Adjusted
EBITDA
|
$
|
(256)
|
$
|
(103)
|
$
|
(8)
|
| Central City Market Data (from July 11, 2006 through December 31, 2006) |
2006
|
|
Market
share of the Central City AGP**
|
23.5%
|
|
Average
number of slot machines
|
523
|
|
Market
share of Central City gaming devices**
|
23.8%
|
|
Average
slot machine win per day
|
$
101
|
|
Central
City average slot machine win per day**
|
$
103
|
**Source:
Colorado Division of Gaming
-31-
Prior
to
July 11, 2006, all operating results reflect the cumulative pre-opening costs
and non-capitalizable expenditures associated with the project. Pre-opening
expenses 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. We have since reduced staffing to normal operating levels. 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. The calculation of minority
interest is determined prior to the elimination of intercompany management
fees.
We incurred $1.7 million and $0.4 million of pre-opening expenses related to
the
project for the years ended December 31, 2006 and 2005,
respectively.
Revenues
are below what we have initially projected. This is primarily because the casino
originally proposed to operate with 625 slots and operated with approximately
400 to 560 slots during its first six months. The property had approximately
560
slot machines in operation as of December 31, 2006. We may add more slot
machines in the future. We are currently reviewing various strategies to
increase revenues and adjusted EBITDA at the property. Management has focused
on
the development of player club memberships, with results being better than
expected. We now have approximately 44,000 players in our player club 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 159 full-time and part-time
employees.
In
December 2006, we wrote off approximately $0.6 million of gaming equipment
that
either had system compatibility issues or that management deemed to be
unsuitable for the Central City market.
For
the
year ended December 31, 2006, the significant increase in interest expense
relates to interest that we incurred based on approximately $34.5 million of
outstanding debt as of December 31, 2006. In previous periods, this interest
was
capitalized towards the cost of the construction of the project. In an effort
to
reduce overall interest charges, the Company repaid $12.5 million of principal
on the outstanding debt in March 2007.
As
CTL
operates as a limited liability company, income taxes in Central City are
provided for on income that will be distributed to us 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 provisions on the pre-opening losses
incurred in 2005 and 2004 were made because these losses were allocated to
the
minority partner.
-32-
Caledon,
South Africa
The
operating results of the Caledon, South Africa segment are primarily those
related to the operations of the Caledon Hotel, Spa and Casino. Intercompany
transactions, including fees to its parent, shareholder’s interest and their
related tax effects have been eliminated within the segment’s results.
Operational results in US dollars for the years ended December 31, 2006, 2005
and 2004 are as follows: (See next page for results in Rand).
|
Dollar
amounts in thousands
|
2006
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Casino
|
$
|
15,632
|
$
|
14,549
|
$
|
12,540
|
|
Hotel,
food and beverage
|
2,945
|
3,050
|
2,778
|
|||
|
Other
(net of promotional allowances)
|
(283)
|
(584)
|
(348)
|
|||
|
Net
operating revenue
|
18,294
|
17,015
|
14,970
|
|||
|
Costs
and expenses
|
||||||
|
Casino
|
5,883
|
5,637
|
5,096
|
|||
|
Hotel,
food and beverage
|
1,986
|
2,157
|
2,548
|
|||
|
General
and administrative
|
2,650
|
2,590
|
2,170
|
|||
|
Impairments
and other write-offs, net of recoveries
|
31
|
(61)
|
-
|
|||
|
Depreciation
|
1,185
|
1,471
|
1,343
|
|||
|
11,735
|
11,794
|
11,157
|
||||
|
Earnings
from operations
|
6,559
|
5,221
|
3,813
|
|||
|
Interest
income
|
31
|
51
|
112
|
|||
|
Interest
expense
|
(773)
|
(832)
|
(788)
|
|||
|
Loss
on foreign currency translation and other
|
(67)
|
-
|
-
|
|||
|
Earnings
before income taxes and preferred dividends
|
5,750
|
4,440
|
3,137
|
|||
|
Income
tax expense
|
1,796
|
1,308
|
943
|
|||
|
Preferred
dividends
|
(138)
|
-
|
-
|
|||
|
Net
earnings
|
$
|
3,816
|
$
|
3,132
|
$
|
2,194
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
earnings
|
$
|
3,816
|
$
|
3,132
|
$
|
2,194
|
|
Minority
interest
|
-
|
-
|
-
|
|||
|
Interest
income
|
(31)
|
(51)
|
(112)
|
|||
|
Interest
expense
|
773
|
832
|
788
|
|||
|
Income
tax expense
|
1,796
|
1,308
|
943
|
|||
|
Depreciation
|
1,185
|
1,471
|
1,343
|
|||
|
Adjusted
EBITDA
|
$
|
7,539
|
$
|
6,692
|
$
|
5,156
|
|
Average
exchange rate (Rand/USD)
|
6.74
|
6.33
|
6.45
|
-33-
Operational
results in Rand for the years ended December 31, 2006, 2005 and 2004 are as
follows:
|
Dollar
amounts in thousands
|
2006
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Casino
|
ZAR
|
105,458
|
ZAR
|
91,817
|
ZAR
|
80,088
|
|
Hotel,
food and beverage
|
19,892
|
19,257
|
17,753
|
|||
|
Other
(net of promotional allowances)
|
273
|
(3,
716)
|
(2,260)
|
|||
|
Net
operating revenue
|
125,623
|
107,358
|
95,581
|
|||
|
Costs
and expenses
|
||||||
|
Casino
|
41,910
|
35,629
|
32,555
|
|||
|
Hotel,
food and beverage
|
13,432
|
13,633
|
16,247
|
|||
|
General
and administrative
|
17,844
|
16,443
|
13,813
|
|||
|
Impairments
and other write-offs, net of recoveries
|
209
|
(400)
|
-
|
|||
|
Depreciation
|
7,992
|
9,328
|
8,595
|
|||
|
81,387
|
74,633
|
71,210
|
||||
|
Earnings
from operations
|
44,236
|
32,725
|
24,371
|
|||
|
Interest
income
|
221
|
322
|
724
|
|||
|
Interest
expense
|
(5,217)
|
(5,299)
|
(5,072)
|
|||
|
Gain
(loss) on foreign currency translation and other
|
(456)
|
1
|
5
|
|||
|
Earnings
before income taxes and preferred dividends
|
38,784
|
27,749
|
20,028
|
|||
|
Income
tax expense
|
12,141
|
8,187
|
6,018
|
|||
|
Preferred
dividends
|
(990)
|
-
|
-
|
|||
|
Net
earnings
|
ZAR
|
25,653
|
ZAR
|
19,562
|
ZAR
|
14,010
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
earnings
|
ZAR
|
25,653
|
ZAR
|
19,562
|
ZAR
|
14,010
|
|
Minority
interest
|
-
|
-
|
-
|
|||
|
Interest
income
|
(221)
|
(322)
|
(724)
|
|||
|
Interest
expense
|
5,217
|
5,299
|
5,072
|
|||
|
Income
tax expense
|
12,141
|
8,187
|
6,018
|
|||
|
Depreciation
|
7,992
|
9,328
|
8,595
|
|||
|
Adjusted
EBITDA
|
ZAR
|
50,782
|
ZAR
|
42,054
|
ZAR
|
32,971
|
| Casino Market Data (in Rand) |
2006
|
2005
|
2004
|
|
Market
share of the Western Cape AGP*
|
5.7%
|
5.6%
|
5.9%
|
|
Market
share of Western Cape gaming devices*
|
12.5%
|
11.8%
|
11.3%
|
|
Average
number of slot machines
|
349
|
313
|
288
|
|
Average
slot machine win per day
|
ZAR
772
|
ZAR
748
|
ZAR
693
|
|
Average
number of tables
|
7
|
9
|
9
|
|
Average
table win per day
|
ZAR
2,766
|
ZAR
1,942
|
ZAR
2,132
|
*Source:
Western Cape Gambling and Racing Board
-34-
The
results discussed below are all based on the Rand to eliminate the effect of
fluctuations in foreign currency exchange rates.
Casino
revenue increased 14.9% in 2006 compared to 2005. This increase can be
attributed to an 11.5% increase in the average number of slot machines and
continued marketing efforts. Casino expenses increased 17.6% in 2006 compared
to
2005, a direct result of the increased revenues and increased marketing
efforts.
When
comparing 2005 and 2004, the 14.6% increase in the gross casino revenue is
attributable to the continued marketing efforts and an 8.7% increase in the
average number of slot machines on the floor. Revenue was impacted in 2005
by
the closure of a significant portion of the main east/west highway to Caledon
from April 11, 2005 to May 27, 2005, a result of severe flooding in the area.
In
addition, the South African government introduced new currency notes during
the
second quarter of 2005. The casino experienced an initial rejection rate of
80%
on these new notes, which diminished as the Company installed new bill
validation software for the slot machines maintained in Caledon.
Hotel,
Food and Beverage
Hotel
occupancy was 45% in 2006 compared to 44% in 2005. Total hotel revenue increased
13.9% in 2006 as a result of upgraded rooms (i.e. standard rooms becoming deluxe
rooms) and their corresponding increases in room rates and increases in
conference, business and leisure sales.
Food
and
beverage revenue decreased by 4.4% in 2006 compared to 2005. This is
attributable to changes in the casino point bonus program which reduced the
number of complimentaries offered by the casino. As a result, food and beverage
revenues achieved through the redemption of bonus points decreased from 17%
in
2005 to 3% in 2006 in relation to total revenues achieved.
Total
hotel, food and beverage costs decreased by 1.5% for 2006 as compared to 2005
as
a result of the decrease in food and beverage revenues.
Hotel
occupancy was 44% for 2005 compared to 48% in 2004. Hotel revenue increased
38.6% due mainly to upgraded rooms (i.e. standard rooms becoming deluxe rooms)
and their corresponding increases in room rates. Leisure sales increased by
44.9% in 2005 compared to 2004. These increases in revenue were offset by a
decrease in conference sales of 20.3% in the year ended December 31, 2005.
Food
and beverage revenue decreased by 0.7% for 2005 compared to 2004 primarily
due
to a decrease in hotel occupancy, the closure of a restaurant in the third
quarter and the decrease in the convention business.
Comparing
2005 to 2004, the 16.1% reduction in hotel, food and beverage expenses results
primarily from the elimination of a separate hotel marketing staff, which
decreased advertising and promotion costs for the hotel. In previous years,
CCAL
advertised the casino and hotel operations separately. Current marketing efforts
have focused on emphasizing the overall resort qualities of the operation,
inclusive of both the casino and hotel. This helped reduce Caledon’s overall
marketing costs.
Other
Other
operating revenue (net of promotional allowances) principally consists of
promotional allowances and revenue generated from the resort’s ancillary
services. The improvement in net other operating revenue (net of promotional
allowances) from 2005 to 2006 is due to additional revenues generated by
ancillary services provided by the resort and a revision of the casino’s
complementary policy.
The
conversion to cashless gaming in March 2005 resulted in a significant increase
in the accumulation of points earned by players reported as an offset to
operating revenue. All patrons of the casino are required to create a personal
players account and play with a card on which they always earn points. Although
gaming revenue increased, the point liability accrued for over 52,000 active
player accounts affected the reported 2005 results by approximately ZAR 0.5
million, net of taxes.
-35-
General
and administrative expenses at Caledon increased 8.5% in 2006 and 19.0% in
2005
as a result of departmental payroll increases related to the casino expansion,
the outsourcing of security service contracts, continued maintenance
expenditures and an increase in gaming and value added taxes.
The
ZAR
0.2 million write off in 2006 consists primarily of a ZAR 0.5 million write-off
in ATM cash discrepancies offset by approximately ZAR 0.3 million of recoveries
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 than the
original estimate. In 2005, the Company recorded a recovery of ZAR 0.4 million
based upon the estimated amount recoverable related to the road
closure..
Depreciation
expense decreased ZAR 1.3 million in 2006 compared to 2005 primarily because
computer equipment with a three year estimated life became fully depreciated
by
the end of 2005. Depreciation expense increased in 2005 compared to 2004
primarily due to an increase in depreciable assets of ZAR 6.4
million.
Even
though CCAL’s average debt balance increased from ZAR 32.4 million in 2005 to
ZAR 52.7 million in 2006, interest expense for CCAL has decreased slightly
due
to the early repayment of the term loan with ABSA Bank in July 2005 and the
early repayment of a series of capital leases in February 2005, offset by
additional interest due on a ZAR 60.0 million term loan borrowed by Caledon
in
August 2005. In order to repay ABSA Bank, CCAL entered into a long term loan
agreement with Nedbank under which Nedbank extended temporary financing until
the long term loan agreement was completed. Caledon incurred a ZAR 1.2 million
interest charge relating to the early repayment of the ABSA Bank loan. As a
result of the transaction, Caledon was able to significantly lower its effective
interest rate on outstanding term loans from 16.9% to a 9.0% rate at the time
(South African Prime less 1.5%). The weighted-average interest rate on the
borrowings under term loan agreements for our South African subsidiaries was
9.9% in 2006, 10.5% in 2005 and 16.9% in 2004.
CCAL’s
effective tax rate in 2006 was 31.3%, primarily due to non-deductible permanent
differences. The marginal tax rate on income in South Africa is currently 29%.
Prior to April 1, 2005, the marginal tax rate was 30%.
Caledon
paid preference shareholder dividends of approximately ZAR 1.0 million in 2006.
Certain preference shareholders are entitled to per share dividends of 0.009%
of
the annual gross gambling revenue of the Caledon Hotel, Spa and Casino after
the
deduction of gaming taxes and value added tax. No dividends were paid or due
in
2005 and 2004.
-36-
Newcastle,
South Africa
The
operating results of the Newcastle, South Africa segment are primarily those
related to the development and operations of the Century Casino & Hotel in
Newcastle, South Africa. Intercompany transactions, including fees to its
parent, shareholder’s interest and their related tax effects have been
eliminated within the segment’s results. Operational results in U.S. dollars
from April 1, 2006 (the date of acquisition) through December 31, 2006 were
as
follows: (See next page for results in Rand).
|
Amounts
in thousands
|
April
1, 2006 through
December
31, 2006
|
|
|
Operating
revenue
|
||
|
Casino
|
$
|
5,640
|
|
Hotel,
food and beverage
|
476
|
|
|
Other
(net of promotional allowances)
|
60
|
|
|
Net
operating revenue
|
6,176
|
|
|
Costs
and expenses
|
||
|
Casino
|
2,177
|
|
|
Hotel,
food and beverage
|
279
|
|
|
General
and administrative
|
1,877
|
|
|
Depreciation
|
163
|
|
|
4,496
|
||
|
Earnings
from operations
|
1,680
|
|
|
Interest
income
|
16
|
|
|
Interest
(expense)
|
(67)
|
|
|
Other
income, net
|
41
|
|
|
Earnings
before income taxes and minority interest
|
1,670
|
|
|
Income
tax expense
|
433
|
|
|
Earnings
before minority interest
|
1,237
|
|
|
Minority
Interest
|
331
|
|
|
Net
earnings
|
$
|
906
|
|
Reconciliation
to Adjusted EBITDA:
|
||
|
Net
earnings
|
$
|
906
|
|
Minority
interest
|
331
|
|
|
Interest
income
|
(16)
|
|
|
Interest
expense
|
67
|
|
|
Income
tax expense
|
433
|
|
|
Depreciation
|
163
|
|
|
Adjusted
EBITDA
|
$
|
1,884
|
|
Average
exchange rate (ZAR/USD)
|
6.95
|
-37-
Operating
results in Rand from April 1, 2006 (the date of acquisition) through December
31, 2006 were as follows:
|
Amounts
in thousands
|
April
1, 2006 through
December
31, 2006
|
|
|
Operating
revenue
|
||
|
Casino
|
ZAR
|
39,299
|
|
Hotel,
food and beverage
|
3,298
|
|
|
Other
(net of promotional allowances)
|
428
|
|
|
Net
operating revenue
|
43,025
|
|
|
Costs
and expenses
|
||
|
Casino
|
15,329
|
|
|
Hotel,
food and beverage
|
2,468
|
|
|
General
and administrative
|
12,409
|
|
|
Depreciation
|
1,086
|
|
|
31,292
|
||
|
Earnings
from operations
|
11,733
|
|
|
Interest
income
|
114
|
|
|
Interest
(expense)
|
(491)
|
|
|
Other
income, net
|
290
|
|
|
Earnings
before income taxes and minority interest
|
11,646
|
|
|
Income
tax expense
|
3,183
|
|
|
Earnings
before minority interest
|
8,463
|
|
|
Minority
Interest
|
2,293
|
|
|
Net
earnings
|
ZAR
|
6,170
|
|
Reconciliation
to Adjusted EBITDA:
|
||
|
Net
earnings
|
ZAR
|
6,170
|
|
Minority
interest
|
2,293
|
|
|
Interest
income
|
(114)
|
|
|
Interest
expense
|
491
|
|
|
Income
tax expense
|
3,183
|
|
|
Depreciation
|
1,086
|
|
|
Adjusted
EBITDA
|
ZAR
|
13,109
|
| Casino Market Data (in Rand) |
April
1, 2006 through
December
31, 2006
|
|
Market
share of the KwaZulu-Natal gaming revenue*
|
2.6%
|
|
Market
share of KwaZulu-Natal gaming devices*
|
6.5%
|
|
Average
number of slot machines
|
206
|
|
Average
slot machine win per day
|
ZAR
630
|
|
Average
number of tables
|
6
|
|
Average
table win per day
|
ZAR
3,114
|
*Source:
KwaZulu-Natal Gambling Board
-38-
April
1, 2006 through December 31, 2006
We
acquired a 60% ownership interest in Balele Leisure (Pty) Ltd. (“Balele”), now
known as Century Casino Newcastle (Pty) Ltd., as of April 1, 2006. Since that
time, the operations of the casino were limited and our efforts were focused
on
the construction of a new facility, which opened on December 2, 2006. We
incurred ZAR 2.3 million of pre-opening expenses related to the project in
2006.
For the month of December 2006, operations were in line with our
expectations.
Interest
expense is payable on a ZAR 50.0 million term loan with Nedbank, bearing an
interest rate of South African Prime less 1.5% (11.0% as of December 31, 2006).
The principal balance outstanding under the term loan agreement is ZAR 50.0
million as of December 31, 2006.
The
calculation of minority interest is determined prior to the elimination of
intercompany management fees. An
additional $0.4 million (ZAR 2.5 million) will be payable to the minority
shareholders if casino revenues during the first 12 months of operation at
the
new casino exceeds $13.5 million (ZAR 95.0 million). As of December 31, 2006,
the Company does not deem it probable that casino revenues will exceed the
required amounts.
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 from April 1
through December 31, 2006 was 27%.
-39-
Edmonton,
Canada
The
operating results of the Edmonton, Canada segment, primarily the development
and
the operations of the Century Casino and Hotel in Edmonton, for the years ended
December 31, 2006 and 2005 are as follows:
|
Dollar
amounts in thousands
|
2006
|
2005
|
||
|
Operating
revenue
|
||||
|
Casino
|
$
|
1,693
|
$
|
-
|
|
Food
and beverage
|
486
|
-
|
||
|
Other
(net of promotional allowances)
|
146
|
57
|
||
|
Net
operating revenue
|
2,325
|
57
|
||
|
Costs
and expenses
|
||||
|
Casino
|
1,352
|
-
|
||
|
Food
and beverage
|
877
|
-
|
||
|
General
and administrative
|
1,294
|
236
|
||
|
Depreciation
|
175
|
3
|
||
|
3,698
|
239
|
|||
|
Loss
from operations
|
(1,373)
|
(182)
|
||
|
Interest
income
|
44
|
12
|
||
|
Interest
(expense)
|
(454)
|
(61)
|
||
|
Other
(expense), net
|
53
|
13
|
||
|
Loss
before income taxes and minority interest
|
(1,730)
|
(218)
|
||
|
Income
tax (benefit)
|
(574)
|
(81)
|
||
|
Loss
before minority interest
|
(1,156)
|
(137)
|
||
|
Minority
interest
|
-
|
(61)
|
||
|
Net
loss
|
$
|
(1,156)
|
$
|
(76)
|
|
Reconciliation
to Adjusted EBITDA:
|
||||
|
Net
loss
|
$
|
(1,156)
|
$
|
(76)
|
|
Minority
interest
|
-
|
(61)
|
||
|
Interest
income
|
(44)
|
(12)
|
||
|
Interest
expense
|
454
|
61
|
||
|
Income
tax expense
|
(574)
|
(81)
|
||
|
Depreciation
|
175
|
3
|
||
|
Adjusted
EBITDA
|
$
|
(1,145)
|
$
|
(166)
|
-40-
Prior
to
November 17, 2006, all costs incurred represent pre-opening expenses. From
January 1, 2006 through November 17, 2006, we incurred approximately $1.9
million of pre-opening expenses. For the year ended December 31, 2005, we
incurred approximately $0.2 million of pre-opening expenses.
Since
opening, gaming revenues are in line with our expectations. We are in the
process of reviewing the cost and staffing structure of the operation to bring
them in line with current revenue levels.
We
opened
the casino with 600 slot machines and may seek approval from the AGLC to add
more slots in the future.
Delays
in
opening the hotel and dinner theater hampered hotel, food and beverage revenues.
The dinner theater opened on December 9, 2006. The hotel will be opening in
March 2007.
As
a
result of the buyout of the minority partner in 2006, we absorbed 100% of
pre-opening losses in 2006.
Management
has focused on the development of player’s club memberships, with over 7,000
players in our player club database.
For
the
year ended December 31, 2006, the significant increase in interest expense
relates to interest that we are incurring based on approximately $16.4 million
(CAD 19.1 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 Edmonton are taxed at a statutory rate of 33.6%.
-41-
All
Other Operating Segments
Combined
operating results for our ship-based casinos and, subsequent to April 13, 2006,
Century Casino Millennium for the years ended December 31, 2006, 2005 and 2004
are as follows:
|
Dollar
amounts in thousands
|
2006
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Casino
|
$
|
4,286
|
$
|
2,911
|
$
|
2,615
|
|
Hotel,
food and beverage
|
19
|
-
|
-
|
|||
|
Other
(net of promotional allowances)
|
296
|
240
|
154
|
|||
|
Net
operating revenue
|
4,601
|
3,151
|
2,769
|
|||
|
Costs
and expenses
|
||||||
|
Casino
|
3,362
|
2,142
|
1,836
|
|||
|
Hotel,
food and beverage
|
40
|
-
|
-
|
|||
|
General
and administrative
|
370
|
-
|
-
|
|||
|
Impairment
and other write-offs, net of recoveries
|
309
|
-
|
-
|
|||
|
Depreciation
|
360
|
144
|
110
|
|||
|
4,441
|
2,286
|
1,946
|
||||
|
Earnings
from operations
|
160
|
865
|
823
|
|||
|
Interest
income
|
11
|
-
|
-
|
|||
|
Interest
(expense)
|
(42)
|
-
|
-
|
|||
|
Other
income, net
|
78
|
-
|
-
|
|||
|
Earnings
before income taxes
|
207
|
865
|
823
|
|||
|
Income
tax expense
|
15
|
26
|
25
|
|||
|
Net
earnings
|
$
|
192
|
$
|
839
|
$
|
798
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
earnings
|
$
|
192
|
$
|
839
|
$
|
798
|
|
Minority
interest
|
-
|
-
|
-
|
|||
|
Interest
income
|
(11)
|
-
|
-
|
|||
|
Interest
expense
|
42
|
-
|
-
|
|||
|
Income
tax expense
|
15
|
26
|
25
|
|||
|
Depreciation
|
360
|
144
|
110
|
|||
|
Adjusted
EBITDA
|
$
|
598
|
$
|
1,009
|
$
|
933
|
-42-
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.
In
accordance with a casino concession agreement, the Company’s service periods on
the Oceania Insignia and Oceania 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. The agreement
with the Oceania Nautica was extended for five years on December 11,
2006.
In
January 2007, the casino concession agreement with the World of Residensea
was
extended for an unlimited period of time, subject to termination under certain
conditions.
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 would terminate as of May 16, 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 the 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.
Cruise
ship casino revenues decreased 3.8% in 2006 as compared to 2005. For all of
2005
and the first six months of 2006, we operated casinos aboard seven ships. From
July 2006 through December 31, 2006, we operated casinos aboard six ships,
which
contributed to the decline in revenues.
Concession
fees paid to the ship operators in accordance with the agreements accounted
for
approximately $1.4 million, $1.3 million and $1.0 million of the total casino
expenses incurred in 2006, 2005 and 2004, respectively.
Casino
expenses, excluding concession fees, increased slightly to 29.9% of casino
revenue in 2006 as compared to 29.3% of casino revenue in 2005 and 30.8% of
casino revenue in 2004. Several of the cruise ships were inactive for periods
of
2004. We cannot operate our casinos while the ships are in port.
The
cruise ship concession agreements were assigned to our wholly-owned subsidiary
Century Resorts International (“CRI”) as of October 1, 2003 and have since been
subject to an effective tax rate of 3% in Mauritius. For the remaining term
of
the original concession agreements, any income earned under these agreements
are
subject to an imputed royalty for US income tax purposes (reported in the
Corporate segment). As a result, the effective tax rate on net income generated
by the cruise ships was 7.0%, 6.2% and 6.2% for 2006, 2005 and 2004,
respectively.
-43-
Century
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.
CM
accounted for $1.6 million of this segment’s revenue in 2006, $1.1 million of
the total increase in casino expenses and substantially all of the increase
in
general and administrative expenses for this segment.
CM
recorded a goodwill impairment charge of $0.2 million and wrote off $0.1 million
of fixed assets that were no longer in service during 2006. The Company is
reviewing several different courses of action to improve overall operations
at
CM.
-44-
Corporate
|
Dollar
amounts in thousands
|
2006
|
2005
|
2004
|
|||
|
Operating
revenue
|
||||||
|
Other
|
$
|
17
|
$
|
105
|
$
|
465
|
|
Net
operating revenue
|
17
|
105
|
465
|
|||
|
Costs
and expenses
|
||||||
|
General
and administrative
|
6,791
|
4,580
|
3,518
|
|||
|
Impairments
and other write-offs, net of recoveries
|
(13)
|
-
|
(218)
|
|||
|
Depreciation
|
68
|
28
|
28
|
|||
|
6,846
|
4,608
|
3,328
|
||||
|
(Loss)
Income from unconsolidated subsidiary
|
-
|
(109)
|
55
|
|||
|
Loss
from operations
|
(6,829)
|
(4,612)
|
(2,808)
|
|||
|
Interest
income
|
776
|
400
|
44
|
|||
|
Interest
(expense), net
|
1,177
|
(35)
|
(15)
|
|||
|
Interest
(expense) on non-Cripple Creek debt allocated to Corporate
|
(497)
|
(1,325)
|
(907)
|
|||
|
Gain
on sale of Gauteng purchase option
|
5,233
|
-
|
-
|
|||
|
Other
income, net
|
363
|
-
|
1
|
|||
|
Non-operating
items from unconsolidated subsidiary
|
-
|
(4)
|
(5)
|
|||
|
Earnings
(loss) before income taxes and minority interest
|
223
|
(5,576)
|
(3,690)
|
|||
|
Income
tax (benefit)
|
(2,484)
|
(2,779)
|
(2,242)
|
|||
|
Earnings
(loss) before minority interest
|
2,707
|
(2,797)
|
(1,448)
|
|||
|
Minority
interest
|
373
|
130
|
106
|
|||
|
Net
earnings (loss)
|
$
|
2,334
|
$
|
(2,927)
|
$
|
(1,554)
|
|
Reconciliation
to Adjusted EBITDA:
|
||||||
|
Net
earnings (loss)
|
$
|
2,334
|
$
|
(2,927)
|
$
|
(1,554)
|
|
Minority
interest
|
373
|
130
|
106
|
|||
|
Interest
income
|
(776)
|
(400)
|
(44)
|
|||
|
Interest
expense (including amounts allocated from Cripple Creek)
|
(680)
|
1,360
|
922
|
|||
|
Income
tax expense
|
(2,484)
|
(2,779)
|
(2,242)
|
|||
|
Depreciation
|
68
|
28
|
28
|
|||
|
Adjusted
EBITDA
|
$
|
(1,165)
|
$
|
(4,588)
|
$
|
(2,784)
|
Prior
to
April 13, 2006, net operating revenue for this segment principally consisted
of
casino technical service fees earned from operating Casino Millennium in Prague,
Czech Republic. In 2004, we recognized a foreign currency translation gain
on
the disposition of Verkrans, a land holding company relating to a casino
development project in Gauteng, South Africa. The translation gain resulted
from
the difference between the exchange rate at the time of purchase in March 2002
and the exchange rate at the time of sale in December 2004. The gain of $0.4
million was recorded as other operating income in 2004.
General
and administrative expenses increased in the year ended December 31, 2006 by
$2.2 million compared to the year ended December 31, 2005, primarily because
of
increased compensation charges, increased travel and communication expenses,
and
higher professional fees. In particular, overall compensation has increased
by
approximately $1.3 million, of which $0.4 million relates to the amortization
of
stock options as prescribed by Statement of Financial Accounting Standard No.
123R. We also have increased the number of employees to support the Company’s
growth.
-45-
General
and administrative expenses in the year ended December 31, 2005 increased over
the year ended December 31, 2004 largely due to costs associated with new
expansion projects, increases in corporate staffing and costs associated with
Sarbanes-Oxley Act compliance. Compliance with the Sarbanes-Oxley Act also
resulted in increased auditing costs.
In
2006,
the Company sold its interest in a casino development project located in
Gauteng, South Africa for $5.7 million (ZAR 43.3 million), less commissions
of
$0.1 million (ZAR 1.3 million). The Company has recorded $5.2 million (ZAR
39.0
million) as a gain on sale of Gauteng purchase option in the December 31, 2006
consolidated statement of earnings.
During
2006, in conjunction with the sale of our interest in the Gauteng casino
project, we recovered approximately $0.4 million of previously written off
loans, which has been recorded as an offset to impairments and other write-offs.
This amount is offset by the write down of the remaining balance of
non-operating casino property and land held for sale in Wells, Nevada. In 2004,
we recovered approximately $0.2 million of previously written off loans
associated with the Gauteng project.
The
significant increase in interest income for this segment is directly related
to
the cash reserves we have accumulated resulting from the ADC offering we
completed in October 2005 and the cash flows generated by our operations.
Interest income in 2005 is primarily derived from interest earned on the
remaining proceeds from the ADC offering in October 2005 and the interest earned
on cash received from the exercise of stock options.
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
Cripple Creek segment allocated $0.5 million, $1.3 million and $0.9 million
in
interest expense to the Corporate segment during the years ended December 31,
2006, 2005 and 2004, respectively. Interest expense on the amounts advanced
by
Womacks, but not repaid, to fund the Company’s acquisitions and the repurchase
of the Company’s common stock is calculated using the effective rate on all
borrowings under Womacks’ revolving credit facility.
We
recognized approximately $0.4 million in foreign currency gains in 2006 which
is
included in other income, net.
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 2006, the tax benefit
on
net U.S. losses (primarily resulting from our new operation in Central City,
Colorado) exceeds the tax on net non-U.S. earnings, which are taxed at
significantly lower rates.
-46-
Liquidity
and Capital Resources
Cash
Flows
Cash
and
cash equivalents totaled $35.0 million plus restricted cash of $2.4 million
at
December 31, 2006. Net working capital totaled $5.2 million. In March 2007,
we
repaid $12.5 million of principal on our Central City debt.
We
use
the cash flows generated by the Company to fund reinvestment in existing
properties for both refurbishment and expansion projects and to pursue
additional growth opportunities via new development opportunities. When
necessary, we supplement the cash flows generated by our operations with either
cash on hand or funds provided by financing activities.
Cash
provided by operating activities was $9.5 million, $7.5 million and $8.5 million
for 2006, 2005 and 2004 respectively. Our cash flows from operations have
historically been positive and sufficient to fund ordinary operations. For
a
description of the operating activities of the Company, please refer to the
consolidated statements of cash flows and management’s discussion of the results
of operations by segment.
Cash
used
in investing activities of $67.2 million for the year ended December 31, 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 $0.3 million); a $4.8 million loan to G5;
$0.5 million in property improvements and equipment additions at Womacks; $1.9
million in property improvements and additional gaming equipment at Caledon,
South Africa; $10.2 million primarily towards the construction of a new
permanent facility in Newcastle, South Africa; $0.2 million in additions to
our
corporate office in Vienna, Austria; $0.4 million in expenditures to upgrade
some of the cruise ships with new gaming equipment; $24.0 million towards
construction in Central City, Colorado; $19.4 million in additional expenditures
towards construction on the property in Edmonton, Alberta, Canada; and $0.5
million towards a company-wide information system implementation. These outflows
were offset by $5.2 million received from the sale of our interest in a project
located in Gauteng, South Africa and $0.2 million in proceeds from the
disposition of property.
Cash
used
in investing activities of $21.7 million for the year ended December 31, 2005
consisted of $2.4 million contribution by us for our investment in CRA,
less $1.7 million in net cash acquired; $1.9 million in property and equipment
additions at Womacks, of which $1.5 million related to the exercise of a
purchase option of previously leased property; $2.8 million in property
improvements, gaming equipment and security equipment additions at Caledon,
South Africa; $0.6 million in expenditures to upgrade some of the cruise ships
with ticket-out slot machines and other gaming equipment; $11.3 million for
construction in Central City, Colorado; and $4.7 million in additional
expenditures towards construction on the property in Edmonton, Alberta, Canada.
These were offset by $0.3 million in proceeds from the disposition of property.
Cash
used
in investing activities of $7.1 million for the year ended December 31, 2004
consisted of $3.5 million for our investment in CTL, $0.4 million towards the
upgrade of the slot accounting system, $1.9 million towards new slot games,
$1.5
million in improvements to the property in Caledon, South Africa; $0.2 million
in expenditures to outfit the cruise ships; and $0.5 million in expenditures
for
other long-lived assets, offset by $0.2 million in proceeds from the disposition
of assets and $0.8 million (ZAR 4.4 million) in proceeds from the disposition
of
the common stock of Verkrans.
Cash
provided by financing activities of $53.8 million for the year ended December
31, 2006 consisted of borrowings of $25.6 million under the CTL
construction/term loan; borrowings of $16.4 million under the CWB construction
loan; borrowings of $7.1 million under the CNEW construction/term loan; net
borrowings of $6.6 million under the Womacks revolving credit facility with
Wells Fargo; $0.5 million in proceeds from the exercise of stock options; and
the recognition of a $0.4 million tax benefit related to the exercise of stock
options. These borrowings were offset by net repayments of $2.4 million towards
the Caledon term loan and $0.4 million of restricted cash deposits related
to
our project in Edmonton.
-47-
Cash
provided by financing activities of $43.9 million for the year ended December
31, 2005, consisted of $46.2 million in proceeds from the ADC offering, $2.3
million from the exercise of stock options, net borrowings of $8.9 million
associated with our construction loan with Wells Fargo Bank for the Central
City
project, net borrowings of $8.9 million associated with our loan with Nedbank
Limited and $0.6 million from the release of restricted cash associated with
a
prior Caledon loan agreement from ABSA Bank. These inflows of cash were offset
by net repayments of $15.1 million (of which $14.5 million was obtained from
the
proceeds of the ADC offering) under the revolving credit facilities with Wells
Fargo, $3.0 million under the agreement with ABSA, $1.1 million to our minority
investor in Central City for a distribution of their interest and the repayment
of an unsecured note payable, deferred financing charges of $2.4 million, a
restricted cash deposit of $1.0 million required for our listing on the Vienna
Stock Exchange and other net repayments of $0.4 million.
Cash
provided by financing activities of $1.9 million for the year ended December
31,
2004 consisted of net borrowings of $3.9 million under the Womacks revolving
credit facility, primarily for the $3.5 million capital contribution to the
Central City, Colorado project, net repayments of $1.3 million under the loan
agreement with ABSA, repayment of a $0.4 million note payable to a founding
stockholder of the Company, and other net repayments of $0.2 million, less
net
borrowing of $0.1 million from a former director, which was subsequently repaid
in 2004 and additional deferred financing and licensing charges incurred by
the
Company with a cost of $0.1 million.
Common
Stock Repurchase Program
Our
Board of Directors has approved a discretionary program to repurchase up to
$5.0 million of the Company’s outstanding common stock. We did
not
purchase
any shares of our common stock on the open market in 2005 or 2006.
The total remaining authorization under the repurchase program was $1.2 million
as of December 31, 2006. The repurchase program has no set expiration or
termination date.
Sources
of Liquidity
Additional
liquidity at Womacks may be provided by our revolving credit facility with
Wells
Fargo Bank (“Wells Fargo”), under which we currently have a total available
commitment of $17.7 million and unused borrowing capacity of approximately
$5.3
million, based on Womacks’ current EBITDA, at December 31, 2006. The maturity
date of the borrowing commitment is December 2008. The available balance was
reduced by $0.7 million on January 1, 2007 and will be further
reduced
by $0.7 million at the beginning of each quarter until maturity in December
2008. 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 us up to the amount of our capital
contributions (currently $8.5 million, subject to the limitation based on
Womacks’ current EBITDA).
Additional
liquidity at CTL
may
be provided by our $2.5 million revolving line of credit with Wells Fargo.
The
revolving line of credit matures on November 21, 2011. Availability under the
line of credit is conditional upon CTL’s compliance with all of the financial
and other covenants contained in the loan agreement at the time of a particular
drawdown, and our continued ability to make certain representations and
warranties.
In
October 2005, under an existing shelf registration, we issued 7.1 million shares
of common stock, in the form of ADCs, through an underwriter, to investors
in
the Republic of Austria and in a private placement to institutional investors
in
other countries in Europe. Net proceeds from this issuance were approximately
$46.2 million. A total of $34.6 million of the proceeds have 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 Contractual
Obligations and Commercial Commitments) and for other operating needs. We plan
to use the remaining proceeds from this issuance to make investments in
additional gaming projects, for working capital and for other general corporate
purposes.
-48-
We
expect
that 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. We believe that our cash at December 31,
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, capital expenditures at existing properties and 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 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
projects.
Contractual
Obligations and Commercial Commitments
The
following is a schedule of our contractual obligations and commercial
commitments as of December 31, 2006:
|
|
Payments
Due by Period (Amounts in Thousands)
|
||||
|
Contractual
Obligations
|
Total
|
Less
than
1 year |
1-3
years
|
4-5
years
|
More
than
5 years |
|
Long-Term
Debt
|
$
75,843
|
$
20,499
|
$
21,937
|
$
15,082
|
$
18,325
|
|
Capital
Leases
|
862
|
170
|
348
|
344
|
-
|
|
Operating
Leases
|
3,342
|
1,062
|
906
|
395
|
979
|
|
Accrued
Construction
|
698
|
698
|
-
|
-
|
-
|
|
Total
|
$
80,745
|
$
22,429
|
$
23,191
|
$
15,821
|
$
19,304
|
On
June
13, 2006, we entered into an agreement, as subsequently amended, to acquire
100%
of all of the issued and outstanding shares of G5 Sp. z o.o. (“G5”), which owns
33.3% of Casinos Poland, for approximately $2.8 million (€2.2 million). The
closing of this transaction occurred on March 12, 2007
We
do not
maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a
material current or future effect upon our financial statements.
-49-
Critical
Accounting Estimates
The
preparation of financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses,
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate these estimates, including those related to goodwill and
other intangible assets and property and equipment. We base our estimates on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially
from these estimates under different assumptions or conditions. Our significant
accounting policies are discussed in Note 2 of the Notes to Consolidated
Financial Statements. Critical estimates inherent in these accounting policies
are discussed in the following paragraphs.
Goodwill
and Other Intangible Assets
- At
December 31, 2006 we had goodwill of approximately $12.3 million and casino
licenses of approximately $9.3 million. Our goodwill results from the
acquisitions of casino and hotel operations and represents the excess of the
purchase price over the fair value of identifiable net tangible and intangible
assets acquired. Goodwill and intangible assets with indefinite lives are
required to be tested for impairment at least annually or more frequently if
an
event occurs or circumstances change that may reduce the fair value of the
asset
below its carrying value. The implied fair value includes estimates of future
cash flows, as well as estimates of critical valuation inputs such as discount
rates, terminal values and similar data based on reasonable and supportable
assumptions that represent our best estimates. Changes in estimates or
application of alternative assumptions and definitions could produce
significantly different results. We have completed our annual assessments of
goodwill and other intangibles with indefinite lives and an impairment charge
of
$0.2 million (CZK 5.0 million) was recorded to eliminate the goodwill associated
with CM.
Property
and Equipment
- We
have significant capital invested in our property and equipment, which
represents approximately 63% of our total assets. Judgments are made in
determining the estimated useful lives of assets, salvage values to be assigned
to assets and if or when an asset has been impaired. The accuracy of these
estimates affects the amount of depreciation expense recognized in our financial
results and the extent to which we have a gain or loss on the disposal of the
asset. We assign lives to our assets based on our standard policy, which we
believe is representative of the useful life of each category of assets. We
review the carrying value of our property and equipment whenever events and
circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its
use
and eventual disposition. The factors we consider in performing this assessment
include current operating results, trends and prospects, as well as the effect
of obsolescence, demand, competition and other economic factors.
Stock-Based
Compensation
- We use
the Black-Scholes option pricing model to estimate the fair value of stock
options. The Black-Scholes model requires management to estimate certain
variables. Such estimates include the estimated lives of options from grant
date
to exercise date, the volatility of the underlying shares and estimated future
dividend rates. The two most significant estimates in the Black-Scholes model
are volatility and expected life. An increase in the volatility rate increases
the value of stock options and a decrease causes a decline in value. We
estimated expected volatility using an average of our common stock price over
the preceding 12 month period. For expected lives, an increase in the expected
life of an option increases its value. For all options currently outstanding,
we
have estimated their expected lives to be equal to their contractual
terms.
In
addition, SFAS No. 123R requires that equity compensation be recorded net of
estimated forfeitures over the vesting term. Determining this estimate requires
significant judgment on the number of actual awards that will ultimately vest
over the term of the award. This estimate is reviewed quarterly and any change
in actual forfeitures in comparison to estimates may cause an increase or
decrease in the ultimate expense recognized in that period.
-50-
Income
Taxes
-
Significant judgment is required in developing our income tax provision. We
have
not recorded a valuation allowance on our deferred tax assets as of December
31,
2006, based on management’s belief that operating income will more likely than
not be sufficient to realize the benefit of our deferred tax assets over time.
In the event that actual results differ from these estimates, we may be required
to record a valuation allowance on our deferred tax assets, which could have
a
material adverse effect on our consolidated financial statements.
Information
regarding accounting pronouncements that have been issued but not yet adopted
by
us is incorporated by reference from Part II, Item 8, Financial Statements
and
Supplemental Data, Note 2 — Significant Accounting Policies, of this Annual
Report on Form 10-K.
ITEM
7A. Quantitative
and Qualitative Disclosures About Market Risk.
We
are
exposed to market risk principally related to changes in interest rates and
foreign currency exchange rates. To mitigate some of these risks, we may utilize
derivative financial instruments to hedge these exposures. We do not use
derivative financial instruments for speculative or trading purposes. All of
the
potential changes noted below are based on information available at December
31,
2006. Actual results may differ materially.
Interest
Rate Sensitivity
We
are
subject to interest rate risk on our outstanding borrowings with Wells Fargo,
Canadian Western Bank and Nedbank Limited. Interest on amounts outstanding
under
these loan agreements are variable and thus subject to fluctuations in their
various prime or LIBOR indexed rates. Based on our current outstanding
borrowings, a 1.0% movement in the weighted average interest rate would result
in an approximate $0.7 million annualized increase or decrease in interest
expense.
As
of and subsequent to December 31, 2006, the Company has no outstanding interest
rate swap agreements.
Foreign
Currency Exchange Risk
As
a
result of our international business presence, we are exposed to foreign
currency exchange risk. We transact in foreign currencies and have significant
assets and liabilities denominated in foreign currencies. Therefore, our
earnings experience volatility related to movements in foreign currency exchange
rates. We have not hedged against foreign currency exchange rate changes related
to our international operations. As a result, a 10% change in the relative
value
of such foreign currency could cause a related 10% change in our previously
expected revenue, cost of services, and operating expenses related to such
currency.
See
“Index” to the Company’s Financial Statements on page F-1 hereof.
None.
-51-
Item
9A. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures - Our
management, with the participation of our principal executive officers,
principal financial officer 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 Annual Report
on Form 10-K. Based on such evaluation, our principal executive officers,
principal financial officer and chief accounting 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 SEC rules and forms and were
effective.
Management’s
Annual Report on Internal Control over Financial Reporting and Attestation
Report of Registered Public Accounting Firm - The
Company’s management is responsible for establishing and maintaining adequate
internal control over our financial reporting, as defined in Rules 13a-15(f)
and
15d-15(f) under the Exchange Act. Our internal control system was designed
to
provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of published financial statements.
The
Company’s management has assessed the effectiveness of our internal controls
over financial reporting as of December 31, 2006. In making this assessment,
our
management used the criteria set forth in the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal
Control - Integrated Framework.
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 consolidated financial statements
of Century Casinos, Inc. The Company is in the process of implementing our
internal controls over financial reporting for the acquired business and
thus
has not yet completed an assessment of their effectiveness. As of and for
the
period ending December 31, 2006, Century Casino Newcastle represents 12%
of
total assets, 12% of total liabilities, 11% of net operating revenue and
12% of
net earnings in the consolidated financial statements of Century Casinos,
Inc.
Based
on
the assessment using the criteria set forth by COSO, our management believes
that, as of December 31, 2006, internal control over financial reporting
was
effective.
Grant
Thornton LLP, our independent registered public accounting firm, also attested
to, and reported on, management’s assessment of the effectiveness of internal
control over financial reporting. Grant Thornton LLP’s report is included under
the caption entitled “Report of Independent Registered Public Accounting Firm”
in Item 8 of this report and is incorporated herein by reference.
Changes
in Internal Control Over Financial Reporting -
During
the fourth quarter of 2006, we began the implementation of a new information
system that we will use to accumulate financial data used in the Company’s
financial reporting. The implementation was not made in response to any
deficiency in our internal controls. In addition, we are continuing to implement
our internal controls over financial reporting for Century Casino Newcastle,
which we acquired on April 1, 2006 and which was excluded from management’s
assessment. There have been no other changes in our internal controls over
financial reporting that occurred during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item
9B. Other
Information.
None.
-52-
PART
III
The
information required by this item will be included in our Proxy Statement with
respect to our 2007 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of December 31, 2006, under the captions “Information Concerning
Directors and Executive Officers” and “Compliance with Section 16(a) of the
Securities Exchange Act” and is incorporated herein by reference.
We
have
adopted a Code of Ethics that applies to all directors, officers and employees,
including our Co Chief Executive Officers, our President, our Senior Vice
President and our Chief Accounting Officer. A complete text of this Code of
Ethics is available on the Company's web site (http://www.cnty.com).
Any
future amendments to or waivers of the Code of Ethics will be posted to the
Investor Relations-Corporate section of the Company’s web site.
The
information required by this item will be included in our Proxy Statement with
respect to our 2007 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of December 31, 2006, under the caption “Information Concerning
Directors and Executive Officers” and is incorporated herein by
reference.
The
information required by this item will be included in our Proxy Statement with
respect to our 2007 Annual Meeting of Stockholders to be filed with the SEC
within 120 days of December 31, 2006, under the caption “Voting Securities” and
is incorporated herein by reference.
Information
related to securities authorized for issuance under equity compensation plans
as
of December 31, 2006 is as follows:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
1,432,710
(1)
|
$2.99
|
1,965,000
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
1,432,710
|
$2.99
|
1,965,000
|
Item
13. Certain
Relationships and Related Transactions, and Director
Independence.
The
information in this item is incorporated by reference from our Proxy Statement
with respect to our 2007 Annual Meeting of Stockholders to be filed with the
SEC
within 120 days of December 31, 2006, under the caption “Certain Relationships
and Related Transactions” and is incorporated herein by reference.
The
information in this item is incorporated by reference from our Proxy Statement
with respect to our 2007 Annual Meeting of Stockholders to be filed with the
SEC
within 120 days of December 31, 2006, under the caption “Principal Accountant
Fees and Services” and is incorporated herein by reference.
-53-
(a) List
of documents filed with this report
| 1. |
Financial
Statements
|
The
financial statements and related notes, together with the reports of Grant
Thornton LLP dated March 15, 2007, appear in Part II, Item 8, Financial
Statements and Supplementary Data, of this Form 10-K.
| 2. |
Financial
Statement
Schedules
|
None.
| 3. |
List
of Exhibits
|
(b)Exhibits
Filed Herewith or Incorporated by Reference to Previous Filings with the
Securities and Exchange Commission:
(3)
Articles of Incorporation and Bylaws
| 3.1 |
Certificate
of Incorporation is hereby incorporated by reference to Century Casinos’
Proxy Statement in respect of the 1994 Annual Meeting of
Stockholders.
|
| 3.2 |
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)
Instruments Defining the Rights of Security Holders, Including
Indentures
| 4.1A |
Rights
Agreement, dated as of April 29, 1999, between the Company and 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.
|
| 4.1B |
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.
|
| 4.1C |
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)
Material Contracts
| 10.1 |
Contribution
agreement dated as of October 12, 2004 among Century Casinos Tollgate
Inc., Tollgate Venture, LLC, KJE Investments, LLC, Central City Venture,
LLC, and CC Tollgate LLC., is hereby incorporated by reference from
Exhibit 10.132 to Century Casinos’ Quarterly Report on Form 10-Q for the
quarterly period ended September 30,
2004.
|
-54-
| 10.2 |
Limited
Liability Company Agreement of CC Tollgate LLC dated as of October
12,
2004, is hereby incorporated by reference from Exhibit 10.133 to
Century
Casinos’ Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004.
|
| 10.3A |
Shareholders’
Agreement between Century Casinos Africa (Proprietary) Limited and
Winlen
Casino Operators (Proprietary) Limited dated November 21, 2005, is
hereby
incorporated by reference from Exhibit 10.159 to Century Casinos’ Current
Report on Form 8-K dated November 23,
2005.
|
| 10.3B |
Sale
of Shares Agreement, entered into as of October 18, 2005, between
Chicory
Investments (Proprietary) Limited, Dynamo Investments Limited, Harvest
Moon Investment Holdings (Proprietary) Limited, Izulu Gaming (Proprietary)
Limited, Khulani Holdings Limited, Libalele Leisure (Proprietary)
Limited,
Malesela Gaming (Proprietary) Limited, Oakland Leisure Investments
(Newcastle) (Proprietary) Limited, Purple Rain Properties No 62
(Proprietary) Limited, Ruvuma Investment (Proprietary) Limited, Saphila
Investments (Proprietary) Limited, Viva Leisure Investment Holdings
(Proprietary) Limited, The Viva Trust and Century Casinos Africa
(Proprietary) Limited, is hereby incorporated by reference from Exhibit
10.170 to Century Casinos’ Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2006.
|
| 10.3C |
Memorandum
of Agreement, entered into as of May 2, 2006, between Chicory Investments
(Proprietary) Limited, Dynamo Investments Limited, Harvest Moon Investment
Holdings (Proprietary) Limited, Izulu Gaming (Proprietary) Limited,
Khulani Holdings Limited, Libalele Leisure (Proprietary) Limited,
Malesela
Gaming (Proprietary) Limited, Oakland Leisure Investments (Newcastle)
(Proprietary) Limited, Purple Rain Properties No 62 (Proprietary)
Limited,
Ruvuma Investment (Proprietary) Limited, Saphila Investments (Proprietary)
Limited, Viva Leisure Investment Holdings (Proprietary) Limited,
The Viva
Trust, Century Casinos Africa (Proprietary) Limited, Balele Leisure
(Proprietary) Limited and Winlen Casino Operators (Proprietary) Limited,
is hereby incorporated by reference from Exhibit 10.171 to Century
Casinos’ Current Report on Form 8-K dated May 8,
2006.
|
| 10.4A |
Share
Sale and Purchase Agreement between Malgorzata Maria Rogowicz-Angierman,
Jerzy Cieślak, Piotr Marcin Nassius, Przemyslaw Dariusz Tomaszewski and
Century Casinos Europe GmbH concluded on June 13, 2006, is hereby
incorporated by reference
from Exhibit 10.172 to Century Casinos’ Current Report on Form 8-K dated
June 19, 2006.
|
| 10.4B |
Loan
Agreement between Century Casinos Europe GmbH and G5 Sp. z o.o. entered
into on June 13, 2006, is hereby incorporated by reference from Exhibit
10.173 to Century Casinos’ Current Report on Form 8-K dated June 19,
2006.
|
| 10.4C† |
Amendment
to Share Sale Agreement between Malgorzata Maria Rogowicz-Angierman,
Jerzy
Cieślak, Piotr Marcin Nassius, Przemyslaw Dariusz Tomaszewski and Century
Casinos Europe
GmbH concluded on February 1, 2007.
|
| 10.4D† |
Loan
Agreement between Century Casinos Europe GmbH and G5 Sp. z o.o. entered
into on February 1, 2007.
|
| 10.5 |
Binding
letter of intent between Century Resorts Alberta Inc., 746306 Alberta
Ltd
and Century Resorts International Ltd dated December 2, 2005 and
accepted
on December 6, 2005, is hereby incorporated by reference from Exhibit
10.164 to Century Casinos’ Current Report on Form 8-K dated December 12,
2005.
|
-55-
| 10.6A |
Amended
and Restated Credit Agreement, by and among, WMCK Venture Corp.,
Century
Casinos Cripple Creek, Inc., and WMCK Acquisition Corp. (collectively,
the
“Borrowers”), Century Casinos, Inc. (the “Guarantor”) and Wells Fargo
Bank, National Association, dated April 21, 2000, is hereby incorporated
by reference from Exhibit 10.93 to Century Casinos’ Quarterly Report on
Form 10-QSB for the quarterly period ended March 31,
2000.
|
| 10.6B |
First
Amendment to the Amended and Restated Credit Agreement, by and among,
WMCK
Venture Corp., Century Casinos Cripple Creek, Inc., and WMCK Acquisition
Corp. (collectively, the “Borrowers”), Century Casinos, Inc. (the
“Guarantor”) and Wells Fargo Bank, National Association, dated August 22,
2001, is hereby incorporated by reference from Exhibit 11.01 to Century
Casinos’ Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2001.
|
| 10.6C |
Second
Amendment to the Amended and Restated Credit Agreement, by and among,
WMCK
Venture Corp., Century Casinos Cripple Creek, Inc., and WMCK Acquisition
Corp. (collectively, the “Borrowers”), Century Casinos, Inc. (the
“Guarantor”) and Wells Fargo Bank, National Association, dated August 28,
2002, is hereby incorporated by reference from Exhibit 10.115 to
Century
Casinos’ Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002.
|
| 10.6D |
Third
Amendment to Restated Credit Agreement dated October 27, 2004 among
WMCK
Venture Corp., Century Casinos Cripple Creek, WMCK Acquisition Corp.,
Century Casinos, Inc. and Wells Fargo Bank, N.A., is hereby incorporated
by reference from Exhibit 10.136 to Century Casinos’ Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2004.
|
| 10.6E |
Fourth
Amendment to Amended and Restated Credit Agreement, dated as of September
23, 2005, is hereby incorporated by reference from Exhibit 10.153
to
Century Casinos’ Current Report on Form 8-K dated September 27,
2005.
|
| 10.6F |
Fifth
Amendment to Amended and Restated Credit Agreement, dated as of December
6, 2005, is hereby incorporated by reference from Exhibit 10.165
to
Century Casinos’ Current Report on Form 8-K dated December 12,
2005.
|
| 10.6G |
Sixth
Amendment to Amended and Restated Credit Agreement, dated as
of October
31, 2006, is hereby incorporated by reference from Exhibit 10.180
to
Century Casinos’ Current Report on Form 8-K dated November 6,
2006.
|
|
10.6H
|
Seventh
Amendment to Amended and Restated Credit Agreement, dated as of February
28, 2007, is hereby incorporated by reference from Exhibit 10.2 to
Century
Casinos’ Current Report on Form 8-K dated March 6,
2007.
|
| 10.7 |
Loan
agreement by and between Century Casinos Caledon (Pty) Limited and
Nedbank
Limited dated August 26, 2005, is hereby incorporated by reference
from
Exhibit 10.152 to Century Casinos’ Current Report on Form 8-K dated
September 1, 2005.
|
| 10.8 |
Commitment
letter by and between Century Resorts Alberta Inc. and Canadian Western
Bank dated September 23, 2005, original commitment letter dated
August 3, 2005 and amendments dated September 8, 2005 and September
21,
2005, is hereby incorporated by reference from Exhibit 10.154 to
Century
Casinos’ Current Report on Form 8-K dated September 27,
2005.
|
-56-
| 10.9A |
Credit
Agreement dated as of November 18, 2005 among CC Tollgate LLC, a
Delaware
limited liability company, as Borrower, the Lenders, the L/C issuer
and
Wells Fargo Bank, National Association, as Agent Bank, is hereby
incorporated by reference from Exhibit 10.160 to Century Casinos’ Current
Report on Form 8-K dated November 29,
2005.
|
| 10.9B |
First
Amendment to Credit Agreement, dated as of June 28, 2006, by and
between
CC Tollgate LLC, the Lenders, the L/C issuer and Wells Fargo Bank,
National Association, as Agent Bank, is hereby incorporated by reference
from Exhibit 10.174 to Century Casinos’ Current Report on Form 8-K dated
July 5, 2006.
|
| 10.9C |
Second
Amendment to Credit Agreement, dated as of February 28, 2007, by
and
between CC Tollgate LLC, the Lenders, the L/C Issuer and Wells
Fargo Bank,
National Association, as Agent Bank, is hereby incorporated by
reference
from Exhibit 10.1 to Century Casinos’ Current Report on Form 8-K dated
March 6, 2007.
|
| 10.10 |
Term
Loan Agreement between Nedbank Limited and Century Casino Newcastle
(Pty)
Ltd., is hereby incorporated by reference from Exhibit 10.182 to
Century
Casinos’ Current Report on Form 8-K dated December 13,
2006.
|
| 10.11A* |
Employment
Agreement by and between Century Casinos, Inc. and Erwin Haitzmann
as
restated on February 18, 2003, is hereby incorporated by reference
from
Exhibit 10.120 to Century Casinos’ Annual Report on Form 10-K for the
fiscal year ended December 31,
2002.
|
| 10.11B* |
Amendment
to Employment Agreement, Dr. Erwin Haitzmann, dated February 3, 2005,
is
hereby incorporated by reference from Exhibit 10.143 to Century Casinos’
Current report on Form 8-K dated February 3,
2005.
|
| 10.11C* |
Amendment
No. 2 to Employment Agreement, effective September 1, 2006, between
Century Casinos, Inc. and Dr. Erwin Haitzmann, dated October
13, 2006, is
hereby incorporated by reference from Exhibit 10.178 to Century
Casinos’
Current Report on Form 8-K dated October 19,
2006.
|
| 10.12A* |
Employment
Agreement by and between Century Casinos, Inc. and Peter Hoetzinger
as
restated on February 18, 2003, is hereby incorporated by reference
from
Exhibit 10.121 to Century Casinos’ Annual Report on Form 10-K for the
fiscal year ended December 31,
2002.
|
| 10.12B* |
Amendment
to Employment Agreement, Mag. Peter Hoetzinger, dated February 3,
2005, is
hereby incorporated by reference from Exhibit 10.144 to Century Casinos’
Current Report on Form 8-K dated February 3,
2005.
|
| 10.12C* |
Amendment
No. 2 to Employment Agreement, effective September 1, 2006, between
Century Casinos, Inc. and Mag. Peter Hoetzinger, dated October 13,
2006,
is hereby incorporated by reference from Exhibit 10.179 to Century
Casinos’ Current Report on Form 8-K dated October 19,
2006.
|
| 10.13* |
Employment
Agreement by and between Century Casinos, Inc and Mr. Larry Hannappel,
dated March 22, 2005, is hereby incorporated by reference from
Exhibit
10.147 to Century Casinos’ Current Report on Form 8-K dated March 22,
2005.
|
-57-
| 10.14* |
Employment
agreement, effective March 15, 2005, between Century Casinos,
Inc. and Mr.
Ray Sienko, dated February 16, 2006, is hereby incorporated by
reference
from Exhibit 10.167 to Century Casinos’ Annual Report on Form 10-K for the
fiscal year ended December 31,
2005.
|
| 10.15* |
Employment
contract, effective January 1, 2006, between Century Casinos
Europe GmbH
and Dr. Christian Gernert dated November 1, 2005, is hereby incorporated
by reference from Exhibit 10.168 to Century Casinos’ Current Report on
Form 8-K dated March 21,
2006.
|
| 10.16* |
Revised
and Restated Management Agreement, effective September 30, 2006,
by and
between Century Resorts International Ltd, Century Casinos, Inc.
and
Flyfish Consulting Agreement, dated October 13, 2006, is hereby
incorporated by reference from Exhibit 10.176 to Century Casinos’ Current
Report on Form 8-K dated October 19,
2006.
|
| 10.17* |
Revised
and Restated Management Agreement, effective September 30, 2006,
by and
between Century Resorts International Ltd, Century Casinos, Inc.
and Focus
Consulting Agreement, dated October 13, 2006, is hereby incorporated
by
reference from Exhibit 10.177 to Century Casinos’ Current Report on Form
8-K dated October 19, 2006.
|
| 10.18 |
Standard
Form of Agreement Between Owner and Contractor where the basis
for payment
is the cost of the work plus a fee with a negotiated Guaranteed
Maximum
Price between the Owner, CC Tollgate LLC, and the Contractor, CFC
Construction, Inc., dated July 21, 2005, is hereby incorporated
by
reference from Exhibit 10.162 to Century Casinos’ Current Report on Form
8-K dated December 8, 2005.
|
| 10.19 |
Agreement
between Century Resorts Alberta Inc. (owner) and Chandos Construction
Ltd.
(contractor) as of December 2, 2005, is hereby incorporated by reference
from Exhibit 10.163 to Century Casinos’ Current Report on Form 8-K dated
December 8, 2005.
|
| 10.20 |
Century
Casinos, Inc. 2005 Equity Incentive Plan effective June 17, 2005,
is
hereby incorporated by reference from Appendix A to Century Casinos’ Proxy
Statement in respect of the 2005 Annual Meeting of
Stockholders.
|
| 10.21A |
ADC
Agreement, dated September 30, 2005, by and among Bank Austria
Creditanstalt AG, Century Casinos, Inc., and Oesterreichische Kontrollbank
Aktiengesellschaft, is hereby incorporated by reference from Exhibit
10.157 to Century Casinos’ Current Report on Form 8-K dated October 3,
2005.
|
| 10.21B |
Annex
to ADC Agreement between Bank Austria Creditanstalt AG, Century Casinos,
Inc. and Oesterreichische Kontrollbank Aktiengesellschaft dated September
30, 2005, is hereby incorporated by reference from Exhibit 10.158
to
Century Casinos’ Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2005.
|
| 10.22 |
Casino
Services Agreement by and between CC Tollgate LLC and Century Resorts
International Limited dated October 12, 2004, is hereby incorporated
by
reference from Exhibit 10.134 to Century Casinos’ Quarterly Report on Form
10-Q for the quarterly period ended September 30,
2004.
|
-58-
| 10.23 |
Management
Agreement entered into as of November 18, 2005, effective April 1,
2006,
by and between Balele Leisure (Proprietary) Limited and Century Casinos
Africa (Proprietary) Limited, is hereby incorporated by reference
from
Exhibit 10.169 to Century Casinos’ Current Report on Form 8-K dated April
6, 2006.
|
| 10.24 |
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., is hereby
incorporated
by reference from Exhibit 10.181 to Century Casinos’ Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2006.
|
(21)
Subsidiaries of the Registrant
| 21† |
Subsidiaries
of the Registrant
|
(23)
Consents of Experts and Counsel
| 23.1† |
Consent
of Independent Auditors - Grant Thornton
LLP
|
(31)
Rule 13a-14(a)/15d-14(a) Certifications
| 31.1† |
Certification
of Erwin Haitzmann, Co Chief Executive Officer, pursuant to Rule
13a-14(a)
under the Securities Exchange Act of
1934.
|
| 31.2† |
Certification
of Peter Hoetzinger, President and Co Chief Executive Officer, pursuant
to
Rule 13a-14(a) under the Securities Exchange Act of
1934.
|
| 31.3† |
Certification
of Larry Hannappel, Senior Vice President and Principal Financial
Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934.
|
| 31.4† |
Certification
of Ray Sienko, Chief Accounting Officer, pursuant to Rule 13a-14(a)
under
the Securities Exchange Act of
1934.
|
(32)
Section 1350 Certifications
| 32.1† |
Certification
of Erwin Haitzmann, Co Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.
|
| 32.2† |
Certification
of Peter Hoetzinger, President and Co Chief Executive Officer, pursuant
to
18 U.S.C. Section 1350.
|
| 32.3† |
Certification
of Larry Hannappel, Senior Vice President and Principal Financial
Officer,
pursuant to 18 U.S.C. Section 1350.
|
| 32.4† |
Certification
of Ray Sienko, Chief Accounting Officer, pursuant to 18 U.S.C. Section
1350.
|
________________
*
A
management contract or compensatory plan or arrangement required to be filed
as
an exhibit pursuant to Item 15(a)(3) of Form 10-K.
†
Filed
herewith. All other exhibits previously filed.
-59-
Pursuant
to the requirements of Section 13 or 15(d) of 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.
|
|
|
By:/s/
Erwin Haitzmann
|
By:/s/
Peter Hoetzinger
|
|
Erwin
Haitzmann,
Chairman of the Board and Co Chief Executive Officer (Co
Principal Executive Officer)
|
Peter
Hoetzinger,
Vice Chairman of the Board, Co Chief Executive Officer and President (Co
Principal Executive Officer)
|
|
By:/s/
Larry Hannappel
|
By:/s/
Ray Sienko
|
|
Larry
Hannappel,
Senior Vice President (Principal
Financial Officer)
|
Ray
Sienko,
Chief Accounting Officer (Principal
Accounting Officer)
|
|
Date:
March 15, 2007
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the Registrant and in the
capacities indicated on March
15, 2007.
|
Signature
|
Title
|
Signature
|
Title
|
|
/s/
Erwin Haitzmann
|
Chairman
of the Board and
|
/s/
Gottfried Schellmann
|
Director
|
|
Erwin
Haitzmann
|
Co
Chief Executive Officer
|
Gottfried
Schellmann
|
|
|
/s/
Peter Hoetzinger
Peter
Hoetzinger
|
Vice
Chairman of the Board,
Co
Chief Executive Officer
and
President
|
/s/
Robert S. Eichberg
Robert
S. Eichberg
|
Director
|
|
/s/
Dinah Corbaci
|
Director
|
||
|
Dinah
Corbaci
|
|||
-60-
Item
8. Financial
Statements and Supplementary Data.
Index
to Financial Statements
|
Financial
Statements:
|
|
|
F2
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
F4
|
|
Consolidated
Statements of Earnings for the Three Years Ended December 31,
2006
|
F5
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for
the Three Years Ended December 31, 2006
|
F6
|
|
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2006
|
F7
|
|
Notes
to Consolidated Financial Statements
|
F11
|
|
Financial
Statement Schedules:
|
|
All
schedules are omitted because they are not applicable or are
insignificant, or the required information is shown in the consolidated
financial statements or notes
thereto.
|
-F1-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and
Shareholders
of Century Casinos, Inc.
We
have
audited the accompanying consolidated balance sheets of Century Casinos, Inc.
(a
Delaware Corporation) and subsidiaries (the “Company”) as of December 31,
2006 and 2005, and the related consolidated statements of earnings,
shareholders’ equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Century Casinos, Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), Share-Based
Payment using
the
modified prospective method as of January 1, 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Century Casinos, Inc.
and
subsidiaries’ internal control over financial reporting as of December 31,
2006, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
and our report dated March 15, 2007 expressed an unqualified opinion on both
management’s assessment of Century Casinos, Inc. and subsidiaries’ internal
control over financial reporting and an unqualified opinion on the effectiveness
of Century Casinos, Inc. and subsidiaries’ internal control over financial
reporting.
/s/
GRANT
THORNTON LLP
Denver,
Colorado
March
15,
2007
-F2-
Shareholders
of Century Casinos, Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting appearing under
Item 9A, that Century Casinos, Inc. (a Delaware Corporation) and
subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Century Casinos, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
As
described in Management’s Report on Internal Control Over Financial Reporting,
Century Casinos, Inc. acquired a 60 percent interest in Balele Leisure (PTY)
Ltd
(now known as “Century Casino Newcastle”)
during 2006, and management has excluded Century Casino Newcastle from its
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006. We have also excluded Century Casino
Newcastle from our audit of internal control over financial reporting. Century
Casino Newcastle’s net operating revenues from April 1, 2006 to
December 31, 2006 represent 11 percent of the Company’s consolidated net
operating revenues for the year ended December 31, 2006 and Century
Casino Newcastle’s total assets represent 12 percent of the Company’s
consolidated assets as of December 31, 2006.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Century Casinos, Inc. and subsidiaries,
maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Also in our opinion, Century Casinos, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).
/s/
GRANT
THORNTON LLP
Denver,
Colorado
March
15,
2007
-F3-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
Amounts
in thousands, except share information
|
December
31, 2006
|
December
31, 2005
|
||
|
ASSETS
|
||||
|
Current
Assets:
|
||||
|
Cash
and cash equivalents
|
$
|
34,969
|
$
|
37,167
|
|
Restricted
cash
|
2,352
|
947
|
||
|
Receivables,
net
|
934
|
293
|
||
|
Prepaid
expenses
|
1,183
|
518
|
||
|
Inventories
|
445
|
209
|
||
|
Other
current assets
|
1,091
|
971
|
||
|
Deferred
income taxes - foreign
|
193
|
72
|
||
|
Total
current assets
|
41,167
|
40,177
|
||
|
Property
and Equipment, net
|
124,638
|
69,602
|
||
|
Goodwill
|
12,262
|
8,662
|
||
|
Casino
Licenses
|
9,341
|
1,820
|
||
|
Deferred
Income Taxes -
domestic
|
1,763
|
219
|
||
|
-
foreign
|
2,143
|
380
|
||
|
Note
Receivable
|
5,170
|
-
|
||
|
Other
Assets
|
1,376
|
2,488
|
||
|
Total
|
$
|
197,860
|
$
|
123,348
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||
|
Current
Liabilities:
|
||||
|
Current
portion of long-term debt
|
$
|
20,669
|
$
|
1,789
|
|
Accounts
payable and accrued liabilities
|
10,625
|
5,504
|
||
|
Accrued
payroll
|
2,172
|
1,149
|
||
|
Taxes
payable
|
2,509
|
1,189
|
||
|
Deferred
income taxes - domestic
|
16
|
8
|
||
|
Total
current liabilities
|
35,991
|
9,639
|
||
|
Long-Term
Debt, less current portion
|
56,036
|
17,934
|
||
|
Minority
Interest
|
5,406
|
4,444
|
||
|
Commitments
and Contingencies
|
||||
|
Shareholders’
Equity:
|
||||
|
Preferred
stock; $.01 par value; 20,000,000 shares authorized; no shares
issued and
outstanding
|
-
|
-
|
||
|
Common
stock; $.01 par value; 50,000,000 shares authorized; 23,168,443
and
22,568,443 shares issued, respectively; 23,004,067 and 22,380,567
shares
outstanding, respectively
|
232
|
226
|
||
|
Additional
paid-in capital
|
69,779
|
68,571
|
||
|
Accumulated
other comprehensive income
|
2,768
|
2,568
|
||
|
Retained
earnings
|
28,020
|
20,391
|
||
|
100,799
|
91,756
|
|||
|
Treasury
stock - 164,376 and 187,876 shares at cost, respectively
|
(372)
|
(425)
|
||
|
Total
shareholders’ equity
|
100,427
|
91,331
|
||
|
Total
|
$
|
197,860
|
$
|
123,348
|
See
notes
to consolidated financial statements
-F4-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGS
| Amounts in thousands, except per share information |
For
the Year Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
Revenue:
|
||||||||||
|
Casino
|
$ 54,499
|
$
36,394
|
$
34,641
|
|||||||
|
Hotel,
food and beverage
|
6,066
|
4,522
|
4,322
|
|||||||
|
Other
|
1,174
|
783
|
1,092
|
|||||||
|
61,739
|
41,699
|
40,055
|
||||||||
|
Less
promotional allowances
|
(5,454
|
)
|
(4,254
|
)
|
(4,290
|
)
|
||||
|
Net
operating revenue
|
56,285
|
37,445
|
35,765
|
|||||||
|
Operating
Costs and Expenses:
|
||||||||||
|
Casino
|
23,123
|
14,293
|
13,760
|
|||||||
|
Hotel,
food and beverage
|
4,926
|
2,776
|
3,134
|
|||||||
|
General
and administrative
|
19,345
|
11,134
|
9,140
|
|||||||
|
Impairments
and other write-offs, net of recoveries
|
894
|
(61
|
)
|
(215
|
)
|
|||||
|
Depreciation
|
4,747
|
3,349
|
2,993
|
|||||||
|
Total
operating costs and expenses
|
53,035
|
31,491
|
28,812
|
|||||||
|
(Loss)
earnings from equity investment
|
-
|
(109
|
)
|
55
|
||||||
|
Earnings
from Operations
|
3,250
|
5,845
|
7,008
|
|||||||
|
Non-Operating
Income (Expense):
|
||||||||||
|
Interest
income
|
896
|
476
|
168
|
|||||||
|
Interest
expense
|
(3,406
|
)
|
(2,290
|
)
|
(1,587
|
)
|
||||
|
Gain
on sale of Gauteng interest
|
5,231
|
-
|
-
|
|||||||
|
Gains
on foreign currency transactions and other
|
469
|
9
|
(4
|
)
|
||||||
|
Non-operating
income (expense), net
|
3,190
|
(1,805
|
)
|
(1,423
|
)
|
|||||
|
Earnings
before
Income Taxes, Minority Interest and Preferred
Dividends
|
6,440
|
4,040
|
5,585
|
|||||||
|
Provision
for income taxes
|
134
|
347
|
749
|
|||||||
|
Earnings
before Minority Interest
and Preferred Dividends
|
6,306
|
3,693
|
4,836
|
|||||||
|
Minority
interest in subsidiary losses (earnings)
|
1,461
|
788
|
(98
|
)
|
||||||
|
Preferred
dividends issued by subsidiary
|
(138
|
)
|
-
|
-
|
||||||
|
Net
Earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
||||
|
Earnings
Per Share
|
||||||||||
|
Basic
|
$
|
0.33
|
$
|
0.28
|
$
|
0.35
|
||||
|
Diluted
|
$
|
0.32
|
$
|
0.25
|
$
|
0.30
|
||||
See
notes
to consolidated financial statements
-F5-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts
in thousands, except per share information)
|
Accumulated
|
||||||||||||||
|
Additional
|
Other
|
|||||||||||||
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Retained
|
Treasury
Stock
|
||||||||||
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Earnings
|
Shares
|
Amount
|
Total
|
|||||||
|
BALANCE
AT JANUARY
1, 2004
|
14,485,776
|
$
|
145
|
$
|
21,529
|
$
|
2,034
|
$
|
11,172
|
805,276
|
$
|
(1,832)
|
$
|
33,048
|
|
Options
exercised
|
-
|
-
|
(1)
|
-
|
-
|
(14,400)
|
31
|
30
|
||||||
|
Foreign
currency translation
adjustment
|
-
|
-
|
-
|
2,775
|
-
|
-
|
-
|
2,775
|
||||||
|
Reclassification
of
gains included in net earnings attributable to the sale of
Verkrans
|
-
|
-
|
-
|
(380)
|
-
|
-
|
-
|
(380)
|
||||||
|
Change
in fair value of interest rate swap, net of income tax
expense
|
-
|
-
|
-
|
428
|
-
|
-
|
-
|
428
|
||||||
|
Reclassification
of interest expense on interest rate swap
|
-
|
-
|
-
|
(260)
|
-
|
-
|
-
|
(260)
|
||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
4,738
|
-
|
-
|
4,738
|
||||||
|
BALANCE
AT DECEMBER 31, 2004
|
14,485,776
|
$
|
145
|
$
|
21,528
|
$
|
4,597
|
$
|
15,910
|
790,876
|
$
|
(1,801)
|
$
|
40,379
|
|
Issuance
of common stock, net of $3.0 million in issuance costs
|
7,132,667
|
71
|
46,116
|
-
|
-
|
-
|
-
|
46,187
|
||||||
|
Options
exercised
|
950,000
|
10
|
927
|
-
|
-
|
(603,000)
|
1,376
|
2,313
|
||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
(2,093)
|
-
|
-
|
-
|
(2,093)
|
||||||
|
Change
in fair value of interest rate swap, net of income tax
expense
|
-
|
-
|
-
|
166
|
-
|
-
|
-
|
166
|
||||||
|
Reclassification
of interest expense on interest rate swap
|
-
|
-
|
-
|
(102)
|
-
|
-
|
-
|
(102)
|
||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
4,481
|
-
|
-
|
4,481
|
||||||
|
BALANCE
AT DECEMBER 31, 2005
|
22,568,443
|
$
|
226
|
$
|
68,571
|
$
|
2,568
|
$
|
20,391
|
187,876
|
$
|
(425)
|
$
|
91,331
|
|
Common
stock issuance costs
|
-
|
-
|
(22)
|
-
|
-
|
-
|
-
|
(22)
|
||||||
|
Options
exercised
|
600,000
|
6
|
454
|
-
|
-
|
(23,500)
|
53
|
513
|
||||||
|
Tax
impact of stock option exercises
|
-
|
-
|
403
|
-
|
-
|
-
|
-
|
403
|
||||||
|
Amortization
of stock based compensation
|
-
|
-
|
373
|
-
|
-
|
-
|
-
|
373
|
||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
200
|
-
|
-
|
-
|
200
|
||||||
|
Net
earnings
|
-
|
-
|
-
|
-
|
7,629
|
-
|
-
|
7,629
|
||||||
|
BALANCE
AT DECEMBER 31, 2006
|
23,168,443
|
$
|
232
|
$
|
69,779
|
$
|
2,768
|
$
|
28,020
|
164,376
|
$
|
(372)
|
$
|
100,427
|
See
notes
to consolidated financial statements
-F6-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Amounts
in thousands
|
For
the Year Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
||||
|
Cash
Flows from Operating Activities:
|
||||||
|
Net
earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities
|
||||||
|
Depreciation
|
4,747
|
3,349
|
2,993
|
|||
|
Imputed
interest
|
160
|
-
|
-
|
|||
|
Amortization
of stock-based compensation
|
373
|
-
|
-
|
|||
|
Amortization
of deferred financing costs
|
200
|
448
|
75
|
|||
|
Deferred
tax (benefit) expense
|
(2,303)
|
(147)
|
554
|
|||
|
Minority
interest in subsidiary (losses) earnings
|
(1,461)
|
(788)
|
98
|
|||
|
Loss
(earnings) from equity investment
|
-
|
109
|
(55)
|
|||
|
Reclassification
of accumulated foreign currency translation adjustment attributable
to the
sale of Verkrans
|
-
|
-
|
(380)
|
|||
|
Impairment
of goodwill - Century Casino Millennium
|
237
|
-
|
-
|
|||
|
Net
proceeds on sale of Gauteng interest
|
(5,231)
|
-
|
-
|
|||
|
Loss
(gain) on disposition of assets
|
22
|
(74)
|
(20)
|
|||
|
Write-off
of fixed assets
|
1,028
|
32
|
-
|
|||
|
Excess
tax benefits from stock-based payment arrangements
|
(403)
|
-
|
-
|
|||
|
Changes
in operating assets and liabilities, net of effects of
acquisitions
|
||||||
|
Receivables
|
(380)
|
(151)
|
110
|
|||
|
Prepaid
expenses and other assets
|
(658)
|
(888)
|
(357)
|
|||
|
Accounts
payable and accrued liabilities
|
3,566
|
798
|
1,282
|
|||
|
Accrued
payroll
|
872
|
(177)
|
43
|
|||
|
Taxes
payable
|
1,096
|
546
|
(609)
|
|||
|
Net
cash provided by operating activities
|
$
|
9,494
|
$
|
7,538
|
$
|
8,472
|
-Continued
on following page-
-F7-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
| Amounts in thousands |
For
the Year Ended December 31,
|
|||||
|
2006
|
|
2005
|
2004
|
|||
|
Cash
Flows from Investing Activities:
|
||||||
|
Purchases
of property and equipment
|
$
|
(57,295)
|
$
|
(21,190)
|
$
|
(4,508)
|
|
Net
proceeds on sale of Gauteng interest
|
5,231
|
-
|
-
|
|||
|
Acquisition
of remaining interest in subsidiary
|
(5,135)
|
-
|
-
|
|||
|
Note
receivable (see Note 1)
|
(4,752)
|
-
|
-
|
|||
|
Cash
contribution of $3.5 million towards interest in CC
Tollgate LLC.
|
-
|
-
|
(3,500)
|
|||
|
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 $0.3 million |
(362)
|
-
|
-
|
|||
|
Cash
contribution of $6.7 million towards interest in Newcastle,
less net cash acquired of $1.5 million |
(5,121)
|
-
|
-
|
|||
|
Proceeds
from disposition of subsidiary
|
-
|
-
|
753
|
|||
|
Proceeds
from disposition of assets
|
229
|
264
|
205
|
|||
|
Net
cash used in investing activities
|
$
|
(67,205)
|
$
|
(21,679)
|
$
|
(7,050)
|
|
Cash
Flows from Financing Activities:
|
||||||
|
Proceeds
from borrowings
|
$
|
84,077
|
$
|
58,680
|
$
|
31,462
|
|
Principal
repayments
|
(30,580)
|
(59,467)
|
(29,479)
|
|||
|
Excess
tax benefits from stock-based payment arrangements
|
403
|
-
|
-
|
|||
|
Distribution
to minority interest
|
-
|
(1,000)
|
-
|
|||
|
Deferred
financing costs
|
(155)
|
(2,419)
|
(113)
|
|||
|
Increase
in restricted cash
|
(416)
|
(387)
|
-
|
|||
|
Proceeds
from exercise of options
|
513
|
2,313
|
31
|
|||
|
Proceeds
from issuance of Austrian Depositary Certificates,
net of $3.0 million in issuance costs
|
(22)
|
46,187
|
-
|
|||
|
Other
|
-
|
4
|
5
|
|||
|
Net
cash provided by financing activities
|
$
|
53,820
|
$
|
43,911
|
$
|
1,906
|
|
Effect
of exchange rate changes on cash
|
1,693
|
(1,014)
|
354
|
|||
|
(Decrease)
Increase
in Cash and Cash Equivalents
|
(2,198)
|
28,756
|
3,682
|
|||
|
Cash
and Cash Equivalents at Beginning of Year
|
37,167
|
8,411
|
4,729
|
|||
|
Cash
and Cash Equivalents at End of Year
|
$
|
34,969
|
$
|
37,167
|
$
|
8,411
|
Supplemental
Disclosure of Noncash Investing and Financing
Activities:
The
Company has approximately $0.7 million and $2.0 million of accrued construction
liabilities relating to its various development projects as of December 31,
2006
and 2005, respectively. In addition, the Company entered into capital leases
of
approximately $0.8 million during 2006. The Company has offset the total
purchases of property and equipment for 2006 and 2005 by these
amounts.
-F8-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
Century
Resorts Alberta, Inc.
On
February 24, 2005, our wholly owned subsidiary, Century Resorts International
Limited (“CRI”), purchased a 56.4% equity interest in Century Resorts Alberta,
Inc. (“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 December 31, 2006
consolidated balance sheet. CRA is a new entity and pro forma information is
not
applicable.
Century
Casino Newcastle
On
April
1, 2006, Century Casinos Africa (“CCA”) completed the purchase of a 60%
controlling interest in Century Casino Newcastle (“CNEW”) 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 fair values
of
the assets acquired and liabilities assumed at the date of
acquisition:
|
Amounts
in thousands
|
||
|
Cash
|
$
|
1,530
|
|
Accounts
receivable
|
35
|
|
|
Prepaid
expenses
|
91
|
|
|
Inventory
|
74
|
|
|
Property
and equipment, net
|
3,009
|
|
|
Casino
licenses
|
8,911
|
|
|
Deferred
income taxes - foreign
|
1,314
|
|
|
Accounts
payable and accrued liabilities
|
(801)
|
|
|
Accrued
payroll
|
(183)
|
|
|
Taxes
payable
|
(446)
|
|
|
Long-term
debt
|
(1,965)
|
|
|
Amount
credited to minority partner
|
(4,917)
|
|
|
Cash
paid
|
$
|
6,652
|
The
assets acquired and liabilities assumed are reported in the December 31, 2006
consolidated balance sheet.
Century
Casino Millennium
In
January 2004, the Company, through its wholly owned subsidiary Century Casinos
Europe GmbH (“CCE”), purchased an additional 40% interest in Century Casino
Millennium (“CM”), bringing its total interest to 50%, by contributing gaming
equipment with a net book value of $0.6 million. The contribution of the gaming
equipment, along with a cash contribution made in December 2002 which was
accounted for by CCE on a cost basis in Euro and had a value of $0.3 million
on
January 3, 2004, brought the Company’s total investment in CM to $0.9 million,
of which $0.3 million was allocated to a shareholder loan acquired as part
of
the transaction. The difference between the cost and the equity of CM, of $0.6
million, was recorded as goodwill.
-F9-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
On
April
13, 2006, CCE purchased the remaining 50% interest in CM 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
|
$
|
318
|
|
Restricted
cash
|
929
|
|
|
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
|
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 December 31, 2006 consolidated balance
sheet.
CC
Tollgate LLC
In
December 2004, the Company, through its wholly owned subsidiary Century Casinos
Tollgate, Inc. (“CTI”), purchased a 65% interest in CC Tollgate LLC (“CTL”). The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of acquisition:
|
Amounts
in thousands
|
||
|
Property
and equipment, net
|
$
|
9,205
|
|
Accounts
payable and accrued liabilities
|
(123)
|
|
|
Long-term
debt
|
(4,582)
|
|
|
Amount
credited to minority partner
|
(1,000)
|
|
|
Cash
paid
|
$
|
3,500
|
The
assets acquired and liabilities assumed are reported in the consolidated balance
sheet. CTL is a new entity and pro forma information is not
applicable.
Supplemental
Disclosure of Cash Flow Information:
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Interest
paid, net of capitalized interest of
$2,105 in 2006, $582 in 2005 and $0 in 2004 |
$
|
4,159
|
$
|
1,890
|
$
|
1,504
|
|
Income
taxes paid
|
$
|
787
|
$
|
1,083
|
$
|
614
|
See
notes
to consolidated financial statements
-F10-
CENTURY
CASINOS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Century
Casinos, Inc. (“CCI” or the “Company”) is an international casino entertainment
company. We own and/or manage casino operations in North America, South Africa,
the Czech Republic and international waters through various entities that are
wholly owned or in which we have a majority ownership position:
|
Parent/Subsidiary
Relationship
|
Abbreviation
|
Parent
|
Ownership
Percentage
|
|
Century
Casinos, Inc.
|
CCI
|
n/a
|
n/a
|
|
WMCK
Venture Corp.
|
WMCK
|
CCI
|
100%
|
|
WMCK-Acquisition
Corp.
|
ACQ
|
WMCK
|
100%
|
|
Century
Casinos Cripple Creek, Inc.
|
CCC
|
WMCK
|
100%
|
|
Century
Resorts Ltd.
|
CRL
|
CCI
|
96.5%
|
|
Blue
Bells Country Club (Pty) Ltd.
|
BBC
|
CRL
|
100%
|
|
Blue
Crane Signature Golf Estates (Pty) Ltd.
|
BCS
|
CRL
|
100%
|
|
Century
Casinos Africa (Pty) Ltd.
|
CCA
|
CRL
|
100%
|
|
Celebrations
Accommodation & Food Service Management (Pty) Ltd.
|
CEL
|
CCA
|
100%
|
|
Century
Casino Newcastle (Pty) Ltd.
|
CNEW
|
CCA
|
60%
|
|
Century
Casinos Caledon (Pty) Ltd.
|
CCAL
|
CCA
|
100%
|
|
Century
Resorts International Ltd.
|
CRI
|
CCI
|
100%
|
|
Century
Resorts Alberta, Inc.
|
CRA
|
CRI
|
100%
|
|
Century
Casinos Tollgate, Inc
|
CTI
|
CCI
|
100%
|
|
CC
Tollgate LLC
|
CTL
|
CTI
|
65%
|
|
Century
Casinos Management, Inc.
|
CCM
|
CCI
|
100%
|
|
Century
Casinos Europe GmbH
|
CCE
|
CCI
|
100%
|
|
Century
Casino Millennium, a.s.
|
CM
|
CCE
|
100%
|
CCI
serves
as a holding company, providing corporate and administrative services to its
subsidiaries.
WMCK
owns and
operates Womacks Casino and Hotel (“Womacks”), a limited-stakes gaming casino in
Cripple Creek, Colorado.
CRL
was
formed to own our South African interests and to provide technical casino
services to some of our foreign and offshore operations. On April 1, 2006,
CCA,
a subsidiary of CRL, completed the purchase of a 60% controlling interest in
Balele Leisure (Pty) Ltd. (“Balele”) for approximately $7.4 million (ZAR 45.5
million - See Note 3). CCAL and CNEW, operating subsidiaries of CCA, own and
operate The Caledon Hotel, Spa and Casino (“Caledon”) and Century Casino
Newcastle, respectively.
-F11-
CRI
serves
as concessionaire of small casinos on luxury cruise vessels and provides
technical casino services to Century Casino Millennium (“CM”), a casino located
within the Marriott Hotel in Prague, Czech Republic. On February 24, 2005,
CRI
acquired a 56.4% interest in Century Resorts Alberta, Inc. (“CRA”) for
approximately $2.4 million. On January 12, 2006, CRI purchased the remaining
43.6% interest in CRA for approximately $6.3 million (CAD 7.3 million). CRA
owns
and operates the Century Casino & Hotel in Edmonton, Alberta, Canada. CRI
paid approximately $5.1 million (CAD 5.8 million) at closing with the remainder
payable on November 17, 2007 (the first anniversary of the opening of the
casino). CRI has entered into casino services agreements and/or executive
management agreements for which it earns a fee from other subsidiaries of
CCI.
CTI
has
a 65%
controlling interest in CTL, which owns and operates the Century Casino and
Hotel, a limited-stakes gaming facility, in Central City, Colorado.
CCM
provides
management services to CTL.
CCE
owns CM.
Prior to April 13, 2006, CCE had a 50% equity ownership in CM. 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 by the
former partner and the purchase price for the former partner’s 50% equity
interest. CCE also provides administrative support for CCI executive management
in Europe.
Other
Developments:
Casinos
Poland - On
June
13, 2006, 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 $3.8 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
unaudited net revenues of approximately $53.7 million in 2006. In connection
with the purchase, we loaned G5 approximately $5.2 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.
On February 1, 2007, we loaned G5 an additional $1.0 million (PLN 3.0 million)
to repay additional amounts to creditors. As a result of the loan, the purchase
price of the shares was reduced by $1.0 million (€0.7 million). As the Company
will only have a 1/3 interest in Casinos Poland and will not have a separate
agreement to manage the property, subject to a Financial Accounting Standards
Board (“FASB”) Interpretation 46 (“FIN 46”) analysis, the Company expects to
account for this transaction under the equity method. The closing of this
transaction occurred on March 12, 2007.
Gauteng,
South Africa -
On
September 28, 2006, the Company sold its interest in a casino development
project located in Gauteng, South Africa for $5.7 million (ZAR 43.3 million),
less commissions of $0.1 million (ZAR 1.3 million). The Company has recorded
$5.2 million (ZAR 39.0 million) as a gain on sale of Gauteng interest on the
December 31, 2006 consolidated statement of earnings (the remaining $0.4 million
(ZAR 3.0 million) related to the recovery of a previously written off loan).
-F12-
2. SIGNIFICANT
ACCOUNTING POLICIES
Principles
of Consolidation -
The
accompanying consolidated financial statements include the accounts of CCI
and
its majority-owned subsidiaries. Investments in unconsolidated affiliates that
are 20% to 50% owned, and in which the Company does not have the ability to
exercise control, are accounted for under the equity method. All intercompany
transactions and balances have been eliminated. Certain prior year amounts
have
been reclassified to conform to the current year presentation.
Our
ownership interests in CTL, CNEW and CRL are carried at our capital account
balances based on provisions in each company’s respective agreements that
require liquidation to be proportionate to each unitholder’s positive capital
account, resulting in cumulative minority interest liabilities of $5.6 million
and $4.4 million as of December 31, 2006 and 2005, respectively. For CTL, prior
to April 2006, by agreement all losses were allocated to the minority partner
until its capital account balance was in the same proportion as its ownership
percentage.
Prior
to
April 13, 2006, we had a 50% ownership in CM and we accounted for this
investment under the equity method. For the year ended December 31, 2005, CM
had
net operating revenues of $2.1 million and a net loss of $0.4 million. For
the
year ended December 31, 2004, CM had net operating revenues of $2.5 million
and
net income of $0.1 million. The Company only recorded its portion of CM’s losses
that reduced its net investment to zero.
Use
of Estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
- All
highly liquid investments with an original maturity of three months or less
are
considered cash equivalents.
Restricted
Cash
-
Restricted cash at December 31, 2006 consists of minimum deposits of $1.1
million (€0.8 million) that are required in connection with our listing on the
Vienna Stock Exchange (“VSE”), $1.1 million (CZK 22.0 million) held with the
Ministry of Finance of the Czech Republic for our casino in Prague and $0.2
million (CAD 0.3 million) of cash required to be used for construction
expenditures in Edmonton, Alberta, Canada. Restricted cash at December 31,
2005
consisted of $0.9 million (€0.8 million) for the required VSE deposit.
Fair
Value of Financial Instruments -
We
calculate the fair value of financial instruments and include this additional
information in the notes to our consolidated financial statements when the
fair
value does not approximate the carrying value of those financial instruments.
Our financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, accounts payable, long-term debt and, at times,
interest rate swap agreements. The Company had no outstanding interest rate
swap
agreements as of December 31, 2006 and 2005. Fair value is determined using
quoted market prices whenever available. When quoted market prices are not
available, we use alternative valuation techniques such as calculating the
present value of estimated future cash flows utilizing risk-adjusted discount
rates. Our carrying value of financial instruments approximates fair value
at
December 31, 2006 and 2005.
-F13-
Property
and Equipment
-
Property and equipment are stated at cost. Depreciation of assets in service
is
provided using the straight-line method over the estimated useful lives of
the
assets. Leased property and equipment under capital leases is amortized over
the
lives of the respective leases or over the service lives of the assets,
whichever is shorter. The interest cost associated with major development and
construction projects is capitalized and included in the cost of the project.
When no debt is incurred specifically for a project, interest is capitalized
on
amounts expended on the project using the weighted-average cost of our
outstanding borrowings. Capitalization of interest ceases when the project
is
substantially complete or development activity is suspended for more than a
brief period. Such capitalized interest becomes part of the cost of the related
asset and is depreciated over the estimated useful life of the asset. The
Company capitalized $2.1 million and $0.6 million towards our various
construction projects during 2006 and 2005, respectively. No interest was
capitalized during 2004.
Assets
are depreciated over their respective service lives as follows:
Buildings
and
improvements 7
- 39
yrs
Gaming
equipment
3
- 7
yrs
Furniture
and office
equipment
5
- 7
yrs
Other
equipment
3
- 7
yrs
Purchased
software is recorded at cost and amortized over its estimated useful life.
Computer software and development costs incurred in the preliminary project
stage, as well as training and maintenance costs, are expensed as incurred.
Direct and indirect costs associated with the application development stage
of
internal use software are capitalized until such time that the software is
substantially complete and ready for its intended use. Capitalized costs are
amortized on a straight-line basis over the estimated useful life of the
software.
Goodwill
-
Goodwill represents the excess of the purchase price over the fair value of
the
net identifiable assets acquired in a business combination. Statement of
Financial Accounting Standard (“SFAS”) No. 142 “Goodwill and Other Intangible
Assets” addresses the methods used to capitalize, amortize and to assess
impairment of intangible assets, including goodwill resulting from business
combinations accounted for under the purchase method. Based on the evaluations
completed in 2006, the Company recorded a charge of $0.2 million (CZK 5.0
million) to eliminate the goodwill associated with CM. No impairments were
indicated as a result of the annual impairment reviews for goodwill in 2005
or
2004.
Casino
Licenses -
In
evaluating the Company’s capitalized casino license costs, management considered
all of the criteria set forth in SFAS 142 for determining useful life. Of
particular significance in this evaluation are the existing regulatory
provisions relating to the renewal of licenses. In general, the renewal of
a
license can be done at minimal cost to the Company, as long as the Company
is in
compliance with all applicable laws. Based on our evaluation, the Company deemed
that casino license costs have an indefinite life.
Impairment
of Long-Lived Assets -
We
review long-lived assets for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If there is an indication of impairment, determined by the excess
of the carrying value in relation to anticipated undiscounted future cash flows,
the carrying amount of the asset is written down to its estimated fair value
by
a charge to operations. For the year ended December 31, 2006, the Company’s
majority owned subsidiary, CTL, wrote off approximately $0.6 million of fixed
assets that were deemed obsolete. No impairment charges were recorded for the
years ended December 31, 2005 and 2004 (See Note 10).
-F14-
Revenue
Recognition
- Casino
revenue is the net win from gaming activities, which is the difference between
gaming wins and losses. Hotel, food and beverage revenues are recognized as
products are delivered or services are performed. Management and consulting
fees
are recognized as revenue as services are provided. The
incremental amount of unpaid progressive jackpots is recorded as a liability
and
a reduction of casino revenue in the period during which the progressive jackpot
increases.
Promotional
Allowances
- Hotel
accommodations and food and beverage furnished without charge to customers
is
included in gross revenue at a value which approximates retail and is then
deducted as complimentary services to arrive at net revenue.
We
issue
free play or coupons for the purpose of generating future revenue. Coupons
are
issued the month prior to when they can be redeemed and are valid for defined
periods of time ranging up to 7 days. The net win from the coupons is expected
to exceed the value of the coupons issued. The cost of the coupons redeemed
is
applied against the revenue generated on the day of the redemption.
Members
of the casinos’ players clubs earn points as a percentage of coin-in. The cost
of the points is offset against the revenue in the period that the revenue
generated the points. The value of the unused or unredeemed points is included
in the accounts payable and accrued liabilities on our consolidated balance
sheets.
Promotional
allowances presented in the consolidated statement of earnings for 2006, 2005
and 2004 include the following:
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
|
||||||
|
Food
& Beverage and Hotel Comps, at retail(1)
|
$
|
1,806
|
$
|
1,373
|
$
|
1,452
|
|
Free
Plays or Coupons
|
1,663
|
1,573
|
1,569
|
|||
|
Player
Points
|
1,985
|
1,308
|
1,269
|
|||
|
Total
Promotional Allowances
|
$
|
5,454
|
$
|
4,254
|
$
|
4,290
|
(1)
The
estimated cost of such complimentary services, charged to casino operations,
was
$0.9 million, $1.0 million and $1.1 million in 2006, 2005 and 2004,
respectively.
Foreign
Currency Translation
-
Adjustments resulting from the translation of the accounts of our foreign
subsidiaries from the local functional currency to U.S. dollars are recorded
as
other comprehensive income or loss in the consolidated statements of
shareholders’ equity and comprehensive income. Foreign currency transaction
gains or losses resulting from the translation of casino operations and other
transactions that are denominated in a currency other than U.S. dollars are
recognized in the statements of earnings. Gains and losses from intercompany
foreign currency transactions that are of a long-term investment nature and
are
between entities of the consolidated group are not included in determining
net
earnings, but rather are reported as translation adjustments within other
comprehensive income or loss in the consolidated statements of shareholders’
equity and comprehensive income.
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:
|
December
31, 2006
|
December
31, 2005
|
December
31, 2004
|
|
|
Canadian
Dollars (CAD)
|
1.1653
|
1.1659
|
1.2036
|
|
Czech
Koruna (CZK)
|
20.8500
|
24.5810
|
22.4640
|
|
Euros
(€)
|
0.7578
|
0.8446
|
0.7388
|
|
Polish
Zloty (PLN)
|
2.9016
|
N/A
|
N/A
|
|
South
African Rand (ZAR)
|
7.0496
|
6.3399
|
5.6640
|
Source:
Pacific Exchange Rate Service
-F15-
Income
Taxes
- We
account for income taxes using the asset and liability method, which provides
that deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amounts
for
financial reporting purposes, at a rate expected to be in effect when the
differences become deductible or payable.
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 Payment” (“SFAS 123R”), and selected the modified prospective
method to initially report stock-based compensation amounts in the consolidated
financial statements. Under the provisions of SFAS 123R, stock-based
compensation cost is measured at the grant date based on the fair value of
the
award and is recognized as expense over the vesting period. The Company is
currently using the Black-Scholes option pricing model to determine the fair
value of all option grants.
Earnings
Per Share -
Basic
earnings per share considers only weighted-average outstanding common shares
in
the computation. Diluted earnings per share gives effect to all potentially
dilutive securities. Diluted earnings per share is based upon the weighted
average number of common shares outstanding during the period, plus, if
dilutive, the assumed exercise of stock options using the treasury stock method
and the assumed conversion of other convertible securities (using the “if
converted” method) at the beginning of the year, or for the period outstanding
during the year for current year issuances.
Comprehensive
Income
-
Comprehensive income includes the effect of fluctuations in foreign currency
rates on the values of our foreign investments and fair value gains and losses
on the interest rate swap agreements we maintain from time to time to hedge
against interest rate increases on our credit facilities.
Operating
Segments
- We are
managed in seven segments, based primarily on our casino properties. Each casino
property derives its revenues primarily from casino operations, room rentals
and
food and beverage sales. Please refer to note 13, “Segment and Geographic
Information“, for a description of our segments.
Advertising
Costs
- Costs
incurred for producing and communicating advertising are expensed when incurred.
Advertising expense was $1.6 million, $0.7 million and $0.8 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
Preopening
Expenses -
Preopening, pre-operating and organization activities are expensed as incurred.
We incurred approximately $4.0 million of pre-opening expenses for the year
ended December 31, 2006 towards our projects in Central City, Colorado,
Edmonton, Canada, and Newcastle,
South Africa. We incurred approximately $0.4 million of pre-opening expenses
in
2005 towards our project in Central City, Colorado. By agreement, the entire
loss was allocated to our minority partner in this project.
-F16-
Recent
Accounting Pronouncements -
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, which permits an entity to measure certain
financial assets and financial liabilities at fair value. SFAS 159 is effective
for fiscal years beginning January 1, 2008. The Company has not yet completed
an
assessment of the impact of SFAS 159 on its consolidated financial
statements.
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 adoption of SAB 108 did not
have an impact on the Company’s consolidated financial statements.
In
September 2006, the FASB issued 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
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 adoption of
SFAS
158 did not have an impact on the Company’s current financial position, results
of operations or cash flows.
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 FIN 48, “Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement 109”, 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.
-F17-
|
3.
|
INVESTMENT
IN NEWCASTLE
|
On
April
1, 2006, our subsidiary CCA completed the purchase of a 60% controlling interest
in Balele, which owns a casino in Newcastle, South Africa, for approximately
$9.3 million (ZAR 57.5 million). Following the purchase, we began the
development of a new casino in Newcastle. In connection with CCA’s purchase of
its equity interest in Balele, a sale of share 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 housed
the original casino for approximately $1.9 million (ZAR 12.0 million) within
60
days of closing. The Sellers informed CCA that they would not be able to sell
the facility for ZAR 12.0 million. As a result, the purchase price for the
60%
interest in Balele was reduced by this amount, resulting in an overall purchase
price of $7.4 million (ZAR 45.5 million). We paid $6.7 million (ZAR 40.5
million) at closing with the remainder payable on the first anniversary of
the
opening of the casino. The Company consolidated the results of Balele, now
known
as Century Casino Newcastle (Pty) Ltd. (“CNEW”), in its financial statements as
of April 1, 2006.
An
additional $0.4 million (ZAR 2.5 million) will be payable to the minority
shareholders if casino revenues during the first 12 months of operation at
the
new casino exceeds $13.5 million (ZAR 95.0 million). As of December 31, 2006,
the Company does not deem it probable that casino revenues will exceed the
required amounts.
The
following pro forma operating information for 2006 and 2005 has been prepared
as
if the acquisition of CCA’s 60% interest in CNEW 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.
Unaudited
pro forma results are as follows:
|
Amounts
in thousands, except for share information
|
2006
|
2005
|
||
|
Net
Operating Revenue
|
$
|
58,356
|
$
|
45,152
|
|
Operating
Costs and Expenses:
|
||||
|
Operating
expenses
|
50,388
|
33,772
|
||
|
Depreciation
and amortization
|
4,865
|
3,867
|
||
|
Total
operating costs and expenses
|
55,253
|
37,639
|
||
|
Earnings
from Operations
|
3,103
|
7,513
|
||
|
Non-operating
income (expenses), net
|
3,223
|
(1,666)
|
||
|
Earnings
before Income Taxes, Minority Interest and Preferred
Dividends
|
6,326
|
5,847
|
||
|
Provision
for income taxes
|
78
|
758
|
||
|
Earnings
before Minority Interest
and Preferred Dividends
|
6,248
|
5,089
|
||
|
Minority
interest in subsidiary losses
|
1,523
|
336
|
||
|
Preferred
dividends issued by subsidiary
|
(138)
|
-
|
||
|
Net
Earnings
|
$
|
7,633
|
$
|
5,425
|
|
Earnings
Per Share:
|
||||
|
Basic
|
$
|
0.34
|
$
|
0.34
|
|
Diluted
|
$
|
0.32
|
$
|
0.30
|
-F18-
| 4. |
PROPERTY
AND EQUIPMENT
|
Property
and equipment at December 31, 2006 and 2005 consist of the
following:
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Buildings
and improvements
|
$
|
86,144
|
$
|
28,828
|
|
Gaming
equipment
|
23,328
|
13,976
|
||
|
Furniture
and office equipment
|
10,473
|
5,075
|
||
|
Other
equipment
|
5,736
|
2,553
|
||
|
125,681
|
50,432
|
|||
|
Less
accumulated depreciation
|
(25,673)
|
(21,869)
|
||
|
100,008
|
28,563
|
|||
|
Land
|
23,833
|
22,432
|
||
|
Capital
projects in process
|
797
|
18,218
|
||
|
Non-operating
casino and land
|
-
|
389
|
||
|
Property
and equipment, net
|
$
|
124,638
|
$
|
69,602
|
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 was $4.7 million,
$3.3 million and $3.0 million, respectively.
|
5.
|
GOODWILL
AND OTHER INTANGIBLE
ASSETS
|
Changes
in the carrying amount of goodwill for the years ended December 31, 2006 and
2005 are as follows by segment:
|
Amounts
in thousands
|
WMCK
|
CCAL
|
CRA
|
CM
|
Total
|
||
|
Balance
- January 1, 2005
|
$
|
7,232
|
1,009
|
-
|
604
|
$
|
8,845
|
|
Effect
of foreign currency translation
|
-
|
(107)
|
-
|
(76)
|
(183)
|
||
|
Balance
- 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% interest in CM
|
-
|
-
|
-
|
(345)
|
(345)
|
||
|
Impairment
|
-
|
-
|
-
|
(237)
|
(237)
|
||
|
Effect
of foreign currency translation
|
-
|
(91)
|
(123)
|
54
|
(160)
|
||
|
Balance
- December 31, 2006
|
$
|
7,232
|
811
|
4,219
|
-
|
$
|
12,262
|
Intangible
assets, not subject to amortization, include casino licenses for the following
properties as of December 31:
|
Amounts
in thousands
|
2006
|
2005
|
||
|
The
Caledon - South Africa (1)
|
$
|
1,636
|
$
|
1,820
|
|
Century
Casino Newcastle - South Africa
|
7,705
|
-
|
||
|
Total
casino licenses
|
$
|
9,341
|
$
|
1,820
|
(1)
Includes impact of foreign currency translation of approximately $0.2 million
in
2006.
-F19-
| 6. |
LONG-TERM
DEBT
|
Long-term
debt at December 31, 2006 and 2005 consists of the following:
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Revolving
Credit Facility - Cripple Creek
|
$
|
7,084
|
$
|
481
|
|
Construction
Term Loan - Central City
|
34,495
|
8,931
|
||
|
Term
Loan - Newcastle
|
7,146
|
-
|
||
|
Term
Loan - Caledon
|
6,743
|
9,091
|
||
|
Construction
Term Loan - Edmonton
|
16,364
|
-
|
||
|
Notes
payable and other
|
4,011
|
1,135
|
||
|
Capital
leases
|
862
|
85
|
||
|
Total
long-term debt
|
76,705
|
19,723
|
||
|
Less
current portion
|
(20,669)
|
(1,789)
|
||
|
Long-term
portion
|
$
|
56,036
|
$
|
17,934
|
Revolving
Credit Facility - Cripple Creek
On
April 21, 2000, the Company and Wells Fargo Bank (the “Bank”) entered into an
Amended and Restated Credit Agreement, which has since been further amended
(the
“Amended Womacks Agreement”). The Amended Womacks Agreement, which matures on
December 31, 2008, provided the Company with an original aggregate borrowing
commitment from the Bank under a Revolving Line of Credit Facility (“Womacks
RCF”) of $26 million. The aggregate commitment available to the Company was
reduced by $0.3 million on July 1, 2005 and October 1, 2005, by $0.6 million
on
January 1, 2006 and April 1, 2006, and will be further reduced by $0.7 million
at the beginning of each quarter effective July 1, 2006 through maturity. The
Amended Womacks Agreement is guaranteed by the Company and permits the Company
to enter into a management agreement with WMCK, subject to certain limitations.
The Amended Womacks Agreement permitted the Company to make capital
contributions to Womacks for a specified period of time for the repayment of
the
outstanding obligations under the Womacks RCF, and subsequently permits Womacks
to make cash distributions to the Company up to the amount of the Company’s
capital contributions (maximum of $8.5 million as of December 31, 2006, subject
to covenant limitations) made during the specified period. The commitment
available as of December 31, 2006, net of quarterly reductions, is $17.7 million
and, based on WMCK’s maximum leverage ratio (as defined in the Amended Womacks
Agreement), unused borrowing capacity is $5.3 million. Interest on the Amended
Womacks Agreement is variable based on the interest rate option selected by
the
Company, plus an applicable margin based on WMCK’s consolidated leverage ratio.
The Amended Womacks Agreement also requires a nonusage fee based on WMCK’s
consolidated leverage ratio on the unused portion of the commitment. The
principal balance outstanding under the Amended Womacks Agreement as of December
31, 2006 and 2005 was $7.1 million and $0.5 million, respectively.
The
Amended Womacks Agreement includes certain restrictive covenants on financial
ratios of WMCK. The most significant covenants include i) a maximum leverage
ratio no greater than 2.75 to 1.00 as of the quarter ending December 31, 2005
(decreasing as scheduled to 2.00 to 1.00 as of the quarter ending June 30,
2007
until the Womacks RCF terminates), ii) a minimum interest coverage ratio no
less
than 2.00 to 1.00, and iii) a TFCC ratio (a derivative of EBITDA, as defined
in
the Amended Womacks Agreement) of no less than 1.10 to 1.00. The Company is
in
compliance with the restrictive covenants on the financial ratios of WMCK
contained in the Womacks
RCF as of December 31, 2006 and 2005. The loan is collateralized by a deed
of
trust and a security agreement with assignments of lease, rents and furniture,
fixtures and equipment of Womacks property. The interest rate at December 31,
2006 was 8.25% for the balance of the loan outstanding under the prime based
provisions of the Amended Womacks Agreement.
-F20-
In
May
2000, we entered into a five-year interest rate swap agreement on $4.0 million
notional amount of debt under the Womacks RCF, whereby we paid a LIBOR-based
fixed rate of 7.95% and received a LIBOR-based floating rate reset quarterly
based on a three-month rate. This swap agreement expired on July 1, 2005. We
have not entered into any new swap agreements as of December 31, 2006. Our
objective for entering into the interest rate swap agreement, a derivative
instrument designated as a cash flow hedging instrument, was to eliminate the
variability of cash flows in the interest payments for a portion of the Womacks
RCF. We have determined that the cash flow hedges were highly effective.
Accordingly no net gain or loss has been recognized in earnings during 2005
and
2004 for hedge ineffectiveness. The effective portion on the interest rate
swaps
of $0.2 million and $0.4 million, net of income tax expense of less than $0.1
million and $0.1 million has been reported in comprehensive income on the
statement of shareholders’ equity and comprehensive income for 2005 and 2004,
respectively. Net additional interest expense to us under the swap agreement
was
$0.1 million and $0.3 million in 2005 and 2004, respectively. Including the
impact of the swap and the amortization of the deferred financing cost, the
effective rate on the borrowings under the Womacks RCF was 10.0%, 7.3% and
6.7%
for 2006, 2005 and 2004, respectively.
The
Company has a non-interest bearing stand-by letter of credit agreement for
$0.8
million with the Bank. The letter of credit is secured by the Amended Womacks
Agreement and expires on March 27, 2007. The letter of credit is a guarantee
to
Central City, Colorado for the Company’s completion of certain requirements
relating to the construction of the Central City casino. As of December 31,
2006, there was no balance outstanding under this letter of credit.
Construction
Term Loan - Central City
On
November 21, 2005, CTL entered into a $35 million loan agreement, that has
since
been amended (“Amended Tollgate Agreement”), with Wells Fargo Bank and a
syndicate of institutional lenders. The Amended Tollgate Agreement consists
of a
$32.5 million construction loan and a $2.5 million revolving line of credit
(“CC
Revolver”). The $32.5 million construction loan converted to a 60-month term
loan (“CC Term Loan”) on November 22, 2006 (“Conversion Date”). The CC Term Loan
and the CC Revolver will both mature on November 22, 2011. Beginning December
31, 2007, the amount outstanding under the CC Term Loan will be subject to
quarterly reductions of $0.6 million. Availability under the CC Revolver
will be
conditional upon CTL being in compliance with all of the financial and other
covenants contained in the loan agreement at the time of a particular drawdown,
and the Company’s continued ability to make certain representations and
warranties, including representations as to the absence of liens on the Central
City properties other than certain permitted liens, the absence of litigation
or
other developments that have or could reasonably be expected to have a material
adverse effect on the Company and its subsidiaries, and continued effectiveness
of the documents granting security for the credit facility. The interest
rate on
both loans, as amended, is the greater of 6.5% or the Prime Rate plus 2.0%
(10.25% as of December 31, 2006) and a service fee of 0.5% on the total
outstanding balance, payable monthly. Upon closing, CTL incurred a facility
fee
of $1.1 million payable to Wells Fargo Bank which was satisfied from the
proceeds of the loan. The Amended Tollgate Agreement is subject to a prepayment
fee, 9.3% at the Conversion Date, which decreases annually to 2.3% in the
17th
full
quarter after the Conversion Date of the loan through maturity; a nonusage
fee
of 0.75% on the unused portion of the total commitment; various reporting
requirements and various financial covenants, the most significant being
Senior
Leverage Ratio, Adjusted Fixed Charge Coverage, Limitation on Indebtedness
and
Restriction on Distributions. The Amended Tollgate Agreement is secured by
all
of CTL’s assets and is guaranteed by the Company. The
principal balance outstanding under the Amended Tollgate Agreement as of
December 31, 2006 was $34.5 million, of
which
$21.4 million is considered long-term in the accompanying December 31, 2006
consolidated balance sheet. On March 2, 2007, the Company repaid $10.0 million
of principal towards the CC Term Loan. On March 13, 2007, the Company repaid
$2.5 million towards the CC Revolver. CTL incurred a prepayment charge of
$0.3
million relating to these early repayments. This charge will be payable on
the
maturity of the Amended Tollgate Agreement.
-F21-
Term
Loan - Newcastle
On
July 20, 2006, CNEW entered into a loan agreement with Nedbank Limited
(“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 $7.1 million (ZAR 50.0 million). The net proceeds from
this
financing were used by CNEW for the construction of a new casino and hotel
in
Newcastle, South Africa. On December 7, 2006, the construction loan converted
to
a term loan, payable in monthly installments of approximately $0.2 million
(ZAR
1.1 million). The loan matures on December 7, 2011. The term loan bears interest
at South Africa’s prime interest rate less 1.5% (which equates to 11.0% as of
December 31, 2006) and is secured by the pledge of 100% of the total outstanding
common stock of CNEW.
As of
December 31, 2006, $7.1 million of principal is outstanding, of which $6.0
million is considered long-term in the accompanying December 31, 2006
consolidated balance sheet.
Term
Loan - Caledon
On
August
26, 2005, CCAL received a $9.4 million (ZAR 60.0 million) term loan from
Nedbank, the net proceeds of which were used for the repayment of existing
bank
debt and additional working capital needs. In connection with the loan, CCAL
and
Nedbank entered into a loan agreement specifying the terms of the loan. Pursuant
to the loan agreement, monthly principal and interest installment payments
of
$0.2 million (ZAR 1.3 million) are due on the first day of each month. The
loan
matures on September 1, 2010, at which time any outstanding principal and
interest will be due. The term loan bears interest at South Africa’s prime
interest rate less 1.5% (which equates to 11.0% as of December 31, 2006) and
is
secured by $1.4 million (ZAR 10.0 million) of CCAL’s assets and 100% of the
issued share capital of CCAL. CCAL has the option to prepay the loan, without
penalty, upon 90 days written notice. As of December 31, 2006, $6.7 million
of
principal is outstanding, of which $5.2 million is considered long-term in
the
accompanying December 31, 2006 consolidated balance sheet.
Construction
Term Loan - Edmonton
On
September 23, 2005, CRA agreed to the terms of a $17.2 million (CAD 20.0
million) credit facility with Canadian Western Bank (“CWB”) for the development
of the Century Casino & Hotel in Edmonton, Alberta, Canada. The credit
facility is initially structured as a construction loan maturing on the earlier
of 18 months from the initial construction draw or the receipt of a certified
architectural completion certificate, certificate of occupancy and casino
license. The construction loan bears interest at CWB’s Prime Lending Rate plus
1.25% (which equates to 7.25% as of December 31, 2006), payable on the first
day
of each month. No principal payments are required on the construction loan.
Upon
maturity of the construction loan, CWB will issue a term loan to CRA, maturing
within one to five years at CRA’s election. Proceeds from the term loan will be
used to pay theoutstanding balance of the construction loan. The interest rate
on the term loan will be based on the maturity date selected by CRA. As of
December 31, 2006, interest rates ranged from 6.65% to 6.80%, depending on
the
length of maturity selected. Monthly principal and interest payments on the
term
loan are based on a 10-year amortization, payable on the first day of each
month. The loan facility is secured by the assets of CRA and guaranteed by
the
Company. CRA has the option to prepay the construction loan without penalty.
CRA
may elect to prepay up to 10% of the original principal amount of the term
loan
annually without penalty or bonus; prepayment of any additional amounts is
subject to three months interest at the fixed interest rate. The
principal balance outstanding under the loan agreement with CWB as of December
31, 2006 was $16.4 million, of which $15.1 million is considered
long-term in the accompanying December 31, 2006 consolidated balance sheet.
-F22-
The
Company has two non-interest bearing stand-by letter of credit agreements
totaling $0.1 million with CWB. These letters of credit have no maturity date
and are cancelable upon written notice by CRA. CRA will incur a 1% charge for
each year the letters of credit are outstanding. These letters of credit
guarantee to the City of Edmonton, Alberta, Canada the completion of certain
requirements relating to the construction of the casino. As of December 31,
2006, there were no balances outstanding under these letters of
credit.
Notes
payable and other
An
unsecured note payable in the amount of $1.0 million to a minority interest
holder in CTL is payable in two equal installments. The first payment is due
on
July 11, 2007, with the second payment due six months later. The note bears
interest at 8%. As of December 31, 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 consolidated balance sheet. The
note
payable is subordinated to the Amended Tollgate Agreement discussed
above.
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 December 31, 2006 consolidated
balance sheet.
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 based on CRA’s weighted
average interest rate, has recorded this note at its net present value of $1.1
million. The note is classified as a current liability on the December 31,
2006
consolidated balance sheet.
As
mentioned in Note 3, 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 based on
CNEW’s weighted average interest rate, and is classified as a current liability
on the December 31, 2006 consolidated balance sheet.
-F23-
In
conjunction with the purchase of CNEW, the Company agreed to reimburse the
previous ownership of CNEW for all professional fees and disbursements incurred
by the previous ownership relating to the development of the new casino between
the date the agreements were signed and date of closing. As agreed, the
reimbursement shall take place when the directors of CNEW consider that the
available cash resources of CNEW so permit and will be paid from CNEW’s
available funds. As a result of this agreement, the Company has a current
liability of $1.1 million (ZAR 7.5 million) on the December 31, 2006
consolidated balance sheet.
Deferred
financing charges, which are reported as a component of other assets, are
summarized as follows:
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Deferred
financing charges - current
|
$
|
898
|
$
|
478
|
|
Deferred
financing charges - long-term
|
1,168
|
1,645
|
||
|
Total
|
$
|
2,066
|
$
|
2,123
|
Amortization
expense relating to these deferred financing charges for the years ended
December 31, 2006, 2005 and 2004 totaled $0.2 million, $0.4 million and less
than $0.1 million, respectively. In 2006, we capitalized approximately $0.3
million of deferred financing charges towards the construction of our new
casinos.
The
consolidated weighted average interest rate on all borrowings for Century
Casinos, Inc. and subsidiaries was 11.1%, 7.0% and 9.1% for the years ended
December 31, 2006, 2005, and 2004, respectively, excluding the amortization
of
deferred financing charges. Construction financing for the Central City,
Colorado project, at a weighted average interest rate of 13.1%, accounted for
approximately 51% of the average outstanding debt during 2006. Repayment of
high
interest rate debt in South Africa helped limit the increase in the weighted
average interest rate for 2005.
As
of
December 31, 2006, scheduled maturities of all long-term debt are as follows:
|
Amounts
in thousands
|
Future
minimum
lease
payment
of
capital leases
|
Other
debt
|
|
|
2007
-
|
$
210
|
$
20,499
|
|
|
2008
-
|
201
|
14,589
|
|
|
2009
-
|
202
|
7,348
|
|
|
2010
-
|
196
|
7,175
|
|
|
2011
-
|
180
|
7,907
|
|
|
Thereafter
|
-
|
18,325
|
|
|
$
989
|
$
75,843
|
||
|
Less
amounts representing interest
|
127
|
-
|
|
|
Total
|
$
862
|
$
75,843
|
Total
|
|
Current
|
$
170
|
$
20,499
|
$
20,669
|
|
Long-Term
|
$
692
|
$
55,344
|
$
56,036
|
-F24-
|
7.
|
ACCOUNTS
PAYABLE AND ACCRUED
LIABILITIES
|
Accounts
payable and accrued liabilities are composed of the following at December 31,
2006 and 2005:
|
Amounts
in thousands
|
2006
|
2005
|
||
|
Accounts
payable
|
$
|
2,719
|
$
|
1,310
|
|
Accrued
points liability
|
414
|
241
|
||
|
Accrued
construction expenditures
|
698
|
1,962
|
||
|
Other
accrued liabilities
|
6,794
|
1,991
|
||
|
Total
|
$
|
10,625
|
$
|
5,504
|
|
8.
|
SHAREHOLDERS’
EQUITY
|
In
July
2005, the Company filed a shelf registration statement with the SEC, under
which
we could issue up to $50.0 million in aggregate issue price of common stock,
preferred stock, debt securities and depository certificates. In October 2005,
under this shelf registration, we issued 7,132,667 shares of common stock,
in
the form of Austrian Depository Certificates (“ADCs”), through an underwriter,
to retail and institutional investors in the Republic of Austria and to
institutional investors in other countries in Europe. Each ADC, which is traded
on the VSE, is equivalent to one share of our common stock. Each holder of
an
ADC is entitled to all the rights and preferences of, and subject to all of
the
limitations of, the underlying share of common stock represented by the ADC
(including dividend, voting, redemption and liquidation rights and preferences).
The number of ADCs and rights of the ADC holders associated with the ADCs held
by such persons are evidenced in a modifiable global certificate which is issued
and held in safe custody by the Oesterreichische Kontrollbank
Aktiengesellschaft. The ADCs are subject to the laws of the Republic of Austria.
The shares of our common stock represented by the ADCs are issued under the
Delaware General Corporation Law. Therefore, the corporate legal matters related
to our shares of common stock underlying the ADCs are governed by Delaware
law.
Net proceeds from this issuance were approximately $46.2 million.
In
May 2006, the Company issued 600,000 new shares of its common stock for stock
options exercised in cash at an exercise price of $0.75 per share. In
August
2005, the Company issued 950,000 new shares of its common stock, at an exercise
price of $1.50 per share, for stock options exercised in cash.
The
Company’s Board of Directors has approved a discretionary program to repurchase
up to $5.0 million of the Company’s outstanding common stock. The Company
did not purchase any shares of its common stock on the open market in 2006
nor
2005. The total remaining authorization under the repurchase program was $1.2
million as of December 31, 2006. The repurchase program has no set expiration
or
termination date.
There
were 164,376 shares in treasury as of December 31, 2006, at an average cost
per
share of $2.26. We re-issued 23,500 shares of treasury stock in 2006 for stock
options exercised in cash, 16,000 of which were to satisfy a director’s options.
In 2005, a total of 603,000
shares were re-issued to satisfy option exercises, 40,000 of which were to
satisfy directors’ options. Subsequent to December 31, 2006, we re-issued 47,000
shares in connection with option exercises.
-F25-
Subsidiary
Preference Shares - In
connection with the granting of a gaming license to CCAL by the Western Cape
Gambling and Racing Board in April 2000, CCAL issued a total of 200 preference
shares, 100 shares each to two minority shareholders, each of whom has one
seat
on the board of directors of CCAL, neither of whom is an officer,
director or affiliate of CCI. The preference shares are not cumulative
nor redeemable. The preference shares entitle the holders of the shares to
total
dividends of 20% of the after-tax profits directly attributable to the CCAL
casino business subject to working capital and capital expenditure requirements
and CCAL loan obligations and liabilities as determined by the directors of
CCAL. If the CCAL casino business is sold or otherwise dissolved, the preference
shareholders are entitled to 20% of any surplus directly attributable to the
CCAL casino business, net of all liabilities attributable to the CCAL casino
business.
In
January 2006, 200 preference shares of a new class (“Class A shares”) were
authorized for issuance. The Class A shares are not cumulative nor redeemable.
Each Class A share entitles the holder to dividends of 0.009% of the annual
gross gambling revenue of the Caledon Hotel, Spa and Casino after the deduction
of gaming taxes and value added tax. Furthermore, should the casino business
be
sold or otherwise dissolved, for each Class A share held, the shareholder would
be entitled to 0.009% of any surplus directly attributable to the casino
business, net of all liabilities attributable to the casino business. The
holders of Class A shares will also be entitled to a one time dividend of ZAR
5,000 per share, offset by any amounts owed by the preference shareholder to
CCAL. These Class A shares were made available to the original preference
shareholders in exchange for their original preference shares. As of December
31, 2006, one preference shareholder accepted the offer to transfer all 100
of
its original preference shares for 100 of the new Class A shares.
CCAL
paid
$0.1 million of preference dividends in 2006. Preference dividends were not
paid
nor were payable in 2005 and 2004.
|
9.
|
STOCK-BASED
COMPENSATION
|
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 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 December 31, 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 December 31, 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 December 31, 2006, there were 1,368,710 options
outstanding to employees of the Company, of which 1,343,710 options were issued
under the EEIP and 25,000 options have been issued under the 2005 Plan.
-F26-
Additionally,
60,000 options were issued under the EEIP to independent directors in
2004.
The
fair
value of options granted under the Company’s stock based compensation plans were
estimated on the date of grant using the Black-Scholes option pricing model
with
the following assumptions:
|
2006
|
2005
|
2004
|
||
|
Weighted-average
risk-free interest rate
|
-
|
4.50%
|
4.00%
|
|
|
Weighted-average
expected life
|
-
|
10.0
yrs
|
9.5
yrs
|
|
|
Weighted-average
expected volatility
|
-
|
46.3%
|
55.1%
|
|
|
Weighted-average
expected dividends
|
-
|
$
0
|
$
0
|
The
weighted-average fair value of options granted was $4.88 in 2005 and $1.97
in
2004. A total of 35,000 and 1,352,710 were granted in 2005 and 2004,
respectively. No options were granted to employees under the 2005 Plan in 2006.
Transactions
regarding the Company’s stock based compensation plans are as
follows:
|
2006
|
2005
|
2004
|
||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||
|
Average
|
Average
|
Average
|
||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||
|
Employee
Stock Options:
|
||||||||
|
Outstanding
at January 1,
|
1,986,210
|
$
2.33
|
3,464,210
|
$
1.92
|
2,160,300
|
$
1.29
|
||
|
Granted
|
-
|
-
|
35,000
|
7.68
|
1,352,710
|
2.93
|
||
|
Exercised
|
(607,500)
|
0.78
|
(1,513,000)
|
1.50
|
(8,000)
|
1.75
|
||
|
Cancelled
or forfeited
|
(10,000)
|
7.68
|
-
|
-
|
(40,800)
|
2.60
|
||
|
Outstanding
at December 31,
|
1,368,710
|
2.98
|
1,986,210
|
2.33
|
3,464,210
|
1.92
|
||
|
Options
exercisable at December 31,
|
419,614
|
$
2.85
|
759,872
|
$
1.15
|
2,136,500
|
$
1.29
|
||
|
Intrinsic
Value of Options (in millions):
|
||||||||
|
Outstanding
|
$
11.2
|
$
12.4
|
$
25.0
|
|||||
|
Exercisable
|
$
3.5
|
$
5.7
|
$
16.8
|
|||||
The
aggregate intrinsic value represents the difference between the Company’s
closing stock price of $11.16, $8.60 and $9.13 as of December 29, 2006, December
30, 2005 and December 31, 2004, respectively, and the exercise price multiplied
by the number of options outstanding as of that date.
The
weighted-average contractual life for options outstanding at December 31, 2006
is 6.9 years.
As
of
December 31, 2006, there were an additional 64,000 options outstanding to
independent directors of the Company with a weighted average exercise price
of
$3.08.
-F27-
For
the
year ended December 31, 2006, the Company recorded $0.4 million ($0.2 million,
net of taxes) for stock-based compensation expense related to stock option
grants made in prior years that vested during the year. This amount is included
in general and administrative expense. The impact to both basic and diluted
earnings per share for the year ended December 31, 2006 was $0.01. There was
no
capitalized stock-based compensation expense.
At
December 31, 2006, there is less than $0.1 million of total unrecognized
compensation expense related to unvested stock options remaining to be
recognized. This amount will be recognized during 2007.
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 year ended December 31, 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 2005 and 2004; however, pro
forma stock-based compensation expense for 2005 and 2004 was as
follows:
|
Amounts
in thousands, except for share information
|
2005
|
2004
|
|||
|
Net
earnings, as reported
|
$
|
4,481
|
$
|
4,738
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
515
|
1,114
|
|||
|
Pro
forma net earnings
|
$
|
3,966
|
$
|
3,624
|
|
|
Earnings
per share
|
|||||
|
Basic
|
As
reported
|
$
|
0.28
|
$
|
0.35
|
|
Pro
forma
|
$
|
0.25
|
$
|
0.27
|
|
|
Diluted
|
As
reported
|
$
|
0.25
|
$
|
0.30
|
|
Pro
forma
|
$
|
0.22
|
$
|
0.23
|
|
|
10.
|
IMPAIRMENTS
AND OTHER WRITE-OFFS
|
|
Impairments
and other write-offs consist of the
following:
|
|
Amounts
in thousands
|
For
the Year Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
||||
|
Recoveries
of receivables and advances
|
$
|
(402)
|
$
|
(30)
|
$
|
(218)
|
|
Write-off
of property held for sale
|
389
|
32
|
-
|
|||
|
Goodwill
impairment - Century Casino Millennium
|
237
|
-
|
-
|
|||
|
Write-down
of property and equipment
|
639
|
-
|
-
|
|||
|
Other
|
31
|
(63)
|
3
|
|||
|
Total
Impairments and Other Write-Offs
|
894
|
(61)
|
(215)
|
|||
Recoveries
of receivables and advances
On
September 28, 2006, the Company sold its interest in a casino development
project located in Gauteng, South Africa for $5.7 million (ZAR 43.3 million),
less commissions of $0.1 million (ZAR 1.3 million). Of this amount, $0.4 million
(ZAR 3.0 million) related to the recovery of the previously written off loan.
-F28-
Write-down
of property held for sale
In
2005,
the Company wrote down non-operating casino property and land held for sale
located in Wells, Nevada to its appraised value less estimated costs to sell.
In
2006, the Company wrote off the remaining balance of $0.4 million.
Goodwill
impairment - Century Casino Millennium
The
Company performs annual tests of its goodwill and indefinite lived intangible
assets in accordance with SFAS 142 “Goodwill and Other Intangible Assets.” As a
result of its 2006 testing, CCI determined that the goodwill at CM is impaired.
The value of CM was determined using the present value of future cash flows,
which depends on a number of significant estimates including long-term revenue
growth, CM’s ability to manage expenses, expected operating margins and the
discount rate used to calculate the present value of cash flows. The Company
is
reviewing several different courses of action to improve overall operations
at
CM.
Write-off
of property and equipment
For
the
year ended December 31, 2006, the Company’s majority owned subsidiary, CTL,
wrote off approximately $0.6 million of fixed assets that were deemed
obsolete.
|
11.
|
INCOME
TAXES
|
The
Company’s provision for income taxes is summarized as follows:
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Federal
- Current
|
$
|
(852)
|
$
|
(172)
|
$
|
(308)
|
|
Federal
- Deferred
|
(121)
|
42
|
604
|
|||
|
Provision
for federal income taxes
|
(973)
|
(130)
|
296
|
|||
|
State
- Current
|
(122)
|
(54)
|
(45)
|
|||
|
State
- Deferred
|
(16)
|
6
|
82
|
|||
|
Provision
for state income taxes
|
(138)
|
(48)
|
37
|
|||
|
Foreign
- Current
|
2,096
|
720
|
548
|
|||
|
Foreign
- Deferred
|
(851)
|
(195)
|
(132)
|
|||
|
Provision
for foreign income taxes
|
1,245
|
525
|
416
|
|||
|
Total
Provision for income taxes
|
$
|
134
|
$
|
347
|
$
|
749
|
The
Company’s effective income tax rate differs from the statutory federal income
tax rate as follows:
|
2006
|
2005
|
2004
|
||||
|
Federal
income tax statutory rate
|
34.0%
|
34.0%
|
34.0%
|
|||
|
Foreign
income taxes
|
(32.4%)
|
(21.0%)
|
(16.1%)
|
|||
|
State
income tax (net of federal benefit)
|
(1.4%)
|
(0.8%)
|
0.6%
|
|||
|
Non-deductible
write-offs (recoveries) and expenses
|
-
|
-
|
(0.9%)
|
|||
|
Effect
of foreign currency translation adjustment for sale of
subsidiary
|
-
|
-
|
(2.0%)
|
|||
|
Effect
of stock option exercises
|
(2.3%)
|
(10.9%)
|
-
|
|||
|
IRS
audit accrual
|
-
|
2.6%
|
-
|
|||
|
Permanent
and other items
|
4.2%
|
4.7%
|
(2.2%)
|
|||
|
Total
effective income tax rate
|
2.1%
|
8.6%
|
13.4%
|
-F29-
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The Company’s deferred incomes taxes
at December 31, 2006 and 2005 are summarized as follows:
|
Amounts
in thousands
Deferred
tax assets (liabilities) - U.S. federal and state:
|
2006
|
2005
|
||
|
Deferred
tax (liabilities) - non-current:
|
||||
|
Amortization
of goodwill for tax
|
$
|
(1,102)
|
$
|
(880)
|
|
Deferred
tax assets - non-current:
|
||||
|
Property
and equipment
|
666
|
434
|
||
|
NOL
carryforward
|
1,833
|
434
|
||
|
Write-down
of non-operating casino property
|
181
|
181
|
||
|
FAS
123R stock amortization
|
134
|
-
|
||
|
Other
|
51
|
50
|
||
|
Total
deferred tax assets - non-current
|
2,865
|
1,099
|
||
|
Net
deferred tax assets - non-current
|
1,763
|
219
|
||
|
Prepaid
expenses - current
|
(112)
|
(111)
|
||
|
Accrued
liabilities and other - current
|
96
|
103
|
||
|
Net
deferred tax (liabilities) assets - current
|
(16)
|
(8)
|
||
|
Total
deferred tax assets - U.S. federal and state
|
$
|
1,747
|
$
|
211
|
|
Deferred
tax assets (liabilities) - foreign:
|
||||
|
Deferred
tax (liabilities) - non-current:
|
||||
|
Property
and equipment
|
$
|
(563)
|
$
|
(104)
|
|
Deferred
tax assets - non-current:
|
||||
|
NOL
carryforward
|
1,400
|
297
|
||
|
Accrued
liabilities and other
|
1,306
|
187
|
||
|
Total
deferred tax assets - non-current
|
2,706
|
484
|
||
|
Net
deferred tax assets - non-current
|
2,143
|
380
|
||
|
Accrued
liabilities and other - current
|
209
|
125
|
||
|
Prepaid
expenses - current
|
(16)
|
(53)
|
||
|
Net
deferred tax assets - current
|
193
|
72
|
||
|
Total
deferred tax assets - foreign
|
$
|
2,336
|
$
|
452
|
|
Net
deferred tax assets
|
$
|
4,083
|
$
|
663
|
-F30-
| 12. |
EARNINGS
PER SHARE
|
Basic
and
diluted earnings per share for the years ended December 31, 2006, 2005 and
2004
were computed as follows:
|
Amounts
in thousands, except share data
|
2006
|
2005
|
2004
|
|||
|
Basic
Earnings Per Share:
|
||||||
|
Net
earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
|
Weighted
average common shares
|
22,777,707
|
15,923,585
|
13,683,016
|
|||
|
Basic
earnings per share
|
$
|
0.33
|
$
|
0.28
|
$
|
0.35
|
|
Diluted
Earnings Per Share:
|
||||||
|
Net
earnings
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
|
Weighted
average common shares
|
22,777,707
|
15,923,585
|
13,683,016
|
|||
|
Effect
of dilutive securities:
|
||||||
|
Stock
options and warrants
|
1,149,042
|
2,155,588
|
2,158,207
|
|||
|
Dilutive
potential common shares
|
23,926,749
|
18,079,173
|
15,841,223
|
|||
|
Diluted
earnings per share
|
$
|
0.32
|
$
|
0.25
|
$
|
0.30
|
Dilutive
potential common shares includes the impact of unexercised stock options using
the treasury stock method. For the year ended December 31, 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.
-F31-
13. SEGMENT
AND GEOGRAPHIC INFORMATION
We
are
managed in seven segments, based primarily on our casino properties. Each casino
property derives its revenues primarily from casino operations, room rentals
and
food and beverage sales. Our segments include:
Cripple
Creek, Colorado
includes
the operating results of WMCK and subsidiaries, which own Womacks in Cripple
Creek, Colorado.
Central
City, Colorado
includes
the operating results of CTI, which owns a majority interest in and operates
the
Century Casino & Hotel in Central City, Colorado.
Caledon,
South Africa
includes
the operating results of CCAL, which operates the Caledon Hotel, Spa and Casino,
and its related food service operation.
Newcastle,
South Africa
includes
the operating results of CNEW, which owns a majority interest in and operates
Century Casino Newcastle in Newcastle, South Africa and its related food service
operation.
Edmonton,
Canada
includes
the financial results of CRA, which operates the Century Casino & 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 CM located in Prague, Czech Republic.
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.
Segment
information as of and for the years ended December 31, 2006, 2005 and 2004
are
presented below.
|
Long-Lived
Assets*
|
||||||
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Cripple
Creek (Colorado, USA)
|
$
|
29,324
|
$
|
30,439
|
$
|
30,218
|
|
Central
City (Colorado, USA)
|
43,952
|
21,105
|
9,200
|
|||
|
Caledon
(South Africa)
|
17,188
|
17,926
|
18,634
|
|||
|
Newcastle
(South Africa)
|
21,499
|
-
|
-
|
|||
|
Edmonton
(Alberta, Canada)
|
31,927
|
8,750
|
-
|
|||
|
Other
Operating:
|
||||||
|
Casino
Millennium (Czech Republic)
|
496
|
-
|
-
|
|||
|
Cruise
Ships (International)
|
1,032
|
854
|
386
|
|||
|
Corporate
|
823
|
1,010
|
1,167
|
|||
|
Total
|
$
|
146,241
|
$
|
80,084
|
$
|
59,605
|
*
Long-lived assets consist of property and equipment, goodwill and casino
licenses.
-F32-
|
Total
Assets
|
||||||
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Cripple
Creek (Colorado, USA)
|
$
|
31,465
|
$
|
33,151
|
$
|
33,101
|
|
Central
City (Colorado, USA)
|
48,661
|
23,219
|
9,268
|
|||
|
Caledon
(South Africa)
|
19,134
|
19,584
|
21,595
|
|||
|
Newcastle
(South Africa)
|
24,535
|
-
|
-
|
|||
|
Edmonton
(Alberta, Canada)
|
39,305
|
9,654
|
-
|
|||
|
Other
operating:
|
||||||
|
Casino
Millennium (Czech Republic)
|
2,166
|
-
|
-
|
|||
|
Cruise
Ships (International)
|
1,839
|
1,629
|
1,028
|
|||
|
Corporate
|
30,755
|
36,111
|
6,212
|
|||
|
Total
|
$
|
197,860
|
$
|
123,348
|
$
|
71,204
|
|
Net
Operating Revenue
|
||||||
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Cripple
Creek (Colorado, USA)
|
$
|
16,255
|
$
|
17,111
|
$
|
17,561
|
|
Central
City (Colorado, USA)
|
8,617
|
6
|
-
|
|||
|
Caledon
(South Africa)
|
18,294
|
17,015
|
14,970
|
|||
|
Newcastle
(South Africa)
|
6,176
|
-
|
-
|
|||
|
Edmonton
(Alberta, Canada)
|
2,325
|
57
|
-
|
|||
|
Other
operating:
|
||||||
|
Casino
Millennium (Czech Republic)
|
1,610
|
-
|
-
|
|||
|
Cruise
Ships (International)
|
2,991
|
3,151
|
2,769
|
|||
|
Corporate
|
17
|
105
|
465
|
|||
|
Total
|
$
|
56,285
|
$
|
37,445
|
$
|
35,765
|
|
Net
Earnings
|
||||||
|
Amounts
in thousands
|
2006
|
2005
|
2004
|
|||
|
Cripple
Creek (Colorado, USA)
|
$
|
2,563
|
$
|
3,055
|
$
|
3,300
|
|
Central
City (Colorado, USA)
|
(1,026)
|
458
|
-
|
|||
|
Caledon
(South Africa)
|
3,816
|
3,132
|
2,194
|
|||
|
Newcastle
(South Africa)
|
906
|
-
|
-
|
|||
|
Edmonton
(Alberta, Canada)
|
(1,156)
|
(76)
|
-
|
|||
|
Other
operating:
|
||||||
|
Casino
Millennium (Czech Republic)
|
(302)
|
-
|
-
|
|||
|
Cruise
Ships (International)
|
494
|
839
|
798
|
|||
|
Corporate
|
2,334
|
(2,927)
|
(1,554)
|
|||
|
Total
|
$
|
7,629
|
$
|
4,481
|
$
|
4,738
|
-F33-
14. COMMITMENTS,
CONTINGENCIES AND OTHER MATTERS
Litigation
- From
time to time we are subject to various legal proceedings arising from normal
business operations. We do not expect the outcome of such proceedings, either
individually or in the
aggregate, to have a material effect on our financial position, cash flows
or
results of operations.
Employee
Benefit Plan
- In
March 1998, we adopted a 401(k) Savings and Retirement Plan (the “Plan”). The
Plan allows eligible employees to make tax-deferred contributions that are
matched by the Company up to a specified level. Participants become fully vested
in employer contributions over a six-year period. The Company contributed less
than $0.1 million to the Plan in each of 2006, 2005 and 2004.
Operating
Lease Commitments and Purchase Options
- We
have
entered into certain noncancelable operating leases for real property and
equipment. Rental expense for the years ended December 31, 2006, 2005 and 2004
was $0.7 million, $0.4 million and $0.4 million, respectively.
We
have
an agreement to lease parking spaces from the City of Cripple Creek through
2010. Under the terms of this agreement, we may purchase the property for $3.3
million, less cumulative lease payments ($0.8 million through December 31,
2006), at any time during the lease term.
Following
is a summary of operating lease commitments as of December 31,
2006:
|
Amounts
in thousands
|
||
|
Year
ending December 31,
|
Amount
|
|
|
2007
|
$
|
1,062
|
|
2008
|
521
|
|
|
2009
|
385
|
|
|
2010
|
272
|
|
|
2011
|
123
|
|
|
Thereafter
|
979
|
|
|
Total
|
$
|
3,342
|
Stock
Redemption Requirement
-
Colorado gaming regulations require the disqualification of any shareholder
who
may be determined by the Colorado Division of Gaming to be unsuitable as an
owner of a Colorado casino. Unless a sale of such common stock to an acceptable
party could be arranged, we would repurchase the common stock of any shareholder
found to be unsuitable under the regulations. We could effect the repurchase
with cash, Redemption Securities, as such term is defined in our Certificate
of
Incorporation and
having terms and conditions as shall be approved by the Board of
Directors,
or a
combination thereof.
|
15.
|
TRANSACTIONS
WITH RELATED PARTIES
|
We
have
entered into compensation agreements with certain members of the Board of
Directors. Specifically, we have entered into separate management agreements
with Flyfish Casino Consulting AG (“Flyfish”), a management company controlled
by Erwin Haitzmann’s family trust/foundation and with Focus Casino Consulting AG
(“Focus”), a management company controlled by Peter Hoetzinger’s family
trust/foundation, to secure the services of each director, respectively.
Included in the consolidated statements of earnings for the years ended December
31, 2006, 2005 and 2004 are Flyfish charges in the amounts of $0.5 million
for
all three years then ended and Focus charges in the amounts of $0.5 million
for
all three years then ended.
Erwin
Haitzmann, Peter Hoetzinger and their respective family trusts/foundations
own a
minority interest in CRL. Collectively they own approximately 3.5% of CRL’s
outstanding shares of common stock.
There
have been no transactions with management for the periods reported, except
as
otherwise disclosed herein.
-F34-
16. UNAUDITED
SUMMARIZED QUARTERLY DATA
Summarized
quarterly financial data for 2006 and 2005 is as follows:
|
Amounts
in thousands,
except
share information:
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|
Year
ended December 31, 2006
|
||||
|
Net
operating revenue
|
$
9,474
|
$
11,869
|
$
16,978
|
$
17,964
|
|
Earnings
(loss) from operations
|
$
1,528
|
$
1,056
|
$
2,666
|
$
(2,000)
|
|
Net
earnings (1)
|
$
1,690
|
$
1,331
|
$
1,851
|
$
2,757
|
|
Basic
earnings per share (2)
|
$
0.08
|
$
0.06
|
$
0.08
|
$
0.12
|
|
Diluted
earnings per share (2)
|
$
0.07
|
$
0.06
|
$
0.08
|
$
0.12
|
|
Year
ended December 31, 2005
|
||||
|
Net
operating revenue
|
$
9,228
|
$
8,908
|
$
10,030
|
$
9,279
|
|
Earnings
from operations
|
$
1,558
|
$
877
|
$
1,945
|
$
1,465
|
|
Net
earnings
|
$
1,007
|
$
509
|
$
1,281
|
$
1,684
|
|
Basic
earnings per share (2)
|
$
0.07
|
$
0.04
|
$
0.09
|
$
0.08
|
|
Diluted
earnings per share (2)
|
$
0.06
|
$
0.03
|
$
0.08
|
$
0.07
|
|
(1)
|
During
the 4thquarter
2006, the Company
recorded revenue associated with the sale of its interest in a
casino development project located in Gauteng, South Africa for
$5.7
million (ZAR 43.3 million), less commissions of $0.1 million (ZAR
1.3
million).
|
|
(2)
|
Sum
of quarterly results may differ from annual results presented in
the
Statement of Earnings and Note 12, Earnings per Share, to the Consolidated
Financial Statements because of
rounding.
|
-F35-