10-Q 1 q032004.txt 10Q--3RD QUARTER, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ___X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR _______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________ Commission file number 0-22290 ------------ CENTURY CASINOS, INC. --------------------- (Exact name of registrant as specified in its charter) DELAWARE 84-1271317 -------- ----------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 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) (Former address of principal executive offices) (Registrant's former telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes___ No _X_ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, $0.01 par value, 13,681,900 shares outstanding as of October 28, 2004. -1- CENTURY CASINOS, INC. FORM 10-Q INDEX Page PART I FINANCIAL INFORMATION (unaudited) Number Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 3 Condensed Consolidated Statements of Earnings for the Three Months Ended September 30, 2004 and 2003 4 Condensed Consolidated Statements of Earnings for the Nine Months Ended September 30, 2004 and 2003 5 Condensed Consolidated Statements of Comprehensive Earnings for the Three Months Ended September 30, 2004 and 2003 6 Condensed Consolidated Statements of Comprehensive Earnings for the Nine Months Ended September 30, 2004 and 2003 6 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 7 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 55 Item 4. Controls and Procedures 56 PART II OTHER INFORMATION (unaudited) Item 1. Legal Proceedings 57 Item 6. Exhibits and Reports on Form 8-K 57 SIGNATURES 58 -2- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- Dollar amounts in thousands, except for share information September 30, December 31, ------------- ------------ 2004 2003 ---- ---- (Unaudited) ----------- ASSETS Current Assets: Cash and cash equivalents $ 4,961 $ 4,729 Restricted cash 618 598 Receivables, net 401 269 Prepaid expenses 604 441 Inventories 175 131 Other current assets 28 28 Deferred income taxes 74 111 ----------- ----------- Total current assets 6,861 6,307 Property and Equipment, net 39,119 36,796 Goodwill, net 8,669 8,088 Casino License Acquisition Costs, net 1,876 1,760 Deferred Income Taxes 624 666 Equity Investment in Unconsolidated Subsidiary 64 - Other Assets 1,078 1,200 ----------- ----------- Total $ 58,291 $ 54,817 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 2,134 $ 2,136 Accounts payable and accrued liabilities 3,262 1,979 Accrued payroll 1,420 1,268 Taxes payable 1,411 1,088 ----------- ----------- Total current liabilities 8,227 6,471 Long-Term Debt, less current portion 12,924 14,913 Other Non-current Liabilities 169 371 Minority Interest 70 14 Commitments and Contingencies - - Shareholders' Equity: Preferred stock; $.01 par value; 20,000,000 shares authorized; no shares issued or outstanding - - Common stock; $.01 par value; 50,000,000 shares authorized; 14,485,776 shares issued; 13,681,900 an 13,680,500 shares outstanding, respecti 145 145 Additional paid-in capital 21,528 21,529 Accumulated other comprehensive earnings 2,601 2,034 Retained earnings 14,456 11,172 ----------- ----------- 38,730 34,880 Treasury stock - 803,876 and 805,276 shares at cost, respectively (1,829) (1,832) ----------- ----------- Total shareholders' equity 36,901 33,048 ----------- ----------- Total $ 58,291 $ 54,817 =========== ===========
See notes to condensed consolidated financial statements. -3- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) -------------------------------------------------------------------------------- For The Three Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Operating Revenue: Casino $ 9,349 $ 8,525 Hotel, food and beverage 1,258 932 Other 267 106 ----------- --------- 10,874 9,563 Less promotional allowances 1,205 1,285 ----------- --------- Net operating revenue 9,669 8,278 ----------- --------- Operating Costs and Expenses: Casino 3,655 3,132 Hotel, food and beverage 843 691 General and administrative 2,292 2,004 Depreciation 732 675 ----------- --------- Total operating costs and expenses 7,522 6,502 ----------- --------- Loss from unconsolidated subsidiary (45) - ----------- --------- Earnings from Operations 2,102 1,776 Non-operating Income (expense): Interest expense (389) (512) Other income, net 37 113 Non-operating items from unconsolidated subsidiary 6 - ----------- --------- Non-operating expense, net (346) (399) ----------- --------- Earnings before Income Taxes and Minority Interest 1,756 1,377 Provision for income taxes 498 463 ----------- --------- Earnings before Minority Interest 1,258 914 Minority interest in subsidiary earnings (25) - ----------- --------- Net Earnings $ 1,233 $ 914 =========== ========= Earnings Per Share: Basic $ 0.09 $ 0.07 =========== ========= Diluted $ 0.08 $ 0.06 =========== =========
See notes to condensed consolidated financial statements. -4- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) -------------------------------------------------------------------------------- For The Nine Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Operating Revenue: Casino $ 26,223 $ 23,670 Hotel, food and beverage 3,197 2,570 Other 543 401 ----------- ---------- 29,963 26,641 Less promotional allowances 3,316 3,429 ----------- ---------- Net operating revenue 26,647 23,212 ----------- ---------- Operating Costs and Expenses: Casino 10,132 8,498 Hotel, food and beverage 2,245 1,841 General and administrative 6,494 5,746 Depreciation 2,114 1,986 ----------- ---------- Total operating costs and expenses 20,985 18,071 ----------- ---------- Income from unconsolidated subsidiary 6 - ----------- ---------- Earnings from Operations 5,668 5,141 Non-operating Income (expense): Interest expense (1,201) (1,564) Other income, net 163 242 Non-operating items from unconsolidated subsidiary (2) - ----------- ---------- Non-operating expense, net (1,040) (1,322) ----------- ---------- Earnings before Income Taxes and Minority Interest 4,628 3,819 Provision for income taxes 1,288 1,391 ----------- ---------- Earnings before Minority Interest 3,340 2,428 Minority interest in subsidiary earnings (56) (8) ----------- ---------- Net Earnings $ 3,284 $ 2,420 =========== ========== Earnings Per Share: Basic $ 0.24 $ 0.18 =========== ========== Diluted $ 0.21 $ 0.16 =========== ==========
See notes to condensed consolidated financial statements. -5- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (Unaudited) -------------------------------------------------------------------------------- For The Three Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Net Earnings $ 1,233 $ 914 Foreign currency translation adjustments (573) 951 Change in fair value of interest rate swaps, net of income taxes 35 97 -------- -------- Comprehensive Earnings $ 695 $ 1,962 ======== ======== For The Nine Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Net Earnings $ 3,284 $ 2,420 Foreign currency translation adjustments 441 2,261 Change in fair value of interest rate swaps, net of income taxes 126 215 ------- -------- Comprehensive Earnings $ 3,851 $ 4,896 ======= ======== See notes to condensed consolidated financial statements.
-6- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -------------------------------------------------------------------------------- For The Nine Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Cash Flows from Operating Activities: Net earnings $ 3,284 $ 2,420 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 2,114 1,986 Amortization of deferred financing costs 61 84 Deferred tax expense 6 126 Minority interest in subsidiary earnings 56 8 Income from unconsolidated subsidiary (4) - Gain on disposition of real estate option and other assets (35) (59) Other 7 (8) Changes in operating assets and liabilities: Receivables (130) (185) Prepaid expenses and other assets (365) (236) Accounts payable and accrued liabilities 332 (341) Accrued payroll 144 (138) Taxes payable 287 205 --------- --------- Net cash provided by operating activities 5,757 3,862 --------- --------- Cash Flows from Investing Activities: Purchases of property and equipment (3,676) (1,769) Acquisition of subsidiary, net of $664 in cash acquired - (1,259) Restricted cash decrease - 49 Proceeds from disposition of assets 206 258 --------- --------- Net cash used in investing activities (3,470) (2,721) --------- ---------
(continued) -7- CENTURY CASINOS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -------------------------------------------------------------------------------- For the Nine Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Cash Flows from Financing Activities: Proceeds from borrowings $ 21,763 $ 21,710 Principal repayments (23,883) (23,442) Proceeds from exercise of options 2 8 Purchases of treasury stock - (431) ---------- ---------- Net cash used in financing activities (2,118) (2,155) ---------- ---------- Effect of exchange rate changes on cash 63 325 ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents 232 (689) Cash and Cash Equivalents at Beginning of Period 4,729 4,582 ----------- ---------- Cash and Cash Equivalents at End of Period $ 4,961 $ 3,893 ========== ==========
Supplemental Disclosure of Noncash Financing Activities: See Note 1 for a summary of the Company's subsidiaries and the abbreviations used in this section. In January 2003, the Company, through its majority owned subsidiary CCA, purchased the remaining 35% interest in CCAL for a total of $2.6 million, of which $1.3 million was used to purchase a loan from the previous minority shareholder, Caledon Overberg Investments (Proprietary) Limited, and is included in principal repayments above, $1.0 million was applied to the minority shareholder liability and $0.3 million increased the carrying value of the land in Caledon. In the second quarter of 2003, James Forbes, a former director of the Company, in accordance with the Company's Employee's Equity Incentive Plan ("EEIP"), exercised all 618,000 of his outstanding options, carrying an average exercise price of $1.306. The shares were issued out of treasury stock. Mr. Forbes paid the exercise price by transferring 357,080 shares of common stock to the Company at a per share price of $2.26, the closing price on April 16, 2003. In January 2004, the Company, through its wholly owned subsidiary CMB, purchased an additional 40% interest in CM, bringing its total interest to 50%, by contributing gaming equipment with a net book value of $0.60 million. The contribution of the gaming equipment, along with a cash contribution made in December 2002 which was accounted for by CMB on a cost basis in Euro and had a value of $0.29 million on January 3, 2004, brought the Company's total investment in CM to $0.89 million, of which $0.26 million was allocated to a shareholder loan acquired as part of the transaction. The difference between the cost and the equity of CM, of $0.57 million, has been recorded as goodwill. Supplemental Disclosure of Cash Flow Information: Interest paid, net of capitalized interest of $0 in 2004 and $46 in 2003 $ 1,129 $ 1,544 ======= ======= Income taxes paid $ 481 $ 700 ======= =======
See notes to condensed consolidated financial statements. -8- CENTURY CASINOS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Century Casinos, Inc. ("CCI" or the "Company") is an international gaming company. The Company owns and/or manages casino operations in the United States, South Africa, the Czech Republic and international waters through the entities listed in the following table: Parent/Subsidiary Relationship Abbreviation Parent Ownership Percentage Century Casinos, Inc. (1) 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 Limited CRL CCI 96.5% Century Casinos Africa (Pty) Ltd. CCA CRL 100% Century Casinos Caledon (Pty) Ltd. CCAL CCA 100% Century Casinos West Rand (Pty) Ltd. CCWR CCA 55% Rhino Resort Ltd. RRL CCA 50% Verkrans Ontwikkelings Maatskappy (Pty) Ltd VOM CCA 100% Century Resorts International Limited CRI CCI 100% Century Resorts Alberta, Inc. CRA CRI 55% Century Casinos Management, Inc. CCM CCI 100% Century Casinos Nevada, Inc. CCN CCI 100% Century Management u. Beteiligungs GmbH CMB CCI 100% Casino Millennium a.s. CM CMB 50%
(1) In October of 2004, the Company formed a wholly owned subsidiary, Century Casinos Tollgate, Inc. ("CTI") which will own 65% of CC Tollgate LLC ("CTL"), the operating company for the proposed project in Central City Colorado. 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. Womacks is one of the largest gaming facilities in Cripple Creek. The facility has 647 slot machines, 6 limited stakes gaming tables, 21 hotel rooms and 2 restaurants. -9- CRL was formed in May 2004 to provide technical casino services to some of the Company's foreign and offshore operations. In July 2004 certain officers of the Company exchanged their 3.5% minority ownership in CCA for a 3.5% minority ownership in CRL of equal value. CCI now owns 96.5% of CRL and CRL owns 100% of CCA. CCA owns CCAL which owns and operates The Caledon Hotel, Spa & Casino near Cape Town, South Africa. The resort has 295 slot machines and 9 gaming tables, a 92-room hotel, mineral hot springs and spa facility, 4 restaurants, 3 bars, conference facilities, an equestrian center and operates the program "Outdoor Experience". The Western Cape Gambling and Racing Board, has recently granted CCAL's request to increase in the number of permitted slot machines to 300. CCM provided technical casino services to some of the Company's operations. The technical services agreements were re-assigned to CRI in October 2003, but CCM is still collecting fees that were earned prior to that time, which remain unpaid. CCN is a dormant subsidiary which owns non-operating casino property and land held for sale in Nevada. CRI serves as concessionaire of small casinos on eight luxury cruise vessels and provides technical casino services to Casino Millennium. The Company has a total of 208 slot machines and 30 table games, or approximately 418 gaming positions on the eight combined shipboard casinos currently in operation. The cruise vessel Insignia resumed operations on March 29, 2004 after it was taken out of service following completion of its cruise schedule to various destinations in the western Mediterranean as of September 26, 2003. The Silver Cloud returned to service on March 27, 2004 following five months of periodic maintenance. On April 10, 2004, the Company opened a casino aboard the Nautica, a cruise ship operated by Oceania Cruises, equipped with 42 slot machines and 3 gaming tables. CRI owns 55% of CRA which was formed in conjunction with an application for a gaming license in Edmonton, Alberta, Canada. On October 12, 2004 CRI entered into a casino services agreement with CC Tollgate LLC to manage the proposed casino in Central City, Colorado. CRI will also enter into a casino services agreement to manage the proposed project in Iowa. CMB acquired a 10% equity interest in Casino Millennium located within a five-star hotel in Prague, Czech Republic through a $0.24 million cash contribution in December 2002. In January 2004, CMB acquired an additional 40% of Casino Millennium, bringing its total ownership to 50%. The current period earnings are reported as income from unconsolidated subsidiary in the Company's condensed consolidated statements of earnings and cash flows. The investment by the Company for the incremental 40% stake totaled $0.60 million and was paid by contributing gaming equipment. Casino Millennium has 38 slot machines and 15 gaming tables. The Company regularly pursues additional gaming opportunities internationally and in the United States, and is currently pursuing the following opportunities: Edmonton - In September 2003, CRI subscribed to 55% of the outstanding shares of CRA, formed in conjunction with its application for a gaming license in Edmonton, Alberta, Canada. The first phase of the proposed project, The Celebrations Casino and Hotel, is planned to include a casino, food and beverage amenities, a dinner theater, a 300 space underground parking garage and a 40-room hotel. CRA is owned by CRI and by the owners of the 7.25 acre property and existing hotel which will be developed into the Celebrations project, if a license is awarded and all other approvals and funding are -10- obtained. The Celebrations Casino and Hotel Project proposed by CRA is estimated to cost 22 million Canadian dollars ($17.4 million), including the 2.50 million Canadian dollars ($2.0 million) contribution of the existing hotel and property by the owners of the existing hotel and an approximately 3 million Canadian dollar ($2.4 million) cash contribution by the Company which will be funded through the revolving credit facility with Wells Fargo Bank. We intend to fund the remaining cost of the project through new project financing. CRI also entered into a long-term agreement to manage the casino if a gaming license is awarded. On April 19, 2004, the Company announced that CRA had been selected as the only one of nine applicants to move to step seven of eight steps of the casino licensing process in Edmonton, Alberta, Canada. This is not an approval or a guarantee that CRA will be issued a casino facility license. Step seven is the "Investigation stage of the Casino Facility Application Process" which is a thorough due diligence investigation of the applicant and the key persons associated with the selected proposal. Although the Company cannot predict how long the due diligence process will take, if step seven is successfully completed, the eighth step will be a recommendation to the Board of the Alberta Gaming and Liquor Commission ("AGLC"), by the commission, regarding issuance of a casino facility license. There is no assurance that a license will be issued to CRA. Central City, Colorado - On October 13, 2004, the Company announced that it signed an agreement with Central City Venture LLC ("Tollgate") to develop and operate a casino and hotel in Central City, Colorado. The proposed $40 million development would include a 60,000 square foot facility with 625 slot machines, six table games, 35 hotel rooms, retail, food and beverage amenities and a 500-space on-site covered parking garage connected to the casino by an environmentally controlled pedestrian walkway. The Company's contribution to the proposed project includes an initial cash capital contribution of $3.5 million, which will be funded through the revolving credit facility with Wells Fargo Bank, in return for a controlling 65% interest. The Company's partner, Tollgate, will contribute three existing non-operating casino buildings, land and land options. We expect to fund the remaining cost of the project through new project financing. Additionally, CRI entered into a Casino Services Agreement to manage the property. Closing of the agreement and completion of the project is subject to various conditions and approvals, including, but not limited to securing acceptable financing, satisfactory environmental studies, licensing by the Colorado Division of Gaming, Century Casinos' Board approval and other due diligence. Subject to satisfactorily meeting these requirements, it is anticipated the project would be completed in the first half of 2006. Iowa - On October 18, 2004, the Company announced that it signed an agreement with the owners of Landmark Gaming LLC of Franklin County, Iowa, to jointly submit as co-applicant with the Franklin County Development Association (FCDA) an application to the Iowa Racing and Gaming Commission (IRGC) to develop and operate a moored barge casino, hotel and entertainment facility in Franklin County, Iowa. The proposed project includes a casino with approximately 40,000 square feet of total space, 120 hotel rooms, 600 covered parking spaces and 375 surface parking spaces. The Company's contribution to the project at closing will include an initial cash capital contribution of $1.25 million, which will be funded through the revolving credit facility with Wells Fargo Bank, in return for a 40% interest. The current owners of Landmark Gaming will contribute the land and land options in return for 60% ownership. Additionally, an affiliate of the Company will enter into a Casino Services Agreement to manage the property in return for a share in gross revenues plus a share in EBITDA. The Company's cash contribution and the beginning of construction are subject to various conditions and approvals, including, but not limited to -11- awarding of a license by the IRGC, securing acceptable financing and other due diligence. We do not expect the IRGC to complete their selection process before December 31, 2004. Johannesburg - On October 20, 2003, the Company announced that judgment had been handed down in the High Court of South Africa compelling the Gauteng Gambling Board ("GGB") to award a casino license to Silverstar Development Limited ("Silverstar") for the western periphery of metropolitan Johannesburg in terms of its original 1997 application. On November 11, 2003, the Company announced that the GGB's subsequent application for leave to appeal the October 20 judgment had been denied by the High Court. On December 3, 2003, the Company announced that the GGB served notice that it had petitioned the South African Supreme Court of Appeal requesting a further appeal against the judgment of the High Court. On February 5, 2004, the Supreme Court of Appeal of South Africa overturned the ruling of the High Court and granted the GGB's request for leave to appeal. Silverstar informed the Company that it does not have any indication with regard to the timing of the appeals process. CCA, through its majority-owned subsidiary, CCWR, remains contracted to Silverstar by a resort management agreement and retains a right of long standing to take up a minority equity interest in the venture although its final level of equity interest remains to be determined. Pursuant to its 1997 application, the Silverstar project provides for up to 1,350 slot machines and 50 gaming tables in a phased development that includes a hotel and other entertainment, dining and recreational activities with a first phase of 950 slot machines and 30 gaming tables. The proposed 400 million Rand ($61.78 million) hotel/casino resort development would be located in the greater Johannesburg area of South Africa known as the West Rand. In January 2000, CCI entered into a brokerage agreement with Novomatic AG in which CCI received an option to purchase seven eighths of the shares that Novomatic AG purchased in Silverstar. The agreement has subsequently been amended two times, most recently in October 2004 eliminating the put option held by Novomatic AG, transferring the rights under the agreement from CCI to CRL and amending the call option under which CRL can require Novomatic AG to sell seven eighths of its shares in Silverstar to CRL. CRL can exercise the call option within three years of the amended and restated agreement. The price of the option varies based upon the legal and operating status of Silverstar. CRL can exercise the option for $1 million even if the Silverstar casino is not operational at the time of the exercise. If the transaction were to be completed, CRL would acquire a 7% interest in Silverstar from Novomatic AG. 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: -12- September 30, December 31, September 30, 2004 2003 2003 South African Rand 6.4749 6.6858 6.9537 Euros 0.8050 0.7938 0.8583 Czech Koruna 25.4310 25.6634 n/a Canadian Dollars 1.2639 1.2924 n/a Source: Pacific Exchange Rate Service
Certain reclassifications have been made to the 2003 financial information in order to conform to the 2004 presentation. The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The accompanying consolidated financial statements include the accounts of CCI and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The financial statements of all foreign subsidiaries consolidated herein have been converted to US GAAP for financial statement presentation purposes. Accordingly, the condensed consolidated financial statements are presented in accordance with US GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for fair presentation of financial position, results of operations and cash flows have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the period ended September 30, 2004 are not necessarily indicative of the operating results for the full year. 2. STOCK BASED COMPENSATION The Company has chosen to account for stock-based compensation for employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire that stock. The Company values stock-based compensation granted to non-employees at fair value. The Company's stock-based employee compensation plan expired in April 2004. Accordingly, no new options can be granted under the plan subsequent to April 2004, but it continues to be administered for previously issued and outstanding options. All options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. -13- For the Three Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Net earnings, as reported $ 1,233 $ 914 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 269 1 ------- ------- Pro forma net earnings $ 964 $ 913 ======= ======= Earnings per share Basic As reported $ 0.09 $ 0.07 Pro forma $ 0.07 $ 0.07 Diluted As reported $ 0.08 $ 0.06 Pro forma $ 0.06 $ 0.06 For the Nine Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Net earnings, as reported $ 3,284 $ 2,420 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 808 3 ------- ------- Pro forma net earnings $ 2,476 $ 2,417 ======= ======= Earnings per share Basic As reported $ 0.24 $ 0.18 Pro forma $ 0.18 $ 0.18 Diluted As reported $ 0.21 $ 0.16 Pro forma $ 0.16 $ 0.16
-14- 3. CHANGE IN ACCOUNTING PRINCIPLES AND RECENTLY ISSUED STANDARDS In December 2003, FASB revised Interpretation No. 46, "Consolidation of Variable Interest Entities". FIN 46(R) addresses consolidation issues by business enterprises of variable interest entities in which 1) the equity interest at risk is not sufficient to finance its activities without additional subordinated financial support, 2) the equity investors lack one or more essential characteristics of a controlling financial interest or 3) the equity investors have voting rights that are not proportionate to their economic interest. The Company adopted FIN 46(R) on January 1, 2004. The Company has determined that CM (Note 8) is a variable interest entity as defined by FIN 46 (R). The Company has also determined that it is not the primary beneficiary as defined by FIN 46 (R) and has, therefore, accounted for the Company's 50% interest in CM on the equity basis. A primary beneficiary is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both as defined in FIN 46(R). Under the equity method of accounting, the Company has recognized the difference between the investment and the underlying cost of the equity as goodwill and reported its percentage of the earnings in CM as income from unconsolidated subsidiary. Additionally, the Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe that any such pronouncements will have a material impact on its financial statements. 4. INCOME TAXES The income tax provisions are based on estimated full-year earnings for financial reporting purposes adjusted for permanent differences. -15- 5.EARNINGS PER SHARE Basic and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003 were computed as follows: For the Three Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Basic Earnings Per Share: Net earnings $ 1,233 $ 914 =========== =========== Weighted average common shares 13,681,900 13,660,500 =========== =========== Basic earnings per share $ 0. 09 $ 0.07 =========== =========== Diluted Earnings Per Share: Net earnings, as reported $ 1,233 $ 914 =========== =========== Weighted average common shares 13,681,900 13,660,500 Effect of dilutive securities: Stock options and warrants 2,259,753 1,050,117 ----------- ----------- Dilutive potential common shares 15,941,653 14,710,617 =========== =========== Diluted earnings per share $ 0. 08 $ 0.06 =========== =========== Excluded from computation of diluted earnings per share Due to antidilutive effect: Options and warrants to purchase common shares - - Weighted average exercise price $ - $ - For the Nine Months Ended September 30, Dollar amounts in thousands, except for share information 2004 2003 ---- ---- Basic Earnings Per Share: Net earnings $ 3,284 $ 2,420 =========== =========== Weighted average common shares 13,681,746 13,623,304 =========== =========== Basic earnings per share $ 0. 24 $ 0.18 =========== =========== Diluted Earnings Per Share: Net earnings, as reported $ 3,284 $ 2,420 =========== =========== Weighted average common shares 13,681,746 13,623,304 Effect of dilutive securities: Stock options and warrants 1,910,382 1,062,136 ----------- ----------- Dilutive potential common shares 15,592,128 14,685,440 =========== =========== Diluted earnings per share $ 0. 21 $ 0.16 =========== =========== Excluded from computation of diluted earnings per share Due to antidilutive effect: Options and warrants to purchase common shares - 10,000 Weighted average exercise price $ - $ 2.28
-16- 6. CRIPPLE CREEK, COLORADO In April 2003, the Company completed construction of a 6,022 square foot expansion and added a total of 5,000 square feet of gaming space to Womacks. Having spanned the alley behind the existing property, Womacks will be able to continue building out the casino to the rear of the property on a single level at a later date. In January 2004, the Company sold a purchase option agreement for a property located in Cripple Creek across Bennett Ave. from Womacks that it had held since 1999, which would have expired on March 30, 2004, to an unrelated party for a sum of $0.20 million. As a result of the transaction, the Company recognized a pre-tax gain of $34.7 thousand in 2004, which is included in other income, net. Womacks has installed a limited number of Ticket-in/Ticket out ("TITO") machines and is operating them under a required field trial with the Division of Gaming. The Division of Gaming has completed its audit of the field trial. Womacks is awaiting the Division's approval to end the field trial so that it may expand the number of TITO machines. In May 2004, Womacks added an additional restaurant, the "Cut Above Buffet", on the second floor of the casino. The restaurant operates on a limited schedule and provides an alternative menu for patrons of the casino. In August 2004, Womacks added an additional bar on the mezzanine, providing another alternative in the video poker section. 7. CALEDON, SOUTH AFRICA In January 2003, CCA purchased the remaining 35% interest in CCAL, becoming the sole owner of all of the common stock of CCAL. The Company paid 21.5 million Rand ($2.53 million). In accordance with FASB Statement No. 141, "Business Combinations", the cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on fair values at the date of acquisition. The assets and liabilities of CCAL, which were carried in the Company's consolidated financial statements at the date of acquisition, had fair values that approximated their carrying value, with the exception of land to which $0.34 million of the acquisition price was allocated. Simultaneous with the transaction, the hotel management agreement between CCAL and Fortes King Hospitality (Pty) Limited ("FKH") was cancelled and CCA assumed the management of the hotel. Financing for the transaction was provided by the Wells Fargo Bank revolving line of credit. In addition to the casino license, hotel and spa, CCAL owns approximately 600 acres of land, which may be used for future expansion. In June 2004, CCAL added a fourth restaurant to the already varied selection. The most recent restaurant offers patrons an Italian cuisine. 8. PRAGUE, CZECH REPUBLIC In January 1999, the Company, through CCM, entered into a 20-year agreement with Casino Millennium a.s., a Czech company ("CM"), and with B.H. Centrum a.s., a Czech subsidiary of Bau Holding AG (now known as Strabag AG), to operate a casino in the five-star Marriott Hotel in Prague, Czech Republic. The Company provided technical casino services in exchange for 10% of the casino's gross revenue, and provided gaming equipment for 45% of the casino's net profit. The hotel and casino opened in July 1999. -17- In December 2002, CMB acquired a 10% ownership interest in CM with the payment of $0.24 million in cash. Effective January 3, 2004, CMB, acquired an additional 40% of CM by contributing gaming equipment with a net book value of $0.60 million. The contribution of the gaming equipment, along with the cash contribution which was previously accounted for by CMB on a cost basis and had a value of $0.29 million on January 3, 2004, brought the Company's total investment in CM to $0.89 million. The Company allocated $0.26 million to a shareholder loan acquired as part of the transaction. CM issued additional shares for the contribution of the gaming equipment towards the Company's additional 40% investment in CM. The difference of $0.57 million between the cost and the equity in CM has been recorded as goodwill. In addition to the 50% ownership, the Company retains its rights under the 1999 casino services agreement which, as amended in October 2003, requires CM to make monthly payments of Euro 7,250 to CRI. CM had approximately $2.4 million in assets as of September 30, 2004 and reported earnings or (losses) for the three and nine months ended September 30, 2004 of approximately ($76) thousand and $6 thousand, respectively, after expensing casino services fees paid to the Company. The Company's estimated maximum exposure to losses at September 30, 2004 consists of the following (Amounts in thousands): Equity investment in Casino Millennium $ 64 Goodwill 554 Note receivable 254 Other receivables 199 ------------ Total $ 1,071 =============
Casino services fee income for the three months ended September 30, 2004 and 2003 was $78 thousand and $0 thousand, respectively and for the nine months ended September 30, 2004 and 2003 was $115 thousand and $8 thousand, respectively. 9. GOODWILL (Amounts in thousands): Balance as of December 31, 2003 $ 8,088 Goodwill recorded in the acquisition of an additional 40% interest in Casino Millennium, as valued on January 3, 2004 565 Effect of exchange rate on goodwill 16 ------------- Balance as of September 30, 2004 $ 8,669 =============
10. LONG-TERM DEBT The principal balance outstanding under the Wells Fargo Bank Revolving Line of Credit Facility ("RCF") as of September 30, 2004 was $11.23 million compared to $11.76 million at December 31, 2003. The amount available under the RCF as of September 30, 2004 was $9.72 million, net of amounts outstanding as of that date, compared to $11.35 million at December 31, 2003. The loan agreement includes certain restrictive covenants on financial ratios of WMCK. The Company was in compliance with the covenants as of September 30, 2004. The interest rate at September 30, 2004 was 3.9% for $10.5 million outstanding under -18- LIBOR based provisions of the loan agreement. The remaining balance of the outstanding debt is subject to interest under the prime based provisions of the loan agreement at a rate of 4.75%. Subsequent to September 30, 2004 an amendment to the RCF changed the aggregate commitment reduction schedule under the RCF. Effective with the amendment, there will be no quarterly reduction until July 1, 2005. The available balance will be reduced by $0.3 million for two quarters beginning July 1, 2005, by $0.6 million for two quarters beginning January 1, 2006, and finally by $0.72 million at the beginning of each quarter beginning July 1, 2006 until maturity in August 2007. The change in the scheduled reduction provides the Company with approximately $3.3 million additional availability over the next one year and three quarters. The fair value of the Company's interest rate swap derivatives as of September 30, 2004 and December 31, 2003 of $0.17 million and $0.37 million, respectively, is reported as an other non-current liability in the condensed consolidated balance sheets. The net gain on the interest rate swaps of $35.1 thousand, net of deferred income tax expense of $20.9 thousand for the third quarter of 2004, has been reported in accumulated other comprehensive earnings in the shareholders' equity section of the accompanying September 30, 2004 condensed consolidated balance sheet. The net gain on the interest rate swaps of $0.13 million, net of deferred income tax expense of $75.3 thousand for the first nine months of 2004, has been reported in accumulated other comprehensive earnings in the shareholders' equity section of the accompanying September 30, 2004 condensed consolidated balance sheet. Net additional interest expense to the Company under the swap agreements was $64.9 thousand and $0.16 million for the three months ended September 30, 2004 and 2003, respectively and $0.20 million and $0.45 million for the nine months ended September 30, 2004 and 2003, respectively. Including the impact of the swaps and the amortization of the deferred financing cost, the effective rate on the borrowings under the RCF was 6.82% and 9.29% for the three months ended September 30, 2004 and 2003, respectively, and 6.35% and 8.57% for the nine months ended September 30, 2004 and 2003, respectively. In April 2000, CCAL entered into a loan agreement with PSG Investment Bank Limited ("PSGIB"), which was subsequently acquired by ABSA Bank ("ABSA"), which provided for a principal loan of approximately $6.20 million (based on an exchange rate of 7.6613 rand per dollar at the time the funds were advanced) to fund development of the Caledon project. The outstanding balances as of September 30, 2004 and December 31, 2003 were $3.18 million and $4.14 million, respectively and the interest rate was 17.05%. The outstanding balances on the standby facility with PSGIB as of September 30, 2004 and December 31, 2003 were $0.31 million and $0.41 million, respectively and the interest rate was 15.1%. The agreement requires quarterly installments over the remaining term of the loan. The agreement requires a minimum deposit in the sinking fund equal to four million Rand (approximately $0.62 million) at the end of each quarter until maturity in June 2006. In addition, one third of the next quarterly principal and interest payment must be deposited on the last day of each month into the fund and used for the next quarterly installment. The loan agreement includes certain restrictive covenants for CCAL. CCAL was in compliance with the covenants as of September 30, 2004. An unsecured note payable, in the amount of $0.38 million, to a founding shareholder bears interest at 6%, payable quarterly. The entire outstanding principal was paid on April 1, 2004. Accordingly, the note is classified as current in the accompanying condensed consolidated balance sheets as of December 31, 2003. An unsecured note payable, in the amount of $90 thousand, to a former director bears interest at 0% and is classified as current in the accompanying condensed consolidated balance sheet as of September 30, 2004. -19- The remaining amount of debt of $0.25 million and $0.36, as of September 30, 2004 and December 31, 2003, respectively, consists of capital leases. The consolidated weighted average interest rate on all borrowings was 9.19% and 10.55% for the nine months ended September 30, 2004 and 2003, respectively. 11. SHAREHOLDERS' EQUITY During the first nine months of 2004, the Company did not purchase any shares of its common stock on the open market. The Company issued 1,400 shares of treasury stock in February 2004 for employee option exercises. Subsequent to September 30, 2004, the Company has not purchased shares of its common stock on the open market. In January 2004, 60,000 options were issued to the Company's outside directors with an exercise price of $3.26. In March 2004, 1,352,710 options were granted by the independent members of the Company's Incentive Plan Committee to eight officers and employees of the Company with an exercise price of $2.93. The Employee Equity Incentive Plan expired in April 2004. At the expiration of the plan, 312,599 available remaining options were not issued. 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 are officers, directors or affiliates of CCI. The preference shares are not cumulative, nor are they redeemable. The preference shares entitle the holders of the shares to dividends of 20% of the after-tax profits directly attributable to the CCAL casino business subject to working capital and capital expenditure requirements and CCAL loan obligations and liabilities as determined by the directors of CCAL. Should the CCAL casino business be sold or otherwise dissolved, the preference shareholders are entitled to 20% of any surplus directly attributable to the CCAL casino business, net of all liabilities attributable to the CCAL casino business. As of September 30, 2004, no dividend has been declared for the preference shareholders. In July 2004 certain officers of the Company exchanged their 3.5% minority ownership in CCA for a 3.5% minority ownership in CRL of equal value. CCI now owns 96.5% of CRL and CRL owns 100% of CCA. CCA owns CCAL which owns and operates The Caledon Hotel, Spa & Casino near Cape Town, South Africa. -20- 12. SEGMENT INFORMATION The Company is managed in four segments; Colorado, South Africa, Cruise Ships and Corporate and Other operations. The operating results of the Colorado segment are those of WMCK Venture Corp. and subsidiaries, which own Womacks Hotel and Casino ("Womacks") in Cripple Creek, Colorado. The operating results of the South African segment are those of Century Casinos Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon (Pty) Limited, which own the Caledon Hotel, Spa & Casino. Cruise Ship operations include the revenue and expense of the eight combined shipboard operations for which the Company has casino concession agreements. Corporate and Other operations include, among other items, the revenue and expense of corporate gaming projects for which the Company has secured long-term service contracts. Earnings before interest, taxes, depreciation and amortization (EBITDA) is not considered a measure of performance recognized as an accounting principle generally accepted in the United States of America. Management believes that EBITDA is a valuable measure of the relative performance amongst its operating segments. The gaming industry commonly uses EBITDA as a method of arriving at the economic value of a casino operation. It is also used by our lending institutions to gauge operating performance. Management uses EBITDA to compare the relative operating performance of separate operating units by eliminating the interest income, interest expense, income tax expense, and depreciation and amortization expense associated with the varying levels of capital expenditures for infrastructure required to generate revenue, and the oftentimes high cost of acquiring existing operations. Reclassification adjustments for 2003 have been made to the Colorado and Corporate and Other segment presentations for corporate bonuses that were charged to Colorado but are attributable to the consolidated results of operations, the interest on debt incurred to fund the purchase of the Company's acquisitions and the repurchase of the Company's common stock, and the related tax effects. There is no effect on the consolidated results. -21- Amounts in thousands Colorado South Africa Cruise Ships As of and for the Three Months ------------------------------- Ended September 30, 2004 2003 2004 2003 2004 2003 ------------------ Net operating revenue $ 5,044 $ 5,034 $ 3,859 $ 2,647 $ 688 $ 597 Operating expenses (excluding depreciation) $ 3,068 $ 2,970 $ 2,432 $ 1,963 $ 461 $ 365 Depreciation $ 382 $ 334 $ 318 $ 275 $ 25 $ 24 Loss from unconsolidated subsidiary $ - $ - $ - $ - $ - $ - Earnings (loss) from operations $ 1,594 $ 1,730 $ 1,109 $ 409 $ 202 $ 208 Interest income $ 2 $ 3 $ 35 $ 46 $ - $ - Interest expense, including debt issuance cost (1) $ 29 $ 23 $ (451) $ (228) $ - $ - Other income (expense), net $ - $ 55 $ - $ (2) $ - $ 10 Non-operating income from unconsolidated subsidiary $ - $ - $ - $ - $ - $ - Earnings (loss) before income taxes and minority interest $ 1,625 $ 1,811 $ 693 $ 225 $ 202 $ 218 Income tax expense (benefit) $ 618 $ 688 $ 232 $ 85 $ 6 $ 82 Minority interest $ - $ - $ - $ - $ - $ - Net earnings (loss) $ 1,007 $ 1,123 $ 461 $ 140 $ 196 $ 136 Reconciliation to EBITDA: Net earnings (loss) (US GAAP) $ 1,007 $ 1,123 $ 461 $ 140 $ 196 $ 136 Interest income $ (2) $ (3) $ (35) $ (46) $ - $ - Interest expense (1) $ (29) $ (23) $ 451 $ 228 $ - $ - Income taxes $ 618 $ 688 $ 232 $ 85 $ 6 $ 82 Depreciation $ 382 $ 334 $ 318 $ 275 $ 25 $ 24 EBITDA $ 1,976 $ 2,119 $ 1,427 $ 682 $ 227 $ 242 .
(1) The Company has not repaid the funds advanced for the Company's acquisitions or the repurchase of the Company's common stock, therefore the debt and accumulated interest allocated to the Corporate & Other segment exceeded the total outstanding borrowing under the RCF in the Colorado segment, resulting in the reported negative interest expense for 2004. -22- Amounts in thousands Inter-segment Corporate and Other Elimination Consolidated As of and for the Three Months ------------------------------- Ended September 30, 2004 2003 2004 2003 2004 2003 ------------------ Net operating revenue $ 78 $ - $ - $ - $ 9,669 $ 8,278 Operating expenses (excluding depreciation) $ 829 $ 529 $ - $ - $ 6,790 $ 5,827 Depreciation $ 7 $ 42 $ - $ - $ 732 $ 675 Loss from unconsolidated subsidiary $ (45) $ - $ - $ - $ (45) $ - Earnings (loss) from operations $ (803) $ (571) $ - $ - $ 2,102 $ 1,776 Interest income $ 346 $ 85 $ (346) $ (85) $ 37 $ 49 Interest expense, including debt issuance cost $ (313) $ (392) $ 346 $ 85 $ (389) $ (512) Other income, net $ - $ 1 $ - $ - $ - $ 64 Non-operating items from unconsolidated subsidiary $ 6 $ - $ - $ - $ 6 $ - Earnings (loss) before income taxes and minority interest $ (764) $ (877) $ - $ - $ 1,756 $ 1,377 Income tax expense (benefit) $ (358) $ (392) $ - $ - $ 498 $ 463 Minority interest $ (25) $ - $ - $ - $ (25) $ - Net earnings (loss) $ (431) $ (485) $ - $ - $ 1,233 $ 914 Reconciliation to EBITDA: Net earnings (loss) (US GAAP) $ (431) $ (485) $ - $ - $ 1,233 $ 914 Interest income $ (346) $ (85) $ 346 $ 85 $ (37) $ (49) Interest expense $ 313 $ 392 $ (346) $ (85) $ 389 $ 512 Income taxes $ (358) $ (392) $ - $ - $ 498 $ 463 Depreciation $ 7 $ 42 $ - $ - $ 732 $ 675 EBITDA $ (815) $ (528) $ - $ - $ 2,815 $ 2,515
-23- Amounts in thousands Colorado South Africa Cruise Ships As of and for the Nine Months ----------------------------- Ended September 30, 2004 2003 2004 2003 2004 2003 ------------------ Property and equipment, net $ 23,790 $ 21,402 $ 14,429 $ 13,451 $ 264 $ 336 Total assets $ 33,679 $ 31,600 $ 21,104 $ 18,551 $ 1,076 $ 873 Net operating revenue $ 13,991 $ 14,246 $ 10,582 $ 7,673 $ 1,959 $ 1,285 Operating expenses (excluding depreciation) $ 8,363 $ 8,130 $ 6,957 $ 5,535 $ 1,325 $ 849 Depreciation $ 1,055 $ 1,033 $ 972 $ 771 $ 67 $ 56 Income from unconsolidated subsidiary $ - $ - $ - $ - $ - $ - Earnings (loss) from operations $ 4,573 $ 5,083 $ 2,653 $ 1,367 $ 567 $ 380 Interest income $ 8 $ 10 $ 115 $ 153 $ - $ - Interest expense, including debt issuance cost (1) $ 84 $ (13) $ (867) $ (695) $ - $ - Other income, net $ 35 $ 55 $ - $ (2) $ - $ 15 Non-operating items from unconsolidated subsidiary $ - $ - $ - $ - $ - $ - Earnings (loss) before income taxes and minority interest $ 4,700 $ 5,135 $ 1,901 $ 823 $ 567 $ 395 Income tax expense (benefit) $ 1,786 $ 1,951 $ 547 $ 319 $ 17 $ 150 Minority interest $ - $ - $ - $ (8) $ - $ - Net earnings (loss) $ 2,914 $ 3,184 $ 1,354 $ 496 $ 550 $ 245 Reconciliation to EBITDA: Net earnings (loss) (US GAAP) $ 2,914 $ 3,184 $ 1,354 $ 496 $ 550 $ 245 Interest income $ (8) $ (10) $ (115) $ (153) $ - $ - Interest expense (1) $ (84) $ 13 $ 867 $ 695 $ - $ - Income taxes $ 1,786 $ 1,951 $ 547 $ 319 $ 17 $ 150 Depreciation $ 1,055 $ 1,033 $ 972 $ 771 $ 67 $ 56 EBITDA $ 5,663 $ 6,171 $ 3,625 $ 2,128 $ 634 $ 451
(1)The Company has not repaid the funds advanced for the Company's acquisitions or the repurchase of the Company's common stock, therefore the debt and accumulated interest allocated to the Corporate & Other segment exceeded the total outstanding borrowing under the RCF in the Colorado segment, resulting in the reported negative interest expense in 2004. -24- Amounts in thousands Inter-segment Corporate and Other Elimination Consolidated As of and for the Nine Months ----------------------------- Ended September 30, 2004 2003 2004 2003 2004 2003 ------------------ Property and equipment, net $ 636 $ 1,054 $ - $ - $ 39,119 $ 36,243 Total assets $ 2,432 $ 2,444 $ - $ - $ 58,291 $ 53,468 Net operating revenue $ 115 $ 8 $ - $ - $ 26,647 $ 23,212 Operating expenses (excluding depreciation) $ 2,226 $ 1,571 $ - $ - $ 18,871 $ 16,085 Depreciation $ 20 $ 126 $ - $ - $ 2,114 $ 1,986 Income from unconsolidated subsidiary $ 6 $ - $ - $ - $ 6 $ - Earnings (loss) from operations $ (2,125) $ (1,689) $ - $ - $ 5,668 $ 5,141 Interest income $ 522 $ 257 $ (517) $ (256) $ 128 $ 164 Interest expense, including debt issuance cost $ (935) $ (1,112) $ 517 $ 256 $ (1,201) $ (1,564) Other income, net $ - $ 10 $ - $ - $ 35 $ 78 Non-operating items from unconsolidated subsidiary $ (2) $ - $ - $ - $ (2) $ - Earnings (loss) before income taxes and minority interest $ (2,540) $ (2,534) $ - $ - $ 4,628 $ 3,819 Income tax expense (benefit) $ (1,062) $ (1,029) $ - $ - $ 1,288 $ 1,391 Minority interest $ (56) $ - $ - $ - $ (56) $ (8) Net earnings (loss) $ (1,534) $ (1,505) $ - $ - $ 3,284 $ 2,420 Reconciliation to EBITDA: Net earnings (loss) (US GAAP) $ (1,534) $ (1,505) $ - $ - $ 3,284 $ 2,420 Interest income $ (522) $ (257) $ 517 $ 256 $ (128) $ (164) Interest expense $ 935 $ 1,112 $ (517) $ (256) $ 1,201 $ 1,564 Income taxes $ (1,062) $ (1,029) $ - $ - $ 1,288 $ 1,391 Depreciation $ 20 $ 126 $ - $ - $ 2,114 $ 1,986 EBITDA $ (2,163) $ (1,553) $ - $ - $ 7,759 $ 7,197
-25- 13. OTHER INCOME, NET Other income, net, consists of the following: For the Three Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Interest income $ 37 $ 49 Gain on disposition of assets - 53 Foreign currency exchange gains - 11 ----- ----- $ 37 $ 113 ===== ===== For the Nine Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Interest income $ 128 $ 164 Gain on disposition of assets - 59 Gain on sale of real estate option and other assets (1) 35 19 Foreign currency exchange gains - - ----- ----- $ 163 $ 242 ===== =====
(1) In January 2004, the Company sold a purchase option agreement for a property located in Cripple Creek across Bennett Ave. from Womacks that it had held since 1999, which would have expired on March 31, 2004, to an unrelated party for a sum of $0.2 million. As a result of the transaction, the Company recognized a pre-tax gain of $34.7 thousand in 2004. -26- 14. PROMOTIONAL ALLOWANCES Promotional allowances presented in the condensed consolidated statements of earnings for the period ended September 30, 2004 and September 30, 2003 include the following: For the Three Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Food & Beverage and Hotel Comps $ 402 $ 379 Free Plays or Coupons 463 537 Player Points 340 369 ----------- ----------- Total Promotional Allowances $ 1,205 $ 1,285 =========== =========== For the Nine Months Ended September 30, Amounts in thousands 2004 2003 ---- ---- Food & Beverage and Hotel Comps $ 1,127 $ 1,013 Free Plays or Coupons 1,208 1,356 Player Points 981 1,060 ----------- ----------- Total Promotional Allowances $ 3,316 $ 3,429 =========== ===========
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 condensed consolidated balance sheets. -27- CENTURY CASINOS, INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Forward-Looking Statements, Business Environment and Risk Factors Forward-looking statements and business environment information contained in the following discussion of results of operations and financial condition of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as "may", "will", "expect", "anticipate", "estimate", or "continue", or variations thereon or comparable terminology. In addition, all statements other than statements of historical facts that address activities, events or developments that the Company expects, believes or anticipates, will or may occur in the future, and other such matters, are forward-looking statements. The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and related notes included elsewhere herein. The Company's future operating results may be affected by various trends and factors, which are beyond the Company's control. These include, among other factors, the competitive environment in which the Company operates, the Company's present dependence upon the Cripple Creek, Colorado and Caledon, South Africa gaming markets, changes in the rates of gaming-specific taxes, shifting public attitudes toward the socioeconomic costs and benefits of gaming, actions of regulatory bodies, dependence upon key personnel, the speculative nature of gaming projects the Company may pursue, risks associated with expansion, and other uncertain business conditions that may affect the Company's business. The Company cautions the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect the Company's actual results and cause actual results to differ materially from those discussed in forward-looking statements. -28- Results of Operations Three Months Ended September 30, 2004 vs. 2003 ---------------------------------------------- The Company is managed in four segments; Colorado, South Africa, Cruise Ships and Corporate and Other operations. The operating results of the Colorado segment are those of WMCK Venture Corp. and subsidiaries, which own Womacks in Cripple Creek, Colorado. The operating results of the South African segment are those of Century Casinos Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon (Pty) Limited which own the Caledon Hotel, Spa & Casino. Cruise Ship operations include the revenue and expense of the eight combined shipboard operations for which the Company has casino concession agreements. Corporate and Other operations include, among other items, the revenue and expense of corporate gaming projects for which the Company has secured long-term service contracts. Consolidated Results of Operations The Company reported net operating revenue of $9.7 million and $8.3 million for the three months ended September 30, 2004 and 2003, respectively. Casino revenue for the three months ended September 30, 2004 and 2003, was $9.3 million compared to $8.5 million, respectively. Casino expense was $3.7 million and $3.1 million for the three months ended September 30, 2004 and 2003, respectively. General and administrative expense was $2.3 million for the three months ended September 30, 2004 compared to $2.0 million for the three months ended September 30, 2003. Depreciation expense was $0.73 million and $0.68 million for the three months ended September 30, 2004 and 2003, respectively. Total Company earnings from operations were $2.1 million and $1.8 million for the three months ended September 30, 2004 and 2003, respectively. Income tax expense for the three months ended September 30, 2004 and 2003 was $0.50 million, and $0.46 million, respectively. The Company's net earnings for the three months ended September 30, 2004 and 2003 were $1.23 million, or $0.09 per share, and $0.91 million, or $0.07 per share, respectively. A discussion by business segment follows below. -29- Colorado The operating results of the Colorado segment are those of WMCK-Venture Corp. and subsidiaries, which own Womacks in Cripple Creek, Colorado. Womacks' results of operations for the three months ended September 30, 2004 and 2003 were as follows: For the three months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 5,557 $ 5,694 $ (137) -2.4% Hotel, food and beverage 498 375 123 32.8% Other (including promotional allowances) (1,011) (1,035) 24 2.3% --------- --------- Net operating revenue 5,044 5,034 10 0.2% --------- --------- Costs and Expenses Casino 1,912 1,829 83 4.5% Hotel, food and beverage 223 119 104 87.4% General and administrative 933 1,022 (89) -8.7% Depreciation 382 334 48 14.4% --------- --------- 3,450 3,304 146 4.4% --------- --------- Earnings from operations 1,594 1,730 (136) -7.9% Interest (expense), net 29 23 6 26.1% Other income, net 2 58 (56) -96.6% --------- --------- Earnings before income taxes 1,625 1,811 (186) -10.3% Income tax expense 618 688 (70) -10.2% --------- --------- Net Earnings $ 1,007 $ 1,123 $ (116) -10.3% ========= =========
Excluded from the above results are corporate bonuses that were previously charged to Womacks, but which are attributable to the consolidated results of operations, the interest on debt incurred to fund the purchase of the Company's acquisitions and the repurchase of the Company's common stock and related tax effects. Reclassifications have been made to the Colorado and Corporate & Other segments of the 2003 financial information in order to conform to the 2004 presentation. -30- Operating results for Womacks were impacted by the casino results detailed below. Market Data For the three months ended September 30, 2004 2003 ---- ---- Market share of the Cripple Creek market 13.2% 14.3% Average number of slot machines 648 610 Market share of Cripple Creek gaming devices 13.5% 14.5% Average slot machine win per day 91 dollars 99 dollars Cripple Creek average slot machine win per day 91 dollars 101 dollars
In June 2004 an additional casino opened in Cripple Creek, bringing the total number of casino licenses to 19 compared to 17 at the same time last year and reduced Womacks' market share of gaming devices by 6.9%. In recent months, the Company has spent approximately $3 million to upgrade the product mix on the gaming floor, improve the player tracking system and introduce cashless gaming machines. These ongoing improvements are expected to add to the customer experience and further improve customer service. The ongoing efforts have helped reduce the potential impact, limiting the decrease in gaming revenue to 2.4% or 4.5 points less than the reduction in market share of gaming devices. During this period, the relative percentage of personnel cost, device fees and the cost of participation machines to net operating revenue contributed to the erosion in earnings from operations. Management regularly evaluates these overhead costs to maintain a good cost benefit relationship. During the three months ended September 30, 2004, Womacks leased approximately an average of 37 slot machines under participation agreements from manufacturers, on which it pays a fee calculated as a percentage of the net win. All of the leases have short term commitment periods not exceeding three months and are classified as operating leases. The leases can be cancelled with no more than 30 days written notice. On a portion of the leases, the manufacturer is guaranteed a minimum fee per day that can range from 15 dollars to 35 dollars for the duration of the lease. In most instances, the branded games that are being introduced to the market are not available for purchase. For financial reporting purposes, the net win on the slot machines is included in our revenue and the amount due to the manufacturer is recorded as an expense, in the period during which the revenue is earned, as casino operating cost. Management makes its decisions to introduce these machines based on the consumer demand for the product. The amount paid under these agreements was $132 thousand and $102 thousand for the three months ended September 30, 2004 and 2003, respectively. Management continues to focus on marketing the casino through its Gold Club in which patrons can earn rewards, that can be redeemed for discounted or free meals, rooms, cash and other prizes, as well as through increased TV and radio advertising. Management continues to refine the Womacks product by upgrading both the interior of the facilities, and modifying the slot machine mix. -31- Hotel, Food and Beverage Hotel revenue, included in hotel, food and beverage revenue, increased by 16.8%, as a result of an increase in the hotel occupancy rate to 94.4% in 2004 from 83.6% in 2003, respectively. All of the revenue generated by the hotel operations is derived from comps to better players, the value of which is included in promotional allowances. In May 2004, Womacks added an additional restaurant, the "Cut Above Buffet", on the second floor of the casino. The restaurant operates on a limited schedule and provides an alternative menu for patrons of the casino. In the three months ended September 30, 2004, food and beverage revenue increased 55.5% when compared to the same period in 2003. The cost of food and beverage promotional allowances, which are included in casino costs, decreased to $0.29 million in the three months ended September 30, 2004 from $0.33 million in the three months ended September 30, 2003. Overall cost of operating the "Cut Above Buffet" accounts for the significantly higher percentage increase in the combined cost of hotel, food and beverage when compared to the percentage increase in the corresponding revenue. The "Cut Above Buffet" offers a premium menu, incurring a higher cost of sales, and has fulfilled the intention of attracting new customers to Womacks Gold Club. Other The $48 thousand increase in depreciation expense when comparing the third quarter of 2004 to the third quarter of 2003 results from an increase of approximately $0.12 million in depreciation on new additions during the trailing twelve months less the reduction in depreciation on assets that are fully depreciated. The Company allocated $0.30 million in interest expense to the Corporate & Other segment during the three months ended September 30, 2004. Interest expense on the amounts advanced, but not repaid, to fund the Company's acquisitions and the repurchase of the Company's common stock is calculated using the effective rate on all borrowings under the RCF. The Company reduces the interest expense incurred by WMCK under the RCF by the amount of interest allocated to the Corporate & Other segment. The Company has not repaid the funds advanced for the Company's acquisitions or the repurchase of the Company's common stock, and therefore the debt and accumulated interest allocated to the Corporate & Other segment exceeded the total outstanding borrowing. As a result Womacks reported a net negative of $29 thousand in interest expense and debt issuance cost. During the same period in 2003, Womacks reported negative interest expense and debt issuance cost, of $23 thousand, net of $0.39 million in interest expense allocated to the Corporate & Other segment. Such decrease is attributable to the decrease in the weighted-average interest rate on the borrowings under the RCF, including effects of swap agreements, to 6.82% from 9.29% and a reduction in the average outstanding balance under the RCF to $11.75 million during the three months ended September 30, 2004 from $12.66 million during the three months ended September 30, 2003. The Colorado segment recognized income tax expense of $0.62 million in the three months ended September 30, 2004 compared to $0.69 million in the three months ended September 30, 2003, principally the result of a decrease in earnings before income taxes. -32- South Africa The operating results of the South African segment are those of Century Casinos Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon (Pty) Limited, which owns the Caledon Hotel, Spa & Casino. Improvement in the Rand versus the dollar when comparing the third quarter of 2004 to the third quarter of 2003 has had a positive impact on the reported revenues and a negative impact on expenses. Operating results in U.S. dollars for the three months ended September 30, 2004 and 2003 were as follows: (See next page for results in Rand) CALEDON For the three months ended Increase % Change September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 3,148 $ 2,256 $ 892 39.5% Hotel, food and beverage 760 557 203 36.4% Other (including promotional allowances) (49) (166) 117 -70.5% -------- -------- Net operating revenue 3,859 2,647 1,212 45.8% -------- -------- Costs and Expenses Casino 1,282 937 345 36.8% Hotel, food and beverage 620 573 47 8.2% General and administrative 524 368 156 42.4% Depreciation 318 275 43 15.6% -------- -------- 2,744 2,153 591 27.5% -------- -------- Earnings from operations 1,115 494 621 125.7% Interest expense (188) (228) 40 -17.5% Other income, net 24 36 (12) -33.33% -------- -------- Earnings before Income Taxes 951 302 649 214.9% Provision for income taxes 308 106 202 190.6% -------- -------- Net Earnings $ 643 $ 196 $ 447 228.1% ======== ======== CENTURY CASINOS AFRICA Costs and Expenses General and administrative $ 6 $ 85 $ (79) -92.9% -------- -------- (Income) Loss from operations (6) (85) 79 -92.9% Interest Expense, net (261) - (261) - Other income, net 9 8 1 12.5% -------- -------- Earnings before Income Taxes (258) (77) (181) 235.1% Provision for income taxes (76) (21) (55) 261.9% -------- -------- Net Loss $ (182) $ (56) $ (126) 225.0% ======== ======== SOUTH AFRICA NET EARNINGS $ 461 $ 140 $ 321 229.3% ======== ======== Average exchange rate (Rand/USD) 6.42 7.28
-33- Operating results in Rand for the three months ended September 30, 2004 and 2003 are as follows: CALEDON For the three months Increase % Change ended September 30, (Decrease) Rand amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino R 20,205 R 16,501 R 3,704 22.4% Hotel, food and beverage 4,871 4,077 794 19.5% Other (including promotional allowances) (301) (1,222) 921 -75.4% ---------- ---------- Net operating revenue 24,775 19,356 5,419 28.0% ---------- ---------- Costs and Expenses Casino 8,225 6,860 1,365 19.9% Hotel, food and beverage 3,971 4,188 (217) -5.2% General and administrative 3,369 2,692 677 25.1% Depreciation 2,038 2,011 27 1.3% ---------- ---------- 17,603 15,751 1,852 11.8% ---------- ---------- Earnings from operations 7,172 3,605 3,567 98.9% Interest expense (1,218) (1,666) 448 -26.9% Other income, net 156 270 (114) -42.2% ---------- ---------- Earnings before income taxes 6,110 2,209 3,901 176.6% Provision for income taxes 1,977 779 1,198 153.8% ---------- ---------- Net Earnings R 4,133 R 1,430 R 2,703 189.0% ========== ========== CENTURY CASINOS AFRICA Costs and Expenses General and administrative R 45 R 610 R (565) -92.6% ---------- ---------- Loss from operations (45) (610) 565 -92.6% Interest Expense, net (1,680) - (1,680) - Other income, net 64 53 11 20.8% ---------- ---------- Earnings before income taxes (1,661) (557) (1,104) 198.2% Income tax expense (498) (163) (335) 205.5% ---------- ---------- Net Loss R (1,163) R (394) R (769) 195.2% ========== ========== SOUTH AFRICA NET EARNINGS R 2,970 R 1,036 R 1,934 186.7% ========== ==========
-34- Casino Market Data (in Rand) For the three months ended September 30, 2004 2003 ---- ---- Market share of the Western Cape market 6.00% 6.02% Market share of Western Cape gaming devices 11.4% 10.9% Average number of slot machines 290 275 Average slot machine win per day 690 Rand 598 Rand Average number of tables 9 8 Average table win per day 2,158 Rand 1,502 Rand
The Geographical differences which separate the casinos in the Western Cape and the gaming board's license management, impacts the results reported above. The results discussed below are based on the Rand to eliminate the effect of fluctuations in foreign currency exchange rates. The 22.4% increase in the casino revenue is attributable to the successful marketing efforts that include the introduction of cash couponing, an expanded smoking section and improved employee and management training. The Company markets an array of amenities at the resort to its guests as a complement to the gaming experience. These currently include a 92-room hotel, a variety of dining experiences, the historic mineral hot spring and spa, the outdoor experience (a team building facility) and an equestrian center. The 0.92 million Rand change in other revenue (including promotional allowances) is attributable to the introduction of cash couponing in the second quarter of 2003 and to the expanded use of player points to attract customers. Hotel, Food and Beverage Conferences and other functions held at the resort play a significant role in the operation of the hotel. Management is attempting to gain additional exposure in this area through marketing efforts. A number of repairs in the hotel infrastructure, including electrical and plumbing, were undertaken in 2003 in order to increase the quality of the facility. Management has taken measures to offset the inflationary pressures in South Africa which have driven up base costs such as labor, supplies and utilities. Hotel revenue increased 17.0% in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The average hotel occupancy rate in the three months ended September 30, 2004 was 49.0% compared to 56.6% in the three months ended September 30, 2003. During this same period the average room rate increased to R417 from R319, completely offsetting the decrease in the occupancy rate. Conference sales increased 17.0%, while leisure sales decreased by 27.0%. In June 2004, CCAL added a fourth restaurant to the already varied selection. The most recent restaurant offers patrons an Italian cuisine. Food and beverage revenue increased 23.0% in the three months ended September 30, 2004 compared to the three months ended September 30, 2003, primarily as a result of the additional food and beverage facility, plus changes in operating hours and a general price increase. -35- Other The decrease in general and administrative expense at CCA is primarily related to the reduction in management services paid for and provided to CCAL. Interest expense for CCAL, including debt issuance cost, decreased 26.9% as the principal balance of the term loans and capitalized leases are repaid. The weighted-average interest rate on the borrowings under the ABSA loan agreement was 16.9% in the three months ended September 30, 2004 and 2003. Interest expense, net for CCA is comprised exclusively of interest on debt between CCA and CRL. The interest expense is eliminated against the interest income included in the Corporate and Other segment; consequently, there is no effect on the consolidated net income. Cruise Ships Cruise ships' operating results for the three months ended September 30, 2004 and 2003 were as follows: For the three months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 644 $ 575 $ 69 12.0% Other (including promotional allowances) 44 22 22 100.0% --------- ------- Net operating revenue 688 597 91 15.2% --------- ------- Costs and Expenses Casino 461 365 96 26.3% General and administrative - - Depreciation 25 24 1 4.2% --------- ------- 486 389 97 24.9% --------- ------- Earnings from operations 202 208 (6) -2.9% Other income, net - 10 (10) -100.0% --------- ------- Earnings before income taxes 202 218 (16) -7.3% Income tax expense 6 82 (76) -92.7% --------- ------- Net Earnings $ 196 $ 136 $ 60 44.1% ========= ========
In the three months ended September 30, 2004, the Company operated casinos on a total of eight ships: four on Silversea Cruises, one on the World of ResidenSea and three on Oceania Cruises, compared to a total of seven ships during the same period in 2003. On April 10, 2004, the Company opened a casino aboard the Nautica, a cruise ship operated by Oceania Cruises equipped with 42 slot machines and three gaming tables. We experience severe fluctuations in the revenue generated on each cruise depending on the number and quality of the players and passengers. This is a condition that we do not control. In August 2004 the Silver Wind suffered a $50 thousand loss to a single player, almost 8% of the total -36- ship casino revenue for the period, contributing significantly to the decrease in earnings from operations for the three months ended September 30, 2004. Concession fees paid to the ship operators in accordance with the agreements accounted for $0.25 million and $0.20 million of the total casino expenses incurred in the three months ended September 30, 2004 and 2003, respectively. The cost of travel expenses to rotate personnel to and from the ships accounted for an increase of $18 thousand in expenses when comparing 2004 to 2003. The decrease in income tax expense is attributable to the assignment of the concession agreements from CCI to CRI as of October 1, 2003. The income assigned to CCI was taxed at a U.S. effective rate of approximately 38%. The income assigned to CRI, the Company's wholly owned subsidiary in Mauritius, is taxed at the statutory rate of 15%, less current tax credits of 12%, resulting in a net rate of 3%. This tax status was effective upon incorporation, September 25, 2003. Corporate & Other For the three months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Other $ 78 $ - $ 78 100.0% -------- -------- Net Operating Revenue 78 - 78 100.0% Costs and Expenses Casino - - - - General and administrative 829 529 300 56.7% Depreciation 7 42 (35) -83.3% -------- -------- 836 571 265 46.4% -------- -------- Loss from unconsolidated subsidiary (45) - 45 100.0% -------- -------- Loss from operations (803) (571) (232) 40.6% Interest expense (313) (392) 79 20.2% Other income, net 346 86 260 302.3% Non-operating items from unconsolidated subsidiary 6 - 6 100.0% -------- -------- Loss before income taxes and minority interest (764) (877) (113) -12.9% Income tax benefit (358) (392) 34 -8.7% Minority interest (25) - (25) - -------- -------- Net Loss $ (431) $ (485) $ 54 -11.1% ======== ========
Revenue in the corporate and other segment for the three months ended September 30, 2004 is comprised exclusively of fees paid by Casino Millennium under the technical services agreement. -37- Included in the above results are corporate bonuses that were previously charged to Womacks, but which are attributable to the consolidated results of operations, the interest on debt incurred to fund the Company's acquisitions and the repurchase of the Company's common stock, and related tax effects. Included on Other income, net for the three months ended September 30, 2004 is $0.26 million in interest income on debt between CRL and CCA. The interest income is eliminated against the interest expense included in the South African segment; consequently, there is no effect on the consolidated net income. Reclassifications have been made to the Colorado and Corporate & Other segments of the 2003 financial information in order to conform to the 2004 presentation. Additionally, general and administrative expenses increased quarter over quarter largely due to an increase in the current year estimate for corporate bonuses based on management's current estimate of annual results. The decrease in depreciation expense is attributable to the acquisition of 50% of CM. Effective January 3, 2004 CMB acquired an additional 40% of CM by contributing gaming equipment, valued at approximately $0.60 million. The gaming equipment, previously allocated to and depreciated in the Corporate & Other segment, is depreciated by CM and therefore affects the income from unconsolidated subsidiary (see Note 8 to the condensed consolidated financial statements). Minority interest is comprised of $24 thousand for the 3.5% minority interest in the earnings of CRL. Income from unconsolidated subsidiary is comprised of the Company's 50% interest in CM earnings. -38- Results of Operations Nine Months Ended September 30, 2004 vs. 2003 --------------------------------------------- Consolidated Results of Operations The Company reported net operating revenue of $26.6 million and $23.2 million for the nine months ended September 30, 2004 and 2003, respectively. Casino revenue for the nine months ended September 30, 2004 and 2003, was $26.2 million compared to $23.7 million, respectively. Casino expense was $10.1 million and $8.5 million for the nine months ended September 30, 2004 and 2003, respectively. General and administrative expense was $6.5 million for the nine months ended September 30, 2004 compared to $5.7 million for the nine months ended September 30, 2003. Depreciation expense was $2.1 million and $2.0 million for the nine months ended September 30, 2004 and 2003, respectively. Total Company earnings from operations were $5.7 million and $5.1 million for the nine months ended September 30, 2004 and 2003, respectively. Tax expense for the nine months ended September 30, 2004 and 2003 was $1.3 million, and $1.4 million, respectively. The Company's net earnings for the nine months ended September 30, 2004 and 2003 were $3.3 million, or $0.24 per share, and $2.4 million, or $0.18 per share, respectively. A discussion by business segment follows below. -39- Colorado The operating results of the Colorado segment are those of WMCK-Venture Corp. and subsidiaries, which own Womacks in Cripple Creek, Colorado. Womacks' results of operations for the nine months ended September 30, 2004 and 2003 were as follows: For the nine months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 15,503 $ 16,151 $ (648) -4.0% Hotel, food and beverage 1,202 954 248 26.0% Other (including promotional allowances) (2,714) (2,859) 145 5.1% -------- --------- Net operating revenue 13,991 14,246 (255) -1.8% -------- --------- Costs and Expenses Casino 5,190 5,042 148 2.9% Hotel, food and beverage 454 264 190 72.0% General and administrative 2,719 2,824 (105) -3.7% Depreciation 1,055 1,033 22 2.1% -------- --------- 9,418 9,163 255 -2.8% -------- --------- Earnings from operations 4,573 5,083 (510) -10.0% Interest (expense), net 84 (13) 97 -746.2% Other income, net 43 65 (22) -33.8% -------- --------- Earnings before income taxes 4,700 5,135 (435) -8.5% Income tax expense 1,786 1,951 (165) -8.5% -------- --------- Net Earnings $ 2,914 $ 3,184 $ (270) -8.5% ======== =========
Excluded from the above results are corporate bonuses that were previously charged to Womacks, but which are attributable to the consolidated results of operations, the interest on debt incurred to fund the purchase of the Company's acquisitions and the repurchase of the Company's common stock and related tax effects. Reclassifications have been made to the Colorado and Corporate & Other segments of the 2003 financial information in order to conform to the 2004 presentation. -40- Operating results for Womacks were impacted by the casino results detailed below. Market Data For the nine months ended September 30, 2004 2003 ---- ---- Market share of the Cripple Creek market 13.7% 14.9% Average number of slot machines 641 625 Market share of Cripple Creek gaming devices 14.2% 14.8% Average slot machine win per day 86 dollars 93 dollars Cripple Creek average slot machine win per day 88 dollars 92 dollars
Womacks' market share is 1.2 percentage points lower than a year ago. In June 2004 an additional casino opened in Cripple Creek, bringing the total number of casino licenses to 19 compared to 17 at the same time last year and reduced Womacks' market share of gaming devices by 4%. The Company has spent approximately $3 million in 2004 to upgrade the product mix on the gaming floor, improve the player tracking system and introduce cashless gaming machines. These ongoing improvements are expected to add to the customer experience and further improve customer service. During the first nine months of 2004, Womacks replaced approximately 149 slot machines and added 20 slot machines to the floor. During this period, the relative percentage of personnel cost, device fees and the cost of participation machines to net operating revenue contributed to the erosion in earnings from operations. Management regularly evaluates these overhead costs to maintain a good cost benefit relationship. During the nine months ended September 30, 2004, Womacks leased approximately an average of 39 slot machines from manufacturers, on which it pays a fee calculated as a percentage of the net win. All of the leases have short term commitment periods not exceeding three months and are classified as operating leases. The leases can be cancelled with no more than 30 days written notice. On a portion of the leases, the manufacturer is guaranteed a minimum fee per day that can range from 15 dollars to 35 dollars for the duration of the lease. In most instances, the branded games that are being introduced to the market are not available for purchase. For financial reporting purposes, the net win on the slot machines is included in our revenue and the amount due to the manufacturer is recorded as an expense, in the period during which the revenue is earned, as casino operating cost. Management makes its decisions to introduce these machines based on the consumer demand for the product. The amount paid under these agreements was $0.32 million and $0.32 million for the nine months ended September 30, 2004 and 2003, respectively. Management continues to focus on marketing the casino through its Gold Club in which patrons can earn rewards that can be redeemed for discounted or free meals, rooms, cash and other prizes, as well as through increased TV and radio advertising. Management continues to refine the product by upgrading both the interior of the facilities, and modifying the slot machine mix. -41- Hotel, Food and Beverage Hotel revenue, included in hotel, food and beverage revenue, increased by 16.7%, as a result of an increase in the hotel occupancy rate to 98.5% in 2004 from 85.7% in 2003, respectively. All of the revenue generated by the hotel operations is derived from comps to better players, the value of which is included in promotional allowances. In May 2004, Womacks added an additional restaurant, the "Cut Above Buffet", on the second floor of the casino. The restaurant operates on a limited schedule and provides an alternative menu for patrons of the casino. In the nine months ended September 30, 2004 food and beverage revenue increased 36.0% when compared to the same period in 2003. In the first quarter of 2003, the Gold Mine restaurant was closed and Bob's Grill was expanded in order to provide better service on the gaming floor and improve accessibility. The cost of food and beverage promotional allowances, which are included in casino costs, decreased to $0.84 million in the first nine months of 2004 from $.95 million in the first nine months of 2003. Overall cost of operating the "Cut Above Buffet" accounts for the significantly higher percentage increase in the combined cost of hotel food and beverage when compared to the percentage increase in the corresponding revenue. The "Cut Above Buffet" offers a premium menu, incurring a higher cost of sales, and has fulfilled the intention of attracting new customers to Womacks Gold Club. Other The Company allocated $0.91 million in interest expense to the Corporate & Other segment during the first nine months of 2004. Interest expense on the amounts advanced, but not repaid, to fund the Company's acquisitions and the repurchase of the Company's common stock is calculated using the effective rate on all borrowings under the RCF. The Company reduces the interest expense incurred by WMCK under the RCF by the amount of interest allocated to the Corporate & Other segment. The Company has not repaid the funds advanced for the Company's acquisitions or the repurchase of the Company's common stock, and therefore the debt and accumulated interest allocated to the Corporate & Other segment exceeded the total outstanding borrowing. As a result Womacks reported a net negative $84 thousand in interest expense and debt issuance cost. During the same period in 2003, Womacks reported interest expense and debt issuance cost, of $13 thousand, net of $1.1 million in interest expense allocated to the Corporate & Other segment. Such decrease is attributable to the decrease in the weighted-average interest rate on the borrowings under the RCF, including effects of swap agreements, to 6.35% from 8.57% and a reduction in the average outstanding balance under the RCF to $11.5 million in the first nine months of 2004 from $13.2 million in the first nine months of 2003. In January 2004, the Company sold a purchase option agreement that it had held since 1999, which would have expired on September 30, 2004, to an unrelated party for a sum of $0.20 million. As a result of the transaction, the Company recognized a pre-tax gain of $34.7 thousand in 2004, which is included in Other income, net. The Colorado segment recognized income tax expense of $1.79 million in the first nine months of 2004 versus $1.95 million in the first nine months of 2003, principally the result of a decrease in earnings before income taxes. -42- South Africa The operating results of the South African segment are those of Century Casinos Africa (Pty) Limited and its subsidiaries, primarily Century Casinos Caledon (Pty) Limited, which owns the Caledon Hotel, Spa & Casino. Improvement in the Rand versus the dollar when comparing the first nine months of 2004 to the first nine months of 2003 has had a positive impact on the reported revenues and a negative impact on expenses. -43- Operating results in U.S. dollars for the nine months ended September 30, 2004 and 2003 were as follows: (See next page for results in Rand) CALEDON For the nine months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 8,872 $ 6,275 $ 2,597 41.4% Hotel, food and beverage 1,995 1,616 379 23.5% Other (including promotional allowances) (285) (218) (67) 30.7% --------- --------- Net operating revenue 10,582 7,673 2,909 37.9% --------- --------- Costs and Expenses Casino 3,617 2,609 1,008 38.6% Hotel, food and beverage 1,791 1,578 213 13.5% General and administrative 1,491 1,077 414 38.4% Depreciation 972 771 201 26.1% --------- --------- 7,871 6,035 1,836 30.4% --------- --------- Earnings from operations 2,711 1,638 1,073 65.5% Interest expense (605) (695) 90 12.9% Other income, net 96 127 (31) -24.4% --------- --------- Earnings before Income Taxes 2,202 1,070 1,132 105.8% Provision for income taxes 635 387 248 64.1% --------- --------- Net Earnings $ 1,567 $ 683 $ 884 129.4% ========= ========= CENTURY CASINOS AFRICA Costs and Expenses General and administrative $ 58 $ 271 $ (213) -78.6% --------- -------- (Income) Loss from operations (58) (271) 213 -78.6% Interest Expense, net (261) - (261) - Other income, net 18 24 (6) -25.0% --------- -------- Earnings before Income Taxes (301) (247) (54) 21.9% Provision for income taxes (88) (68) (20) 29.4% --------- -------- Net Loss $ (213) $ (179) $ (34) 19.0% ========= ======== MINORITY INTEREST EXPENSE $ - $ (8) $ (8) -100.00% -------- -------- SOUTH AFRICA NET EARNINGS $ 1,354 $ 496 $ 858 172.9% ========= ======== Average exchange rate (Rand/USD) 6.56 7.71
-44- Operating results in Rand for the nine months ended September 30, 2004 and 2003 are as follows: CALEDON For the nine months Increase % Change ended September 30, (Decrease) Rand amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino R 58,203 R 48,400 R 9,803 20.3% Hotel, food and beverage 13,076 12,485 591 4.7% Other (including promotional allowances) (1,834) (1,614) (220) 13.6% -------- -------- Net operating revenue 69,445 59,271 10,174 17.2% -------- -------- Costs and Expenses Casino 23,713 20,145 3,568 17.7% Hotel, food and beverage 11,753 12,191 (438) -3.6% General and administrative 9,812 8,322 1,490 17.9% Depreciation 6,384 5,950 434 7.3% -------- -------- 51,662 46,608 5,054 10.8% -------- -------- Earnings from operations 17,783 12,663 5,120 40.4% Interest expense (3,984) (5,385) 1,401 -26.0% Other income, net 633 991 (358) -36.1% -------- -------- Earnings before Income Taxes 14,432 8,269 6,163 74.5% Income tax expense 4,168 2,997 1,171 39.1% -------- -------- Net Earnings R 10,264 R 5,272 R 4,992 94.7% ======== ======== CENTURY CASINOS AFRICA Costs and Expenses General and administrative R 404 R 2,083 R (1,679) -80.6% -------- -------- Loss from operations (404) (2,083) 1,679 -80.6% Interest Expense, net (1,680) - (1,680) - Other income, net 122 185 (63) -34.1% -------- -------- Earnings before Income Taxes (1,962) (1,898) (64) 3.4% Provision for income taxes (575) (549) (26) 4.7% -------- -------- Net Loss R (1,387) R (1,349) R (38) -2.8% ======== ======== MINORITY INTEREST EXPENSE R - R (71) R (71) - -------- -------- SOUTH AFRICA NET EARNINGS R 8,877 R 3,852 R 5,025 130.5% ======== ========
-45- Casino Market Data (in Rand) For the nine months ended September 30, 2004 2003 ---- ---- Market share of the Western Cape market 5.9% 6.0% Market share of Western Cape gaming devices 11.2% 10.9% Average number of slot machines 285 275 Average slot machine win per day 680 Rand 589 Rand Average number of tables 9 8 Average table win per day 2083 Rand 1,716 Rand
The Geographical differences which separate the casinos in the Western Cape and the gaming board's license management, impacts the results reported above. The results discussed below are based on the Rand to eliminate the effect of fluctuations in foreign currency exchange rates. The 20.3% increase in the casino revenue is attributable to the successful marketing efforts that include introduction of cash couponing, an expanded smoking section and improved employee and management training. The Company markets an array of amenities at the resort to its guests as a complement to the gaming experience. These currently include a 92-room hotel, a variety of dining experiences, the historic mineral hot spring and spa, the outdoor experience (a team building facility) and an equestrian center. The 0.2 million Rand change in other revenue (including promotional allowances) is attributable to the introduction of cash couponing in the second quarter of 2003 and to the expanded use of player points to attract customers. Hotel, Food and Beverage Conferences and other functions held at the resort play a significant role in the operation of the hotel. Management is attempting to gain additional exposure in this area through marketing efforts. A number of repairs in the hotel infrastructure, including electrical and plumbing, were undertaken in 2003 in order to increase the quality of the facility. Management has taken measures to offset the inflationary pressures in South Africa which have driven up base costs such as labor, supplies and utilities. Hotel revenue decreased 2.0% in the first nine months of 2004 compared to the first nine months of 2003. The average hotel occupancy rate in the first nine months of 2004 was 49.4% compared to 56.5% in the first nine months of 2003. Conference sales decreased 18.0%, while leisure sales improved 14.0%. In June 2004, CCAL added a fourth restaurant to the already varied selection. The most recent restaurant offers patrons an Italian cuisine. Food and beverage revenue increased 10.0% in the first nine months of 2004 compared to the first nine months of 2003, as a result of the additional food and beverage facility, plus changes to operating hours and a general price increase. Other The decrease in general and administrative expense at CCA is primarily related to the reduction in management services paid for and provided to CCAL. -46- Interest expense for CCAL, including debt issuance cost, decreased 26.0% as the principal balance of the term loans and capitalized leases are repaid. The weighted-average interest rate on the borrowings under the ABSA loan agreement was 16.9% in the first nine months of 2004 and 2003. Income tax expense for the current year has been reduced by 0.73 million Rand as a result of an adjustment to the prior years' tax liability. Interest expense, net for CCA is comprised exclusively of interest on debt between CCA and CRL. The interest expense is eliminated against the interest income included in the Corporate and Other segment; consequently, there is no effect on the consolidated net income. Cruise Ships Cruise ships' operating results for the nine months ended September 30, 2004 and 2003 were as follows: For the nine months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Casino $ 1,848 $ 1,244 $ 604 48.6% Other (including promotional allowances) 111 41 70 170.7% ------- ------- Net operating revenue 1,959 1,285 674 52.5% ------- ------- Costs and Expenses Casino 1,325 846 479 56.6% General and administrative - 3 (3) Depreciation 67 56 11 19.6% ------- ------- 1,392 905 487 53.8% ------- ------- Earnings from operations 567 380 187 49.2% Other income, net - 15 (15) -100.0% ------- ------- Earnings before income taxes 567 395 172 43.5% Income tax expense 17 150 (133) -88.7% ------- ------- Net Earnings $ 550 $ 245 $ 305 124.5% ======= =======
In the first nine months of 2004, the Company operated casinos on a total of eight ships: four on Silversea Cruises, one on the World of ResidenSea and three on Oceania Cruises, compared to a total of seven ships during the same period in 2003. Two ships, the Silver Cloud and the Insignia, resumed operations late in the first quarter of 2004. The Silver Cloud, a cruise ship operated by Silversea Cruises, resumed its operations on March 27, 2004 following five months of periodic maintenance. The Insignia, a cruise ship operated by Oceania Cruises, resumed its operations on March 29, 2004 following its five-month inaugural voyage, which ended in September 2003. On April 10, 2004, the Company opened a casino aboard the Nautica, a cruise ship operated by Oceania Cruises. The casino is equipped with 42 slot machines and three gaming tables. We experience severe fluctuations in the revenue generated on each cruise depending on the number and quality of the players and passengers. This is a condition that we do not control. In -47- August 2004 the Silver Wind suffered a $50 thousand loss to a single player, almost 3% of the total ship casino revenue for the period, significantly reducing the earnings from operations for the nine months ended September 30, 2004. Concession fees paid to the ship operators in accordance with the agreements accounted for $0.73 million and $0.41 million of the total casino expenses incurred in the first nine months ended September 30, 2004 and 2003, respectively. The cost of travel expenses to rotate personnel to and from the ships accounted for an increase of $23 thousand in expenses when comparing the first nine months of 2004 to 2003. Ship personnel are rotated on and off the ships and the end of their contracts or as needed. In the first nine months of 2004 there were two ships out of service for a period of two months each compared to three ships that were out of service for periods ranging from three to five months in 2003, accounting for the majority if the increase in casino expenses in the ship segment. The decrease in income tax expense is attributable to the assignment of the concession agreements from CCI to CRI as of October 1, 2003. The income assigned to CCI was taxed at a U.S. effective rate of approximately 38%. The income assigned to CRI, the Company's wholly owned subsidiary in Mauritius, is taxed the statutory rate of 15%, less current tax credits of 12%, resulting in a net rate of 3%. -48- Corporate & Other For the nine months Increase % Change ended September 30, (Decrease) Dollar amounts in thousands 2004 2003 ---- ---- Operating Revenue Other $ 115 $ 8 $ 107 1337.5% --------- --------- Net Operating Revenue 115 8 107 1337.5% Costs and Expenses Casino - - - - General and administrative 2,226 1,571 655 41.7% Depreciation 20 126 (106) -84.1% --------- --------- 2,246 1,697 549 32.4% --------- --------- Income from unconsolidated subsidiary 6 - 6 100.0% --------- --------- Loss from operations (2,125) (1,689) (436) 25.8% Interest expense (935) (1,112) (177) -15.9% Other income, net 522 267 255 95.5% Non-operating items from unconsolidated subsidiary (2) - (2) 100.0% --------- --------- Loss before income taxes and minority interest (2,540) (2,534) (6) -0.2% Income tax benefit (1,062) (1,029) (33) -3.2% Minority interest (56) - (56) 100.0% --------- --------- Net Loss $ (1,534) $ (1,505) $ (29) -1.9% ========= =========
Revenue in the corporate and other segment for the nine months ended September 30, 2004 and 2003 is comprised exclusively of fees paid by Casino Millennium under the technical services agreement. Included in the above results are corporate bonuses that were previously charged to Womacks, but which are attributable to the consolidated results of operations, the interest on debt incurred to fund the Company's acquisitions and the repurchase of the Company's common stock, and related tax effects. Included on Other income, net for the nine months ended September 30, 2004 is $0.26 million in interest income on debt between CRL and CCA. The interest income is eliminated against the interest expense included in the South African segment; consequently, there is no effect on the consolidated net income. Reclassifications have been made to the Colorado and Corporate & Other segments of the 2003 financial information in order to conform to the 2004 presentation. Additionally, general and administrative expenses increased year to date 2004 over year to date 2003 largely due to an increase in the current year estimate for corporate bonuses based on management's current estimate of annual results. The decrease in depreciation expense is attributable to the acquisition of 50% of CM. Effective January 3, 2004, the Company through its wholly-owned subsidiary, CMB, acquired an additional 40% of CM by contributing gaming equipment, valued at approximately $0.60 million. The gaming -49- equipment, previously allocated to and depreciated in the Corporate & Other segment, is depreciated by CM and therefore affects the income from unconsolidated subsidiary (see Note 8 to the condensed consolidated financial statements). Minority interest is comprised of $56 thousand for the 3.5% minority interest in the earnings of CRL. Income from unconsolidated subsidiary is comprised of the Company's 50% interest in CM earnings. Liquidity and Capital Resources Cash and cash equivalents totaled $5.0 million plus restricted cash of $0.62 million at September 30, 2004, and the Company had deficit working capital of $1.37 million. Additional liquidity may be provided by the Company's revolving credit facility ("RCF") with Wells Fargo Bank, under which the Company had a total commitment of $26 million ($20.95 million net of the quarterly reduction) and unused borrowing capacity of approximately $9.72 million at September 30, 2004. The maturity date of the borrowing commitment is August 2007. Subsequent to September 30, 2004 an amendment to the RCF changed aggregate commitment reduction schedule under the RCF. Effective with the amendment, there will be no quarterly reduction until July 1, 2005. The available balance will be reduced by $0.3 million for two quarters beginning July 1, 2005, by $0.6 million for two quarters beginning January 1, 2006, and finally by $0.72 million at the beginning of each quarter beginning July 1, 2006 until maturity in August 2007. The change in the scheduled reduction provides the Company with approximately $3.3 million additional availability over the next one and three quarter years. The Company has the flexibility to use the funds for various business projects and investments. For the nine months ended September 30, 2004, cash provided by operating activities was $5.8 million compared with $3.9 million in the prior-year period. Please refer to the condensed consolidated statements of cash flows and management's discussion of the results of operation by segment. Cash used in investing activities of $3.5 million for the first nine months of 2004 include $0.4 million towards the upgrade of the slot accounting system, $1.9 million towards new slot games, $48 thousand for new slot stools and $24 thousand for restaurant equipment at Womacks, $0.9 million in improvements to the property in Caledon, South Africa, $0.17 million in expenditures to outfit the cruise ships and $0.3 million in expenditures for other long-lived assets, less $0.2 million in proceeds from the disposition of assets. Cash used in investing activities of $2.7 million for the first nine months of 2003 consisted of: $0.7 million towards the expansion of the Womacks casino at the rear of the property that was completed in the second quarter of 2003, providing additional gaming space; $0.5 million for additional improvements to the property in Caledon, South Africa, including $61 thousand additional capitalized building costs related to the original construction; $1.3 million towards the purchase of the remaining 35% interest in Century Casinos Caledon (Pty) Limited, $1.0 million of which was applied against the minority shareholder liability and $0.3 million of which increased the carrying value of the land in Caledon; $0.2 million principally for outfitting one of the two new casinos aboard the luxury cruise ships operated by Oceania and to finish re-outfitting the Silver Wind; $0.3 million due to expenditures for other long-lived assets, net of $0.3 million in proceeds from the disposition of assets; and a decrease of $49 thousand in restricted cash. Cash used in financing activities of $2.1 million for the first nine months of 2004 consisted of net repayments of $0.5 million under the RCF with Wells Fargo, net repayments of $1.1 million under the loan agreement with ABSA, repayment of a $0.4 million from a founding shareholder, and other net repayments of $0.2 million, less net borrowing of $90 thousand from a former director and $2 thousand in proceeds from the exercise of stock options. Cash used in financing activities of $2.2 -50- million for the first nine months of 2003 consisted of net borrowings of $0.4 million under the RCF with Wells Fargo plus $8 thousand in proceeds from the exercise of stock options, less net repayments of $0.9 million under the loan agreement with ABSA, $1.3 million to acquire a loan to CCAL held by an unaffiliated minority shareholder; $1.0 million towards the repurchase of Company's stock on the open market at cost; $0.3 million towards the purchase of 132,184 shares of common stock from a former director, at a per share price of $2.26; and other net repayments of $0.4 million. In January 2000, CCI entered into an agreement with Novomatic AG in which CCI received an option to purchase seven eighths of the shares that Novomatic AG purchased in Silverstar at a price equal to 85% of their fair market value at the time of exercise. The agreement has subsequently been amended two times, most recently in October 2004 eliminating the put option held by Novomatic AG transferring the rights under the agreement from CCI to CRL and amending the call option under which CRL can require can require Novomatic AG to sell seven eighths of its shares in Silverstar to CRL. CRL can exercise the option for $1 million even if the Silverstar casino is not operational at the time of the exercise. The price of the option cannot be determined for the remaining situations at this time. If the transaction were to be completed, CRL would acquire a 7% interest in Silverstar from Novomatic AG. CRA has submitted an application to the Alberta Gaming and Liquor Commission ("AGLC") for an additional casino facility license in the greater Edmonton area. The first phase of the proposed project, The Celebrations Casino and Hotel, is planned to include a casino, food and beverage amenities, a dinner theater, a 300 space underground parking garage and a 40-room hotel. CRA is owned by CRI (previously named CRL), a wholly owned subsidiary of the Company and by 746306 Alberta Ltd, the owners of the 7.25 acre property and existing hotel which will be developed into the Celebrations project, if a license is awarded and all other approvals and funding are obtained. The Celebrations Casino and Hotel Project proposed by CRA is valued at 22 million Canadian dollars ($17.4 million), including the contribution of the existing hotel and property, valued at 2.5 million Canadian dollars ($2.0 million) by the owners of the existing hotel and an approximately 3 million Canadian dollar ($2.4 million) cash contribution by the Company which will be funded through the revolving credit facility with Wells Fargo Bank. The remaining cost of the project will be funded through new project financing. On April 19, 2004, the Company announced that CRA had been selected as the only one of nine applicants to move to step seven of eight steps of the casino licensing process in Edmonton, Alberta, Canada. This is not an approval or a guarantee that the CRA will be issued a casino facility license. Step seven is the "Investigation stage of the Casino Facility Application Process" which is a thorough due diligence investigation of the applicant and the key persons associated with the selected proposal. Although the Company cannot predict how long the due diligence process will take, once step seven is successfully completed, the eighth step will be a recommendation to the Board of the AGLC, by the evaluating committee, regarding issuance of a casino facility license. There is no assurance that a license will be issued to CRA. On October 13, 2004, the Company announced that it has signed an agreement with Central City Venture LLC ("Tollgate") to develop and operate a casino and hotel in Central City, Colorado. The proposed $40.0 million development includes a 60,000 square foot facility with 625 slot machines, six table games, 35 hotel rooms, retail, food and beverage amenities and a 500-space on-site covered parking garage connected to the casino by an environmentally controlled pedestrian walkway. The Company's contribution to the proposed project includes an initial cash capital contribution of $3.5 million, which will be funded through the revolving credit facility with Wells Fargo Bank, in return for a controlling 65% interest. The Company's partner, Tollgate, will contribute three existing non-operating casino buildings, land and land options. We expect to fund the remaining cost of the project through new project financing. Additionally, CRI entered into a Casino Services Agreement to -51- manage the property. Closing of the agreement and completion of the project is subject to various conditions and approvals, including, but not limited to securing acceptable financing, satisfactory environmental studies, licensing by the Colorado Division of Gaming, Century Casinos' Board approval and other due diligence. On October 18, 2004, the Company announced that it signed an agreement with the owners of Landmark Gaming LLC of Franklin County, Iowa, to jointly submit as co-applicant with the Franklin County Development Association (FCDA) an application to the Iowa Racing and Gaming Commission (IRGC) to develop and operate a moored barge casino, hotel and entertainment facility in Franklin County, Iowa. The proposed project includes a casino with approximately 40,000 square feet of total space, 120 hotel rooms, 600 covered parking spaces and 375 surface parking spaces. The Company's contribution to the project at closing will include an initial cash capital contribution of $1.25 million, which will be funded through the revolving credit facility with Wells Fargo Bank, in return for a 40% interest. The current owners of Landmark Gaming will contribute the land and land options in return for 60% ownership. Additionally, an affiliate of the Company will enter into a Casino Services Agreement to manage the property in return for a share in gross revenues plus a share in EBITDA. The Company's cash contribution and the beginning of construction are subject to various conditions and approvals, including, but not limited to awarding of a license by the IRGC, securing acceptable financing and other due diligence. We do not expect the IRGC to complete their selection process before December 31, 2004. In January 2004, the Company signed commitments for gaming equipment and upgrades to its slot accounting system at Womacks totaling approximately $3.0 million. As of September 30, 2004 the Company has expended or accrued $2.9 million towards the commitments. The Company's Board of Directors has approved a discretionary program to repurchase up to $5 million of the Company's outstanding common stock. During the first nine months of 2004, the Company did not purchase any shares of its common stock on the open market. Through September 30, 2004, the Company had repurchased 2,559,004 shares of its common stock at a total cost of approximately $3.8 million. Management believes that the Company's cash at September 30, 2004, together with expected cash flows from operations, its borrowing capacity under the RCF and its ability to secure additional project financing with competitive terms will be sufficient to fund its anticipated capital expenditures, pursue additional business growth opportunities for the foreseeable future, and satisfy its debt repayment obligations. There is a risk that the Company cannot obtain the financing necessary to pursue the proposed projects in Central City Colorado and Iowa. Critical Accounting Policies In accordance with recent Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor's understanding of the Company's financial results and condition and/or require complex management judgment have been expanded and are discussed below. Consolidation - The accompanying consolidated financial statements include the accounts of CCI and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The financial statements of all foreign subsidiaries consolidated herein have been converted to US GAAP for financial statement presentation purposes. Accordingly, the consolidated financial statements are presented in accordance with US GAAP. -52- In January 2004, the Company adopted FASB revised Interpretation 46 ("FIN 46 (R)"), "Consolidation of Variable Interest Entities". FIN 46(R) addresses consolidation issues by business enterprises of variable interest entities in which 1) the equity interest at risk is not sufficient to finance its activities without additional subordinated financial support, 2) the equity investors lack one or more essential characteristics of a controlling financial interest or 3) the equity investors have voting rights that are not proportionate to their economic interest. The Company has determined that CM (Note 8) is a variable interest entity as defined by FIN 46 (R). The Company has also determined that it is not the primary beneficiary as defined by FIN 46 (R) and has, therefore, accounted for the Company's 50% interest in CM under the equity method. Revenue Recognition - Casino revenue is the net win from gaming activities, which is the difference between gaming wins and losses. Management and consulting fees are recognized as revenue as services are provided unless their collectability is doubtful, in which case they are recognized on a cash basis. The incremental amount of unpaid progressive jackpot is recorded as a liability and a reduction of casino revenue in the period during which the progressive jackpot increases. Goodwill and Other Intangible Assets - The Company's goodwill results from the acquisitions of casino and hotel operations. SFAS No. 142 "Goodwill and Other Intangible Assets" addresses the methods used to capitalize, amortize and to assess impairment of intangible assets, including goodwill resulting from business combinations accounted for under the purchase method. Effective with the adoption of SFAS No. 142, the Company no longer amortizes goodwill and other intangible assets with indefinite useful lives, principally deferred casino license costs. In evaluating the Company's capitalized casino license cost related to CCAL, which comprises principally all of its other intangible assets, management considered all of the criteria set forth in SFAS No. 142 in determining its useful life. Of particular significance in that evaluation was the existing regulatory provision for annual renewal of the license at minimal cost and the current practice of the Western Cape Gambling and Racing Board ("Board") of granting such renewals as long as all applicable laws are complied with, as well as compliance with the original conditions of the casino operator license as set forth by the Board. Among other things, the Company also evaluated the following criteria; 1) the high value of the assets it has placed in service and the significant barrier that a high initial investment poses to potential competitors, 2) the future potential of the resort property, 3) the unique attraction of the resort property, 4) the dependence of the hotel and other amenities of the resort property upon the casino operation, and 5) the intentions of the Company to operate the casino indefinitely. Based on its evaluation, the Company has deemed the casino license costs to have an indefinite life. Goodwill recognized in the acquisition of 40% of the outstanding stock of CM, which has been accounted for on the equity method, was $0.57 million. Included in assets at September 30, 2004 is unamortized goodwill of approximately $8.67 million and unamortized casino license costs of approximately $1.88 million. The Company will continue to assess goodwill and other intangibles for impairment at least annually. Management has not identified any impairment indicators with respect to the casino license or goodwill during the three and nine months ended September 30, 2004. Impairment of Long-Lived Assets - The Company reviews long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication of impairment, which is estimated as the difference between anticipated undiscounted future cash flows and carrying value, the carrying amount of the asset is written down to its estimated fair value by a charge to operations. Fair value is estimated based on the present value of estimated future cash flows using a discount rate commensurate with the risk involved. Estimates of future cash flows are inherently subjective and are based on management's best assessment of expected future conditions. -53- The carrying value of the non-operating property held for sale in Wells Nevada, is subject to periodic evaluation. The property has been listed for sale since April 1998. In 2001 we attempted to reach agreement with an interested third-party that would have recouped our investment through a long-term lease agreement that contained a purchase option, which enabled us to conclude that the carrying value was still reasonable. We could not reach an agreement and, as the result of no further activity, reduced the value of the property to its estimated fair value in 2002. An appraisal of the property, which was completed on January 26, 2004, continues to support the net fair value of the assets as recorded in the Consolidated Balance Sheet as of September 30, 2004. Foreign Exchange - Current period transactions affecting the profit and loss of operations conducted in foreign currencies are valued at the average exchange rate for the period in which they are incurred. Except for equity transactions and balances denominated in U.S. dollars, the balance sheet is translated based on the exchange rate at the end of the period. -54- CENTURY CASINOS, INC. AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK -------------------------------------------------------------------------------- We are exposed to market risk principally related to changes in interest rates and foreign currency exchange rates. To mitigate some of these risks, we utilize derivative financial instruments to hedge these exposures. We do not use derivative financial instruments for speculative or trading purposes. All of the potential changes noted below are based on information available at September 30, 2004. Actual results may differ materially. Interest Rate Sensitivity The Company is subject to interest rate risk on the outstanding borrowing under the RCF with Wells Fargo Bank. Interest on the agreement is variable based on the interest rate option selected by the Company, whereby the interest on the outstanding debt is subject to fluctuations in the prime interest rate as set by Wells Fargo, or LIBOR. In order to minimize the risk of increases in the prime rate or LIBOR, the Company has one remaining interest-rate swap agreement on a total of $4.0 million notional amount of debt. In 1998, the Company entered into a five-year interest rate swap agreement that matured on October 1, 2003 on $7.5 million notional amount of debt under the RCF, whereby the Company paid a LIBOR-based fixed rate of 5.55% and received a LIBOR-based floating rate reset quarterly based on a three-month rate. In May 2000, the Company entered into a second five-year interest rate swap agreement which matures on July 1, 2005 on $4.0 million notional amount of debt under the RCF, whereby the Company pays a LIBOR-based fixed rate of 7.95% and receives a LIBOR-based floating rate reset quarterly based on a three-month rate. Generally, the swap arrangement is advantageous to the Company to the extent that interest rates increase in the future and disadvantageous to the extent that they decrease. Therefore, by entering into the interest rate swap agreements, we have a cash flow risk when interest rates drop. With the expiration of the swap agreement on the $7.5 million notional amount of debt on October 1, 2003, each hypothetical 100 basis point increase results in an increased use of $40 thousand in cash on an annual basis. In an environment of falling interest rates, as we have seen in the last two years, the swap agreements are disadvantageous. Without the swap agreements the weighted-average interest rate on the RCF for the three months ended September 30, 2004 and 2003 would have been 4.60% and 4.47%, respectively and for the nine months ended September 30, 2004 and 2003 would have been 4.01% and 4.00%. The Company has not entered into any new swap agreements subsequent to September 30, 2004. Foreign Currency Exchange Risk A total of 39.7% of our revenue for the nine months ended September 30, 2004 was derived from our South African operations and principally denominated in South African Rand. A total of 39.4% of our expenses for the nine months ended September 30, 2004 were paid in currencies other than US dollars of which 37.9% were paid in South African Rand and 1.5% were paid in Euros. Our US operations generate revenues denominated in US dollars. If an arrangement provides for us to receive payments in a foreign currency, revenue realized from such an arrangement may be lower if the value of such foreign currency declines. Similarly, if an arrangement provides for us to make payments in a foreign currency, cost of services and operating expenses for such an arrangement may be higher if the value of such foreign currency increases. For example, 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. If the international portion of our business continues to grow, more revenue and expenses will be denominated in foreign currencies, which increases our exposure to fluctuations in currency exchange rates. We have not hedged against foreign currency exchange rate changes related to our international operations. -55- CENTURY CASINOS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- Item 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (which are designed to ensure that information required to be disclosed in the reports submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms) as of the end of the period covered by this report. Based on their evaluation, the Company's principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. * * * * * * * * * * * * * * * * * * * * -56- PART II OTHER INFORMATION Item 1. - Legal Proceedings The Company is not a party to, nor is it aware of, any pending or threatened litigation which, in management's opinion, could have a material adverse effect on the Company's financial position or results of operations. Items 2 to 5 - None Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits - The following exhibits are filed herewith: 10.132 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. 10.133 Limited Liability Company Agreement of CC Tollgate LLC dated as of October 12, 2004. 10.134 Casino Services Agreement by and between CC Tollgate LLC and Century Resorts International Limited dated October 12, 2004. 10.135 Memorandum of Understanding by and between Gayle Burnett, Roger Burnett, B. Michael Dunn and Century Casinos, Inc. dated October 13, 2004. 10.136 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. 10.137 Amended and Restated Brokerage Agreement between Novomatic AG and Century Resort Limited (rights transferred from Century Casinos Inc.) dated October 1, 2004 10.138 Employment agreement by and between Century Casinos Inc. and Mr. Richard S. Rabin, Chief Operating Officer, North America dated July 19, 2004 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chairman of the Board and Chief Executive Officer. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Vice-Chairman and President. 31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chief Accounting Officer. 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chairman of the Board and Chief Executive Officer. 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Vice-Chairman and President. 32.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chief Accounting Officer -56- (b) Reports on Form 8-K: On July 30, 2004, the Registrant furnished a Current Report on Form 8-K, reporting Item 12, in which it announced it had posted to its website a presentation of the review of financial results of operations and financial condition as of and for the period ended June 30, 2004. SIGNATURES: Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURY CASINOS, INC. /s/ Larry Hannappel --------------------------- Larry Hannappel Chief Accounting Officer Date: October 28, 2004 -57-