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