Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS
OF OPERATIONS
Forward-Looking
Statements, Business Environment and Risk Factors
This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. In
addition, Century Casinos, Inc. (the “Company”) may make other written and oral
communications from time to time that contain such
statements. Forward-looking statements include statements as to
industry trends and future expectations of the Company and other matters that
do
not relate strictly to historical facts and are based on certain assumptions
by
management. These statements are often identified by the use of words
such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,”
“estimate,” or “continue,” and similar expressions or
variations. These statements are based on the beliefs and assumptions
of the management of the Company based on information currently available to
management. Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could cause actual results to
differ materially from the forward-looking statements include, among others,
the
risks described in the section entitled “Risk Factors” under Item 1A in our
Annual Report on Form 10-K filed on March 16, 2007. We caution the reader to
carefully consider such factors. Furthermore, such forward-looking
statements speak only as of the date on which such statements are
made. We undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such
statements.
This
report includes amounts translated into U.S. dollars from certain foreign
currencies. For a description of the currency conversion methodology and
exchange rates used for certain transactions, see Note 1 to the condensed
consolidated financial statements included elsewhere in this
report.
References
in this item to “we,” “our,” or “us” are to the Company and its subsidiaries on
a consolidated basis unless the context otherwise requires.
OVERVIEW
Our
executive officers review operating results, assess performance and make
decisions related to the allocation of resources on a property-by-property
basis. We, therefore, believe that each property is an operating segment. In
order to provide more detail than would be possible on a consolidated basis,
our
properties have been grouped as follows to facilitate discussion of our
operating results:
Cripple
Creek, Colorado
includes the operating results of WMCK Venture Corp.
(“WMCK”) and subsidiaries, which own Womacks Casino and Hotel (“Womacks”) in
Cripple Creek, Colorado.
Edmonton,
Canada
includes the operating results of Century Resorts Alberta, Inc. (and
its sister company 1214741 Alberta Ltd.), which owns and operates the Century
Casino & Hotel in Edmonton, Alberta, Canada.
Caledon,
South Africa
includes the operating results of Century Casinos Caledon (Pty)
Ltd. (“CCAL”), which operates the Caledon Hotel, Spa and Casino, and its related
food service operation.
Newcastle,
South Africa
includes the operating results of Century Casino Newcastle
(Pty) Ltd. (“CNEW”), which owns and operates Century Casino Newcastle in
Newcastle, South Africa and its related food service operation.
Central
City, Colorado
includes the operating results of Century Casinos Tollgate,
Inc., which owns a majority interest in and operates a casino and hotel in
Central City, Colorado.
All
Other Operating Segments
includes the operating results of the shipboard
operations for which the Company has casino concession agreements and,
subsequent to April 13, 2006, the operating results of Century Casino Millennium
(“CM”) located in Prague, Czech Republic.
Corporate
operations include, among other items, the expenses associated with being a
public company, including Sarbanes-Oxley Act compliance, the results of our
equity investment in Casinos Poland and general corporate overhead
expenses.
CONSOLIDATED
RESULTS OF OPERATIONS
We
reported net operating revenue of $24.7 million and $17.0 million for the three
months ended September 30, 2007 and 2006, respectively, and $68.5 million and
$38.3 million for the nine months ended September 30, 2007 and 2006,
respectively. Casino revenue was $23.2 million and $16.3 million for
the three months ended September 30, 2007 and 2006, respectively, and was $64.5
million and $36.7 million for the nine months ended September 30, 2007 and
2006,
respectively. Casino expense was $9.2 million and $6.7 million for the three
months ended September 30, 2007 and 2006, respectively, and $25.8 million and
$14.4 million for the nine months ended September 30, 2007 and 2006,
respectively. General and administrative expense was $7.2 million and
$5.1 million for the three months ended September 30, 2007 and 2006,
respectively. General and administrative expense was $20.0 million and $12.7
million for the nine months ended September 30, 2007 and 2006,
respectively. Depreciation expense was $2.0 million and $1.3 million
for the three months ended September 30, 2007 and 2006, respectively, and $6.3
million and $3.0 million for the nine months ended September 30, 2007 and 2006,
respectively.
Total
earnings from operations were $3.6 million and $2.7 million for the three months
ended September 30, 2007 and 2006, respectively, and $8.5 million and $5.2
million for the nine months ended September 30, 2007 and 2006,
respectively.
We
recorded income tax expense of less than $0.1 million and an income tax benefit
of less than $0.1 million for the three months ended September 30, 2007 and
2006, respectively. Income tax expense was $0.7 million and $0.4 million for
the
nine months ended September 30, 2007 and 2006, respectively.
Our
net
earnings were $1.9 million, or $0.08 per basic share, and $1.9 million, or
$0.08
per basic share, for the three months ended September 30, 2007 and 2006,
respectively. Net earnings were $4.5 million, or $0.20 per basic share, and
$4.9
million, or $0.21 per basic share, for the nine months ended September 30,
2007
and 2006, respectively.
The
most
significant impacts on reported earnings for the three months ended September
30, 2007 were:
|
·
|
Our
new casinos in Central City, Colorado, Newcastle, South Africa and
Edmonton, Canada contributed $7.2 million towards the total increase
of
$7.7 million in net operating revenue and contributed $4.9 million
towards
the total increase of $6.9 million in net operating
expenses;
|
|
·
|
Corporate
expenses increased $1.2 million for the three months ended September
30,
2007 compared to the three months ended September 30, 2006, primarily
due
to a $0.5 million increase in payroll resulting from additional staffing
and the amortization of costs associated with restricted stock and
stock
options issued in July 2007 and $0.1 million in increased legal,
accounting and other professional fees expenses. In addition, for
the
three months ended September 30, 2006, the Company recovered approximately
$0.4 million of previously written off loans in conjunction with
the sale
of our interest in a casino project located in Gauteng, South Africa;
and
|
|
·
|
Net
interest charges increased $0.4 million primarily due to the interest
charges on bank debt that funded the construction of the three new
casinos.
|
The
most
significant impacts on reported earnings for the nine months ended September
30, 2007 were:
|
·
|
Our
new casinos in Central City, Colorado, Newcastle, South Africa and
Edmonton, Canada contributed $29.1 million towards the total increase
of
$30.1 million in net operating revenue and contributed $22.9 million
towards the total increase of $26.9 million in net operating
expenses;
|
|
·
|
Corporate
expenses increased $2.5 million for the nine months ended September
30,
2007 as compared to the nine months ended September 30, 2006 primarily
because of $0.5 million in increased travel and communication expenses,
$0.7 million in increased professional fees which includes an arbitration
with one of our cruise ship based casinos, and $0.6 million in increased
payroll due to an increase in the number of corporate employees to
support
the Company’s growth and the amortization of costs associated with
restricted stock and stock options issued in July 2007. In addition,
for
the nine months ended September 30, 2006, the Company recovered
approximately $0.4 million of previously written off loans in conjunction
with the sale of our interest in a casino project located in Gauteng,
South Africa; and
|
|
·
|
Net
interest charges increased $3.3 million primarily due to the interest
charges on bank debt that funded the construction of the three new
casinos.
|
A
discussion by segment follows below.
CRIPPLE
CREEK, COLORADO
The
operating results of the Cripple Creek, Colorado segment, includes the
operations of Womacks. Intercompany transactions, including fees to its parent,
interest and their related tax effects have been eliminated within the segment’s
results. Operational results for the three and nine months ended September
30,
2007 and 2006 are as follows:
|
|
For
the three months
ended
September 30,
|
|
|
For
the nine months
ended
September 30,
|
|
Amounts
in thousands
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
5,392
|
|
|
$
|
5,126
|
|
|
$
|
14,742
|
|
|
$
|
13,768
|
|
Hotel,
food and beverage
|
|
|
444
|
|
|
|
400
|
|
|
|
1,104
|
|
|
|
1,043
|
|
Other
(net of promotional allowances)
|
|
|
(825
|
)
|
|
|
(796
|
)
|
|
|
(2,336
|
)
|
|
|
(2,277
|
)
|
Net
operating revenue
|
|
|
5,011
|
|
|
|
4,730
|
|
|
|
13,510
|
|
|
|
12,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
1,716
|
|
|
|
1,218
|
|
|
|
4,644
|
|
|
|
3,590
|
|
Hotel,
food and beverage
|
|
|
450
|
|
|
|
424
|
|
|
|
1,211
|
|
|
|
1,076
|
|
General
and administrative
|
|
|
1,013
|
|
|
|
1,021
|
|
|
|
2,851
|
|
|
|
2,921
|
|
Depreciation
|
|
|
399
|
|
|
|
399
|
|
|
|
1,183
|
|
|
|
1,211
|
|
Total
operating costs and expenses
|
|
|
3,578
|
|
|
|
3,062
|
|
|
|
9,889
|
|
|
|
8,798
|
|
Earnings
from operations
|
|
|
1,433
|
|
|
|
1,668
|
|
|
|
3,621
|
|
|
|
3,736
|
|
Interest
income
|
|
|
3
|
|
|
|
6
|
|
|
|
8
|
|
|
|
12
|
|
Interest
(expense)
|
|
|
28
|
|
|
|
(103
|
)
|
|
|
10
|
|
|
|
(306
|
)
|
Other
(expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
Earnings
before income taxes
|
|
|
1,464
|
|
|
|
1,571
|
|
|
|
3,638
|
|
|
|
3,442
|
|
Income
tax expense
|
|
|
556
|
|
|
|
605
|
|
|
|
1,383
|
|
|
|
1,307
|
|
Net
Earnings
|
|
$
|
908
|
|
|
$
|
966
|
|
|
$
|
2,255
|
|
|
$
|
2,135
|
|
Casino
Market Data
|
|
For
the three months
ended
September 30,
|
|
|
For
the nine months
ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Market
share of the Cripple Creek gaming revenue*
|
|
|
12.5
|
%
|
|
|
12.0
|
%
|
|
|
12.3
|
%
|
|
|
11.6
|
%
|
Average
number of slot machines
|
|
|
586
|
|
|
|
585
|
|
|
|
590
|
|
|
|
584
|
|
Market
share of Cripple Creek gaming devices*
|
|
|
12.7
|
%
|
|
|
12.4
|
%
|
|
|
12.7
|
%
|
|
|
12.3
|
%
|
Average
slot machine win per day
|
|
$
|
101
|
|
|
$
|
94
|
|
|
$
|
90
|
|
|
$
|
85
|
|
Cripple
Creek average slot machine win per day*
|
|
$
|
103
|
|
|
$
|
96
|
|
|
$
|
92
|
|
|
$
|
89
|
|
*Source:
Colorado Division of Gaming
The
Womacks casino is one of the larger gaming facilities in Cripple
Creek. Management continues to focus on the marketing of Womacks
through the player’s club. Womacks has continued the effort to improve the
customer experience by converting 450 slot machines, which represent more than
77% of the total machines on the floor, to Ticket in/Ticket Out (“TITO”) devices
at September 30, 2007, compared to 63% at September 30, 2006. Management uses
points and coupons to attract customers with the expectation of increasing
gaming revenue, while monitoring and adjusting the programs as
necessary. Based on management’s ongoing evaluation of the comp
policies at the casino, the cost of points and coupons is in line with
management’s expectations and prior year results. There were a number of changes
made in key management positions at Womacks during the third quarter of 2006,
which have contributed to improved results at the property.
In
2008,
a casino that is larger than Womacks is expected to open in Cripple Creek.
Management believes this casino will have approximately 700 slot machines and
14
table games and will introduce further competition to our casino.
The
casino is currently undergoing a $2.0 million renovation project. The Company
expects to be able to capitalize a majority of this cost.
During
the second quarter of 2007, the Colorado legislature approved a bill banning
smoking at Colorado casinos starting January 1, 2008. This could result in
fewer
customers who smoke or more customers who do not smoke visiting Womacks, which
would affect our results.
Three
months ended September 30, 2007 compared to 2006
Casino
revenue for the three months ended September 30, 2007 was 5.2% higher than
during the same period last year, and net operating revenue increased 5.9%
as a
result of increased marketing efforts which contributed to a 7.4% increase
in
average slot machine win per day. Womacks’ market share of gaming devices
increased 2.4% in the three months ended September 30, 2007 over the same period
last year. For the entire Cripple Creek market, gaming revenue increased during
the three months ended September 30, 2007, closing 2.6% higher than the same
period last year.
Casino
expense increased by 40.9%, or $0.5 million, for the three months ended
September 30, 2007 as compared to the three months ended September 30, 2006,
primarily the result of $0.2 million in increased marketing expenditures related
to a special promotion in the third quarter of 2007 and a $0.2 million increase
in gaming taxes and royalties resulting from the increase in casino revenue
for
the period.
General
and administrative expense remained flat period over period.
Interest
expense decreased $0.1 million as the average debt balance for the casino was
less than $0.1 million. The casino has repaid a majority of its
outstanding debt on the Womacks credit facility, which reduced the casino’s
average debt balance for the period. The majority of the amount outstanding
under the casino’s revolving credit facility relates to funding provided to the
Corporate segment. Whenever the advances to the Corporate segment exceed the
outstanding borrowings, the Cripple Creek segment reports negative interest
expense.
Cripple
Creek’s effective tax rate has remained stable at approximately 38.0% for the
three months ended September 30, 2007 as compared to 38.5% for the three months
ended September 30, 2006.
Nine
months ended September 30, 2007 compared to 2006
Management
believes that January 2007 revenues in Cripple Creek were negatively impacted
by
a series of winter storms that occurred during the month. Strong
revenue growth since that time has offset the January results. Casino revenue
for the nine months ended September 30, 2007 was 7.1% higher than
during
the same period last year and net operating revenue increased 7.8%, the result
of successful marketing efforts which contributed to a 5.9% increase in average
win per day. Womacks’ market share of gaming devices increased 3.3% in the nine
months ended September 30, 2007 over the same period in 2006. For the entire
Cripple Creek market, gaming revenue increased less than 1% for the nine months
ended September 30, 2007 as compared to the nine months ended September 30,
2006.
Casino
expense increased by 29.4%, or $1.1 million, for the nine months ended September
30, 2007 as compared to the nine months ended September 30, 2006, primarily
the
result of $0.3 million in increased marketing expenditures related to a special
promotion in the third quarter of 2007, a $0.5 million increase in gaming taxes
and royalties resulting from the increase in casino revenue for the period
and a
$0.2 million increase in payroll.
General
and administrative expense remained flat period over period.
Interest
expense decreased $0.3 million for the nine months ended September 30, 2007.
The
casino has repaid a majority of its outstanding debt on the Womacks credit
facility, which reduced the casino’s average debt balance for the period. The
majority of the amount outstanding under the facility relates to funding
provided to the Corporate segment. Whenever the advances to the Corporate
segment exceed the outstanding borrowings, Cripple Creek segment reports
negative interest expense.
Cripple
Creek’s effective tax rate has remained stable at approximately 38.0% for each
of the nine months ended September 30, 2007 and 2006.
CENTRAL
CITY, COLORADO
We
opened
a casino and hotel in Central City, Colorado on July 11, 2006. Prior
to July 11, 2006, operating expenses for this segment consisted primarily of
pre-opening and non-capitalizable construction expenditures. Intercompany
transactions, including fees to its parent, interest and their related tax
effects have been eliminated within the segment’s results. The operating results
of the Central City, Colorado segment for the three and nine months ended
September 30, 2007 and 2006 are as follows:
|
|
For
the three months
ended
September 30,
|
|
|
For
the nine months
ended
September 30,
|
|
Amounts
in thousands
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
6,312
|
|
|
$
|
4,475
|
|
|
$
|
16,898
|
|
|
$
|
4,475
|
|
Hotel,
food and beverage
|
|
|
732
|
|
|
|
432
|
|
|
|
1,903
|
|
|
|
432
|
|
Other
(net of promotional allowances)
|
|
|
(1,090
|
)
|
|
|
(219
|
)
|
|
|
(3,272
|
)
|
|
|
(219
|
)
|
Net
operating revenue
|
|
|
5,954
|
|
|
|
4,688
|
|
|
|
15,529
|
|
|
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
2,441
|
|
|
|
2,425
|
|
|
|
6,530
|
|
|
|
2,468
|
|
Hotel,
food and beverage
|
|
|
597
|
|
|
|
661
|
|
|
|
1,709
|
|
|
|
661
|
|
General
and administrative
|
|
|
1,147
|
|
|
|
968
|
|
|
|
3,387
|
|
|
|
1,663
|
|
Depreciation
|
|
|
762
|
|
|
|
451
|
|
|
|
2,173
|
|
|
|
451
|
|
Total
operating costs and expenses
|
|
|
4,947
|
|
|
|
4,505
|
|
|
|
13,799
|
|
|
|
5,243
|
|
Earnings
(loss) from operations
|
|
|
1,007
|
|
|
|
183
|
|
|
|
1,730
|
|
|
|
(555
|
)
|
Interest
income
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Interest
(expense)
|
|
|
(734
|
)
|
|
|
(1,281
|
)
|
|
|
(2,389
|
)
|
|
|
(1,766
|
)
|
Other
(expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
Earnings
(loss) before income taxes and minority interest
|
|
|
279
|
|
|
|
(1,098
|
)
|
|
|
(654
|
)
|
|
|
(2,321
|
)
|
Income
tax expense (benefit)
|
|
|
191
|
|
|
|
(247
|
)
|
|
|
188
|
|
|
|
(401
|
)
|
Earnings
(loss) before minority interest
|
|
|
88
|
|
|
|
(851
|
)
|
|
|
(842
|
)
|
|
|
(1,920
|
)
|
Minority
Interest
|
|
|
(224
|
)
|
|
|
(446
|
)
|
|
|
(1,149
|
)
|
|
|
(1,265
|
)
|
Net
earnings (loss)
|
|
$
|
312
|
|
|
$
|
(405
|
)
|
|
$
|
307
|
|
|
$
|
(655
|
)
|
Casino
Market Data
|
|
For
the three months
ended
September 30,
|
|
|
For
the nine months
ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
Market
share of the Central City gaming revenue*
|
|
|
28.5
|
%
|
|
|
21.1
|
%
|
|
|
27.5
|
%
|
N/A
|
Average
number of slot machines
|
|
|
580
|
|
|
|
488
|
|
|
|
572
|
|
N/A
|
Market
share of Central City gaming devices*
|
|
|
26.6
|
%
|
|
|
22.3
|
%
|
|
|
26.2
|
%
|
N/A
|
Average
slot machine win per day
|
|
$
|
115
|
|
|
$
|
109
|
|
|
$
|
105
|
|
N/A
|
Central
City average slot machine win per day*
|
|
$
|
107
|
|
|
$
|
115
|
|
|
$
|
100
|
|
N/A
|
*Source:
Colorado Division of Gaming
Revenue
at our Century Casino in Central City has not yet met our expectations. However,
gaming revenue has grown consistently since opening, with our highest monthly
revenue occurring in September 2007. The property is currently operating with
572 slot machines. We are currently reviewing various strategies to
increase revenue, which includes the potential addition of more slot machines
in
the future. Management has focused on the development of player club
memberships, with results being better than expected. We now have approximately
71,000 players in our player club database. Management’s marketing
strategy continues to focus on direct marketing to the players in our database.
After some initially higher than expected costs, casino costs are now in line
with management’s expectations based on current casino revenue.
During
the second quarter of 2007, the Colorado legislature approved a bill banning
smoking at Colorado casinos starting January 1, 2008. This could result in
fewer
customers who smoke or more customers who do not smoke visiting our casino
in
Central City, which would affect our results.
Three
months ended September 30, 2007 compared to September 30,
2006
Casino
revenue for the three months ended September 30, 2007 was 41.1% higher than
during the same period last year, and net operating revenue increased 27.0%
as a
result of increased marketing efforts which contributed to a 5.5% increase
in
average slot machine win per day. The Century Casino’s market share of gaming
devices increased 19.3%. For the entire Central City market, gaming revenue
increased during the three months ended September 30, 2007, closing 1.6% higher
than the same period last year.
Casino
expense remained flat period over period. Increases in gaming taxes and other
variable expenses were offset by decreases in marketing charges. Our marketing
charges for the three months ended September 30, 2006 were higher than usual
due
to the opening of the casino in July 2006.
General
and administrative expense increased 18.5%, or $0.2 million, for the three
months ended September 30, 2007 primarily due to increased property taxes and
professional fees.
For
the
three months ended September 30, 2007, the $0.5 million decrease in interest
expense relates to interest that we are incurring based on an average debt
balance of approximately $22.5 million. In an effort to reduce third party
interest charges, we repaid $12.5 million of debt in March 2007, utilizing
cash
on hand from other Company resources.
The
calculation of minority interest is determined prior to the elimination of
intercompany management fees and interest.
Because
CC Tollgate LLC, the operating company of this segment, is a limited liability
company, income taxes are provided for on income that will be allocated to
us
using an effective tax rate of 38%. Pre-tax income is reduced by the minority
interest in determining the income subject to tax.
Nine
months ended September 30, 2007 compared to 2006
Casino
revenue and casino expense for the nine months ended September 30, 2007
represent a full nine months of operation. The casino opened in July 2006.
Therefore, casino revenue and casino expense for the nine months ended September
30, 2006 is based upon approximately 2.5 months of operation.
General
and administrative expense increased $1.7 million for the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006
primarily due to a $0.8 million increase in property tax assessments, a $0.5
million increase in payroll and a $0.4 million increase in utilities and
maintenance fees. The casino opened in July 2006. Prior to this time, a
significant portion of general and administrative expenses reflect the
cumulative pre-opening costs associated with the project.
For
the
nine months ended September 30, 2007, the $0.6 million increase in interest
expense relates to interest that we are incurring based on an average debt
balance of approximately $25.2 million. In an effort to reduce third party
interest charges, we repaid $12.5 million of debt in March 2007, utilizing
cash
on hand from other Company resources. For the nine months ended September 30,
2006, a majority of our interest charges were capitalized towards the cost
of
the construction of the casino and hotel.
In
April
2006, we began allocating pre-tax losses to the minority partner in proportion
to its ownership percentage. Prior to this date, by agreement all losses were
allocated to the minority partner until its capital account balances were in
the
same proportion as its ownership percentage. The calculation of minority
interest is determined prior to the elimination of intercompany management
fees
and interest.
Because
CC Tollgate LLC, the operating company of this segment, is a limited liability
company, income taxes are provided for on income that will be allocated to
us
using an effective tax rate of 38%. Pre-tax income is reduced by the minority
interest in determining the income subject to tax.
EDMONTON,
CANADA
We
opened
a casino and hotel in Edmonton, Alberta, Canada on November 17,
2006. Prior to this date, operating expenses for this segment
consisted primarily of pre-opening and non-capitalizable construction
expenditures. Intercompany transactions, including fees to its parent, interest
and their related tax effects have been eliminated within the segment’s results.
The operating results of the Edmonton, Canada segment for the three and nine
months ended September 30, 2007 and 2006 are as follows (See next page for
results in Canadian dollars):
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
$
|
3,759
|
$
|
-
|
$
|
10,309
|
$
|
-
|
Hotel,
food and beverage
|
|
1,066
|
|
-
|
|
2,913
|
|
-
|
Other
(net of promotional allowances)
|
|
105
|
|
1
|
|
340
|
|
3
|
Net
operating revenue
|
|
4,930
|
|
1
|
|
13,562
|
|
3
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
1,368
|
|
8
|
|
3,837
|
|
9
|
Hotel,
food and beverage
|
|
905
|
|
27
|
|
2,660
|
|
32
|
General
and administrative
|
|
1,139
|
|
129
|
|
3,397
|
|
234
|
Depreciation
|
|
347
|
|
6
|
|
954
|
|
14
|
Total
operating costs and expenses
|
|
3,759
|
|
170
|
|
10,848
|
|
289
|
Earnings
(loss) from operations
|
|
1,171
|
|
(169)
|
|
2,714
|
|
(286)
|
Interest
income
|
|
13
|
|
4
|
|
57
|
|
16
|
Interest
(expense)
|
|
(373)
|
|
(101)
|
|
(1,031)
|
|
(110)
|
Other
(expense), net
|
|
(11)
|
|
(21)
|
|
(16)
|
|
(9)
|
Earnings
(loss) before income taxes
|
|
800
|
|
(287)
|
|
1,724
|
|
(389)
|
Income
tax expense (benefit)
|
|
266
|
|
(88)
|
|
586
|
|
(126)
|
Net
earnings (loss)
|
$
|
534
|
$
|
(199)
|
$
|
1,138
|
$
|
(263)
|
Average
exchange rate (CAD/USD)
|
|
1.04
|
|
1.12
|
|
1.10
|
|
1.13
|
Operating
results in Canadian dollars for the three and nine months ended September 30,
2007 and 2006 were as follows:
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
CAD
|
3,949
|
CAD
|
-
|
CAD
|
11,323
|
CAD
|
-
|
Hotel,
food and beverage
|
|
1,113
|
|
-
|
|
3,209
|
|
-
|
Other
(net of promotional allowances)
|
|
117
|
|
-
|
|
381
|
|
3
|
Net
operating revenue
|
|
5,179
|
|
-
|
|
14,913
|
|
3
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
1,421
|
|
9
|
|
4,213
|
|
10
|
Hotel,
food and beverage
|
|
937
|
|
31
|
|
2,920
|
|
36
|
General
and administrative
|
|
1,226
|
|
144
|
|
3,764
|
|
262
|
Depreciation
|
|
362
|
|
7
|
|
1,050
|
|
16
|
Total
operating costs and expenses
|
|
3,946
|
|
191
|
|
11,947
|
|
324
|
Earnings
(loss) from operations
|
|
1,233
|
|
(191)
|
|
2,966
|
|
(321)
|
Interest
income
|
|
12
|
|
5
|
|
64
|
|
18
|
Interest
(expense)
|
|
(443)
|
|
(114)
|
|
(1,180)
|
|
(123)
|
Other
income, net
|
|
1
|
|
-
|
|
3
|
|
1
|
Earnings
(loss) before income taxes
|
|
803
|
|
(300)
|
|
1,853
|
|
(425)
|
Income
tax expense (benefit)
|
|
261
|
|
(246)
|
|
622
|
|
(140)
|
Net
Earnings
|
CAD
|
542
|
CAD
|
(54)
|
CAD
|
1,231
|
CAD
|
(285)
|
Prior
to
November 17, 2006, all costs incurred represent pre-opening
expenses.
Since
opening in November 2006, gaming revenue has continued to be slightly below
our
2007 budget expectations, due to a lower than expected return on table games.
We
do not expect this to be a continuing trend. We opened the casino with 600
slot
machines and have since increased the number of machines on the floor to 654.
With the addition of 54 slot machines since opening, we expect gaming revenues
to increase.
In
addition, delays in opening the hotel have hampered hotel, food and beverage
revenues. The hotel opened in March 2007. Hotel occupancy rates are on the
rise,
which resulted in a 32.4% increase in the third quarter 2007 from the second
quarter 2007. The dinner theatre has been transitioned into a live entertainment
and catering venue and we expect overall hotel, food and beverage revenues
to
benefit from this change.
Management
has focused on the development of player’s club memberships, with over 16,500
players in our player club database. Management’s marketing strategy
will focus on direct marketing to the players in our database, as well as the
marketing of our showroom/conference center and hotel.
We
are in
the process of reviewing the cost and staffing structure of the casino and
hotel
operations in order to bring them in line with current revenue
levels.
The
results discussed below are based on the Canadian Dollar to eliminate the impact
of the translation between the US Dollar and Canadian Dollar.
Three
months ended September 30, 2007 compared to 2006
For
the
three months ended September 30, 2007, the CAD 0.3 million increase in interest
expense relates to interest that we are incurring based on an average debt
balance of approximately $20.0 million (CAD 20.7 million). For the three months
ended September 30, 2006, a majority of our interest charges were capitalized
towards the cost of the construction of the casino and hotel.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The statutory tax rate
on income in Edmonton is currently 32.1%. The effective tax rate for
this segment for the three months ended September 30, 2007 was
32.5%.
Nine
months ended September 30, 2007 compared to 2006
For
the
nine months ended September 30, 2007, the CAD 1.1 million increase in interest
expense relates to interest that we are incurring based on an average debt
balance of approximately $19.0 million (CAD 20.7 million). For the nine months
ended September 30, 2006, this interest was capitalized towards the cost of
the
construction of the casino and hotel.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The effective tax rate for this
segment for the nine months ended September 30, 2007 was 33.6%.
CALEDON,
SOUTH AFRICA
The
operating results of the Caledon, South Africa segment are primarily those
related to the operations of the Caledon Hotel, Spa and Casino. Intercompany
transactions, including fees to its parent, interest and their related tax
effects have been eliminated within the segment’s results. Operational results
in US dollars for the three and nine months ended September 30, 2007 and 2006
are as follows (See next page for results in Rand):
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
$
|
3,912
|
$
|
3,728
|
$
|
11,369
|
$
|
11,732
|
Hotel,
food and beverage
|
|
810
|
|
676
|
|
2,342
|
|
2,182
|
Other
(net of promotional allowances)
|
|
(196)
|
|
(54)
|
|
(387)
|
|
(131)
|
Net
operating revenue
|
|
4,526
|
|
4,350
|
|
13,324
|
|
13,783
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
1,531
|
|
1,416
|
|
4,426
|
|
4,434
|
Hotel,
food and beverage
|
|
541
|
|
443
|
|
1,538
|
|
1,437
|
General
and administrative
|
|
508
|
|
696
|
|
1,707
|
|
2,277
|
Impairments
and other write-offs, net of
recoveries
|
|
-
|
|
(26)
|
|
28
|
|
(26)
|
Depreciation
|
|
329
|
|
279
|
|
973
|
|
882
|
Total
operating costs and expenses
|
|
2,909
|
|
2,808
|
|
8,672
|
|
9,004
|
Earnings
from operations
|
|
1,617
|
|
1,542
|
|
4,652
|
|
4,779
|
Interest
income
|
|
21
|
|
5
|
|
83
|
|
13
|
Interest
(expense)
|
|
(176)
|
|
(182)
|
|
(545)
|
|
(590)
|
Other
(expense) income, net
|
|
(1)
|
|
-
|
|
5
|
|
(32)
|
Earnings
before income taxes and preferred dividends
|
|
1,461
|
|
1,365
|
|
4,195
|
|
4,170
|
Income
tax expense
|
|
356
|
|
375
|
|
1,305
|
|
1,298
|
Preferred
dividends
|
|
(59)
|
|
-
|
|
(335)
|
|
-
|
Net
earnings
|
$
|
1,046
|
$
|
990
|
$
|
2,555
|
$
|
2,872
|
Average
exchange rate (ZAR/USD)
|
|
7.11
|
|
7.18
|
|
7.15
|
|
6.57
|
Operating
results in Rand for the three and nine months ended September 30, 2007 and
2006
are as follows:
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
ZAR
|
27,805
|
ZAR
|
26,773
|
ZAR
|
81,238
|
ZAR
|
77,041
|
Hotel,
food and beverage
|
|
5,753
|
|
4,873
|
|
16,739
|
|
14,337
|
Other
(net of promotional allowances)
|
|
(1,039)
|
|
(382)
|
|
(2,764)
|
|
(875)
|
Net
operating revenue
|
|
32,519
|
|
31,264
|
|
95,213
|
|
90,503
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
10,881
|
|
10,174
|
|
31,619
|
|
29,189
|
Hotel,
food and beverage
|
|
3,845
|
|
3,144
|
|
10,994
|
|
9,368
|
General
and administrative
|
|
3,441
|
|
5,010
|
|
12,219
|
|
14,994
|
Impairments
and other write-offs, net of
recoveries
|
|
-
|
|
(214)
|
|
200
|
|
(214)
|
Depreciation
|
|
2,338
|
|
2,010
|
|
6,950
|
|
5,779
|
Total
operating costs and expenses
|
|
20,505
|
|
20,124
|
|
61,982
|
|
59,116
|
Earnings
from operations
|
|
12,014
|
|
11,140
|
|
33,231
|
|
31,387
|
Interest
income
|
|
147
|
|
40
|
|
594
|
|
90
|
Interest
(expense)
|
|
(1,251)
|
|
(1,309)
|
|
(3,899)
|
|
(3,883)
|
Other
(expense) income, net
|
|
(9)
|
|
2
|
|
36
|
|
(208)
|
Earnings
before income taxes and preferred dividends
|
|
10,901
|
|
9,873
|
|
29,962
|
|
27,386
|
Income
tax expense
|
|
2,632
|
|
2,715
|
|
9,336
|
|
8,506
|
Preferred
dividends
|
|
(419)
|
|
-
|
|
(2,419)
|
|
-
|
Net
Earnings
|
ZAR
|
7,850
|
ZAR
|
7,158
|
ZAR
|
18,207
|
ZAR
|
18,880
|
Casino
Market Data (in Rand)
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|
2007
|
2006
|
2007
|
2006
|
Market
share of the Western Cape gaming revenue*
|
5.1%
|
5.7%
|
5.0%
|
5.9%
|
Market
share of Western Cape gaming devices*
|
9.9%
|
12.4%
|
10.5%
|
12.9%
|
Average
number of slot machines
|
370
|
348
|
361
|
349
|
Average
slot machine win per day
|
ZAR
770
|
ZAR
782
|
ZAR
720
|
ZAR
754
|
Average
number of tables
|
6
|
6
|
6
|
7
|
Average
table win per day
|
ZAR
2,901
|
ZAR
3,127
|
ZAR
3,131
|
ZAR
2,783
|
*Source:
Western Cape Gambling and Racing Board
The
results discussed below are based on the Rand to eliminate the effect of foreign
currency fluctuations between the US Dollar and Rand.
Three
months ended September 30, 2007 compared to 2006
Casino
revenue increased 3.9% from the three months ended September 30, 2006 to the
three months ended September 30, 2007 primarily due to a 6.3% increase in the
average number of slot machines on the floor, which offset the 1.5% decrease
in
average slot win per day. Our market share of the Western Cape gaming revenue
declined due to the opening of a new casino in the Western Cape in November
2006. In addition, the largest casino in the Western Cape increased
its total number of slot machines by 750, adding approximately 25% more slot
machines to the market. The Western Cape now operates with the maximum permitted
number of casinos. Casino expense increased 6.9% from the three months ended
September 30, 2006 to the three months ended September 30, 2007, primarily
due
to the increase in casino revenue, as well as an increase in promotional
expenses for the period.
Hotel,
food and beverage revenue increased ZAR 0.1 million for the three months ended
September 30, 2007 as compared to the three months ended September 30, 2006,
primarily due to an increase in food and beverage sales.
Other
operating revenue (net of promotional allowances) primarily consists of
promotional allowances and revenue generated from the resort’s ancillary
services.
The
ZAR
1.6 million decrease in Caledon’s general and administrative expense is
primarily the result of a decrease in professional fees and property taxes.
In
addition, Caledon wrote off approximately ZAR 0.5 million in cash vault
discrepancies during the three months ended September 30, 2006.
Depreciation
expense increased ZAR 0.3 million, primarily as a result of property
improvements made in the second half of 2006.
Interest
income on cash earned in interest bearing accounts increased ZAR 0.1 million
for
the three months ended September 30, 2007 as compared to the three months ended
September 30, 2006.
Interest
expense for CCAL decreased slightly period over period. This is due to a
reduction in the outstanding principal of our variable interest debt, offset
by
increases in the South African prime rate. The South African prime rate was
11.5% on September 30, 2006. On September 30, 2007, the rate was 13.5% and
has
subsequently increased to 14.0% in October 2007.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The marginal tax rate on income
in South Africa is currently 29%. CCAL’s effective tax rate for the three months
ended September 30, 2007 was 24% compared to 27% in the same 2006
period.
Preference
shareholders are entitled to per share dividends of 0.009% of the annual gross
gambling revenue of the Caledon Hotel, Spa and Casino after the deduction of
gaming taxes and value added tax. Caledon paid preference shareholder dividends
of approximately ZAR 0.4 million for the three months ended September 30,
2007.
Nine
months ended September 30, 2007 compared to 2006
Casino
revenue increased 5.4% in the nine months ended September 30, 2007 compared to
the nine months ended September 30, 2006, which includes an increase of 12.5%
in
average table win offset by a 4.5% decrease in average slot win. The casino
increased the number of slot machines on the floor from 350 to 370 in May
2007.
Casino expense increased 8.3% in the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006, and is directly
related to the increase in casino revenue and increased advertising
expenditures.
Hotel,
food and beverage revenue increased ZAR 2.4 million for the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006.
This
is due to an increase in our hotel occupancy rate from 42% for the first nine
months of 2006 to 59% for the first nine months of 2007, primarily the result
of
a special promotion offered by the hotel for May and June 2007 combined with
an
overall increase in room rates as a result of upgraded rooms.
Other
operating revenue (net of promotional allowances) principally consists of
promotional allowances and revenue generated from the resort’s ancillary
services.
The
ZAR
2.8 million decrease in Caledon’s general and administrative expense is
primarily the result of a decrease in payroll of ZAR 0.5 million, a decrease
in
auditing and professional fees of ZAR 0.9 million and a decrease in insurance
expenses of approximately ZAR 0.3 million, and a decrease in property taxes
of
ZAR 0.4 million.
Depreciation
expense increased ZAR 1.2 million for the nine months ended September 30, 2007
as compared to the nine months ended September 30, 2006, primarily as a result
of property improvements made in the second half of 2006.
Interest
income on cash earned in interest bearing accounts increased ZAR 0.5 million
for
the nine months ended September 30, 2007 as compared to the nine months ended
September 30, 2006.
Interest
expense for CCAL remained flat period over period. This is due to a reduction
in
the outstanding principal of our variable debt, offset by increases in the
South
African prime rate. As of September 30, 2006, the South African prime rate
was
11.5%. On September 30, 2007, the rate was 13.5% and has subsequently increased
to 14.0% in October 2007.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The marginal tax rate
on income in South Africa is currently 29%. CCAL’s effective tax rate was 31%
for both the nine months ended September 30, 2007 and 2006.
Preference
shareholders are entitled to per share dividends of 0.009% of the annual gross
gambling revenue of the Caledon Hotel, Spa and Casino after the deduction of
gaming taxes and value added tax. Caledon paid preference shareholder dividends
of approximately ZAR 2.4 million for the nine months ended September 30, 2007,
which includes a once off dividend payment of ZAR 1.2 million to the preference
shareholder that exchanged its original preference shares for Class A preference
shares in March 2007.
NEWCASTLE,
SOUTH AFRICA
The
operating results of the Newcastle, South Africa segment are primarily those
related to the operations of the Century Casino Newcastle. Intercompany
transactions, including fees to its parent, interest and their related tax
effects have been eliminated within the segment’s results. Operating results in
U.S. dollars for the three and nine months ended September 30, 2007 and 2006
were as follows (See next page for results in Rand):
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006*
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
$
|
2,499
|
$
|
1,719
|
$
|
7,549
|
$
|
3,579
|
Hotel,
food and beverage
|
|
383
|
|
113
|
|
1,007
|
|
311
|
Other
(net of promotional allowances)
|
|
3
|
|
59
|
|
39
|
|
51
|
Net
operating revenue
|
|
2,885
|
|
1,891
|
|
8,595
|
|
3,941
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
1,086
|
|
685
|
|
3,187
|
|
1,403
|
Hotel,
food and beverage
|
|
287
|
|
47
|
|
761
|
|
205
|
General
and administrative
|
|
828
|
|
552
|
|
1,976
|
|
1,040
|
Impairments
and other write-offs, net of
recoveries
|
|
(3)
|
|
-
|
|
6
|
|
-
|
Depreciation
|
|
30
|
|
38
|
|
599
|
|
144
|
Total
operating costs and expenses
|
|
2,228
|
|
1,322
|
|
6,529
|
|
2,792
|
Earnings
from operations
|
|
657
|
|
569
|
|
2,066
|
|
1,149
|
Interest
income
|
|
5
|
|
-
|
|
13
|
|
-
|
Interest
(expense)
|
|
(183)
|
|
-
|
|
(552)
|
|
(8)
|
Other
(expense), net
|
|
(3)
|
|
-
|
|
(3)
|
|
-
|
Earnings
before income taxes and minority interest
|
|
476
|
|
569
|
|
1,524
|
|
1,141
|
Income
tax expense
|
|
148
|
|
183
|
|
469
|
|
356
|
Earnings
before minority interest
|
|
328
|
|
386
|
|
1,055
|
|
785
|
Minority
Interest
|
|
7
|
|
89
|
|
197
|
|
218
|
Net
Earnings
|
$
|
321
|
$
|
297
|
$
|
858
|
$
|
567
|
Average
exchange rate (ZAR/USD)
|
|
7.11
|
7.18
|
7.15
|
6.57
|
*
We
acquired a 60% interest in Century Casino Newcastle on April 1, 2006. Prior
to
this date we had no interest in the entity.
Operating
results in Rand for the three and nine months ended September 30, 2007 and
2006
were as follows:
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006*
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
ZAR
|
17,763
|
ZAR
|
12,330
|
ZAR
|
53,939
|
ZAR
|
24,300
|
Hotel,
food and beverage
|
|
2,708
|
|
819
|
|
7,177
|
|
2,094
|
Other
(net of promotional allowances)
|
|
37
|
|
428
|
|
292
|
|
371
|
Net
operating revenue
|
|
20,508
|
|
13,577
|
|
61,408
|
|
26,765
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
7,644
|
|
4,916
|
|
22,699
|
|
9,537
|
Hotel,
food and beverage
|
|
2,031
|
|
342
|
|
5,426
|
|
1,355
|
General
and administrative
|
|
5,334
|
|
3,990
|
|
14,184
|
|
7,085
|
Impairments
and other write-offs, net of
recoveries
|
|
(22)
|
|
-
|
|
41
|
|
-
|
Depreciation
|
|
211
|
|
275
|
|
4,279
|
|
938
|
Total
operating costs and expenses
|
|
15,198
|
|
9,523
|
|
46,629
|
|
18,915
|
Earnings
from operations
|
|
5,310
|
|
4,054
|
|
14,779
|
|
7,850
|
Interest
income
|
|
35
|
|
-
|
|
92
|
|
-
|
Interest
(expense)
|
|
(1,299)
|
|
-
|
|
(3,952)
|
|
(61)
|
Other
(expense), net
|
|
(46)
|
|
-
|
|
(46)
|
|
-
|
Earnings
before income taxes and minority interest
|
|
4,000
|
|
4,054
|
|
10,873
|
|
7,789
|
Income
tax expense
|
|
1,235
|
|
1,316
|
|
3,353
|
|
2,447
|
Earnings
before minority interest
|
|
2,765
|
|
2,738
|
|
7,520
|
|
5,342
|
Minority
Interest
|
|
36
|
|
634
|
|
1,403
|
|
1,474
|
Net
Earnings
|
ZAR
|
2,729
|
ZAR
|
2,104
|
ZAR
|
6,117
|
ZAR
|
3,868
|
*
We
acquired a 60% interest in Century Casino Newcastle on April 1, 2006. Prior
to
this date we had no interest in the entity.
Casino
Market Data (in Rand)
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|
2007
|
2006
|
2007
|
2006
|
Market
share of the KwaZulu-Natal gaming revenue*
|
3.4%
|
2.4%
|
3.5%
|
2.5%
|
Market
share of KwaZulu-Natal gaming devices*
|
7.9%
|
6.3%
|
7.9%
|
6.3%
|
Average
number of slot machines
|
250
|
200
|
250
|
200
|
Average
slot machine win per day
|
ZAR
715
|
ZAR
605
|
ZAR
717
|
ZAR
589
|
Average
number of tables
|
7
|
7
|
7
|
7
|
Average
table win per day
|
ZAR
2,042
|
ZAR
1,865
|
ZAR
2,626
|
ZAR
2,154
|
*Source:
KwaZulu-Natal Gambling Board
The
results discussed below are based on the Rand to eliminate the effect of foreign
currency fluctuations between the US Dollar and Rand.
For
the
three months ended September 30, 2007, net operating revenue continues to be
in
line with our expectations. Our hotel is now fully operational. In addition
our
player’s club has shown consistent growth for the past nine months and now
stands at approximately 6,150 members.
Three
months ended September 30, 2007 compared to 2006
Casino
revenue increased 44.1% to ZAR 17.8 million for the three months ended September
30, 2007 as compared to ZAR 12.3 million for the three months ended September
30, 2006. This is directly related to the opening of our new facility in
December 2006, which management believes is superior to the old facility, and
an
increase of 50 gaming machines. Casino expense increased 55.5% to ZAR 7.6
million for the three months ended September 30, 2007 from ZAR 4.9 million
for
the three months ended September 30, 2006, primarily due to the increase in
casino revenue.
During
the three months ended September 30, 2007, a detailed review of all fixed assets
at the new facility in Newcastle was performed. As a result of the review,
we
concluded that various reclassifications amongst fixed asset categories and
estimated lives were necessary to conform to our accounting policy. This process
resulted in a depreciation adjustment of approximately ZAR 1.5 million in the
current quarter.
Interest
expense is payable on a ZAR 50.0 million term loan with Nedbank, bearing an
interest rate of South African prime less 1.5% (12.0% as of September 30, 2007,
which has subsequently increased to 12.5% in October 2007). The principal
balance outstanding under the term loan agreement was ZAR 43.4 million as of
September 30, 2007. For the three months ended September 30, 2006, interest
on
the term loan was capitalized towards the construction of the new
facility.
The
calculation of minority interest is determined prior to the elimination of
intercompany management fees.
The
income tax provisions are based on estimated full-year earnings for financial
reporting purposes and are adjusted for permanent differences. Therefore, the
tax provision will vary from period to period. The marginal tax rate on income
in South Africa is currently 29%. Newcastle’s effective tax rate was 31% and 32%
for the three months ended September 30, 2007 and 2006,
respectively.
Nine
months ended September 30, 2007
We
acquired our ownership interest in Century Casino Newcastle as of April 1,
2006. We opened a new casino facility in December 2006. Prior to this
date, casino operations were held in a temporary facility. Management believes
that the increase in net operating revenues are directly related to the opening
of our new facility. For the nine months ended September 30, 2007, net operating
revenues at the new casino continue to be in line with our
expectations.
An
additional $0.4 million (ZAR 2.5 million) will be payable to the minority
shareholders if casino revenue during the first 12 months of operation at the
new casino exceeds $13.8 million (ZAR 95.0 million). As of September 30, 2007,
we do not deem it probable that casino revenue will exceed the required
amount.
Interest
expense is payable on a ZAR 50.0 million term loan with Nedbank, bearing an
interest rate of South African prime less 1.5% (12.0% as of September 30, 2007,
which has subsequently increased to 12.5% in October 2007). The principal
balance outstanding under the term loan agreement was ZAR 43.4 million as of
September 30, 2007. For the nine months ended September 30, 2006, interest
on
the term loan was capitalized towards the construction of the new
facility.
The
income tax provisions are based on
estimated full-year earnings for financial reporting purposes and are adjusted
for permanent differences. Therefore, the tax provision will vary from period
to
period. The marginal tax rate on income in South Africa is currently 29%.
Newcastle’s effective tax rate was 31% for both the nine months ended September
30, 2007 and 2006.
ALL
OTHER OPERATING SEGMENTS
The
operating results of this segment are primarily those of our ship-based casinos
and, subsequent to April 13, 2006, Century Casino Millennium. Intercompany
transactions, including fees to its parent, interest and their related tax
effects have been eliminated within the segment’s results. Combined operating
results for the segment for the three and nine months ended September 30, 2007
and 2006 are as follows:
|
|
For
the three months
ended
September 30,
|
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Casino
|
$
|
1,289
|
$
|
1,213
|
$
|
3,674
|
$
|
3,113
|
Hotel,
food and beverage
|
|
44
|
|
6
|
|
56
|
|
13
|
Other
(net of promotional allowances)
|
|
42
|
|
99
|
|
158
|
|
226
|
Net
operating revenue
|
|
1,375
|
|
1,318
|
|
3,888
|
|
3,352
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
Casino
|
|
1,080
|
|
953
|
|
3,166
|
|
2,464
|
Hotel,
food and beverage
|
|
22
|
|
14
|
|
48
|
|
26
|
General
and administrative
|
|
87
|
|
71
|
|
274
|
|
130
|
Impairments
and other write-offs,
net
of recoveries
|
|
12
|
|
-
|
|
-
|
|
-
|
Depreciation
|
|
55
|
|
97
|
|
257
|
|
246
|
Total
operating costs and expenses
|
|
1,256
|
|
1,135
|
|
3,745
|
|
2,866
|
Earnings
from operations
|
|
119
|
|
183
|
|
143
|
|
486
|
Interest
income
|
|
7
|
|
4
|
|
16
|
|
7
|
Interest
(expense)
|
|
-
|
|
(9)
|
|
-
|
|
(23)
|
Other
(expense) income, net
|
|
(48)
|
|
1
|
|
(51)
|
|
(26)
|
Earnings
before income taxes
|
|
78
|
|
179
|
|
108
|
|
444
|
Income
tax expense
|
|
3
|
|
5
|
|
2
|
|
14
|
Net
earnings
|
$
|
75
|
$
|
174
|
$
|
106
|
$
|
430
|
Cruise
Ships
We
experience fluctuations in the casino revenue generated on each cruise depending
on the number and gaming quality of the passengers, and these fluctuations
may
be extreme. In addition, the cruise ships on which we conduct operations may
be
out of service from time to time for periodic maintenance or based on the
operating schedule of the cruise line. As a result, revenues from our cruise
ship based operations may fluctuate significantly from period to period. Cruise
ship earnings are also affected by an increase in concession fees in proportion
to the revenue.
In
January 2007, our casino concession agreement with the World of Residensea
was
extended for an unlimited period of time, subject to termination under certain
conditions. In July 2007, our casino concession agreements with Oceania Cruises
were extended through 2012.
Our
right
to operate the casinos aboard the Silver Whisper and Silver Wind, cruise ships
operated by Silversea Cruises, Ltd. (“Silversea”), terminated in July 2006 and
May 2007, respectively. On March 8, 2006, we received notification from
Silversea purporting to terminate our right to operate the casino aboard the
Silver Cloud cruise ship as of March 30, 2006; however, we believe the purported
termination was untimely under the terms of our casino concession agreement
with
Silversea, resulting in a five year
extension
of the agreement as to the Silver Cloud. In April 2006, Silversea commenced
an
arbitration proceeding with the International Chamber of Commerce International
Court of Arbitration seeking to terminate the concession agreement as to the
Silver Cloud. We have filed an answer denying that the agreement as to the
Silver Cloud was terminated and seeking to confirm that we have the right to
a
five-year extension of the agreement as well as the right to operate the casinos
on future Silversea vessels that come into operation during those five years.
We
have also filed a counterclaim seeking damages arising from the wrongful
termination of the concession agreement. We intend to continue operation of
our
casino aboard the Silver Cloud pending resolution of the arbitration, which
was
held in May 2007. The arbitrator has not yet ruled on the case.
Three
months ended September 30, 2007 compared to 2006
Cruise
ship casino revenue decreased 11.5% for the three months ended September 30,
2007 as compared to the three months ended September 30, 2006. For the three
months ended September 30, 2006, we operated casinos aboard six ships. For
the
three months ended September 2007, we operated casinos aboard five
ships.
Concession
fees paid to the ship operators in accordance with the agreements accounted
for
approximately $0.3 million of the total casino expenses incurred for both the
three months ended September 30, 2007 and 2006, respectively.
Casino
expense, excluding concession fees, increased to 50.0% of casino revenue for
the
three months ended September 30, 2007 as compared to 27.8% of casino revenue
for
the three months ended September 30, 2006, primarily due to the write off of
approximately $0.1 million in costs associated with a ship concession agreement
that the Company chose not to pursue.
The
cruise ship concession agreements are subject to an effective tax rate of 3%
in
Mauritius.
Nine
months ended September 30, 2007 compared to 2006
Cruise
ship casino revenue decreased 14.4% for the nine months ended September 30,
2007
as compared to the nine months ended September 30, 2006, primarily due to the
operation of less ship-based casinos in 2007.
Concession
fees paid to the ship operators in accordance with the agreements accounted
for
approximately $1.0 million and $1.1 million of the total casino expenses
incurred for the nine months ended September 30, 2007 and 2006,
respectively.
Casino
expense, excluding concession fees, increased to 46.1% of casino revenue for
the
nine months ended September 30, 2007 as compared to 29.2% of casino revenue
for
the nine months ended September 30, 2006, primarily due to the write off of
approximately $0.2 million in costs associated with a ship concession agreement
that the Company chose not to pursue as well as increased travel expenses
associated with employee rotation.
The
cruise ship concession agreements are subject to an effective tax rate of 3%
in
Mauritius.
Century
Casino Millennium
As
a
result of our purchase of the remaining 50% interest that we did not previously
own in CM, we began consolidating the operating results of CM on April 13,
2006.
Prior to this time, we were accounting for the results of CM as an equity-method
investment.
CM’s
casino revenue was $0.7 million and $0.5 million for the three months ended
September 30, 2007 and 2006, respectively. Casino expense was $0.4 million
for
both the three months ended September 30, 2007 and 2006,
respectively.
CM
contributed approximately $1.8 million and $0.9 million of casino revenue to
this segment for the nine months ended September 30, 2007 and 2006,
respectively. Casino expense for CM was $1.3 million and $0.7 million for the
nine months ended September 30, 2007 and 2006, respectively.
CM
accounts for substantially all of the general and administrative expense for
this segment.
CORPORATE
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
Amounts
in thousands
|
2007
|
2006
|
2007
|
2006
|
Operating
Revenue
|
|
|
|
|
|
|
|
|
Other
|
$
|
43
|
$
|
-
|
$
|
50
|
$
|
12
|
Net
operating revenue
|
|
43
|
|
-
|
|
50
|
|
12
|
|
|
|
|
|
|
|
|
|
Operating
Costs and Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
2,444
|
|
1,681
|
|
6,359
|
|
4,402
|
Impairments
and other write-offs, net of recoveries
|
|
-
|
|
(394)
|
|
-
|
|
(379)
|
Depreciation
|
|
65
|
|
23
|
|
171
|
|
50
|
Total
operating costs and expenses
|
|
2,509
|
|
1,310
|
|
6,530
|
|
4,073
|
Earnings
from unconsolidated subsidiary
|
|
37
|
|
-
|
|
91
|
|
-
|
Loss
from operations
|
|
(2,429)
|
|
(1,310)
|
|
(6,389)
|
|
(4,061)
|
Interest
income
|
|
30
|
|
137
|
|
619
|
|
547
|
Interest
(expense), net
|
|
(211)
|
|
356
|
|
(773)
|
|
1,026
|
Other
(expense) income, net
|
|
(83)
|
|
1
|
|
708
|
|
367
|
Loss
before income taxes and minority interest
|
|
(2,693)
|
|
(816)
|
|
(5,835)
|
|
(2,121)
|
Income
tax benefit
|
|
(1,493)
|
|
(900)
|
|
(3,278)
|
|
(2,054)
|
Minority
interest
|
|
47
|
|
56
|
|
130
|
|
147
|
Net
(loss) earnings
|
$
|
(1,247)
|
$
|
28
|
$
|
(2,687)
|
$
|
(214)
|
Three
months ended September 30, 2007 compared to 2006
General
and administrative expense increased $0.8 million for the three months ended
September 30, 2007 compared to the three months ended September 30, 2006,
primarily due to a $0.5 million increase in payroll resulting from additional
staffing and the amortization of costs associated with restricted stock and
stock options issued in July 2007 and $0.1 million in increased legal,
accounting and other professional fees.
In
conjunction with the sale of our interest in a casino project located in
Gauteng, South Africa, we recovered approximately $0.4 million of previously
written off loans in the three months ended September 30, 2006. This amount
is
recorded as impairments and other write-offs, net of recoveries in the three
months ended September 30, 2006.
On
March
12, 2007, we completed the acquisition of G5 Sp. z o.o. (“G5”). G5 owns 33.3% of
all shares issued by Casinos Poland (“CPL”). Our portion of CPL’s earnings are
recorded as earnings from unconsolidated subsidiary.
For
the
three months ended September 30, 2007, the segment incurred $0.2 million of
interest expense on amounts borrowed to fund the Company’s prior acquisitions.
Cripple Creek’s revolving credit facility was the primary source of this
funding. For the three months ended September 30, 2006, the net negative
interest expense results from the elimination of the interest on intercompany
debt that was used to finance our construction projects in Central City,
Colorado and Edmonton, Alberta, Canada. The interest charged to these segments
is capitalized as part of the construction costs and does not appear as interest
expense. Caledon’s loan with Nedbank was the primary source of debt that funded
the early stages of construction in Edmonton and Newcastle.
For
the
three months ended September 30, 2007, we recognized approximately $0.1 million
in foreign currency losses on the exchange of currency which is included in
other income.
The
Corporate segment includes earnings and losses sustained by multiple companies
taxed at their respective country’s rates. The mix of earnings and losses
impacts the effective rate reported in the segment. For the three months ended
September 30, 2007 and 2006, the tax benefit on net U.S. losses (primarily
resulting from our new operation in Central City, Colorado) exceeds the tax
on
net non-U.S. earnings, which are taxed at significantly lower
rates.
Nine
months ended September 30, 2007 compared to 2006
General
and administrative expense increased $2.0 million for the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006
primarily because of $0.5 million in increased travel and communication
expenses, $0.7 million in increased professional fees, which includes fees
associated with the Silversea arbitration. We also have increased our payroll
by
$0.6 million due to an increase in the number of corporate employees to support
the Company’s growth and the amortization of costs associated with restricted
stock and stock options issued in July 2007.
Depreciation
expense increased $0.1 million in the nine months ended September 30, 2007
as
compared to the nine months ended September 30, 2006 due to the upgrade of
our
computer accounting system in the second half of 2006.
In
conjunction with the sale of our interest in a casino project located in
Gauteng, South Africa, we recovered approximately $0.4 million of previously
written off loans in the nine months ended September 30, 2006. This amount
is
recorded as impairments and other write-offs, net of recoveries in the nine
months ended September 30, 2006.
For
the
nine months ended September 30, 2007, we recorded approximately $0.3 million
of
interest income related to a loan outstanding to the previous owners of G5.
We
did not determine the collectibility of the interest to be reasonably assured
until we completed the acquisition of G5. The remaining interest income for
this
segment is directly related to cash on hand.
For
the
nine months ended September 30, 2007, the segment incurred $0.7 million of
interest expense on amounts borrowed to fund the Company’s prior acquisitions.
Cripple Creek’s revolving credit facility was the primary source of this
funding. For the nine months ended September 30, 2006, the net negative interest
expense results from the elimination of the interest on intercompany debt that
was used to finance our construction projects in Central City, Colorado and
Edmonton, Alberta, Canada. The interest charged to these segments is capitalized
as part of the construction costs and does not appear as interest expense.
Caledon’s loan with Nedbank was the primary source of debt that funded the early
stages of construction in Edmonton and Newcastle.
For
the
nine months ended September 30, 2007 and 2006, we recognized approximately
$0.7
million and $0.3 million, respectively, in foreign currency gains resulting
from
the exchange of currency which is included in other income.
The
Corporate segment includes earnings and losses sustained by multiple companies
taxed at their respective country’s rates. The mix of earnings and losses
impacts the effective rate reported in the segment. For the nine months ended
September 30, 2007 and 2006, the tax benefit on net U.S. losses (primarily
resulting from our new operation in Central City, Colorado) exceeds the tax
on
net non-U.S. earnings, which are taxed at significantly lower
rates.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Cash
and
cash equivalents totaled $18.2 million at September 30, 2007, and the Company
had negative working capital (current assets minus current liabilities) of
$0.4
million compared to cash and cash equivalents of $35.0 million and working
capital of $5.2 million at December 31, 2006.
We
use
the cash flows that we generate to fund reinvestment in existing properties
for
both refurbishment and expansion projects and to pursue additional growth
opportunities via new development opportunities. When necessary, we supplement
the cash flows generated by our operations with either cash on hand or funds
provided by financing activities.
For
the
nine months ended September 30, 2007, $7.4 million of net cash was provided
by
operating activities. For the nine months ended September 30, 2006, $5.5 million
of net cash was provided by operating activities. The change from the
2006 period relates primarily to changes in working capital items, which can
vary from period to period based on the timing of cash receipts and payments,
offset by cash generated from operations. For a description of the operating
activities of the Company, please refer to the condensed consolidated statements
of cash flows and management’s discussion of the results of operations by
segment.
Cash
used
in investing activities of $8.9 million for the first nine months of 2007
consisted of $2.0 million towards the acquisition of G5 Sp. z o.o., a Polish
entity that owns a 33.3% interest in Casinos Poland; $1.2 million in property
improvements and equipment additions at Womacks; $0.7 million towards
construction in Edmonton, Alberta, Canada; $1.6 million in property and gaming
equipment additions in Central City, Colorado; $0.8 million towards the
development of a golf course and other property improvements at Caledon; $2.4
million towards property improvements and furniture and fixtures at our
Newcastle, South Africa property; $0.2 million for additional gaming equipment
on the ships; and $0.2 million of cumulative additions at our other remaining
properties. These repayments were offset by a release of restricted cash
relating to the construction of the casino in Edmonton of $0.2.
Cash
used
in investing activities of $51.7 million for the first nine months of 2006
consisted of a $5.1 million buyout of our minority partner in CRA; $6.7
million towards the purchase of a 60% interest in Century Casino Newcastle
(offset by casino cash acquired of $1.5 million); $0.7 million buyout of our
minority partner at Century Casino Millennium (offset by casino cash acquired
of
$0.4 million); a $4.8 million loan to G5; $0.2 million in property and equipment
additions at Womacks; $2.1 million in property improvements at Caledon, South
Africa; $3.9 million primarily towards the construction of the permanent
facility in Newcastle, South Africa; $0.3 million in additions to our corporate
office in Vienna, Austria; $0.2 million in expenditures to upgrade some of
the
cruise ships with new gaming equipment; $22.9 million towards construction
in
Central City, Colorado; and $12.1 million in additional expenditures towards
construction on the property in Edmonton, Alberta, Canada. These outflows were
offset by $5.4 million received from the sale of our interest in a project
located in Gauteng, South Africa.
Cash
used
in financing activities of $15.1 million for the first nine months of 2007
consisted of net repayments of $12.0 million towards the Central City term
loan;
net repayments of $1.4 million towards the Womacks revolving credit facility;
repayments of $1.1 million towards our Caledon term loan; repayments of $1.0
million towards our Newcastle term loan; net repayments on capital
leases of approximately $0.2 million; and other net repayments of $0.1 million.
These repayments were offset by borrowings of $0.7 million under the loan
agreement with Canadian Western Bank for the Edmonton property.
Cash
provided by financing activities of $40.9 million for the first nine months
of
2006 consisted of borrowings of $25.6 million under the Tollgate construction
loan; borrowings of $11.2 million under the Canadian Western Bank construction
loan; borrowings of $2.1 million under the Newcastle construction loan; net
borrowings of $4.1 million under the Womacks revolving credit facility with
Wells Fargo; and the recognition of a $0.4 million tax benefit related to the
exercise of stock options by our Co Chief Executive Officers. These inflows
of
cash were offset by repayments of $1.7 million towards our Caledon loan
agreement with Nedbank Limited, $0.5 million in proceeds from the exercise
of
stock options and other net repayments of $0.3 million.
Common
Stock Repurchase
Program
In
March 2000,
our
Board of
Directors approved a discretionary program to repurchase up to $5
.0
million
of the
Company’s outstanding common stock.
We did not
purchase any
shares of our common stock on the open market during the nine months ended
September 30, 2007 or 2006. The total remaining authorization under the
repurchase program was $1.2 million as of September 30, 2007. The repurchase
program has no set expiration or termination date.
In
addition to our cash on hand, additional liquidity at Womacks may be provided
by
our revolving credit facility with Wells Fargo Bank (“Wells Fargo”), under which
we currently have a total available commitment of $15.6 million and unused
borrowing capacity of approximately $4.7 million, based on Womacks’ current
EBITDA, at September 30, 2007. The maturity date of the borrowing commitment
is
December 2008. The available balance was reduced by $0.7 million on October
1,
2007 and will be further reduced
by $0.7 million
at the
beginning of each quarter until maturity in December 2008. Borrowings under
the
credit facility may be used for capital expenditures and working capital
at
Cripple Creek and corporate headquarters. Womacks is also permitted to make
cash
distributions to us up to the amount of our capital contributions subject
to
a
limitation based on Womacks’
current EBITDA
.
Additional
liquidity
for our
Central
City property
may be provided by our $2.5 million revolving line of
credit with Wells Fargo. The revolving line of credit matures on November
21,
2011. Availability under the line of credit is conditional upon CTL’s compliance
with all of the financial and other covenants contained in the loan agreement
at
the time of a particular drawdown, and our continued ability to make certain
representations and warranties.
The
Company is currently reviewing strategies to reduce its overall interest
charges. This includes, but is not limited to, the refinancing of some or
all of
the Company’s outstanding debt.
Short-Term
Liquidity and Capital Requirements
We
expect
that the primary source of our future operating cash flows will be from gaming
operations. We expect to continue to rely on revolving lines of
credit and term loans from commercial banks or other debt instruments to
supplement our working capital and investing requirements. Expected
short-term uses of cash include ordinary operations, a $2.0 million remodeling
project at Womacks, foreign income tax payments, and interest and principal
payments on outstanding debt.
We
believe that our cash at September 30, 2007, together with expected cash
flows
from operations and borrowing capacity under the various credit facilities,
will
be sufficient to fund our anticipated operating costs and capital expenditures
at existing properties and to satisfy our current debt repayment
obligations. We will continue to evaluate our planned capital
expenditures at each of our existing locations in light of the operating
performance of the facilities at such locations. From time to time we expect
to
have cash needs for the development of new properties or expansion of existing
properties that exceed our current borrowing capacity and we may be required
to
seek additional financing in the debt or equity markets. We may be
unable to obtain additional debt or equity financing on acceptable terms
or at
all. As a result, limitations on our capital resources could delay or
cause us to abandon certain plans for the development of new properties or
expansion and/or renovation of existing properties.