Item 1. Business.
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General
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Century Casinos, Inc., a Delaware corporation founded in 1992, is an international casino entertainment company that develops and operates gaming establishments as well as related lodging, restaurant, horse racing (including off-track betting) and entertainment facilities around the world. Our main goal is to grow our business worldwide by actively pursuing the development or acquisition of new gaming opportunities and reinvesting in our existing operations.
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Overview of Operations
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We view each property as a separate operating segment and aggregate all such properties into three reportable segments based on the geographical locations in which our casinos operate. We have additional business activities, including concession, management and consulting agreements and certain other corporate and management operations that we report as Corporate and Other. The following are our reportable segments:
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Canada
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United States
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Poland
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Corporate and Other
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Canada
Net operating revenue from our Canada segment was $57.7 million, or 37%, of our total net operating revenue for the year ended December 31, 2017.
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Century Casino & Hotel - Edmonton, Alberta, Canada (“CRA” or “Edmonton”). We opened this wholly-owned casino in November 2006 and the attached hotel in March 2007. Edmonton is the capital of the Canadian province of Alberta, serving a metropolitan population of over one million people. The facility has 800 ticket in/ticket out (“TITO”) slot machines, 35 tables (including a 24-hour poker room) and 22 video lottery terminals. In addition, the property has 26 hotel rooms, a 10,700 square foot showroom that can seat approximately 450 customers, a 3,000 square foot showroom that can seat approximately 200 customers, where we host Yuk Yuks Comedy Club comedic performances, two restaurants, three bars, 600 surface parking spaces and a complimentary underground heated parking garage with 300 additional spaces.
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Century Casino St. Albert - Edmonton, Alberta, Canada (“CSA” or “St. Albert”). We acquired this wholly-owned casino in October 2016. St. Albert is located 13 miles from CRA. The casino includes 407 TITO slot machines, 11 tables and 15 video lottery terminals. In addition, the property has a restaurant, a bar, a lounge, a banquet facility and 567 surface parking spaces.
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Century Casino Calgary - Calgary, Alberta, Canada (“CAL” or “Calgary”). We acquired this wholly-owned casino in January 2010. Calgary is the largest city in the province of Alberta, serving a metropolitan population of over one million people. The casino includes 504 TITO slot machines, 18 tables, 25 video lottery terminals and a full service off-track betting parlor. In addition, the property has a restaurant, a lounge, a 1,000 square foot showroom that can seat approximately 100 customers, a 30 lane bowling alley, an 18 hole miniature golf course, 465 owned surface parking spaces and 41 leased surface parking spaces neighboring the casino.
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Century Downs Racetrack and Casino - Calgary, Alberta, Canada (“CDR” or “Century Downs”). Our subsidiary Century Casinos Europe GmbH (“CCE”) owns 75% of United Horsemen of Alberta Inc. dba Century Downs Racetrack and Casino, which in turn owns and operates a Racing and Entertainment Center (“REC”). The REC, which opened in April 2015, is located 17 miles from CAL and 4.5 miles from the Calgary International Airport. The casino includes 590 TITO slot machines and 10 video lottery terminals. In addition, the property has a 5.5 furlong (0.7 mile) racetrack, a bar, a lounge, a restaurant facility, an off-track betting area, an entertainment area and 700 surface parking spaces. We hold a minimum of 100 racing days per year during the horse racing season from March through November, and we host both standardbred and thoroughbred horse races. CDR is consolidated as a majority-owned subsidiary for which we have a controlling financial interest.
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Century Bets! Inc. - Calgary, Alberta, Canada (“CBS” or “Century Bets”). Our subsidiary CCE formed Century Bets! Inc. in January 2015 and owns 75% of its outstanding shares. CBS operates the southern Alberta pari-mutuel network consisting of the sourcing of common pool pari-mutuel wagering content for racetracks throughout North America and world-wide. As of March 8, 2018, CBS provides pari-mutuel wagering content and live video to 15 off-track betting parlors throughout southern Alberta and has agreements with over 90 racetracks worldwide to broadcast races through the off-track betting network. CBS is consolidated as a majority-owned subsidiary for which we have a controlling financial interest.
			
		
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Century Mile Racetrack and Casino - Edmonton, Alberta, Canada (“CMR” or “Century Mile”). In September 2016, we were selected by Horse Racing Alberta (“HRA”) as the successful applicant to own, build and operate a horse racing facility in the Edmonton market area, which we are planning to operate as Century Mile Racetrack and Casino. In March 2017, we received approval for the Century Mile project from the Alberta Gaming and Liquor Commission (“AGLC”). Century Mile will be a one-mile horse racetrack and a multi-level REC. The multi-level REC is expected to have 550 slot machines, restaurants, bars, delis, an off-track betting parlor and grandstand. We expect to hold a minimum of 100 racing days per year. The project is located on Edmonton International Airport land close to the city of Leduc, south of Edmonton. Century Mile will be approximately 30 miles from both CRA and CSA. We estimate that this project will cost approximately CAD 60.0 million ($47.8 million based on the exchange rate in effect as of December 31, 2017) and that it will be completed in early 2019. We will finance the project with $25.0 million of the $34.4 million received from the common stock offering we completed in November 2017. The balance of the Century Mile construction will be financed through new credit facilities or with available cash.
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United States
Net operating revenue from our United States segment totaled $32.2 million, or 21%, of our total net operating revenue for the year ended December 31, 2017.
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Century Casino & Hotel - Central City, Colorado (“CTL” or “Central City”). We opened this wholly-owned casino and hotel in July 2006, as part of a joint venture in which we owned a 65% interest. On December 31, 2007, we acquired the remaining 35% interest in the joint venture. Central City is located approximately 35 miles west of Denver, serving a metropolitan population of over 3.0 million people. Century Casino & Hotel is located in Central City at the end of the Central City Parkway, a four lane highway that connects I-70, the main east/west interstate highway in Colorado, to Central City. The facility has 496 TITO slot machines, seven tables, 26 hotel rooms, a bar, two restaurants and a 500 space on-site covered parking garage.
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Century Casino & Hotel - Cripple Creek, Colorado (“CRC” or “Cripple Creek”). We have owned and operated this wholly-owned casino and hotel since 1996. The town of Cripple Creek is located approximately 45 miles southwest of Colorado Springs, the second largest city in the state of Colorado, serving a metropolitan population of over 700,000 people. The facility has 442 TITO slot machines, six tables, 21 hotel rooms, two bars, a restaurant and 271 surface parking spaces neighboring the casino.
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Poland
Net operating revenue from our Poland segment totaled $59.8 million, or 39%, of our total net operating revenue for the year ended December 31, 2017.
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Casinos Poland - Poland (“CPL” or “Casinos Poland”). In March 2007, our subsidiary CCE acquired 33.3% of the outstanding shares of Casinos Poland Ltd. In April 2013, CCE increased its ownership interest in CPL to 66.6% and we began consolidating CPL as a majority-owned subsidiary for which we have a controlling financial interest.
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CPL has been in operation since 1989 and is the owner and operator of casinos throughout Poland. The following table summarizes information about the casinos that CPL operated as of December 31, 2017.
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Casino licenses are granted for six years. When a casino license expires, the Polish Minister of Finance notifies the public of its availability, and interested parties can submit an application for the casino license. Following approval of a casino license by the Minister of Finance, there is a period in which applicants can appeal the decision. The licenses for our Lodz and Plock casinos expired in February 2018, the license for our Krakow casino expires in March 2018, and the license for our Poznan casino expires in April 2018. CPL has submitted or will submit applications for casino licenses in these cities.
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In October 2017, we were awarded casino licenses expiring in 2023 for the Polish cities of Katowice, Bielsko-Biala and Wroclaw. The license awards were appealed by our competitors, and the appeals have been dismissed by the Minister of Finance. In January 2018, we opened the Bielsko-Biala casino, which has 50 slot machines and five tables. We expect the Katowice and Wroclaw casinos will open in the second quarter of 2018 with 62 slot machines and 14 tables and 70 slot machines and 18 tables, respectively.
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Corporate and Other
Net operating revenue from our Corporate and Other segment totaled $4.4 million, or 3%, of our total net operating revenue for the year ended December 31, 2017.
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Cruise Ships. Through concession agreements with TUI Cruises, Windstar Cruises, Marella Cruises (formerly Thomson Cruises) and Diamond Cruise International Co., Ltd. (“Diamond”), we operate 14 ship-based casinos. The concession agreement with Windstar Cruises also gives us the exclusive right to install and operate casinos onboard any new ships built or acquired by Windstar Cruises. We operate a total of 236 slot machines and 43 tables onboard the 14 ships. The following table summarizes information about the ship-based casinos that we operate.
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The Mein Schiff 1 and Mein Schiff 2 will be transferred from the TUI Cruises fleet to another cruise line in April 2018 and February 2019, respectively, at which time the concession agreements for these two vessels will end.
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We began operating the ship-based casino onboard the Mein Schiff 6, a new 2,500 passenger cruise ship in May 2017.
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In July 2016, we entered into a cooperation agreement with Dynamic Partners International, Ltd. (“Dynamic”) regarding the operations of the ship-based casino onboard Glory Sea. Both parties terminated this agreement in November 2017, and we charged the outstanding $0.3 million related to obtaining this agreement to operating costs and expenses on our consolidated statement of earnings for the year ended December 31, 2017. We will continue to operate the ship-based casino onboard the Glory Sea. However, Dynamic will no longer market and promote the casino to VIP players.
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In March 2015, we mutually agreed with Norwegian Cruise Line Holdings (“Norwegian”) to terminate our concession agreements with Oceania Cruises (“Oceania”) and Regent Seven Seas Cruises (“Regent”), indirect subsidiaries of Norwegian, effective June 1, 2015 (the “Termination Agreement”). We transitioned operations of the eight ship-based casinos that we operated onboard Oceania and Regent vessels to Norwegian in the second quarter of 2015. As consideration for the early termination of the concession agreements, we received $4.0 million in June 2015, which we recorded on our consolidated statement of earnings under operating revenue net of $0.6 million in assets that were sold to Norwegian as part of the Termination Agreement.
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In March 2015, in connection with the Termination Agreement with Norwegian, we entered into a two-year consulting agreement with Norwegian that became effective June 1, 2015. Under the consulting agreement, we provided limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million payable $250,000 per quarter through May 2017.
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Mendoza Central Entretenimientos S.A. (“MCE”). In October 2014, our subsidiary CCE purchased 7.5% of the shares of MCE for $1.0 million. The shares are reported on our consolidated balance sheet using the cost method of accounting. MCE has an exclusive agreement with the Instituto Provincial de Juegos y Casinos (“IPJC”) to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina and owned by the Province of Mendoza. MCE may also pursue other gaming opportunities. MCE leases 600 TITO slot machines to Casino de Mendoza. CCE has appointed one director to MCE’s board of directors and had a three-year option through October 2017 to purchase up to 50% of the shares of MCE, which we did not exercise. In addition, CCE and MCE have entered into a consulting services agreement pursuant to which CCE provides advice on casino matters and receives a service fee consisting of a fixed fee plus a percentage of MCE’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). See Note 4 to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report.
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Saw Close Casino Ltd. (“SCCL”). In June 2017, our subsidiary CCE acquired casino licenses held by Saw Close Casino Ltd. in Bath, England (the “SCCL License Acquisition”). We are planning to develop and operate a 15,000 square foot casino using the casino licenses. The casino is expected to include 36 slot machines, 20 table games and 48 automated live gaming terminals. The purchase price for the license acquisition was GBP 0.6 million ($0.8 million based on the exchange rate in effect on December 31, 2017), of which GBP 0.1 million ($0.1 million based on the exchange rate in effect on June 20, 2017) was paid at closing, GBP 0.2 million ($0.3 million based on the exchange rate in effect on December 22, 2017) was paid after the receipt of regulatory and governmental approvals, and GBP 0.3 million ($0.4 million based on the exchange rate in effect on December 31, 2017) is subject to the opening of the casino. In addition, we assumed liabilities in the amount of GBP 0.2 million ($0.3 million based on the exchange rate in effect on December 31, 2017) that are repayable if certain performance criteria are met once the casino is in operation. We also have deposited GBP 0.8 million ($1.1 million based on the exchange rate in effect on December 31, 2017) into an escrow account to secure performance of certain obligations under the lease agreements with the landlord of the property that will be released in connection with work performed by SCCL to fit out the casino. We estimate construction and fitting out of the casino will cost an additional GBP 5.5 million ($7.4 million based on the exchange rate in effect on December 31, 2017) and that the casino will open in the second quarter of 2018. We are financing the project with GBP 2.0 million ($2.7 million based on the exchange rate in effect on December 31, 2017) financed through a loan from UniCredit Bank Austria AG (“UniCredit”) and with available cash.
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Hilton Aruba Caribbean Resort & Casino Management Agreement. We had a management agreement to direct the operation of the casino at the Hilton Aruba Caribbean Resort & Casino, for which we received a monthly management fee. The management agreement ended on November 30, 2017. We do not expect the expiration of this management agreement to have a material effect on our results of operations.
			
		
Additional Projects and Other Developments
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We are exploring an expansion at Century Casino & Hotel Cripple Creek to provide additional hotel rooms for our existing casino and hotel.
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In August 2017, we announced that, together with the owner of the Hamilton Princess Hotel & Beach Club in Hamilton, Bermuda, we had submitted a license application to the Bermudan government for a casino at the Hamilton Princess Hotel & Beach Club. The casino will feature approximately 200 slot machines, 17 live table games, one or more electronic table games and a high limit area and salon privé. In September 2017, the Bermuda Casino Gaming Commission granted a provisional casino gaming license, which is subject to certain conditions and approvals including the adoption of certain rules and regulations by the Parliament of Bermuda. CCE entered into a long-term management agreement with the owner of the hotel to manage the operations of the casino and receive a management fee if the license is awarded. CCE will also provide a $5.0 million loan for the purchase of casino equipment if the license is awarded.
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We have additional potential gaming projects that we are currently exploring. Along with the capital needs of potential projects, there are various other risks which, if they materialize, could affect our ability to complete a proposed project or could eliminate its feasibility altogether. For more information on these and other risks related to our business, see Item 1A, “Risk Factors” below.
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Capital Needs, Uses and Cash Flow
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As a gaming company, our operating results are highly dependent on the volume of customers at our casinos. Most of our revenue is essentially cash-based, through customers wagering with cash or paying for non-gaming services with cash or credit cards. Our industry is capital intensive, and we rely heavily on the ability of our casinos to generate operating cash flow to maintain operations, fund reinvestment in existing properties for both refurbishment and expansion projects, repay third party debt, and pursue additional growth via new development and acquisition opportunities. When necessary and available, we supplement the cash flows generated by our operations with either cash on hand or funds provided by bank borrowings or other debt or equity financing.
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Marketing and Competition
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We face intense competition from other casinos within the jurisdictions in which we operate. Many of our competitors are larger and have substantially greater name recognition and financial and marketing resources than we do. We seek to compete through promotion of our players’ clubs, enhancement of social networking initiatives and other marketing efforts. In addition to our players’ clubs, we also have various cash and prize promotions and market our casinos through a variety of media outlets including internet, television, radio, print and billboard advertising. Our marketing focuses on competition and other facts and circumstances of each market area in which we operate. Our primary marketing strategy centers on attracting new customers and rewarding repeat customers through our players’ club programs. All visitors to our properties are offered the opportunity to join our players’ club. We maintain a proprietary database that consists primarily of slot machine customers that allows us to create effective targeted marketing and promotional programs, cash and merchandise giveaways, coupons, downloadable promotional credits, preferred parking, food, lodging, game tournaments and other special events. In Colorado, our players’ club cards allow us to update our database and track member gaming preferences, including, but not limited to, maximum, minimum, and total amounts wagered and frequency of visits. We have designed reward programs based on total amount wagered and frequency of visits to reward customer loyalty and attract new customers to our properties. Those who qualify for VIP status receive additional benefits compared to regular club membership, such as invitations to exclusive VIP events.
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Canada
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Edmonton - The Century Casino & Hotel in Edmonton, Canada and Century Casino St. Albert have six competitors (five casinos and one REC) in the Edmonton market. The distance between our properties is approximately 13 miles. We do not believe that our properties compete against one another for customers. The REC that is currently operating in the Edmonton market will close before we complete the Century Mile project. As a result, we do not anticipate that the opening of Century Mile will increase competition in the Edmonton market.
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Century Casino & Hotel in Edmonton - This property is one of two casinos in Edmonton that have both a hotel and showrooms. The property’s showrooms allow us to attract customers to the casino through live music concerts, private concerts, comedic performances, catering and banquet events. In addition, the property is the only casino in the Edmonton market to offer a heated and complimentary parking garage. Our main marketing activity focuses on branding the casino, through various forms of media, as the ultimate entertainment destination and as a provider of a sophisticated, interactive and intimate gaming experience. The casino is located in a densely populated area with the closest competing casino approximately six miles away.
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Century Casino St. Albert -This property is located in St. Albert, the second largest city in the Edmonton capital region. The closest competitor is located approximately five miles away. Our main marketing focus is our distinct casino branding, the players’ club program and promotions made through various marketing channels such as print, mail and social media. The property positions itself as a fine entertainment venue with an excellent restaurant, a small concert and event venue and a well-appointed gaming floor.
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Calgary - Century Casino Calgary and Century Downs have six competitors (two of which have a combination of hotel and casino) in the Calgary market. Both of our casinos have off-track betting parlors, and there is only one other casino in the Calgary market with an off-track betting parlor. The distance between our properties is 17 miles. We do not believe that our properties compete against one another for customers.
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Century Casino Calgary - Unique to this property is a 30 lane bowling alley, an 18 hole miniature golf course, an amusement arcade, a lounge and a showroom. Using numerous forms of media, such as print, radio, mail and social media, we concentrate our marketing on the casino floor, the players’ club and the bowling and miniature golf entertainment center. This property is located in an industrial area approximately three miles from downtown Calgary with the closest competition located three blocks away.
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Century Downs - Unique to this property is a 5.5 furlong (0.7 mile) horse racetrack. Using numerous forms of media, such as radio, television and billboards, we concentrate our marketing on the casino floor, the players’ club and racetrack. This property is located one mile north of the city limits of Calgary, one mile from the Crossiron Mills Mall and 4.5 miles from the Calgary International Airport with the closest competition located approximately 13 miles away.
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Century Bets - Century Bets is the exclusive operator of the southern Alberta pari-mutuel network. In addition to permitting customers to place wagers at off-track betting locations, the network offers advance deposit wagering for online wagering.
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United States
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Cripple Creek, Central City and Black Hawk are the only three cities in Colorado that allow gaming, exclusive of two Native American gaming operations in southwestern Colorado. Cripple Creek, located approximately 45 miles southwest of Colorado Springs, and Central City and Black Hawk, located approximately 35 miles west of Denver, are historic mining towns dating back to the late 1800’s that have developed into tourist attractions. As of December 31, 2017, there were 12 active casino licensees operating in Cripple Creek, 6 active casino licensees operating in Central City and 15 active casino licensees operating in Black Hawk. Unlike other regions in which we operate, gaming in Colorado is “limited stakes”, which restricts any single wager to a current maximum of one hundred dollars.
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The cities of Central City and Black Hawk are adjoining small mountain tourist towns, located approximately one mile apart. Central City and Black Hawk compete with one another for market share, and we view the two cities as one combined market servicing the Denver area. Black Hawk, which we believe does not maintain the same rigorous historical preservation standards as Central City, has been able to successfully attract major casino industry leaders with the ability to offer larger hotels, upscale dining facilities, performance centers and spa facilities. The casino operations in Black Hawk constitute a significant portion of the overall casino gaming market in Colorado (exclusive of the Native American gaming operations), with 57% of the total gaming devices in Colorado in 2017 and approximately 76% of total gaming revenues in Colorado in 2017.
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Management believes that an integral component in attracting gaming patrons to our Colorado casinos is the availability of adequate, nearby parking and lodging. At our Cripple Creek property, we presently own a total of 271 surface parking spaces. We believe we have sufficient close proximity parking. However, covered parking garages provided by four of our competitors in Cripple Creek may negatively impact our casino, particularly during inclement weather. Our casino in Central City has a 500-space covered parking garage offering free public parking. Several other casinos in the Central City/Black Hawk market also have covered parking garages. In addition, three of our competitors in the Cripple Creek market and five of our competitors in the Central City and Black Hawk market have more hotel rooms, providing them with an advantage during inclement weather and the peak tourist season.
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Our marketing objective for the casinos in Colorado is to create public awareness by positioning our casinos as the premier provider of personal service, convenient parking, the latest gaming products and superior food. In addition to our players’ clubs, we also have various cash and prize promotions and market our casinos through a variety of channels including radio, billboard, print and social media.
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Poland
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There are 52 casino licenses available throughout Poland. The Polish government generally forbids the marketing of gaming activities outside of a casino, but the marketing of entertainment is permissible. Therefore, CPL’s marketing has focused on advertising the entertainment possibilities at each casino, such as concerts and parties. CPL also relies on the locations of its casinos, which are in major cities throughout Poland, to attract customers. The Polish government issues casino licenses in Poland by district, and there are additional casinos in each district in which CPL operates. For example, five other casinos in the Warsaw district compete with our Warsaw casinos. The Polish Minister of Finance does not disclose individual casino data. Changes to the Polish gaming law that went into effect in April 2017 legalize online gaming and reintroduce slot arcades through a state run company. We expect that online gaming and the slot arcades will begin operating in 2018 and that the slot arcades will be located in many of the cities in which our casinos are located, which may increase competition for our casinos.
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Corporate and Other
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Cruise Ships - We have limited marketing opportunities on our ship-based casinos. We work jointly with the onboard revenue departments of the cruise lines on casino promotions and signage, which are in line with the cruise line’s guidelines. While we offer modern gaming products, we compete with other activities on the ship as well as onshore activities, including land-based casinos.
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Argentina - The Casino de Mendoza has four competitors in the Mendoza market. The IPJC is responsible for the marketing efforts for the casino, which are targeted at local residents as well as tourists.
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Bath, England - The city of Bath does not presently have any casinos. Saw Close Casino will be the only casino in the city. No additional casino licenses can be created in, or moved to, Bath without new legislation by the British Parliament. The casino will be located in a new development in the center of Bath’s evening leisure district adjoining the Komedia Club and opposite the Theatre Royal. In addition to the casino, the development will consist of a new 4-star boutique hotel with 147 rooms and two ground floor restaurants. The closest competition is three casinos located in Bristol, 13 miles away.
			
		
Seasonality
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Canada - Our Edmonton and Calgary casinos in Alberta, Canada attract more customers from September through April. During the remainder of the year, the casinos attract fewer customers because we compete with outdoor activities. Century Downs also attracts additional customers during the racing season from March through November. Century Bets attracts more customers to off-track betting parlors during the peak racing season from May through August.
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United States - Our casinos in Colorado attract more customers during the warmer months from May through September. We expect to attract fewer customers from October through April because weather conditions during this period are variable and can have a significant impact on daily business levels.
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Poland - CPL generally attracts more customers from October through March because domestic customers generally vacation out of the country during the summer months.
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Corporate and Other
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Cruise Ships - Our business onboard cruise ships typically is not impacted by seasonality because the cruise ships generally operate year round. Our revenues from these operations fluctuate significantly with the volume and quality of the players onboard the ships. In addition, the cruise ships on which we conduct operations may be out of service from time to time for maintenance or based on the operating schedule of the cruise line, which may impact revenue from our cruise ship casinos.
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Argentina - The Mendoza market has a slight seasonal increase from January through March due to increased tourism.
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Bath, England - Bath attracts tourists year round with an increase in the summer months as well as late November through early December with the Christmas market.
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Governmental Regulation and Licensing
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The ownership and operation of casino gaming facilities are subject to extensive state, local, foreign, provincial or federal regulations. We are required to obtain and maintain gaming licenses in each of the jurisdictions in which we conduct gaming operations. The limitation, conditioning, suspension, revocation or non-renewal of gaming licenses, or the failure to reauthorize gaming in certain jurisdictions, would materially adversely affect our gaming operations in that jurisdiction. In addition, changes in law that restrict or prohibit gaming operations in any jurisdiction could have a material adverse effect on our financial position, results of operations and cash flows.
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Statutes and regulations can require us to meet various standards relating to, among other matters, business licenses, registration of employees, floor plans, background investigations of licensees and employees, historic preservation, building, fire and accessibility requirements, payment of gaming taxes, and regulations concerning equipment, machines, chips, gaming participants, and ownership interests. Civil and criminal penalties, including shutdowns or the loss of our ability to operate gaming facilities in a particular jurisdiction, can be assessed against us and/or our officers to the extent of their individual participation in, or association with, a violation of any of the state or local gaming statutes or regulations. Such laws and regulations apply in all jurisdictions in which we may do business. Management believes that we are in compliance with all applicable gaming and non-gaming regulations as described below.
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Canada
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AGLC - Gaming in Alberta is governed by the provincial government. The AGLC administers and regulates the gaming industry in Alberta. The AGLC operates in accordance with the Gaming and Liquor Act, the Gaming and Liquor Regulation and the Criminal Code of Canada.
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The AGLC requires all gaming operations to be licensed but only allows a certain number of licenses to be granted. All available licenses have currently been granted and the AGLC has an indefinite moratorium on new casinos and RECs. If the AGLC increases the number of licenses available in the future, applicants for a gaming license must submit an application and run through a detailed approval process. Following the approval of the board of the AGLC, the applicant may operate the casino applied for in accordance with federal and provincial legislation, regulation, and policies as well as the municipal requirements, permits, licenses and authorization relating to the casino. At Edmonton and Calgary, our licenses must be renewed every five years, with the next renewals scheduled for 2018 for both casinos. At Century Downs and St. Albert, our licenses must be renewed every two years, with the next renewals scheduled for 2018. The AGLC monitors the casino operator and its compliance with all requirements. In the event of a violation of such requirements, civil and criminal charges can be assessed. The failure or inability of our casinos, or the failure or inability of others associated with these casinos, to maintain necessary gaming licenses or approvals for our casinos would have a material adverse effect on our operations.
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The AGLC allows casinos to operate slot machines and table games a daily maximum of 17 consecutive hours commencing at 10:00 a.m. and ending no later than 3:00 a.m. and to operate casino poker rooms 24 hours a day. Casinos and RECs may permit only individuals 18 or older to gamble in the casino. The AGLC permits slot machines, video lottery terminals, baccarat, blackjack, poker, craps and roulette. There is a maximum single bet of $2,000 on table games and a maximum table aggregate bet of $12,000 on baccarat. There is also a maximum denomination bet of $5 for slot machines with a maximum single bet of $125.
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The AGLC provides casinos with slot machines, slot technicians and personnel to administer table game counts. In return, casino licensees provide the AGLC with a place to operate slot machines, market the casinos, and provide table game dealers, slot attendants, security and surveillance. Casino licensees do not incur lease expenditures to the AGLC. In lieu of these lease expenses and other expenses associated with operating slot machines (i.e. equipment and personnel), casino licensees retain only a portion of net sales. Net sales, as defined by the AGLC, are calculated as cash played, less cash won, less the cost to lease the equipment, if applicable. At our Edmonton, St. Albert and Calgary casinos, the AGLC retains 85% of slot machine net sales, of which it allocates 15% to charities designated by the AGLC and 70% to the Alberta Lottery Fund. At Century Downs, the AGLC retains 40% of slot machine net sales, which are allocated to the Alberta Lottery Fund. For all table games, excluding poker and craps, we are required to allocate 50% of our net win to a charity designated by the AGLC, with the exception of St. Albert, from which we allocate 35% of our net win to a charity designated by the AGLC. For poker and craps, we are required to allocate 25% of our net win to the charity. We record our revenue net of the amounts retained by the AGLC or allocated to the AGLC-designated charity or the Alberta Lottery Fund.
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HRA - HRA was formed in June 2002 to facilitate long term industry renewal for horse racing. The objectives of HRA are to govern, direct, control, regulate, manage, market and promote horse racing in any or all of its forms; to protect the health, safety and welfare of racehorses and, with respect to horse racing, the safety and welfare of racing participants and racing officials; and to safeguard the interest of the general public in horse racing.
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HRA requires all horse racing operators to be licensed. A licensed operator is responsible for the general supervision of horse races at its facilities but must not interfere with the proper performance of the functions and responsibilities of racing officials. Only individuals 18 or older may place a bet on horse races. HRA also prohibits racing officials, HRA employees, jockeys, drivers of horses and any employee of any of them from betting on a race, encouraging others to bet on a race on their behalf or owning a pari-mutuel ticket. A licensed owner of a horse, its trainer and any authorized agent or employee of such owner or trainer may not bet or encourage others to place a bet on their behalf on a horse other than the horse owned or trained by such licensed owner or trainer.
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A licensed operator must also provide and maintain a suitable racetrack, file with HRA a certificate of measurement of the track and provide services at race meetings, including first aid and ambulance facilities. HRA must approve the equipment, facility and any services the operator will provide. HRA also requires a licensed operator to establish and maintain complete records of each horse race conducted by the operator.
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The HRA’s portion of slot machine net sales retained from Century Downs, which is currently 16.25%, is used to fund animal welfare programs, purses, breed improvement programs, marketing, and administration and backstretch programs. For off-track betting and live racing wagers, CBS and CDR retain approximately 21.5% of each bet, from which they will distribute 5.4% to the HRA, 0.8% to the Canadian Pari-Mutuel Agency and use the remainder to pay expenses related to the conduct of pari-mutuel wagering.
			
		
United States
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The ownership and operation of gaming facilities in Colorado are subject to extensive state and local regulations. Licenses must be obtained from the Colorado Limited Gaming Control Commission (the “Gaming Commission”) prior to offering limited gaming to the public in the State of Colorado. In addition, the Division of Gaming (the “DOG”) within the Colorado Department of Revenue, licenses, implements, regulates, and supervises the conduct of limited stakes gaming. The Director of the DOG, under the supervision of the Gaming Commission, has been granted broad powers to ensure compliance with the laws and regulations. The Gaming Commission, DOG and DOG Director are collectively referred to as the “Colorado Gaming Authorities.”
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The laws, regulations, and internal control minimum procedures of the Colorado Gaming Authorities seek to maintain public confidence and trust that licensed limited gaming is conducted honestly and competitively, that the rights of the creditors of licensees are protected, and that gaming is free from criminal and corruptive elements. The Colorado Gaming Authorities’ stated policy is that public confidence and trust can be maintained only by strict regulation of all persons, locations, practices, associations, and activities related to the operation of the licensed gaming establishments and the manufacture and distribution of gaming devices and equipment.
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The Gaming Commission is empowered to issue six types of licenses. In order to operate a casino, an operator is required to obtain a retail gaming license. Further, under Colorado gaming regulations, no person or entity can have an ownership interest in more than three retail licenses. We currently operate under the maximum of three retail gaming licenses in Colorado (Century Casino & Hotel in Cripple Creek operates under two gaming licenses). Licenses must be renewed every two years, with the next renewals scheduled for 2019 for our casinos in Central City and Cripple Creek. In addition, the Gaming Commission has broad discretion to revoke, suspend, condition, limit or restrict the licensee at any time. The failure or inability of the Century Casino & Hotel in Central City or Cripple Creek, or the failure or inability of others associated with these casinos, to maintain necessary gaming licenses or approvals for the casinos would have a material adverse effect on our operations.
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Our Colorado casinos must meet specified architectural requirements and must not exceed specified gaming square footage limits as a total of each floor and the full building. Colorado casinos may operate 24-hours a day, and may permit only individuals 21 or older to gamble in the casino. Colorado law permits slot machines, blackjack, poker, craps and roulette with a maximum single bet of $100. Colorado casinos may not provide credit to gaming patrons.
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The Colorado constitution permits a gaming tax of up to 40% on adjusted gross proceeds (“AGP”), and voter approval is required for any increase to this gaming tax rate. The current gaming tax in Colorado established by the Gaming Commission is a graduated rate of 0.25% to 20% on AGP, where casinos pay a higher percentage as their AGP increase.
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Colorado law requires that every officer, director or stockholder holding a 5% or greater interest or controlling interest of a publicly traded corporation, or owner of an applicant or licensee, shall be a person of good moral character and submit to and pay the cost of a full background investigation conducted by the Gaming Commission. Persons found unsuitable by the Gaming Commission may be required to immediately terminate any interest in, association or agreement with, or relationship to, a gaming licensee. A finding of unsuitability with respect to any officer, director, employee, associate, lender or beneficial owner of a licensee or applicant may also jeopardize the licensee’s retail license or applicant’s license application. Licenses may, however, be conditioned upon termination of any relationship with unsuitable persons.
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We may not issue any voting securities except in accordance with the provisions of the Colorado Limited Gaming Act (the “Act”) and the regulations promulgated thereunder. The issuance of any voting securities in violation of the Act will be void, and the voting securities will be deemed not to be issued and outstanding. No voting securities may be transferred, except in accordance with the provisions of the Act and the regulations promulgated thereunder. Any transfer in violation of these provisions will be void. If the Gaming Commission at any time determines that a holder of our voting securities is unsuitable to hold the securities, then we may, within sixty (60) days after the finding of unsuitability, purchase the voting securities of the unsuitable person at the lesser of (a) the cash equivalent of such person’s investment, or (b) the current market price as of the date of the finding of unsuitability, unless such voting securities are transferred to a suitable person within sixty (60) days after the finding of unsuitability. Until our voting securities are owned by persons found by the Gaming Commission to be suitable to own them, (a) we are not permitted to pay any dividends or interest with regard to the voting securities, (b) the holder of such voting securities will not be entitled to vote, and the voting securities will not for any purposes be included in the voting securities entitled to vote, and (c) we may not pay any remuneration in any form to the holder of the voting securities, except in exchange for the voting securities.
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Poland
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Gaming in Poland is governed by the Minister of Finance, who operates in accordance with Polish gaming law and has the authority to grant casino licenses. Polish gaming law was enacted in 1992. Key items included in Polish gaming law include the following requirements:
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Slot arcades and online gaming, which will be operated through a state run company, are currently permitted under legislation that became effective in April 2017 and are expected to begin operating in 2018;
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A maximum of 70 slot machines are allowed per casino;
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Licenses are not renewable, and licensees must reapply for a license once their current six year license has expired;
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The gaming tax rate assessed on gross gaming revenue is 50%;
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Poker cash games are prohibited in Poland, except for authorized poker tournaments; and
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Under legislation effective in January 2018, casino patrons winning over PLN 2,280 in a single casino visit are subject to personal income tax on the winnings.
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Casino licenses in Poland are limited to 52 and are subject to regional limitations. When a casino license expires, the Minister of Finance notifies the public of its availability, and those interested can submit an application for the casino license. Applicants for a gaming license must complete a detailed approval process. Following approval from the Minister of Finance, there is a period in which applicants can appeal the decision. Once the license is awarded, the applicant may operate the casino for six years. In October 2017, we were awarded casino licenses for the Polish cities of Katowice, Bielsko-Biala and Wroclaw. The license awards were appealed by our competitors, and the appeals have been dismissed by the Minister of Finance. We opened the Bielsko-Biala casino in January 2018. Management believes that CPL will open the Katowice and Wroclaw casinos in the second quarter of 2018. The casino licenses for the Plock, Krakow and Lodz casinos expire in the first quarter of 2018, and the casino license for the Poznan casino will expire in the second quarter of 2018. CPL has submitted or will submit applications for casino licenses in these cities. The Minister of Finance monitors the casino operator and its compliance with all requirements. In the event of a violation, the Minister of Finance can assess charges and, in certain cases, withdraw casino licenses.
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Corporate and Other
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Cruise Ships -- The casinos onboard the cruise ships operate in international waters and are not regulated by any national or local regulatory body. However, we follow standardized rules and practices in the daily operation of the casinos.
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Argentina - The Casino de Mendoza is owned and operated by the Province of Mendoza. To retain the exclusive agreement with the IPJC, MCE must remain in good standing and operate ethically and without fault. In addition, any changes to the slot machines leased by MCE to Casino de Mendoza require approval from the IPJC.
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Bath, England - Gaming in England is governed by the Gambling Commission, operating in accordance with the Gambling Act of 2005.
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The laws and regulations of the Gambling Commission seek to keep gambling crime free, ensure that gambling is conducted in a fair and open way, and protect children and other vulnerable people from being harmed or exploited by gambling. Casino operators must create corporate policies and procedures in compliance with the Gambling Commission’s License Conditions and Codes of Practice and other industry guidance. Operators must commit to conducting their licensing activities with integrity, maintaining a responsible gaming provision, providing regular training to advise and guide staff as well as ensuring that a healthy, responsible and informed environment is maintained.
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In order to operate a casino, an operator is required to obtain an operating license, personal licenses and a premises license from the Gambling Commission. The operator must pay an annual fee to maintain an operating license, and the license may be suspended or revoked. Personal licenses are granted to individuals responsible for activities at licensed gambling operators and are renewed every five years. A premises license is granted to operate a casino on certain premises. Currently, no additional premise licenses can be awarded under the Gambling Act of 2005.
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The Gambling Act of 2005 sets the gambling duty rate based on the type of gambling and gross gaming yield of the casino premises. The gaming duty rate is scaled from 15% to 50% based on the gross gaming yield in a three-month period.
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The Gambling Act of 2005 requires that a personal declaration be completed by any stockholder holding a 10% or greater interest in a company that owns a casino. In addition, the Gambling Commission also requires that the company list all stockholders with a 3% or greater interest in the company.
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Other Regulation
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We are subject to certain foreign, federal, state, provincial and local safety and health, employment and environmental laws, regulations and ordinances that apply to our non-gaming operations. We have not made, and do not anticipate making, material expenditures with respect to these laws, regulations and ordinances. However, the coverage of, and attendant compliance costs associated with, such laws, regulations and ordinances may result in future additional costs to our operations.
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Rules and regulations regarding the service of alcoholic beverages are strict. The loss or suspension of a liquor license could significantly impair our operations. Local building, parking and fire codes and similar regulations also could impact our operations and any proposed development of our properties.
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We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering laws and regulations. Any violations of anti-money laundering laws or regulations by any of our properties could have an adverse effect on our business.
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Employees
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As of December 31, 2017, we had approximately 1,554 full-time employees and 356 part-time employees. During busier months, a casino may supplement its permanent staff with seasonal employees. Approximately 243 employees at our CPL casinos in Poland belong to trade unions. The trade unions do not currently have any collective bargaining agreements with CPL, but changes in pay of union employees at CPL require approval of the unions.
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Executive Officers of the Company
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Name
Age
Position Held
Erwin Haitzmann
Chairman of the Board and Co-Chief Executive Officer
Peter Hoetzinger
Vice Chairman of the Board, Co-Chief Executive Officer and President
Margaret Stapleton
Executive Vice President, Principal Financial/Accounting Officer and Secretary
Andreas Terler
Managing Director of Century Casinos Europe GmbH,
Vice President Operations and Chief Information Officer
Nikolaus Strohriegel
Managing Director of Century Casinos Europe GmbH and
Vice President Operations
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Erwin Haitzmann holds a Doctorate and a Masters degree in Social and Economic Sciences from the University of Linz, Austria (1980), and has extensive casino gaming experience ranging from dealer through various casino management positions. Dr. Haitzmann has been employed full-time by us since 1993 and has been employed as either Chief Executive Officer or Co-Chief Executive Officer since March 1994.
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Peter Hoetzinger received a Masters degree from the University of Linz, Austria (1986). He thereafter was employed in several managerial positions in the gaming industry with Austrian casino companies. Mr. Hoetzinger has been employed full-time by us since 1993 and has been Co-Chief Executive Officer since March 2005.
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Margaret Stapleton was appointed Executive Vice President, Principal Financial/Accounting Officer and Secretary, effective May 2010. She holds a Bachelor of Science degree in Accounting from Regis University, Denver, Colorado (2004) and has over 30 years of experience in corporate accounting and internal audit. Mrs. Stapleton previously served as our Director of Internal Audit and Compliance from 2005 until May 2010.
			
		
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Andreas Terler is a Graduate Engineer in Applied Mathematics from the University of Graz, Austria (1994). Mr. Terler is currently overseeing our operations in North America, our cruise ship-based casinos and our Caribbean operations. Mr. Terler has been employed by us since 2006. He has served as Chief Information Officer since February 2006, Managing Director of CCE since February 2007, and Vice President of Operations since May 2011.
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Nikolaus Strohriegel received a Masters degree from the University of Vienna, Austria (1996). Mr. Strohriegel is currently overseeing our operations in Poland and the Saw Close Casino project. Mr. Strohriegel has been employed by us since 2007. He has served as Managing Director of CCE since January 2009 and Vice President of Operations since March 2017.
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Available Information
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Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our website at https://www.cnty.com/corporate/investor-relations/sec-filings as soon as reasonably practicable after such report has been filed with, or furnished to, the SEC. None of the information posted to our website is incorporated by reference into this report.
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Financial Information about Segments and Geographic Areas
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See Note 13 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report for financial information about segments and geographic areas.
			
		
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Item 1A.
Item 1A. Risk Factors.
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Our short and long-term success is subject to many factors beyond our control. If any of the following risks, or any risks described elsewhere in or incorporated by reference in this report, actually occur, our business, financial condition or results of operations could suffer. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our business, financial condition or results of operations.
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Risks Related to our Business and Operations
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We face significant competition, and if we are not able to compete successfully, our results of operations will be harmed.
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We face intense competition from other casinos in jurisdictions in which we operate. Many of our competitors are larger and have substantially greater name recognition and financial and marketing resources than we do. We seek to compete through promotion of our players’ clubs and other marketing efforts. For example, for CRA, we emphasize the casino’s showroom, complimentary heated parking, players’ club program, and superior service. These marketing efforts may not be successful, which could hurt our competitive position.
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The markets in which we operate are generally not destination resort areas and rely on a local customer base as well as tourists during peak seasons. The number of casinos in our markets may exceed demand, which could make it difficult for us to sustain profitability. New or expanded operations by other entities in any of the markets in which we operate will increase competition for our gaming operations and could have a material adverse impact on us. We are particularly vulnerable to competition in Colorado and Poland due to the large number of competitors in those markets. Internet gaming or other gaming opportunities that become available in our markets could also attract players that might otherwise have visited our casinos. At the end of 2016, the gaming law in Poland was changed to permit Internet gaming and slot arcades through a state run company, effective April 2017. The changes have not yet been implemented. We expect online gaming and the slot arcades to begin operating in 2018. Once they begin operations, these changes could increase competition and adversely affect our results of operations. Capital expenditures, such as those for new gaming equipment, room refurbishments and amenity upgrades may be necessary from time to time to preserve the competitiveness of our properties. If we are not successful in making these improvements, our facilities may be less attractive to our visitors than those of our competitors, which could have a negative impact on our business.
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We face extensive regulation from gaming and other regulatory authorities, which involve considerable expense and could harm our business.
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As owners and operators of gaming facilities, we are subject to extensive state, local, and international provincial regulation. State, local and provincial authorities require us and our subsidiaries to demonstrate suitability to obtain and retain various licenses and require that we have registrations, permits and approvals to conduct gaming operations. Various regulatory authorities may, for any reason set forth in applicable legislation, rules and regulations, limit, condition, suspend or revoke a license or registration to conduct gaming operations or prevent us from owning the securities of any of our gaming subsidiaries. Like all gaming operators in the jurisdictions in which we operate or plan to operate, we must periodically apply to renew our gaming licenses or registrations and have the suitability of certain of our directors, officers and employees approved. At CRA and CAL, our licenses must be renewed every five years, with the next renewals scheduled for 2018. At Century Downs and St. Albert and in Colorado, our licenses must be renewed every two years, with the next renewals scheduled for 2018 for Century Downs and St. Albert and 2019 for Central City and Cripple Creek. In Poland, gaming licenses are granted for six year periods and are not renewable. When a gaming license in Poland expires, any gaming company can apply for the license and there can be no guarantee that we will be granted a new license at our existing casinos. The licenses for our Lodz and Plock casinos expired in February 2018, the license for our Krakow casino expires in March 2018, and the license for our Poznan casino expires in April 2018. We may not be able to obtain license renewals or approvals of new licenses. Regulatory authorities may also levy substantial fines against us or seize our assets or the assets of our subsidiaries or the people involved in violating gaming laws or regulations. Any of these events could force us to terminate operations at an existing gaming facility, either on a temporary or permanent basis, could result in us being fined or could prohibit us from successfully completing a project in which we invest. Closing facilities or an inability to expand may have a material adverse effect on our business, financial condition and results of operations.
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In addition to gaming regulations, we are also subject to various federal, state, provincial, local and foreign laws and regulations affecting businesses in general. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, smoking, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Rules and regulations regarding the service of alcoholic beverages are strict. The loss or suspension of a liquor license could significantly impair our operations.
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We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violations of anti-money laundering laws or regulations by any of our properties could have an adverse effect on our financial condition, results of operations or cash flows. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted.
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Potential changes in the regulatory environment may adversely affect the results of our operations.
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From time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations or that may otherwise adversely impact our operations in the jurisdictions in which we operate. Any expansion of the gaming industry that results in increased competition and any restriction on or prohibition of our gaming operations could have a material adverse effect on our operating results or cause us to record an impairment of our assets. In Poland, changes to the gaming law that went into effect in April 2017, but have not yet been implemented, legalized online gaming and reintroduced slot arcades that will be operated through a state run company. We expect the online gaming and slot arcades to begin operating in 2018. Once they begin operation, these changes could increase competition and adversely affect our results of operations. In addition, there is uncertainty surrounding future legislative changes that the U.S. Congress could impose relating to gaming, including potential changes to online gaming or sports betting laws. Any newly adopted gaming laws in the U.S. or other jurisdictions in which we operate could have an adverse impact on our financial position and results of operations.
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The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform laws or policies could materially affect our financial position and results of operations.
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We are subject to taxation at the federal, state, provincial and local levels in the U.S. and various other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher corporate taxes than would be incurred under existing tax law and could adversely affect our financial condition or results of operations.
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The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and included significant changes to the U.S. Internal Revenue Code, including, among other items, a reduction of the federal corporate tax rate from 35% to 21%, a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, and the creation of new taxes on certain foreign earnings. These changes are complex and will require the Internal Revenue Service (“IRS”) to issue interpretations and regulations that may significantly impact how the Tax Act is applied and ultimately may impact our results of operations. If there are significant interpretations and regulations issued related to the Tax Act that would increase the tax rates on future U.S. or foreign earnings, these changes could have a material adverse effect on our effective tax rate, financial condition, results of operations and cash flows.
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We face extensive taxation from gaming and regulatory authorities. Potential changes to the tax laws in the jurisdictions in which we operate may adversely affect the results of our operations.
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We believe that the prospect of significant revenue to a jurisdiction through taxation and fees is one of the primary reasons jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees in addition to normal federal, state, provincial and local income taxes, and such taxes and fees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations. For instance, the Colorado constitution permits a gaming tax of up to 40% on adjusted gross gaming proceeds. The current gaming tax in Colorado established by the Colorado Gaming Commission is a graduated rate of 0.25% to 20% on adjusted gross gaming proceeds, where casinos pay a higher percentage as their adjusted gross proceeds increase. At our Edmonton, St. Albert and Calgary casinos, the AGLC retains 85% of slot machine net sales, of which the AGLC allocates 15% to licensed charities and 70% to the Alberta Lottery Fund. For all table games in Alberta, Canada, excluding poker and craps, we are required to allocate 50% of our net win to a charity designated by the AGLC, with the exception of our St. Albert casino, for which we are required to allocate 35% of our net win to a charity designated by the AGLC. For poker and craps in Alberta, Canada, we are required to allocate 25% of our net win to the charity. At Century Downs, the AGLC and HRA retain 56.25% of slot machine net sales, which are allocated to and used by the Alberta Lottery Fund and by HRA to fund purses, marketing, administration and animal welfare and other programs. Any change to the agreement between the AGLC and HRA on the division of the slot machine net sales at Century Downs could negatively impact our revenue, as HRA may increase the amount it retains in order to offset increased retention from the AGLC. The Polish Minister of Finance assesses a gaming tax rate on gross gaming revenue of 50%. In Poland, under legislation enacted in late 2017 and effective in January 2018, casino patrons winning over PLN 2,280 in a single casino visit are now subject to personal income tax on their winnings, which could adversely affect our casino patronage and our results of operations. In addition, negative economic conditions could intensify the efforts of federal, state, provincial and local governments to raise revenues through increases in gaming taxes or introduction of additional gaming opportunities.
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We may be unable to obtain the capital necessary to fund our operations or potential acquisitions.
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Our industry is capital intensive, and we rely heavily on the ability of our casinos to generate operating cash flow to repay debt financing, fund maintenance capital expenditures and provide excess cash for future development. While we have a significant amount of cash currently on hand, we may not be able to obtain funding when we need it on favorable terms or at all. We are currently constructing the Century Mile horse racing facility in the Edmonton market area, which we estimate will cost approximately CAD 60.0 million ($47.8 million based on the exchange rate in effect as of December 31, 2017). We plan to finance this project with $25.0 million received from an equity offering in November 2017, loans under our existing or additional credit facilities and available cash. If we are unable to finance our current or future expansion projects, such as the Century Mile, Saw Close Casino Ltd., and Cripple Creek Palace Hotel projects, we will have to adopt one or more alternatives, such as reducing or delaying planned expansion, development and renovation projects and capital expenditures, selling assets, restructuring debt, obtaining additional equity financing or joint venture partners, or modifying our bank credit facility. In addition, the amount of capital that we are able to raise often depends on variables that are beyond our control, such as the share price of our stock and its trading volume. The availability of financing may be impacted by local, regional and global economic, credit and stock market conditions, all of which have been volatile. As a result, we may not be able to secure financing on terms attractive to us, in a timely manner or at all. If we are able to consummate a financing arrangement, the amount raised may not be sufficient to meet all of our future needs and, if it involves equity, may be highly dilutive to our stockholders. If we cannot raise adequate funds to satisfy our capital requirements, we may have to reduce, dispose of or eliminate certain operations.
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Our financing agreements in Canada impose restrictive covenants that limit our operating flexibility, and a default could have a material adverse effect on us.
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Our various credit agreements require us to adhere to a number of significant financial covenants and for the Company to guaranty the debt of our subsidiaries. These restrictions limit the ability of our subsidiaries in Canada to incur additional debt, obtain future financings to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary corporate activities. A breach of any covenant in any of our credit agreements would result in an event of default under that agreement after any applicable grace periods. An event of default, if not waived or cured, could cause the lender to accelerate the repayment of all outstanding amounts due under the agreement, foreclose on the security granted under the agreement and enforce the Company’s obligations under its guarantee. There can be no assurances that we or our subsidiaries would be able to obtain a waiver of an event of default or modification of a covenant if necessary, or otherwise obtain alternative sources of funding to repay the obligation if a default occurred. Any such occurrences could have a material adverse effect on us.
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Difficulties in managing our worldwide operations may have an adverse impact on our business.
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We derive our revenue principally from operations located on two continents and on cruise ships operating around the world. Our management is located in the United States and Europe. Our worldwide operations pose risks to our business, especially for a smaller company such as ours. Risks associated with international operations include:
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different time zones;
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culture, management and language differences;
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fluctuations in foreign currency exchange rates;
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changes in laws and policies that govern our foreign operations;
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possible failure to comply with anti-bribery laws such as the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;
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difficulty in establishing staffing and managing non-United States operations;
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different labor regulations;
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changes in environmental, health and safety laws;
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potentially negative consequences from changes in or interpretations of tax laws;
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political instability and actual or anticipated military or political conflicts;
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economic instability and inflation, recession or interest rate fluctuations; and
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uncertainties regarding judicial systems and procedures.
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These factors make it more challenging to manage and administer a globally-dispersed business and, as a result, we must devote greater resources to operating under several regulatory and legislative regimes (See “Governmental Regulation and Licensing” in Item 1, “Business”). This business model also increases our costs.
			
		
We may experience construction delays during our expansion or development projects, including the development and construction costs associated with the Century Mile project in Edmonton and the Saw Close Casino project in Bath, which could adversely affect our operations.
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From time to time we may commence construction projects at our properties. Construction on the Century Mile project in Edmonton, Alberta, Canada commenced in July 2017, and we expect to open the REC in early 2019. Construction on the Saw Close Casino project in Bath, England commenced in October 2017, and we expect to open the casino in the second quarter of 2018. We may engage in additional construction projects in the future. Construction projects entail significant risks, which can substantially increase costs or delay completion of a project. Most of these factors are beyond our control.
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Our current and future projects could also experience:
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failure to obtain necessary licenses, permits, entitlements or other governmental approvals;
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changes to plans and specifications (some of which may require the approval of regulatory agencies);
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delays and significant cost increases;
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shortages of materials;
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shortages of skilled labor or work stoppages for contractors and subcontractors;
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labor disputes or work stoppages;
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disputes with and defaults by contractors and subcontractors;
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health and safety incidents and site accidents;
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engineering problems, including defective plans and specifications;
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poor performance or nonperformance by our partners or other third parties on whom we place reliance;
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changes in laws and regulations, or in the interpretation and enforcement of laws and regulations, applicable to gaming and other facilities, real estate development or construction projects;
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unforeseen construction scheduling, engineering, environmental, permitting, construction or geological problems;
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environmental issues, including the discovery of unknown environmental contamination;
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weather interference, floods, fires or other casualty losses; and
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other unanticipated circumstances or cost increases.
The occurrence of any of these development and construction risks could increase the total costs of our construction projects, including the Century Mile or Saw Close Casino projects, or delay or prevent the construction or opening or otherwise affect the design and features of our construction projects. This could materially adversely affect our plan of operations, financial condition and ability to satisfy our debt obligations. In addition, construction at our operating casinos may disrupt our customers’ experience and cause a decline in our revenue.
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Actual costs and construction periods for any of our projects can differ significantly from initial expectations. We can provide no assurance that we will complete any project on time, if at all, or within established budgets, or that any project will result in increased earnings to us. If our initial budgets are not accurate, we may need to pursue additional financing to complete a proposed project, which may not be available on favorable terms or at all. The adverse impact on our results of operations resulting from cost overruns on any construction projects we undertake may harm our stock prices.
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We intend to develop and operate additional properties in the future and if our development efforts are not successful, our business may be adversely affected.
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We regularly review opportunities to develop new properties. We may not be successful in obtaining the rights to develop such properties, and as a result, we may incur significant costs for which we will receive no return. Even if we are successful in obtaining the rights to develop new casino properties, commencing operations at new casino projects may require substantial development capital. Additional risks before commencing operations include the time and expense incurred and unforeseen difficulties in obtaining suitable sites, liquor licenses, building permits, materials, competent and able contractors, supplies, employees, gaming devices and related matters.
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We may engage in construction projects as part of our development of additional properties in the future. Construction projects entail significant risks, which can substantially increase costs or delay completion of a project. Most of these factors are beyond our control. The occurrence of any of these development and construction risks could increase the total costs of our construction projects or delay or prevent the construction or opening or otherwise affect the design and features of our construction projects. This could materially adversely affect our plan of operations, financial condition and ability to satisfy our debt obligations.
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Development activities such as the Century Mile and SCCL projects involve substantial risks, such as uncertainties regarding our ability to secure various licenses, permits and government authorizations, and expenses related to such activities, as well as the risks of potential cost over-runs, construction delays and market deterioration.
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We may pursue gaming opportunities that would require us to obtain a gaming license. While our management believes that we are licensable in any jurisdiction that allows gaming operations, each licensing process is unique and requires a significant amount of funds and management time. The licensing process in any particular jurisdiction can take significant time and expense through licensing fees, background investigation costs, legal fees and other associated preparation costs. Moreover, if we proceed with a licensing approval process with industry partners, such industry partners would be subject to regulatory review as well. We seek to find industry partners that are licensable, but cannot assure that such partners will, in fact, be licensable. Certain licenses include competitive situations where, even if we and our industry partners are licensable, other factors such as the economic impact of gaming, financial and operational capabilities of competitors must be analyzed by regulatory authorities. In addition, political factors may make the licensing process more difficult. If any of our gaming license applications are denied, we may have to write off costs related to our investment in such application processes, which could be significant. In addition, our ability to attract and retain competent management and employees for any new location is critical to our success. One or more of these risks may result in any new gaming opportunity not being successful. If we are not able to successfully commence operations at these properties, our results of operations may be adversely affected.
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Our reputation and business may be harmed by cyber security breaches, and we may be subject to legal claims if there is loss, disclosure or misappropriation of or access to our customers', our business partners' or our own information or other breaches of our information security.
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We make use of online services and centralized data processing, including through third party service providers. The secure maintenance and transmission of customer information, including credit card numbers and other personally identifiable information for marketing and promotional purposes, is a critical element of our operations. Our collection and use of personal data are governed by state and federal privacy laws as well as the applicable laws in other countries in which we operate. Compliance with applicable privacy regulations may increase our operating costs or adversely impact our ability to market our products, properties and services to our guests.
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Our information technology and other systems that maintain and transmit customer information, or those of service providers, or our employee or business information may be compromised by a malicious third party penetration of our network security, or that of a third party service provider or business partner, or by actions or inactions by our employees. As a result, information of our customers, third party service providers or business partners or our employee or business information may be lost, disclosed, accessed or taken without their or our consent. Non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) or a breach of security on systems storing our data may result in a loss of customers and subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of data. Our insurance does not cover cyber security incidents. The loss, disclosure or misappropriation of our business information may adversely affect our businesses, operating results and financial condition. Furthermore, a cyber security breach could have a serious impact on our reputation and may adversely affect our businesses, operating results and financial condition.
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We may be adversely affected by reductions in discretionary consumer spending as a result of consumer concerns over economic conditions, homeland security, terrorism and war.
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Our business may be adversely affected by international, national and local economic and political conditions. From time to time, the volatile global economic environment has had negative effects on our business because our business is largely impacted by discretionary consumer spending. Reductions in discretionary consumer spending or changes in consumer preferences brought about by factors such as increased unemployment, perceived or actual deterioration in general economic conditions, housing market instability, perceived or actual decline in disposable consumer income and wealth, and changes in consumer confidence in the economy could reduce customer demand for the leisure activities we offer and may adversely affect our revenue and operating cash flow. For example, Alberta, is Canada’s largest oil and gas producer and a decrease in oil and gas prices could create higher unemployment and reduce discretionary consumer spending at our Canadian casinos.
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Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties and have had a negative impact on travel and leisure expenditures, including gaming, lodging and tourism. For example, our locations in Poland are in close proximity to Ukraine and Russia. While we have not experienced any material impact from the acts of hostility between the two countries, an increase in those hostilities could adversely affect our casinos in Poland. We cannot predict the extent to which terrorism, security alerts or war, or hostilities in countries throughout the world will directly or indirectly affect our business and operating results, but the impact could be material.
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Insufficient or lower-than-expected results generated from our new developments and acquired properties may negatively affect our operating results and financial condition.
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Our acquisitions and new developments may not generate revenues that will be sufficient to pay related expenses, or, even if such revenues are sufficient to pay related expenses, the acquisitions and new developments may not yield an adequate return or any return on our significant investments. In addition, generating returns on acquisitions and new investments may take significantly longer than we expect and may negatively impact our operating results and financial condition. New facilities also may compete with existing facilities that we own and operate.
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Inclement weather and other conditions could seriously disrupt our business, which may hamper our financial condition and results of operations.
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The operations of our facilities are subject to disruptions or reductions in the number of customers who visit our properties because of severe weather conditions. If weather conditions limit access to our casino properties or otherwise adversely impact our ability to operate our casinos at full capacity, our revenue will suffer, which will negatively impact our operating results. High winds, flooding, blizzards and sub-zero temperatures, such as those experienced in Colorado and Alberta from time to time, can limit access to our properties.
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Our insurance coverage may not be adequate to cover all possible losses that our properties could suffer, our insurance costs may increase and we may not be able to obtain the same insurance coverage in the future.
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We may suffer damage to our property caused by a casualty loss (such as fire, natural disasters, acts of war or terrorism), that could severely disrupt our business or subject us to claims by third parties who are injured or harmed. Although we maintain insurance customary in our industry, including property, casualty, terrorism and business interruption insurance, that insurance is subject to deductibles and limits on maximum benefits, including limitations on the coverage period for business interruption. Due to these variables, we may not be able to fully insure such losses, or fully collect, if at all, on claims resulting from severe weather conditions. The lack of sufficient insurance for these types of acts could expose us to heavy losses if any damages occur, directly or indirectly, that could have a significant adverse impact on our operations.
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We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage or self-insure. Among other factors, regional political tensions, homeland security concerns, other catastrophic events or any change in government legislation governing insurance coverage for acts of terrorism could materially adversely affect available insurance coverage and result in increased premiums on available coverage (which may cause us to elect to reduce our policy limits), additional exclusions from coverage or higher deductibles. Among other potential future adverse changes, in the future we may elect to not, or may not be able to, obtain any coverage for losses due to acts of terrorism.
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Our business, financial condition, and results of operations may be harmed by work stoppages and other labor issues.
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There are 243 employees at our CPL casinos in Poland who belong to trade unions. The trade unions do not currently have any collective bargaining agreements with CPL but changes in pay for union employees at CPL require approval from the trade unions. A lengthy strike or other work stoppage at our casino properties in Poland could have an adverse effect on our business and results of operations. Our employees in the U.S. and Canada and in our Corporate and Other segment are not covered by collective bargaining agreements. From time to time, we have experienced attempts to unionize certain of our non-union employees. If a union seeks to organize any of our employees, we could experience disruption in our business and incur significant costs, both of which could have a material adverse effect on our results of operation and financial condition. If a union were successful in organizing any of our employees, we could experience significant increases in our labor costs which could also have a material adverse effect on our business, financial condition, and results of operations.
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Fluctuations in currency exchange rates and currency controls in foreign countries could adversely affect our business.
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Our casinos in Canada and Poland represent a significant portion of our business, and the revenue generated and expenses incurred by these operations are generally denominated in Canadian dollars and Polish zloty, respectively. Decreases in the value of these currencies in relation to the value of the U.S. dollar have decreased the operating profit from our foreign operations when translated into U.S. dollars, which has adversely affected our consolidated results of operations, and such decreases may occur in the future. In addition, we may expand our operations into other countries and, accordingly, we could face similar exchange rate risk with respect to the costs of doing business in such countries as a result of any increases in the value of the U.S. dollar in relation to the currencies of such countries. We do not currently hedge our exposure to fluctuations of these foreign currencies, and there is no guarantee that we will be able to successfully hedge any future foreign currency exposure.
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We have invested $1.0 million in capital in the MCE project located in Argentina. In addition, we have a Consulting Services Agreement with MCE in which CCE is receiving a service fee consisting of a fixed fee plus a percentage of MCE’s EBITDA. Argentina has implemented currency controls within the country that could limit our ability to repatriate our initial capital, the consulting service fee, or other funds.
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The loss of key personnel could have a material adverse effect on us.
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We are highly dependent on the services of Erwin Haitzmann and Peter Hoetzinger, our Co-Chief Executive Officers, and other members of our senior management team. The employment agreements with Erwin Haitzmann and Peter Hoetzinger provide that, under some circumstances, the departure of one executive could allow the other to leave for cause. Our ability to retain key personnel is affected by the competitiveness of our compensation packages and the other terms and conditions of employment, our continued ability to compete effectively against other gaming companies and our growth prospects. The loss of the services of any of these individuals could have a material adverse effect on our business, financial condition and results of operations.
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We may be required in the future to record impairment losses related to assets we currently carry on our balance sheet.
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We have $275 million of tangible and intangible assets, including $15 million of goodwill, $15 million in casino licenses, $2 million in trademarks and $153 million in property and equipment as of December 31, 2017. Accounting rules require that we make certain estimates and assumptions related to our determinations as to the future recoverability of these assets. If we were to determine that the values of these assets carried on our balance sheet are impaired due to adverse changes in our business or otherwise, we may be required to record an impairment charge to write down the value of these assets, which would adversely affect our results during the period in which we recorded the impairment charge.
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We are or may become involved in legal proceedings that, if adversely adjudicated or settled, could impact our financial condition.
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From time to time, we are defendants in various lawsuits and gaming regulatory proceedings relating to matters incidental to our business. As with all litigation, no assurance can be provided as to the outcome of these matters and, in general, litigation can be expensive and time consuming. We may not be successful in the defense or prosecution of our current or future legal proceedings, which could result in settlements or damages that could significantly impact our business, financial condition and results of operations.
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In Poland, tax laws and other Polish laws and regulations change from time to time, sometimes with no reference to established regulations or cases. The current Polish laws and regulations also have ambiguities that lead to differences in interpretations between authorities and between authorities and companies. Taxes or other payments may frequently be inspected by Polish authorities that are authorized to impose significant fines, extra liabilities and interest for underpayments. As a result, our tax risk is higher in Poland than in countries with better-developed tax systems. Since Polish tax payments may be inspected for up to five years, the amounts included in our financial statements for Polish taxes may change at a later date after the final amounts are determined, and other Polish laws and regulations may lead to additional liabilities. We have open tax audits currently in litigation with the Polish Internal Revenue Service (“Polish IRS”), as described further in Item 3, “Legal Proceedings”. The Supreme Administrative Court in Poland found in favor of the Polish IRS in 2016 regarding certain open tax audits, and we are awaiting a decision from the Supreme Administrative Court relating to another open tax audit. Additional tax obligations as a result of the tax audits by the Polish IRS could adversely affect our financial position.
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We are dependent upon technology services and electrical power to operate our business, and if we experience damage or service interruptions, we may have to cease some or all of our operations, resulting in a decrease in revenue.
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Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security system and all of our slot machines are controlled by computers and reliant on electrical power to operate. A loss of electrical power or a failure of the technology services needed to run the computers would make us unable to run all or parts of our gaming operations. Any unscheduled interruption in our technology services or interruption in the supply of electrical power is likely to result in an immediate, and possibly substantial, loss of revenue due to a shutdown of our gaming operations. Although we have designed our systems around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Additionally, substantial increases in the cost of electricity and natural gas could negatively affect our results of operations.
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Any violation of the Foreign Corrupt Practices Act or any other similar anti-corruption laws could have a negative impact on us.
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A significant portion of our revenue is derived from operations outside the United States, which exposes us to complex foreign and U.S. regulations inherent in doing cross-border business and in each of the countries in which we transact business. We are subject to compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other similar anti-corruption laws, which generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. Violations of these laws may result in severe criminal and civil sanctions as well as other penalties, and the SEC and U.S. Department of Justice have increased their enforcement activities with respect to the FCPA. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
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Risks Related to Our Common Stock
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Our stock price has been volatile and may decline significantly and unexpectedly.
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Our common stock trades in the U.S. on the Nasdaq Capital Market, which consists of relatively small issuers and a lack of significant trading volumes relative to other U.S. markets. These factors may result in volatility in the price of our common stock. For instance, the trading price of our common stock on the Nasdaq Capital Market in 2016 and 2017 varied from a high of $9.85 to a low of $5.34.
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Certain anti-takeover measures we have adopted may limit our ability to consummate transactions that some of our security holders might otherwise support.
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We have a fair price business combination provision in our certificate of incorporation, which requires approval of certain business combinations and other transactions by holders of 80% of our outstanding shares of voting stock. In addition, our certificate of incorporation allows our board of directors to issue shares of preferred stock without stockholder approval. These provisions generally have the effect of requiring that any party seeking to acquire us negotiate with our board of directors in order to structure a business combination with us. This may have the effect of depressing the price of our common stock due to the possibility that certain transactions that our stockholders might favor could be precluded by these provisions.
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Regulation Risk Related to Stockholders
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Stockholders may be required to dispose of their shares of our common stock if they are found unsuitable by U.S. gaming authorities.
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Gaming authorities in the U.S., Canada and the United Kingdom generally can require that any beneficial owner of our common stock and other securities file an application for a finding of suitability. If a gaming authority requires a record or beneficial owner of our securities to file a suitability application, the owner must apply for a finding of suitability within 30 days or at an earlier time prescribed by the gaming authority. The gaming authority has the power to investigate an owner's suitability, and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of our securities. Our certificate of incorporation also provides us with the right to repurchase shares of our common stock from certain beneficial owners declared by gaming regulators to be unsuitable holders of our equity securities, and the price we pay to any such beneficial owner may be below the price such beneficial owner would otherwise accept for his or her shares of our common stock.
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Item 1B.
Item 1B. Unresolved Staff Comments.
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None.
			
		
Item 2.
Item 2. Properties.
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The following table sets forth the location, applicable reportable segment, size and description of certain types of gaming facilities available at each of our casinos as of December 31, 2017:
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Summary of Property Information
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(1) Century Bets! Inc. runs the pari-mutuel network in southern Alberta. The off-track betting parlors are located throughout southern Alberta, including in Century Casinos - Calgary and Century Downs Racetrack and Casino.
(2) As of December 31, 2017, Casinos Poland operated six separate casinos in leased building spaces, including hotels, throughout Poland. For the locations of these casinos, see “Overview of Operations - Poland” in Item 1, “Business” of this report.
(3) Operated under concession agreements. We do not own the ships on which our casinos operate.
(4) Operated under a consulting services agreement. We do not own the building in which the casino operates.
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Each of the locations listed in the table above are wholly-owned by us except for Century Downs Racetrack and Casino, Century Bets! Inc., the casinos operated by Casinos Poland, the cruise ships and Mendoza Central Entretenimientos S.A.
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As of December 31, 2017, the Century Casino & Hotel in Edmonton, Century Casino St. Albert and Century Casino in Calgary and our 75% interest in Century Downs are pledged as collateral for our obligations under a mortgage with the Bank of Montreal. As of December 31, 2017, a parcel of land in Kolbaskowo, Poland owned by Casinos Poland was used to secure a bank guarantee with mBank. See Note 7 to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report.
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Additional Property Information
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Century Casino Calgary - In addition to the property described above, we lease approximately 13,049 square feet of land at our property in Calgary for additional parking.
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Century Downs Racetrack and Casino - The land on which the REC is located was sold by CDR to 1685258 Alberta Ltd. (“Rosebridge”) prior to our acquisition of our ownership interest in CDR. CDR leases from Rosebridge the 57.3 acres on which the REC is located.
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Century Bets - Century Bets leases approximately 250 square feet of office space from Century Casino & Hotel Edmonton and 80 square feet of office space from Century Casino Calgary for administrative purposes.
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Corporate Offices - We lease approximately 5,700 square feet of office space in Colorado Springs, Colorado and approximately 2,500 square feet of office space in Vienna, Austria for corporate and administrative purposes.
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Item 3.
Item 3. Legal Proceedings.
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We are not a party to any pending litigation that, in management’s opinion, could have a material effect on our financial position or results of operations except as follows.
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Since 2011, the Polish IRS has conducted a series of tax audits of CPL to review the calculation and payment of personal income tax by CPL employees for periods ranging from 2007 to 2013. The Polish IRS has asserted that CPL should calculate, collect and remit to the Polish IRS personal income tax on tips received by CPL employees from casino customers and has prevailed in several court challenges by CPL. Through December 31, 2017, CPL has paid PLN 9.4 million ($2.9 million) to the Polish IRS related to these audits. As a result of one court decision currently on appeal, which is scheduled to be heard in April 2018, CPL’s tax records for 2009 remain open for audit.
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The Polish IRS did not conduct a tax audit for the period from January 1, 2010 to November 30, 2010, and the statute of limitations has passed for an audit to be conducted. As a result, we adjusted our contingent liability related to the CPL taxes to remove the estimated taxes accrued for the 2010 tax year. The adjustment reduced the contingent liability by PLN 3.4 million ($0.9 million) in December 2015 and was recorded as gain on foreign currency and other on our consolidated statement of earnings during the fourth quarter of the year ended December 31, 2015. In June 2017, the Polish IRS began a tax audit of 2012 and 2013. The audit was completed in August 2017. CPL estimates that it will be required to pay PLN 4.8 ($1.4 million based on the exchange rate in effect on December 31, 2017) related to this audit. The Polish IRS has not issued an official decision on this audit and no payment will be made until the decision is issued. CPL plans to file an appeal if the tax decision would result in a payment to the Polish IRS.
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The balance of the potential contingent liability on our consolidated balance sheet for all open periods as of December 31, 2017 is PLN 6.3 million ($1.8 million based on the exchange rate in effect on December 31, 2017). We have evaluated the contingent liability recorded on our consolidated balance sheet as of December 31, 2017 and have concluded that it is properly accrued in light of our estimated obligation related to personal income tax on tips as of December 31, 2017. Additional court decisions and other proceedings by the Polish IRS may expose us to additional employment tax obligations in the future. Any additional tax obligations are not probable or estimable, and we have not recorded any additional obligation related to such taxes as of December 31, 2017. Additional tax obligations assessed in the future as a result of these matters, if any, may be material to our financial position, results of operations and cash flows.
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In October 2016, we filed a motion for arbitration in Poland against LOT Polish Airlines, which previously owned a 33.3% interest in CPL that it sold to us in 2013. We are seeking to collect amounts owed to us by LOT Polish Airlines in connection with the payments made to the Polish IRS for the tax periods December 1, 2007 to December 31, 2008 and January 1, 2011 to January 31, 2011 pursuant to an agreement with LOT Polish Airlines under which we acquired the additional 33.3% interest in CPL. In June 2017, the arbitrator awarded us PLN 1.2 million ($0.3 million based on the exchange rate in effect on December 31, 2017) related to this claim for the periods indicated. LOT Polish Airlines is appealing the decision.
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Item 4.
Item 4. Mine Safety Disclosures.
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Not applicable.
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PART II
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Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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Our common stock is traded in the United States on the Nasdaq Capital Market under the symbol “CNTY”.
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The following graph illustrates the cumulative shareholder return of our common stock during the period beginning December 31, 2012 through December 31, 2017, and compares it to the cumulative total return on the Nasdaq and the Dow Jones US Gambling Index. The comparison assumes a $100 investment on December 31, 2012, in our common stock and in each of the foregoing indices, and assumes reinvestment of dividends, if any. This table is not intended to forecast future performance of our common stock.
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The following table sets forth the low and high sales price per share of our common stock as reported on the Nasdaq Capital Market for the periods indicated.
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No dividends have been declared or paid by us. Declaration and payment of dividends, if any, in the future will be at the discretion of the board of directors. At the present time, we intend to use any earnings that may be generated to finance the growth of our business.
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At March 1, 2018, we had 143 holders of record of our common stock.
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In March 2000, our board of directors approved and announced a discretionary program to repurchase up to $5.0 million of our outstanding common stock. In November 2009, our board of directors approved an increase of the amount available to be repurchased under the program to $15.0 million. The amount available for repurchase as of December 31, 2017 is $14.7 million. The repurchase program has no set expiration or termination date. No repurchases were made during the year ended December 31, 2017.
			
		
Item 6.
Item 6. Selected Financial Data.
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The selected financial data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Part II, Item 8, “Financial Statements and Supplementary Data”, of this Form 10-K.
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(1)
In November 2017, we completed an underwritten public offering in which we sold 4,887,500 shares of our common stock and collected proceeds from the offering of $34.4 million.
(2)
In October 2016, we began operation of Century Casino St. Albert. We also adopted Accounting Standard Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”) on a prospective basis as of December 31, 2016. As permitted by the standard, no prior periods have been restated in this report. As a result of the adoption of ASU 2015-17, we netted our deferred taxes into a long-term deferred tax asset. As of December 31, 2015, we had deferred tax liabilities of $3.6 million reported on our consolidated balance sheet.
(3)
In April 2015, we began operations of CDR’s casino and racetrack. In June 2015, we recorded $3.4 million in net operating revenue from the $4.0 million consideration for the early termination of our Oceania and Regent concession agreements net of $0.6 million in assets sold to Norwegian as part of the termination agreement.
(4)
In April 2013, we purchased an additional 33.3% ownership interest in CPL and began consolidating CPL as a majority-owned subsidiary for which we have a controlling financial interest and we recorded a gain on business combination of $2.1 million associated with the purchase. Additionally, we recorded a gain on business combination of $0.4 million associated with the CDR acquisition in December 2013.
(5)
A reconciliation of Adjusted EBITDA to Net earnings attributable to Century Casinos, Inc. shareholders is presented below.
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We have not declared or paid dividends in any of the years presented above.
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Non-GAAP Measures - Adjusted EBITDA
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We define Adjusted EBITDA as net earnings (loss) attributable to Century Casinos, Inc. shareholders before interest expense (income), net, income taxes (benefit), depreciation, amortization, non-controlling interests (earnings) losses and transactions, pre-opening expenses, acquisition costs, non-cash stock-based compensation charges, asset impairment costs, (gain) loss on disposition of fixed assets, discontinued operations, (gain) loss on foreign currency transactions and other, gain on business combination and certain other one-time transactions. Intercompany transactions consisting primarily of management and royalty fees and interest, along with their related tax effects, are excluded from the presentation of net earnings (loss) and Adjusted EBITDA reported for each segment. Not all of the aforementioned items occur in each reporting period, but have been included in the definition based on historical activity. These adjustments have no effect on the consolidated results as reported under US generally accepted accounting principles (“GAAP”). Adjusted EBITDA is not considered a measure of performance recognized under US GAAP.
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Management believes that Adjusted EBITDA is a valuable measure of the relative performance of the Company and its properties. The gaming industry commonly uses Adjusted EBITDA as a method of arriving at the economic value of a casino operation. Management uses Adjusted EBITDA to evaluate and forecast the operational performance of the Company and its properties as well as to compare results of current periods to prior periods. Management believes that presenting Adjusted EBITDA to investors provides them with information used by management for financial and operational decision making in order to understand the Company’s operating performance and evaluate the methodology used by management to evaluate and measure such performance. Management believes that using Adjusted EBITDA is a useful way to compare the relative operating performance of separate reporting segments by eliminating the above mentioned items associated with the varying levels of capital expenditures for infrastructure required to generate revenue, and the often high cost of acquiring existing operations. Our computation of Adjusted EBITDA may be different from, and therefore may not be comparable to, similar measures used by other companies within the gaming industry.
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The reconciliation of Adjusted EBITDA to net earnings (loss) attributable to Century Casinos, Inc. shareholders is presented below.
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Other one-time (income) costs for the year ended December 31, 2015 for Corporate and Other were attributable to the termination of the Oceania and Regent concession agreements.
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Other one-time (income) costs for the year ended December 31, 2014 for Canada were insurance proceeds and for Poland were the costs associated with relocating the Poznan casino to Hotel Andersia and the write-off of the Sosnowiec casino license.
			
		
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Other one-time (income) costs for the year ended December 31, 2013 for Canada were insurance proceeds, for Poland were the impairment of long-lived assets and for Corporate and Other were the gain on bargain purchase recorded for the additional 33.3% ownership interest in CPL and the 15% ownership interest in CDR.
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Non-GAAP Measures - Constant Currency
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The impact of foreign exchange rates is highly variable and difficult to predict. We use a constant currency basis to show the impact from foreign exchange rates on the current period results compared to the prior period results using the prior period’s foreign exchange rates. In order to properly understand the underlying business trends and performance of the Company’s ongoing operations, management believes that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our net operating revenue, earnings from operations and net earnings (loss) attributable to Century Casinos, Inc. shareholders. Constant currency results are calculated by dividing the current year to date local currency segment results by the prior year’s average exchange rate for the year and comparing them to actual U.S. dollar results for the prior quarter or year. The current and prior year’s average exchange rates are presented in Note 2 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report. The constant currency results are presented below.
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Gains and losses on foreign currency transactions are added back to net earnings in our Adjusted EBITDA calculations. As such, there is no foreign currency impact to Adjusted EBITDA when calculating constant currency results.
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Non-GAAP Measures - Net Debt
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We define Net Debt as total long-term debt (including current portion) plus deferred financing costs minus cash and cash equivalents. Net Debt is not considered a liquidity measure recognized under US GAAP. Management believes that Net Debt is a valuable measure of our overall financial situation. Net Debt provides investors with an indication of our ability to pay off all of our long-term debt if it becomes due simultaneously. The reconciliation of Net Debt is presented below.
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Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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The following discussion should be read in conjunction with Part II, Item 8, “Financial Statements and Supplementary Data” of this report. Information contained in the following discussion of our results of operations and financial condition contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and, as such, is based on current expectations and is subject to certain risks and uncertainties. The reader should not place undue reliance on these forward-looking statements for many reasons, including those risks discussed under Item 1A, “Risk Factors,” and elsewhere in this document. See “Disclosure Regarding Forward-Looking Statements” that precedes Part I of this report. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.
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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. The term “USD” refers to US dollars, the term “CAD” refers to Canadian dollars, the term “PLN” refers to Polish zloty and the term “GBP” refers to British pounds. Certain terms used in this Item 7 without definition are defined in Item 1, “Business” of this report.
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Amounts presented in this Item 7 are rounded. As such, there may be rounding differences in period over period changes and percentages reported throughout this Item 7.
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EXECUTIVE OVERVIEW
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Overview
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Since our inception in 1992, we have been primarily engaged in developing and operating gaming establishments and related lodging, restaurant and entertainment facilities. Our primary source of revenue is from the net proceeds of our gaming machines and tables, with ancillary revenue generated from hotel, restaurant, horse racing (including off-track betting), bowling and entertainment facilities that are in most instances a part of the casinos.
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We view each casino property as a separate operating segment and aggregate all such properties into three reportable segments based on the geographical locations in which our casinos operate: Canada, United States and Poland. We have additional business activities including concession agreements, management agreements, consulting agreements and certain other corporate and management operations that we report as Corporate and Other.
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The table below provides information about the aggregation of our operating segments into reportable segments:
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The following operating segments are owned, operated and managed through wholly-owned subsidiaries:
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·
The Century Casino & Hotel in Edmonton, Alberta, Canada;
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The Century Casino St. Albert in Edmonton, Alberta, Canada;
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The Century Casino Calgary in Calgary, Alberta, Canada;
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The Century Casino & Hotel in Central City, Colorado; and
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The Century Casino & Hotel in Cripple Creek, Colorado.
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We have controlling financial interests through our subsidiary CCE in the following operating segments:
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We have a 66.6% ownership interest in CPL and we consolidate CPL as a majority-owned subsidiary for which we have a controlling financial interest. Polish Airports owns the remaining 33.3% of CPL. We account for and report the 33.3% Polish Airports ownership interest as a non-controlling financial interest. CPL has been in operation since 1989 and, as of December 31, 2017, was the owner and operator of six casinos throughout Poland.
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During the first half of 2018, the casino licenses for the casinos in Plock, Lodz, Krakow and Poznan have expired or are expiring, and we have submitted, or will submit, applications for casino licenses in these cities. In October 2017, we were granted new casino licenses in the Polish cities of Katowice, Bielsko-Biala and Wroclaw, which have been issued by the Polish Minister of Finance. The license awards at these locations were appealed by CPL’s competitors, and all appeals were denied. The Bielsko-Biala casino opened in January 2018. Management expects to open the Katowice and Wroclaw casinos in the second quarter of 2018.
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We have a 75% ownership interest in CDR and we consolidate CDR as a majority-owned subsidiary for which we have a controlling financial interest. We account for and report the remaining 25% ownership interest in CDR as a non-controlling financial interest. CDR operates Century Downs Racetrack and Casino, a REC in Balzac, a north metropolitan area of Calgary, Alberta, Canada. CDR is the only horse racetrack in the Calgary area and is located less than one-mile north of the city limits of Calgary and 4.5 miles from the Calgary International Airport.
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We have a 75% ownership interest in CBS and we consolidate CBS as a majority-owned subsidiary for which we have a controlling financial interest. Rocky Mountain Turf Club (“RMTC”) owns the remaining 25% of CBS. We account for and report the 25% ownership interest of RMTC in CBS as a non-controlling financial interest. The pari-mutuel network consists of sourcing of common pool pari-mutuel wagering content and live video to off-track betting parlors throughout southern Alberta.
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The following agreements make up the operating segment Cruise Ships & Other in the Corporate and Other reportable segment:
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We operate 14 ship-based casinos through concession agreements with four cruise lines.
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In May 2017, we began operating the ship-based casinos onboard the Mein Schiff 6, a new 2,500 passenger cruise ship.
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The Mein Schiff 1 and Mein Schiff 2 are being transferred from the TUI Cruises fleet to another cruise line in April 2018 and February 2019, respectively, at which time the concession agreements for these two vessels will end.
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In July 2016, we entered into a cooperation agreement with Dynamic regarding the operations of the ship-based casino onboard Glory Sea. Both parties terminated this agreement in November 2017, and we charged the outstanding $0.3 million related to obtaining this agreement to operating costs and expenses on our consolidated statement of earnings for the year ended December 31, 2017. We will continue to operate the ship-based casino onboard the Glory Sea; however, Dynamic will no longer market and promote the casino to VIP players.
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In March 2015, we mutually agreed with Norwegian to terminate our concession agreements with Oceania and Regent, indirect subsidiaries of Norwegian, effective June 1, 2015 (the “Termination Agreement”). We transitioned operations of the eight ship-based casinos that we operated onboard Oceania and Regent vessels to Norwegian in the second quarter of 2015. As consideration for the early termination of the concession agreements, we received $4.0 million in June 2015, which we recorded on our consolidated statement of earnings under operating revenue, net of $0.6 million in assets that were sold to Norwegian as part of the Termination Agreement.
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In March 2015, in connection with the Termination Agreement with Norwegian, we entered into a two-year consulting agreement with Norwegian that became effective June 1, 2015. Under the consulting agreement, we provided limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million payable $250,000 per quarter through May 2017.
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Through our subsidiary CCE, we have a 7.5% ownership interest in MCE and we report our ownership interest using the cost method of accounting. MCE has an exclusive concession agreement with IPJC to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina, and owned by the Province of Mendoza. MCE may also pursue other gaming opportunities. CCE has appointed one director to MCE’s board of directors and had a three-year option through October 2017 to purchase up to 50% of the shares of MCE, which we did not exercise. In addition, CCE and MCE have entered into a consulting service agreement pursuant to which CCE provides advice on casino matters and receives a service fee consisting of a fixed fee plus a percentage of MCE’s EBITDA.
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We had a management agreement to direct the operation of the casino at the Hilton Aruba Caribbean Resort & Casino from which we received a monthly management fee. The management agreement ended on November 30, 2017. We do not expect expiration of this management agreement to have a material effect on our results of operations.
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Additional Projects Under Development
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In September 2016, we were selected by HRA as the successful applicant to own, build and operate a horse racing facility in the Edmonton market area, which we are planning to operate as Century Mile Racetrack and Casino. In March 2017, we received approval for the Century Mile project from the AGLC. Century Mile will be a one-mile horse racetrack and a multi-level REC. The project is located on Edmonton International Airport land close to the city of Leduc, south of Edmonton. We began construction on the Century Mile project in July 2017. We estimate this project will cost approximately CAD 60.0 million ($47.8 million based on the exchange rate in effect as of December 31, 2017) and that it will be completed in early 2019. We will finance the project with $25.0 million of the $34.4 million received from the common stock offering we completed in November 2017 and the balance of the Century Mile construction will be financed through new credit facilities or with available cash.
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In June 2017, our subsidiary, CCE, acquired casino licenses held by Saw Close Casino Ltd. in Bath, England (the “SCCL License Acquisition”). We are planning to develop and operate a 15,000 square foot casino using the casino licenses. The casino is expected to include approximately 35 slot machines, 18 table games and 24 automated live gaming terminals. The purchase price for the license acquisition was GBP 0.6 million ($0.8 million based on the exchange rate in effect on December 31, 2017), of which GBP 0.1 million ($0.1 million based on the exchange rate in effect on June 20, 2017) was paid at closing, GBP 0.2 million ($0.3 million based on the exchange rate in effect on December 22, 2017) was paid after the receipt of regulatory and governmental approvals, and GBP 0.2 million ($0.3 million based on the exchange rate in effect on December 31, 2017) will be paid after the casino opens. In addition, we assumed liabilities in the amount of GBP 0.2 million ($0.3 million based on the exchange rate in effect on December 31, 2017) that are repayable if certain performance criteria are met once the casino is in operation. We also have deposited GBP 0.8 million ($1.1 million based on the exchange rate in effect on December 31, 2017) into an escrow account to secure performance of certain obligations under the lease agreements with the landlord of the property that will be released in connection with work performed by SCCL to fit out the casino. We estimate construction and fitting out of the casino will cost an additional GBP 5.5 million ($7.4 million based on the exchange rate in effect on December 31, 2017) and that the casino will open in the second quarter of 2018, subject to the receipt of certain regulatory and governmental approvals.
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In August 2017, we announced that, together with the owner of the Hamilton Princess Hotel & Beach Club in Hamilton, Bermuda, we had submitted a license application to the Bermudan government for a casino at the Hamilton Princess Hotel & Beach Club. The casino will feature approximately 200 slot machines, 17 live table games, one or more electronic table games and a high limit area and salon privé. In September 2017, the Bermuda Casino Gaming Commission granted a provisional casino gaming license, which is subject to certain conditions and approvals including the adoption of certain rules and regulations by the Parliament of Bermuda. CCE entered into a long-term management agreement with the owner of the hotel to manage the operations of the casino and receive a management fee if the license is awarded. CCE will also provide a $5.0 million loan for the purchase of casino equipment if the license is awarded.
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We are exploring an expansion at Century Casino & Hotel Cripple Creek to provide additional hotel rooms for our existing casino and hotel.
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Presentation of Foreign Currency Amounts - The average exchange rates to the U.S. dollar used to translate balances during each reported period are as follows:
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We recognize in our statement of earnings, foreign currency transaction gains or losses resulting from the translation of casino operations and other transactions that are denominated in a currency other than U.S. dollars. Our casinos in Canada and Poland represent a significant portion of our business, and the revenue generated and expenses incurred by these operations are generally denominated in Canadian dollars and Polish zloty. A decrease in the value of these currencies in relation to the value of the U.S. dollar would decrease the earnings from our foreign operations when translated into U.S. dollars. An increase in the value of these currencies in relation to the value of the U.S. dollar would increase the earnings from our foreign operations when translated into U.S. dollars. See Note 2, “Significant Accounting Policies - Foreign Currency” to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report.
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DISCUSSION OF RESULTS
Years ended December 31, 2017, 2016 and 2015
Century Casinos, Inc. and Subsidiaries
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(1)
For a discussion of Adjusted EBITDA and reconciliation of Adjusted EBITDA to net earnings (loss) attributable to Century Casinos, Inc. shareholders, see Item 6, “Selected Financial Data” of this report.
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Factors impacting year-over-year comparability of the results include the following:
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In March 2015, we acquired an additional 60% ownership interest in CDR through the conversion of CAD 11.0 million in loans we made to CDR. We now own 75% of CDR. The non-controlling interest in CDR was 85% through March 19, 2015 and 25% beginning as of March 20, 2015. The casino and racetrack at CDR began operating in April 2015.
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CDR contributed $17.4 million in net operating revenue and $2.1 million in net earnings for the year ended December 31, 2017, $16.0 million in net operating revenue and $3.7 million in net earnings for the year ended December 31, 2016 and $12.0 million in net operating revenue and $1.5 million in net earnings for the year ended December 31, 2015. CDR is reported in the Canada reportable segment.
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CBS began operating the southern Alberta pari-mutuel network in May 2015. We have a 75% ownership interest in CBS.
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CBS contributed a total of $2.7 million in net operating revenue and $0.1 million in net earnings for the year ended December 31, 2017, $3.0 million in net operating revenue and $0.2 million in net earnings for the year ended December 31, 2016 and $2.2 million in net operating revenue and $0.1 million in net earnings for the year ended December 31, 2015. CBS is reported in the Canada reportable segment.
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We recorded $3.4 million in net operating revenue and net earnings for the year ended December 31, 2015 in the Corporate and Other segment, related to the $4.0 million consideration for the termination of the Oceania and Regent concession agreements net of $0.6 million of assets sold as part of the agreement. This is included in the Corporate and Other segment.
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We began operating CSA in October 2016. CSA contributed a total of $8.8 million in net operating revenue and $1.2 million in net earnings for the year ended December 31, 2017 and $2.0 million in net operating revenue and $0.3 million in net earnings for the year ended December 31, 2016. CSA is reported in the Canada reportable segment.
			
		
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We released the $2.2 million Canadian valuation allowance on CDR’s deferred tax assets, resulting in a tax benefit for the year ended December 31, 2016.
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We released the $5.7 million U.S. valuation allowance on our U.S. deferred tax assets, resulting in a tax benefit for the year ended December 31, 2017. The tax benefit from the release of the U.S. valuation allowance was offset by increased tax expense of $5.4 million resulting from the tax law changes made in the Tax Act that became effective in the 2017 tax year, as discussed further in Taxes below.
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Results in Poland for the year ended December 31, 2017 were negatively impacted by the expiration of several casino licenses in Poland, which resulted in the closure of the Wroclaw casino in June 2017 and the Katowice casino in July 2016. Although we have applied for and obtained some casino licenses following their expiration, including the Wroclaw and Katowice casino licenses, and will be applying for other licenses, license expirations may continue to impact results in Poland in 2018
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In November 2017, we closed a public offering of 4,887,500 shares of our common stock. The additional shares of common stock decreased earnings per share attributable to Century Casinos Inc. shareholders by $0.01 for the year ended December 31, 2017.
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Net operating revenue increased by $14.8 million, or 10.7%, and by $5.5 million, or 4.1%, for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015, respectively. Following is a breakout of net operating revenue by segment for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Canada increased by $7.5 million, or 14.9%, and by $5.0 million, or 11.1%.
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United States increased by $2.0 million, or 6.7%, and by $1.7 million, or 6.0%.
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Poland increased by $4.9 million, or 8.9%, and by $2.7 million, or 5.1%.
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Corporate Other increased by $0.4 million, or 10.4%, and decreased by ($3.9) million, or (49.6%).
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Operating costs and expenses increased by $16.4 million, or 13.3%, and by $5.1 million, or 4.4%, for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015, respectively. Following is a breakout of operating costs and expenses by segment for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Canada increased by $6.1 million, or 16.4%, and by $3.7 million, or 11.1%.
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United States increased by $1.1 million, or 4.4%, and by $0.8 million, or 3.4%.
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Poland increased by $7.7 million, or 15.6%, and by $1.4 million, or 3.0%.
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Corporate Other increased by $1.5 million, or 13.1%, and decreased by ($0.9) million, or (7.1%).
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Earnings from operations decreased by ($1.6) million, or (9.6%), and increased by $0.4 million, or 2.3%, for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015, respectively. Following is a breakout of earnings from operations by segment for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Canada increased by $1.4 million, or 10.8%, and by $1.3 million, or 11.2%.
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United States increased by $0.9 million, or 19.0%, and by $0.9 million, or 22.5%.
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Poland decreased by ($2.8) million, or (52.2%), and increased by $1.2 million, or 29.8%.
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Corporate Other decreased by ($1.0) million, or (14.6%), and by ($3.1) million, or (75.2%).
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Net earnings decreased by ($3.0) million, or (32.1%), and by ($2.3) million, or (20.0%), for the year ended December 31, 2017 compared to the year ended December 31, 2016 and for the year ended December 31, 2016 compared to the year ended December 31, 2015, respectively. Items deducted from or added to earnings from operations to arrive at net earnings include interest income, interest expense, gains (losses) on foreign currency transactions and other, income tax expense and non-controlling interests. For a discussion of these items, see “Non-Operating Income (Expense)” and “Taxes” below in this Item 7.
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Reportable Segments
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The following discussion provides further detail of consolidated results by reportable segment.
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On October 1, 2016, our subsidiary, Century Casino St. Albert Inc., acquired 100% of the issued and outstanding shares of several entities that collectively owned and operated the Apex Casino in St. Albert, Edmonton, Canada, as well as the related real property (the “Apex Acquisition”). In October 2016, we began operating CSA.
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CDR began hosting thoroughbred horse races, in addition to standardbred horse races, in September 2017. Previously, CDR conducted only standardbred horse races. The thoroughbred races have generated additional customers and increased gaming and food and beverage revenue. We released the $2.2 million Canadian valuation allowance on CDR’s deferred tax assets, resulting in a tax benefit for the year ended December 31, 2016.
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Construction on the Century Mile project began in July 2017. We estimate that we will open Century Mile in early 2019.
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In Edmonton, our competitors continue to remodel their casinos with the Palace Casino at the West Edmonton Mall undergoing rebranding and renovations in 2018. The renovations could lead to increased business at CRA and CSA during construction.
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At CAL we converted one of our showrooms to an 18 hole miniature golf course. We are marketing the miniature golf course and bowling alley as an entertainment center and anticipate a new customer demographic to visit the casino as a result of these changes.
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Years ended December 31, 2017 and 2016
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The following discussion highlights results for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Results in U.S. dollars were impacted by a 2.1% exchange rate increase in the average rate between the U.S. dollar and Canadian dollar for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Revenue Highlights
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In CAD
						
In U.S. dollars
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At CRA, net operating revenue decreased by (CAD 1.1) million, or (3.9%), due to lower gaming and food and beverage revenue. Increased competition from a casino that opened in the downtown Edmonton area in 2016 contributed to the decline in gaming revenue. In addition, the decreased food and beverage revenue was due to fewer shows presented in our showroom throughout the year and lower spending per customer.
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At CRA, net operating revenue decreased by ($0.4) million, or (1.7%).
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At CSA, net operating revenue increased by CAD 8.7 million, or 322.9%, due to operating the casino for a full year in 2017 versus three months in 2016.
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At CSA, net operating revenue increased by $6.8 million, or 335.6%.
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At CAL, net operating revenue decreased by (CAD 0.2) million, or (1.6%), due to lower gaming and food and beverage revenue and increased promotional allowances. In the fourth quarter of 2017, we completed the addition of an 18 hole miniature golf course that, together with the 30 lane bowling alley, will create an entertainment center that we believe will attract new customers to the casino.
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At CAL, net operating revenue increased by $0.1 million, or 0.7%.
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At CDR, net operating revenue increased by CAD 1.4 million, or 6.4%, due to increased gaming and food and beverage revenue. The increased revenue was due to the addition of 40 slot machines during the second quarter of 2017 and our introduction of thoroughbred racing during the fourth quarter of 2017. Thoroughbred racing attracts patrons that tend to spend more on gaming and food and beverage.
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At CDR, net operating revenue increased by $1.4 million, or 8.5%.
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Operating Expense Highlights
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In CAD
						
In U.S. dollars
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At CRA, operating expenses decreased by (CAD 0.9) million, or (4.4%), due to decreased cost of goods as a result of lower food and beverage sales; decreased marketing expenses due to fewer shows presented in the showroom; and decreased payroll costs due to labor efficiencies.
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At CRA, operating expenses decreased by ($0.3) million, or (2.3%).
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At CSA, operating expenses increased by CAD 6.3 million, or 324.3%, due to operating the casino for a full year in 2017 versus three months in 2016.
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At CSA, operating expenses increased by $4.9 million, or 336.8%.
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At CAL, operating expenses increased by CAD 0.5 million, or 4.9%, primarily due to increased payroll costs due in part to staffing changes in upper management and increased marketing expense related to marketing the new entertainment center.
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At CAL, operating expenses increased by $0.5 million, or 7.2%.
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At CDR, operating expenses increased by CAD 1.2 million, or 8.6%, due to increased payroll costs and operating expenses primarily related to operating thoroughbred racing beginning in September 2017.
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At CDR, operating expenses increased by $1.2 million, or 10.9%.
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Operating expenses related to the Century Mile project were less than $0.1 million for the year ended December 31, 2017.
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We also operate the Southern Alberta pari-mutuel off-track betting network through CBS. Earnings from operations at CBS decreased by ($0.1) million, or (30.5%), for the year ended December 31, 2017 compared to the year ended December 31, 2016. We anticipate that earnings from operations at CBS for the year ending December 31, 2018 will remain flat compared to 2017.
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A reconciliation of net earnings attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Years ended December 31, 2016 and 2015
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The following discussion highlights results for the year ended December 31, 2016 compared to the year ended December 31, 2015. In March 2015, our subsidiary, CCE, converted CAD 11.0 million of loans it made to CDR into an additional 60% ownership interest in CDR, resulting in a 75% ownership interest in CDR. CDR began operations in April 2015 and CBS began operations in May 2015.
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Results in U.S. dollars were impacted by a 3.7% exchange rate decrease in the average rate between the U.S. dollar and Canadian dollar for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Revenue Highlights
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In CAD
						
In U.S. dollars
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At CRA, net operating revenue decreased by (CAD 0.8) million, or (2.7%), due to lower gaming and food and beverage revenue. We conducted a casino remodel during the second and third quarters of 2016, which contributed to the decrease in revenue. The remodel included expanding the gaming floor, relocating the poker room, enhancing the high limit gaming area and adding a new bar to the casino. The remodel was substantially completed in November 2016. In addition, increased competition from a new casino in the downtown Edmonton area contributed to the decline in net operating revenue.
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At CRA, net operating revenue decreased by ($1.4) million, or (6.3%).
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At CSA, net operating revenue was CAD 2.7 million.
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At CSA, net operating revenue was $2.0 million.
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At CAL, net operating revenue decreased by (CAD 0.1) million, or (0.8%), due to lower gaming and food and beverage revenue. CAL was greatly impacted by the weak Alberta economy resulting from lower oil prices. In response to the decreased gaming and food and beverage revenue, we decreased the promotional allowances offered at this location.
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At CAL, net operating revenue decreased by ($0.4) million, or (4.7%).
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At CDR, net operating revenue increased by CAD 5.8 million, or 37.5%, due to operating the casino for three additional months and the racetrack for approximately two additional months in 2016 compared to 2015.
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At CDR, net operating revenue increased by $4.0 million, or 33.7%.
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Operating Expense Highlights
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In CAD
						
In U.S. dollars

At CRA, operating expenses increased by CAD 0.6 million, or 2.9%, primarily due to increased payroll costs of CAD 0.4 million from higher minimum wages in Alberta, Canada and increased marketing expenses of CAD 0.2 million.
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At CRA, operating expenses decreased by ($0.1) million, or (0.8%).
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At CSA, operating expenses were CAD 2.0 million.
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At CSA, operating expenses were $1.5 million.
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At CAL, operating expenses increased by CAD 0.2 million, or 2.1%, primarily due to increased payroll costs of CAD 0.2 million, resulting primarily from higher minimum wages in Alberta, Canada, and increased administrative expenses of CAD 0.1 million, offset by decreased marketing expenses of CAD 0.1 million.
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At CAL, operating expenses decreased by ($0.1) million, or (1.5%).
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At CDR, operating expenses increased by CAD 2.8 million, or 24.9%, due to operating the casino for three additional months and the racetrack for approximately two additional months in 2016 compared to 2015.
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At CDR, operating expenses increased by $1.9 million, or 21.7%.
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Earnings from operations at CBS increased by $0.2 million, or 188.6%, for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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A reconciliation of net earnings attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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We continue to see growth at our Colorado properties and anticipate slow growth in these markets in the coming years. In Central City, the Reserve has been upgraded and rebranded as the Grand Z. We anticipate that this may negatively impact CTL’s market share and results of operations during 2018. We are exploring an expansion at CRC to provide additional hotel rooms for our existing casino and hotel. We estimate that this project, if undertaken, will cost approximately $6.5 million.
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Years ended December 31, 2017 and 2016
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The following discussion highlights results for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Market Share Highlights
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Market share is calculated by dividing our property’s AGP into the market’s AGP for the same time period, as reported by the Colorado Division of Gaming.
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The Central City market increased by 3.2% and CTL’s share of the Central City market was 29.3%, an increase of 4.3% compared to the year ended December 31, 2016.
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The Cripple Creek market increased by 2.5% and CRC’s share of the Cripple Creek market was 10.1%, an increase of 2.0% compared to the year ended December 31, 2016.
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Revenue Highlights
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At CTL, net operating revenue increased by $1.2 million, or 6.9%, primarily due to increased gaming and food and beverage revenue, offset by increased promotional allowances. CTL has had continued success in attracting more VIP players to the casino, which contributed to the increased net operating revenue.
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At CRC, net operating revenue increased by $0.8 million, or 6.4%, primarily due to increased gaming and decreased promotional allowances.
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Operating Expense Highlights
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At CTL, operating expenses increased by $1.0 million, or 6.6%, due to increased gaming-related expenses, increased payroll costs and increased cost of goods sold related to increased food and beverage sales. These increases were offset by a decrease in advertising expenses.
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At CRC, operating expenses increased by $0.1 million, or 1.1%, primarily due to increased payroll costs.
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A reconciliation of net earnings attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Years ended December 31, 2016 and 2015
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The following discussion highlights results for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Market Share Highlights
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Market share is calculated by dividing our property’s AGP into the market’s AGP for the same time period.
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The Central City market increased by 6.4% and CTL’s share of the Central City market was 28.2%, an increase of 0.5% compared to the year ended December 31, 2015.
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The Cripple Creek market increased by 2.6% and CRC’s share of the Cripple Creek market was 9.9%, remaining constant compared to the year ended December 31, 2015.
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Revenue Highlights
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At CTL, net operating revenue increased by $1.4 million, or 8.5%, primarily due to increased gaming and food and beverage revenue. CTL has been successful in attracting more VIP players to the casino, which contributed to the increased net operating revenue.
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At CRC, net operating revenue increased by $0.3 million, or 2.5%, primarily due to increased gaming and hotel revenue offset by increased promotional allowances. Online hotel bookings contributed to increased hotel revenue.
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Operating Expense Highlights
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At CTL, operating expenses increased by $0.7 million, or 4.8%, due to increased gaming-related expenses of $0.4 million and increased payroll costs of $0.1 million.
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At CRC, operating expenses increased by $0.1 million, or 1.3%, primarily due to increased payroll costs.
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A reconciliation of net earnings attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
			
		
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In June 2017, we opened the 17,000 square foot casino at the Hilton Warsaw Hotel and Convention Centre in Warsaw, Poland with 70 slot machines, 24 table games and a bar and lounge area. The Hilton Warsaw Hotel is utilizing the casino license that was used at the LIM Center casino in Warsaw, which had a 3,000 square foot casino and was closed in May 2017. As a result of the closure of the LIM Center casino, we impaired PLN 0.5 million ($0.1 million) in leasehold improvements that are included in general and administrative expenses in our consolidated statement of earnings for the year ended December 31, 2017.
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In June 2017, the casino license at our Wroclaw casino expired. In October 2017, we were awarded a casino license for Wroclaw as well as the Polish cities of Katowice and Bielsko-Biala. The license awards were appealed by our competitors, and all appeals have been denied by the Polish Minister of Finance. We opened the Bielsko-Biala casino with 50 slot machines and 5 live table games in January 2018. We expect to open the Katowice and Wroclaw casinos in the second quarter of 2018 with 62 slot machines and 14 live table games and 70 slot machines and 18 live table games, respectively.
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Effective April 2017, the Polish gaming laws permit online gaming and slot arcades operated through a state run company. We expect online gaming and the slot arcades to begin operating in 2018. Once they begin operation, these changes could increase competition and adversely affect our results of operations in the future. In addition, pursuant to changes to the Polish income tax laws enacted by the Polish Parliament in late 2017 and effective in January 2018, casino patrons winning over PLN 2,280 in a single casino visit are subject to personal income tax on their winnings. Increased taxation on winnings could adversely affect our casino patronage and our results of operations in the future.
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The casino licenses for the casinos in Plock, Lodz and Krakow expire in the first quarter of 2018, and the license for the casino in Poznan will expire in the second quarter of 2018. CPL has submitted or will submit applications for casino licenses in these cities. If any of the licenses are awarded, CPL plans to operate the casinos at their existing locations and management believes that there may be a period of three to six months that the casinos are not operating while the license tender process is ongoing. Management believes that the revenue that may be lost during this time period will be partially offset by revenue generated from the new casinos in Bielsko-Biala, Katowice and Wroclaw as well as the operation of the casino at the Hilton Warsaw Hotel for the full year of 2018. The casinos operated by CPL in Plock, Lodz, Krakow and Poznan had net operating revenue of $15.6 million and earnings from operations of $0.7 million for the year ended December 31, 2017.
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Years ended December 31, 2017 and 2016
The following discussion highlights results for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Results in U.S. dollars were impacted by a 4.3% exchange rate increase in the average rate between the U.S. dollar and Polish zloty for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Revenue Highlights
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In PLN
						
In U.S. dollars

Net operating revenue increased by PLN 9.0 million, or 4.1%, due to increased gaming revenue offset by increased promotional allowances. Revenue increased at all locations in Poland. However, the increases were offset by decreased revenue at our closed casino locations in Wroclaw, Katowice, Sosnowiec and the LIM Center in Warsaw. Our casinos in Warsaw continued to generate the majority of revenue for CPL. In 2017, the table hold percentage, which represents the percentage of PLN bet that we retained, decreased 24%, primarily related to fourth quarter table game results at our Warsaw casinos, which we do not expect to continue in 2018.
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Net operating revenue increased by $4.9 million, or 8.9%.
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Operating Expense Highlights
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In PLN
						
In U.S. dollars

Operating expenses increased by PLN 19.8 million, or 10.1%, primarily due to increased gaming related expenses of PLN 3.1 million, payroll costs of PLN 10.1 million and increased marketing expenses of PLN 1.5 million. In addition, we had a PLN 0.5 million impairment on leasehold improvements at the LIM Center casino. Payroll costs increased as the result of salary increases and additional payroll expenses related to increased staff required to operate the casino at the Hilton Warsaw Hotel.
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Operating expenses increased by $7.7 million, or 15.6%.
A reconciliation of net earnings (loss) attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Years ended December 31, 2016 and 2015
The following discussion highlights results for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Results in U.S. dollars were impacted by a 4.6% exchange rate decrease in the average rate between the U.S. dollar and Polish zloty for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Revenue Highlights
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In PLN
						
In U.S. dollars

Net operating revenue increased by PLN 19.9 million, or 10.1%, due to increased gaming revenue. In Warsaw, our main competitor ceased operations, contributing to increased revenue at our Marriott Warsaw property. The increased revenue at the Marriott Warsaw was offset by the closure of the Katowice casino in June 2016, and the movement of its casino operations to the Sosnowiec casino.
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Net operating revenue increased by $2.7 million, or 5.1%.
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Operating Expense Highlights
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In PLN
						
In U.S. dollars

Operating expenses increased by PLN 14.2 million, or 7.8%, primarily due to increased gaming related expenses of PLN 10.4 million and payroll costs of PLN 4.0 million, offset by decreased marketing expenses of (PLN 0.4) million. In addition, we had a PLN 1.2 million impairment on the leasehold improvements at the Katowice location due to the loss of the casino license.

Operating expenses increased by $1.4 million, or 3.0%, including as a result of the Katowice leasehold improvements impairment of $0.4 million.
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A reconciliation of net earnings (loss) attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Years ended December 31, 2017 and 2016
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We began operating the ship-based casinos onboard the Mein Schiff 5 and Marella Discovery in June 2016, the Glory Sea in July 2016 and the Mein Schiff 6 in May 2017.
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The Mein Schiff 1 and Mein Schiff 2 will be transferred from the TUI Cruises fleet to another cruise line in April 2018 and February 2019, respectively, at which time the concession agreements for these two vessels will end. The Mein Schiff 1 and Mein Schiff 2 casinos contributed $0.4 million in net operating revenue and less than $0.1 million in earnings from operations during the year ended December 31, 2017.
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In July 2016, we entered into a cooperation agreement with Dynamic regarding the operations of the ship-based casino onboard Glory Sea. Both parties terminated this agreement in November 2017, and we charged the outstanding $0.3 million related to obtaining this agreement to operating costs and expenses on our consolidated statement of earnings for the year ended December 31, 2017. We will continue to operate the ship-based casino onboard the Glory Sea. However, Dynamic will no longer market and promote the casino to VIP players.
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We began construction on the SCCL project in October 2017. We anticipate the casino will open in the second quarter of 2018.
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The following discussion highlights results for the year ended December 31, 2017 compared to the year ended December 31, 2016.
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Revenue Highlights
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·
Net operating revenue for Cruise Ships & Other increased by $0.4 million, or 10.4%, due to a full year of revenue from the Mein Schiff 5, Marella Discovery and Glory Sea, which increased revenue by $0.7 million and revenue from the Mein Schiff 6 of $0.2 million. The increased gaming revenue was offset by decreased revenue of ($0.6) million due to the termination of the consulting agreement with Norwegian Cruise Line Holdings in May 2017.
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Operating Expense Highlights
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·
Total operating costs and expenses for Cruise Ships & Other increased by $0.7 million, or 20.9%, primarily due to a full year of operations onboard the Mein Schiff 5, Marella Discovery and Glory Sea, the operation of the Mein Schiff 6, as well as the $0.3 million charged to operating costs and expenses related to the termination of the cooperation agreement with Dynamic.
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Losses from operations attributable to the SCCL project were ($0.3) million for the year ended December 31, 2017.
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Losses from operations attributable to our Corporate Other operating segment, which includes certain other corporate and management operations, increased by ($0.5) million, or (6.7%), for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to increased payroll and travel costs as well as the acquisition costs related to the SCCL project. This increased the net loss attributable to Century Casinos, Inc. shareholders for the year ended December 31, 2017.
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The net loss attributable to Century Casinos, Inc. shareholders from the Corporate and Other segment was also impacted by the release of our $5.7 million U.S. valuation allowance on our U.S. deferred tax assets, resulting in a tax benefit for the year ended December 31, 2017. The tax benefit from the release of the U.S. valuation allowance was offset by increased tax expense of $5.4 million resulting from the tax law changes made in the Tax Act that became effective in the 2017 tax year, as discussed further in Taxes below.
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A reconciliation of net loss attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Years ended December 31, 2016 and 2015
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The following discussion highlights results for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Revenue Highlights
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·
Net operating revenue for Cruise Ships & Other decreased by ($0.5) million, or (12.1%), primarily due to decreased revenue related to a casino onboard the Nova Star that we no longer operate, offset by additional revenue from the consulting agreement with Norwegian and revenue from beginning casino operations onboard Mein Schiff 5, Marella Discovery and Glory Sea.
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Operating Expense Highlights
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·
Total operating costs and expenses for Cruise Ships & Other decreased by ($0.5) million, or (14.1%), primarily due to decreased cruise ship-related expenses as a result of the termination of the concession agreements with Oceania and Regent, offset by increased payroll and start-up costs related to our casino onboard the Glory Sea.
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Losses from operations attributable to our Corporate Other operating segment, which includes certain other corporate and management operations, increased by $3.0 million, or 60.7%, for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to $3.4 million of revenue related to the termination of the concession agreements with Oceania and Regent that we recognized in the 2015 period and increased payroll expense.
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A reconciliation of net loss attributable to Century Casinos, Inc. shareholders to Adjusted EBITDA can be found in the “Non-GAAP Measures - Adjusted EBITDA” discussion in Item 6, “Selected Financial Data” of this report.
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Non-Operating Income (Expense)
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Non-operating income (expense) for the years ended December 31, 2017, 2016 and 2015 was as follows:
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Interest income
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Interest income is directly related to interest earned on our cash reserves.
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Interest expense
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Interest expense is directly related to interest owed on our borrowings under our second amended and restated credit agreement with the Bank of Montreal (the “BMO Credit Agreement”), the fair value adjustments for our interest rate swap agreements that began in 2015, our CPL and SCCL borrowings, our capital lease agreements and interest expense related to CDR’s land lease.
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Gain on foreign currency transactions, cost recovery income and other
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Cost recovery income of $0.6 million, $2.2 million and $0.5 million was received by CDR for the years ended December 31, 2017, 2016 and 2015, respectively, related to infrastructure built during the development of the Century Downs REC project. The distribution to CDR’s non-controlling shareholders through non-controlling interest is part of the credit agreement between CCE and CDR. Gain on foreign currency transactions, cost recovery income and other for the year ended December 31, 2015 also includes a $0.9 million reduction of the contingent liability during the year ended December 31, 2015 due to the expiration of the statute of limitations for the Polish IRS to audit CPL for the 2010 tax year.
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Taxes
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Our income tax expense by jurisdiction is summarized in the table below:
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Our worldwide effective income tax rate for 2017 was 36.6%. The blended corporate income tax rate in the United States for 2017 was 37.25%. However, the effective tax rate in the United States for 2017 was 46.9% due to several factors taking place in 2017, including the release of our $5.7 million valuation allowance and items impacted by the Tax Act. A substantial portion of our earnings are from Canada, which has a 27% income tax rate; the effective tax rate in Canada of 25.6% for 2017 was due primarily to the impact of foreign currency exchange rates. The income tax rate for our earnings from Mauritius is 3%; the effective tax rate of 2.6% for 2017 was due primarily to immaterial permanent deductions. A portion of our earnings are from Austria, which has a 25% income tax rate, and due to disallowed interest expense and the impact of foreign currency exchange rates, the effective tax rate for 2017 was (560.6%). Another substantial portion of our earnings are from Poland, which has a 19% income tax rate. The effective tax rate in Poland of 45.0% for 2017 was due to nondeductible payments to certain governing authorities, contingent liability settlements, as well as meals, entertainment, gifts and giveaways. A portion of our earnings are from the United Kingdom (“U.K.”), where the income tax rate is 19%. The effective tax rate in the U.K. of 8.1% is due to nondeductible initial startup fees and exchange rate differences. The movement of exchange rates for intercompany loans denominated in U.S. dollars further impacts the effective income tax rate because foreign currency gains and losses generally are not taxed until realized. Therefore, the overall effective income tax rate was significantly impacted in 2017 and can be significantly impacted by foreign currency gains or losses in the future.
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The Tax Act, which was enacted on December 22, 2017, included significant changes to the Internal Revenue Code including, among other items, a reduction of the federal corporate tax rate from 35% to 21%, a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, and the creation of new taxes on certain foreign earnings. The amounts recorded resulting from the provisions of the Tax Act represent management's best estimates of the effect on the current period and are subject to refinement and revisions over a one-year period ending December 22, 2018. See Note 11 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report for more discussion of provisional amounts related to the Tax Act.
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Our effective income tax rate for 2017 was impacted by the decrease of pre-tax income in Canada, Mauritius and Poland. The comparison of pre-tax income of $12.5 million for the year ended December 31, 2017, compared to pre-tax income of $15.6 million for the year ended December 31, 2016 should be considered when comparing tax rates year over year. The overall effective tax rate of 36.6% was significantly driven by the full release of the U.S. valuation allowance and the impact of the Tax Act. A majority of the earnings recognized by us during the year ended December 31, 2017 were from our properties in Canada.
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LIQUIDITY AND CAPITAL RESOURCES
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Our business is capital intensive, and we rely heavily on the ability of our casinos to generate operating cash flow. We use the cash flows that we generate to maintain operations, fund reinvestment in existing properties for both refurbishment and expansion projects, repay third party debt, and pursue additional growth via new development and acquisition opportunities. When necessary and available, we supplement the cash flows generated by our operations with either cash on hand or funds provided by bank borrowings or other debt or equity financing activities.
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As of December 31, 2017, our total debt under bank borrowings and other agreements net of $0.3 million related to deferred financing costs was $56.7 million, of which $51.0 million was long-term debt and $5.7 million was the current portion of long-term debt. The current portion relates to payments due within one year under our BMO Credit Agreement, SCCL’s credit agreement and other capital lease agreements. We intend to repay the current portion of our debt obligations with available cash. For a description of our debt agreements, see Note 7 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report. Net Debt was ($17.7) million as of December 31, 2017 compared to $17.2 million as of December 31, 2016, primarily due to the increase in cash to $74.7 million at December 31, 2017 from $38.8 million at December 31, 2016 as a result of the $34.3 million of net proceeds from the public offering of common stock in November 2017. In September 2017, we borrowed GBP 2.0 million ($2.7 million based on the exchange rate in effect on December 31, 2017) from UniCredit to finance the construction and fitting out of the SCCL project. For the definition and reconciliation of Net Debt to the most directly comparable GAAP measure, see “Non-GAAP Measures - Net Debt” in Item 6, “Selected Financial Data” of this report.
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The following table lists the 2018 maturities of our debt:
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Cash Flows
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Cash, cash equivalents and restricted cash totaled $76.4 million and working capital (current assets minus current liabilities) was $50.2 million at December 31, 2017 compared to cash, cash equivalents and restricted cash of $39.0 million and working capital of $17.3 million at December 31, 2016, and cash, cash equivalents and restricted cash of $29.6 million and working capital of $10.8 million at December 31, 2015. The increase in cash, cash equivalents and restricted cash from December 31, 2016 to December 31, 2017 is due to $19.4 million of cash provided by operating activities, $34.3 million of net proceeds received in the common stock offering in November 2017, less than $0.1 million in proceeds from the exercise of stock options and $1.7 million in exchange rate changes on cash, offset by $11.1 million of cash used to purchase property and equipment, $2.5 million in principal repayments net of borrowings, $1.5 million paid for the Apex Acquisition, $0.4 million paid for the acquisition of the Saw Close Casino licenses, a $2.0 million distribution to non-controlling interests in CDR, and $0.5 million in principal repayments of capital lease agreements.
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Net cash provided by operating activities was $19.4 million, $22.3 million and $19.3 million in 2017, 2016 and 2015, respectively. Our cash flows from operations have historically been positive and sufficient to fund ordinary operations. Trends in our operating cash flows tend to follow trends in earnings from operations, excluding non-cash charges. Please refer also to the consolidated statements of cash flows and to management’s discussion of the results of operations above in this Item 7 for a discussion of earnings from operations.
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Net cash used in investing activities of $13.0 million for the year ended December 31, 2017 consisted of $4.3 million for the Century Mile project; $0.1 million for the Palace Hotel renovation project at CRC, which was placed on hold during the first quarter of 2017; $0.3 million to purchase slot machines for CTL and CRC; $0.1 million for the CRA casino renovation; $0.5 million for bowling lane renovations and a miniature golf course at CAL; $0.8 million for a parking lot and thoroughbred infrastructure at CDR; $0.1 million in new carpet for the gaming floor at CSA; $2.1 million in leasehold improvements, gaming and other equipment at the Hilton Hotel Warsaw and new CPL locations in Katowice and Wroclaw; $0.5 million in gaming equipment upgrades at various CPL casinos; $1.2 million for the SCCL leasehold renovations; $0.2 million for equipment for the Mein Schiff 6; $0.9 million in other fixed asset additions at our properties, a $1.5 million payment related to a working capital adjustment for the Apex Acquisition and $0.4 million related to the SCCL License Acquisition, offset by less than $0.1 million in proceeds from the disposition of fixed assets.
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Net cash used in investing activities of $26.8 million for the year ended December 31, 2016 consisted of $19.7 million for the Apex Acquisition; $2.0 million for the casino remodel at CRA; $1.7 million of development costs for continued work related to landscaping, barns and equipment at CDR; $0.8 million to purchase slot machines and table game equipment for the casinos operated by Casinos Poland; $0.3 million for improvements to the LIM Center casino operated by Casinos Poland; $0.4 million to purchase slot machines and table game equipment for the Mein Schiff 5 and Marella Discovery ship-based casinos; $0.2 million to purchase equipment and upgrade the casino onboard the Glory Sea; $0.4 million to purchase slot machines and gaming equipment for our Cripple Creek and Central City properties; $0.2 million in pre-construction costs related to the Cripple Creek Hotel project; $0.1 million to renovate a bar at CAL and $1.0 million in other fixed asset additions at our properties.
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Net cash used in investing activities of $18.2 million for the year ended December 31, 2015 consisted of $14.1 million for development costs related to the Century Downs project; $0.7 million to purchase slot machines and table game equipment for the casinos operated by Casinos Poland, $0.1 million for improvements to the casinos in Poznan and Katowice operated by Casinos Poland, $0.1 million in new sign displays for the casinos in Warsaw and Wroclaw operated by Casinos Poland, $0.3 million to purchase new slot machines for the Mein Schiff 4, Star Breeze and Star Legend ship-based casinos, $0.5 million to purchase slot machines for our Cripple Creek and Central City properties, $0.2 million to purchase new surveillance equipment at our Cripple Creek property, $0.1 million to purchase new HVAC equipment for our hotel rooms in Central City, $0.1 million in sound equipment for the showroom and $0.1 million in parking lot repairs at CRA, $0.1 million to remodel the Mid City Grill and kitchen at CAL and $2.5 million in other fixed asset additions at our properties offset by $0.7 million in proceeds from the disposition of assets.
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Net cash provided by financing activities of $29.2 million for the year ended December 31, 2017 consisted of $34.3 million in net proceeds received in the common stock offering completed in November 2017 and less than $0.1 million from the exercise of stock options, offset by $2.5 million of principal repayments net of borrowings, $0.5 million of principal repayments for capital leases, and $2.0 million in distributions to non-controlling interests in CDR, CBS and CPL.
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Net cash provided by financing activities of $15.6 million for the year ended December 31, 2016 consisted of $22.8 million received from borrowings under our BMO Credit Agreement for the Apex Acquisition and $0.1 million cash from the exercise of stock options, offset by $4.8 million of principal repayments, $0.4 million of principal repayments for capital leases, $0.3 million deferred financing costs paid and $1.9 million in distributions to non-controlling interests in CDR and CPL.
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Net cash provided by financing activities of $4.4 million for the year ended December 31, 2015 consisted of $4.8 million received from various loan agreements net of principal repayments and $0.1 million cash from the exercise of stock options, offset by a $0.5 million distribution to non-controlling interests in CDR.
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Tax Act
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The Tax Act, which was enacted on December 22, 2017, makes significant changes to the Internal Revenue Code effective for 2018, although certain provisions affected our 2017 financial results. The changes impacting our 2017 results include, but are not limited to, the write-down of net deferred tax assets resulting from the reduction in the U.S. federal corporate income tax rate from 35% to 21% and a one-time deemed transition tax on certain unremitted earnings of foreign subsidiaries. We have not completed our accounting for the income tax effects of the Tax Act and the provisional amounts will be refined as needed during the measurement period allowed by Staff Accounting Bulletin No. 118 (“SAB 118”). While we believe that we have made reasonable estimates of the impact of the U.S. corporate income tax rate reduction and the one-time deemed transition tax on unremitted earnings of foreign subsidiaries, these estimates could change as we continue to analyze IRS guidance related to the Tax Act as it is released. Further changes could result as we refine our calculations surrounding the remeasurement of our deferred tax balances, as well as our calculations of earnings and profits as used in the computation of the transition tax. The estimated net cash payments resulting from the Tax Act are estimated to be $1.2 million as detailed in the Contractual Obligations and Contingencies table below.
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Common Stock Repurchase Program
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Since 2000, we have had a discretionary program to repurchase our outstanding common stock. In November 2009, we increased the amount available to be repurchased to $15.0 million. We did not repurchase any common stock in 2017, 2016 or 2015. The total amount remaining under the repurchase program was $14.7 million as of December 31, 2017. The repurchase program has no set expiration or termination date.
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Potential Sources of Liquidity, Short-Term Liquidity
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Historically, our primary sources of liquidity and capital resources have been cash flow from operations, bank borrowings, sales of existing casino operations and proceeds from the issuance of equity securities upon the exercise of stock options. In November 2017, we closed a public offering of 4,887,500 shares of our common stock. The proceeds from the offering were approximately $34.4 million. As discussed below, we plan to use up to $25.0 million of the proceeds for construction of the Century Mile project. We intend to use the remaining net proceeds to invest in additional gaming projects and for working capital and other general corporate purposes.
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We believe that our cash at December 31, 2017, as supplemented by cash flows from operations, will be sufficient to fund our anticipated operating costs, capital expenditures at existing properties and current debt repayment obligations for at least the next 12 months. We expect that the primary sources of cash will be from our gaming operations and additional borrowings under the BMO Credit Agreement and other credit arrangements. In addition to the payment of operating costs, expected uses of cash within one year include capital expenditures for our existing properties, interest and principal payments on outstanding debt, the construction of Century Mile, the construction of the SCCL project, an expansion at CRC to provide additional hotel rooms for our existing casino and hotel, and other potential new projects. 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.
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We estimate that the Century Mile project will cost approximately CAD 60.0 million ($47.8 million based on the exchange rate in effect on December 31, 2017). We plan to use up to $25.0 million of the net proceeds from the common stock offering for construction of the Century Mile project. The balance of the Century Mile construction will be financed through new credit facilities or with available cash. The debt financing for the Century Mile project may be in the form of a construction or term loan or line of credit with a commercial bank, or a combination of these financings. We estimate that the SCCL project will cost approximately GBP 5.5 million ($7.4 million based on the exchange rate in effect on December 31, 2017), in addition to GBP 0.3 million ($0.4 million based on the exchange rate in effect on December 31, 2017) of additional payments due to the seller of SCCL on the satisfaction of certain conditions. In September 2017, we obtained a loan for the SCCL project of GBP 2.0 million ($2.7 million based on the exchange rate in effect as of December 31, 2017) and expect to fund the balance of the SCCL project costs with available cash.
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We have a shelf registration statement with the SEC that became effective in July 2017 under which we may issue, from time to time, up to $100 million of common stock, preferred stock, debt securities and other securities and under which we undertook the common stock offering in November 2017. If necessary, we may seek to obtain further term loans, mortgages or lines of credit with commercial banks or other debt or equity financings to supplement our working capital and investing requirements. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.
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In addition, we expect our U.S. domestic cash resources will be sufficient to fund our U.S. operating activities and cash commitments for investing and financing activities. While we currently do not have an intent nor foresee a need to repatriate funds, we could require more capital in the U.S. than is generated by our U.S. operations either for operations, capital expenditures or significant discretionary activities such as acquisitions or businesses and share repurchases. If so, we could elect to repatriate earnings from foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. Under the newly-enacted Tax Act, a cash dividend from a foreign subsidiary to its U.S. parent would generally be exempt from U.S. income taxation. We estimate that approximately $35.3 million of our total $74.7 million in cash and cash equivalents at December 31, 2017 is held by our foreign subsidiaries and is not available to fund U.S. operations unless repatriated. The determination of the additional deferred taxes that would be provided for undistributed earnings has not been determined because the hypothetical calculation is not practicable.
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Contractual Obligations and Contingencies
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The following table summarizes our future commitments and contingency payments as of December 31, 2017.
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(1)
Represents principal payments only, and excludes any fair market value adjustments recorded in long-term debt under derivative and hedge accounting rules. These amounts do not reflect the impact of future foreign exchange rate changes. Payments due in one to three years represent the portion of the BMO Credit Agreement expiring in August 2019. Payments due in three to five years represent the remaining balance of the BMO Credit Agreement expiring in September 2021. We currently intend to seek to extend the term of the BMO Credit Agreement or otherwise refinance the loan. The payments due after five years include the CDR land lease. The CDR land lease is accounted for using the financing method, and no principal payments will be made unless the land is purchased. The first option to purchase the land is July 1, 2023. See Notes 7 and 12 to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report for further information.
(2)
Estimated contingencies related to the CPL contingent liability are not included in the table above because we are not able to make reasonably reliable estimates of the period of cash settlement. See Note 14 to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report for further information.
(3)
Estimated interest payments are based on principal amounts and expected maturities of long-term debt outstanding as of December 31, 2017 and management’s forecasted rates for our BMO Credit Agreement and SCCL credit agreement. Estimated interest payments do not reflect the impact of future foreign exchange rate changes.
(4)
Operating leases do not include month-to-month lease agreements. In 2017, we entered into a 20-year lease agreement with Edmonton International Airport to lease the land on which CMR is currently being constructed. Payments are scheduled to begin when the casino opens. In 2017, we also entered into a 30-year lease agreement for the lease of the building in which we are constructing the SCCL casino. Payments are scheduled to begin in November 2018.
(5)
Amounts reflect estimated payments related to the Tax Act. Payments are allowed over an eight year period. See Note 11 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report for additional discussion of the effects of the Tax Act.
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Off-Balance Sheet Arrangements
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The unrecorded contractual obligations above are not expected to have a material effect on our consolidated financial statements. We do not have any additional off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our consolidated financial statements.
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Critical Accounting Estimates
Management's discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements. To prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the amounts reported in the consolidated financial statements. On an on-going basis, we evaluate these estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this report. Critical estimates inherent in these accounting policies are discussed in the following paragraphs.
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Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 56% of our total assets as of December 31, 2017. Judgments are made in determining the estimated useful lives of assets, salvage values to be assigned to assets and if or when an asset has been impaired. The accuracy of these estimates affects the amount of depreciation expense recognized in our financial results and the extent to which we have a gain or loss on the disposal of the asset. We assign lives to our assets based on our standard policy, which we believe is representative of the useful life of each category of assets. We review the carrying value of our property and equipment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors we consider in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. As of December 31, 2017, we believe that our investments in property and equipment are recoverable. For the year ended December 31, 2017, we wrote down the leasehold improvements at Casinos Poland’s LIM Center casino due to the transfer of the license to the Hilton Warsaw casino and charged $0.1 million to operating costs and expenses. For the year ended December 31, 2016, we wrote down the leasehold improvements at Casinos Poland’s Katowice casino based on the loss of the license for that location and charged $0.4 million to operating costs and expenses. There were no impairment charges recorded for the year ended December 31, 2015.
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Goodwill - We test goodwill for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. Testing compares the estimated fair values of our reporting units to the reporting units’ carrying values. Our reporting units with goodwill balances as of December 31, 2017 include CRA, CSA, CDR and CPL. We consider a variety of factors when estimating the fair value of our reporting units, including estimates about the future operating results of each reporting unit, multiples of earnings, various market analyses, and recent sales of comparable businesses, if such information is available to us. We make a variety of estimates and judgments about the relevance of these factors to the reporting units in estimating their fair values. If the carrying value of a reporting unit exceeds its estimated fair value, the fair value of each reporting unit is allocated to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill and whether impairment is necessary. No impairment charges related to goodwill were recorded for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the fair value of our goodwill at our CSA reporting unit was 1% in excess of its related carrying value. Goodwill related to our CSA reporting unit was $3.7 million as of December 31, 2017. Key assumptions in the valuation of goodwill at the CSA reporting unit relate to future earnings at CSA. A downturn in the Alberta economy could negatively affect the key assumptions management used in its analysis.
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Intangible Assets - Identifiable intangible assets include trademarks and casino licenses. Our trademarks, CDR’s licenses issued by the AGLC and HRA, CSA’s license issued by the AGLC and SCCL’s licenses issued by the Great Britain Gambling Commission are indefinite-lived intangible assets and therefore are not amortized. We test our trademarks and indefinite-lived licenses for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. We test for impairment using the relief-from-royalty method. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, we would recognize an impairment charge equal to the difference. No impairment charges related to our trademarks or indefinite-lived licenses were recorded for the years ended December 31, 2017, 2016 and 2015. Our casino licenses related to CPL are finite-lived intangible assets and are amortized over their respective useful lives. CPL licenses are evaluated for impairment annually or more frequently if necessary. There were no impairment charges recorded for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the fair value of our indefinite-lived intangible assets at our CSA reporting unit was 6% in excess of its related carrying value. Intangible assets related to our CSA reporting unit were $9.7 million as of December 31, 2017. Key assumptions in the valuation of intangible assets at the CSA reporting unit relate to future earnings at CSA. A downturn in the Alberta economy could negatively affect the key assumptions management used in its analysis.
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Income Taxes - The determination of our provision for income taxes requires management’s judgment in the use of estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We establish contingency reserves for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. Our reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved or clarified. While we believe that our reserves are adequate to cover reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount different from the related reserve. Such differences could materially increase or decrease our income tax provision in the current and/or future periods. When facts and circumstances change (including a resolution of an issue or statute of limitations expiration), these reserves are adjusted through the provision for income taxes in the period of change. To the extent we determine that we will not realize the benefit of some or all of the deferred tax assets, then these assets will be adjusted through our provision for income taxes in the period in which this determination is made.
﻿
The Tax Act, enacted on December 22, 2017, makes significant changes to the Internal Revenue Code effective for 2018, although certain provisions affected our 2017 financial results. The changes impacting our 2017 results include, but are not limited to, the write-down of net deferred tax assets resulting from the reduction in the U.S. federal corporate income tax rate from 35% to 21% and imposing a one-time deemed transition tax on certain unremitted earnings of foreign subsidiaries. The Tax Act also establishes new corporate tax laws that will be effective in 2018, but did not impact our 2017 financial results. These changes include, but are not limited to, lowering the U.S. federal corporate income tax rate, a general elimination of U.S. federal income taxes on income and dividends from foreign subsidiaries, a new tax on global intangible low-taxed income (“GILTI”) net of allowable foreign tax credits, a new deduction for foreign derived intangible income (“FDII”), and limitations on the use of foreign tax credits to reduce the U.S. federal income tax liability.
﻿
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued SAB 118, which provided guidance on accounting for the income tax effects of the Tax Act. SAB 118 provided a measurement period that may not extend beyond one year from the Tax Act enactment date to complete the accounting for the impact of the Tax Act. SAB 118 allowed us to provide provisional estimates of the impact of the Tax Act in our financial statements for the year ended December 31, 2017. Accordingly, based on information and IRS guidance currently available, we have recorded a net tax expense of $5.4 million for the year ended December 31, 2017 related to the Tax Act provisions. This consists primarily of a net expense of $0.3 million for the write down of our net deferred tax balances due to the U.S. corporate income tax rate reduction and a net expense of $5.1 million for the one-time deemed transition tax. We have not completed our analysis of the tax impact resulting from the enactment of the Tax Act and the provisional amounts will be refined as needed during the measurement period allowed by SAB 118. While we believe that we have made reasonable estimates of the impact of the U.S. corporate income tax rate reduction and the one-time deemed transition tax on unremitted earnings of foreign subsidiaries, these estimates could change as we continue to analyze IRS guidance related to the Tax Act as it is released. Further changes could result as we refine our calculations surrounding the remeasurement of our deferred tax balances, as well as our calculations of earnings and profits as used in the computation of the transition tax.
﻿
The Tax Act creates a new requirement that certain income, such as GILTI, earned by a controlled foreign corporation (“CFC”) must be included currently in the gross income of the CFC’s U.S. shareholder, effective in 2018. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of our deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends not only on our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements for the period ended December 31, 2017, and we have not made a policy choice regarding whether to record deferred taxes on GILTI. We will continue to analyze the effects of the Tax Act on our financial statements, and additional impacts from the enactment of the Tax Act will be recorded as they are identified during the measurement period as allowed in SAB 118.
﻿
As of December 31, 2017, our undistributed foreign earnings have been subject to the one-time transition tax. We continue to consider our foreign earnings indefinitely reinvested. Based on our capital, debt and liquidity position, there is no expected need for cash repatriation from foreign subsidiaries, and all cash held in foreign jurisdictions is considered permanently reinvested. These foreign earnings could become subject to additional taxes, such as withholding taxes and local country taxes, if they are repatriated to the United States.
﻿
			
		
See Note 11 to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report for additional discussion of the Tax Act.
﻿
﻿
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
﻿
Our earnings, cash flows and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. All of the potential changes noted below are based on information available at December 31, 2017. We attempt to limit our exposure to interest rate risk by managing the mix of our debt between fixed-rate and variable-rate obligations. Of our $56.7 million face value of debt outstanding as of December 31, 2017, $0.5 million is fixed-rate capital lease agreements, $22.8 million is fixed-rate debt using interest rate swap agreements and $33.4 million is variable-rate debt. Each one percentage point change associated with the variable rate debt would result in a $0.2 million change to our annual cash interest expenses.
﻿
As of December 31, 2017, our three interest rate swap agreements totaled $22.8 million. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt in the period incurred. Changes in the variable interest rates to be paid pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows.
﻿
Foreign Currency Exchange Risk
As a result of our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have significant assets and liabilities denominated in foreign currencies. Therefore, our earnings experience volatility related to movements in foreign currency exchange rates. We have not hedged against foreign currency exchange rate changes related to our international operations.
﻿
﻿
Item 8.
Item 8. Financial Statements and Supplementary Data.
﻿
See Index to Financial Statements on page.
﻿
﻿
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
﻿
None.
﻿
﻿
Item 9A.
Item 9A. Controls and Procedures.
﻿
Evaluation of Disclosure Controls and Procedures - Our management, with the participation of our principal executive officers and principal financial/accounting officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2017. Based on such evaluation, our principal executive officers and principal financial/accounting officer have concluded that as of December 31, 2017, our disclosure controls and procedures were effective.
﻿
			
		
Management’s Annual Report on Internal Control over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements.
﻿
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth in the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on this assessment, our management believes that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.
﻿
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein on the following page.
﻿
Changes in Internal Control Over Financial Reporting - There were no changes in our internal control over financial reporting during the three months ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
			
		
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
﻿
To the Shareholders and the Board of Directors of
Century Casinos, Inc.
Colorado Springs, Colorado
﻿
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Century Casinos, Inc. and subsidiaries (the "Company") as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 8, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
﻿
/s/ Deloitte & Touche LLP
Denver, Colorado
March 8, 2018
			
		
Item 9B.
Item 9B. Other Information.
﻿
None.
PART III
﻿
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
﻿
The information required by this item will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017 and is incorporated herein by reference. Information required by Regulation S-K Item 401 concerning executive officers is included in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Company.”
﻿
We have adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including our Co-Chief Executive Officers and our Principal Financial/Accounting Officer. A complete text of this Code of Business Conduct and Ethics is available on our web site (http://www.cnty.com). Any future amendments to or waivers of the Code of Business Conduct and Ethics will be posted to the Corporate Governance section of our web site.
﻿
﻿
Item 11.
Item 11. Executive Compensation.
﻿
The information required by this item will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017 and is incorporated herein by reference.
﻿
﻿
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
﻿
The information required by this item relating to securities ownership of certain beneficial owners and management will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017 and is incorporated herein by reference.
﻿
Information relating to securities authorized for issuance under equity compensation plans as of December 31, 2017 is as follows:
﻿
﻿
﻿
﻿
(1)
These plans consist of the 2005 Equity Incentive Plan, as amended (the “2005 Plan”), which expired in June 2015, and the 2016 Equity Incentive Plan (the “2016 Plan”), which was approved by our stockholders in June 2016.
(2)
As of December 31, 2017, there were (i) 1,349,361 shares of our common stock issuable upon exercise of outstanding options issued under the 2005 Plan and (ii) 167,968 performance stock units (the “2016 PSUs”) issued under the 2016 Plan that, if and when vested, will be settled in shares of our common stock. The amount reported in the table assumes target level performance for the 2016 PSUs. Assuming maximum level performance for the 2016 PSUs, the number of shares of common stock would increase by 167,968.
(3)
The weighted-average exercise price relates only to outstanding stock options.
			
		
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
﻿
The information required by this item will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017 and is incorporated herein by reference.
﻿
﻿
Item 14.
Item 14. Principal Accountant Fees and Services.
﻿
The information required by this item will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2017 and is incorporated herein by reference.
			
		
PART IV
﻿
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
﻿
﻿
						
﻿
						
(a)
List of documents filed with this report
1.
Financial Statements
﻿
The financial statements and related notes, together with the reports of our independent registered public accounting firm, appear in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Form 10-K.
2.
Financial Statement Schedules
﻿
None.
3.
List of Exhibits
(b)
Exhibits Filed Herewith or Incorporated by Reference to Previous Filings with the Securities and Exchange Commission
﻿
(3) Articles of Incorporation and Bylaws
3.1P
Certificate of Incorporation of Century Casinos, Inc. is hereby incorporated by reference to the Company’s Proxy Statement in respect of the 1994 Annual Meeting of Stockholders.
﻿3.2
Amended and Restated Bylaws of Century Casinos, Inc., is hereby incorporated by reference to Exhibit 11.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
﻿
(4) Instruments defining the rights of security holders, including indentures
﻿4.1
Form of Indenture by and between Century Casinos, Inc. and a trustee, relating to debt securities, is hereby incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 filed on May 26, 2017.
﻿
(10) Material Contracts
﻿10.1
Credit Agreement by and between Century Casinos Europe GmbH and United Horsemen of Alberta Inc., dated October 25, 2012, is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 3, 2012.
﻿10.2
Management Agreement by and between Century Casinos Europe GmbH and United Horsemen of Alberta Inc., dated November 30, 2012, is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 3, 2012.
﻿10.3
Credit Agreement as of November 29, 2013 by and between Century Casinos Europe GmbH and United Horsemen of Alberta Inc., is hereby incorporated by reference to Exhibit 10.2B to the Company’s Current Report on Form 8-K filed on December 3, 2013.
﻿10.4
Preliminary Conditional Share Sale Agreement by and between Polskie Linie Lotnicze LOT S.A. and Century Casinos Europe GmbH, dated September 21, 2012, is hereby incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K dated December 31, 2012.
﻿10.5
Share Sale Agreement by and between Polskie Linie Lotnicze LOT S.A. and Century Casinos Europe GmbH dated April 8, 2013, is hereby incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 9, 2013.
﻿10.6A*
Employment Agreement by and between Century Casinos, Inc. and Erwin Haitzmann as restated on February 18, 2003, is hereby incorporated by reference to Exhibit 10.120 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
﻿10.6B*
Amendment No. 1 to Employment Agreement by and between Century Casinos, Inc. and Erwin Haitzmann, dated February 3, 2005, is hereby incorporated by reference to Exhibit 10.143 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
﻿
			
		
﻿
﻿
						
﻿10.6C*
Amendment No. 2 to Employment Agreement by and between Century Casinos, Inc. and Erwin Haitzmann, effective September 1, 2006, is hereby incorporated by reference to Exhibit 10.178 to the Company’s Current Report on Form 8-K filed on October 19, 2006.
﻿10.6D*
Amendment No. 3 to Employment Agreement by and between Century Casinos, Inc. and Erwin Haitzmann, effective November 5, 2009, is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 10, 2009.
﻿10.6E*
Amendment No. 4 to Employment Agreement by and between Century Casinos, Inc. and Erwin Haitzmann, effective November 3, 2014, is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2014.
﻿10.6F*
Amendment to Employment Agreement, by and among Century Casinos, Inc., Century Resorts International Ltd., Century Casinos Europe GmbH and Erwin Haitzmann, effective September 30, 2015, is hereby incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2015.
﻿10.7A*
Employment Agreement by and between Century Casinos, Inc. and Peter Hoetzinger as restated on February 18, 2003, is hereby incorporated by reference to Exhibit 10.121 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
﻿10.7B*
Amendment No. 1 to Employment Agreement by and between Century Casinos, Inc. and Peter Hoetzinger, dated February 3, 2005, is hereby incorporated by reference to Exhibit 10.144 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
﻿10.7C*
Amendment No. 2 to Employment Agreement by and between Century Casinos, Inc. and Peter Hoetzinger, effective September 1, 2006, is hereby incorporated by reference to Exhibit 10.179 to the Company’s Current Report on Form 8-K filed on October 19, 2006.
﻿10.7D*
Amendment No. 3 to Employment Agreement by and between Century Casinos, Inc. and Peter Hoetzinger, effective November 5, 2009, is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 10, 2009.
﻿10.7E*
Amendment No. 4 to Employment Agreement by and between Century Casinos, Inc. and Peter Hoetzinger effective November 3, 2014, is hereby incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 12, 2014.
﻿10.8A
Credit Agreement by and between Century Resorts Alberta Inc. and Century Casino Calgary Inc. and the Bank of Montreal, dated April 11, 2012, is hereby incorporated by reference to the Company’s Current Report on Form 8-K filed on May 29, 2012.
﻿10.8B
Amended and Restated Credit Agreement, dated as of August 15, 2014, by and among Century Resorts Alberta Inc., Century Casino Calgary Inc. and the Bank of Montreal, is hereby incorporated by reference to Exhibit 10.8A to the Company’s Current Report on Form 8-K filed on August 19, 2014.
﻿10.8C
First Amending Agreement to Amended and Restated Credit Agreement, by and among Century Resorts Alberta Inc., Century Casino Calgary Inc. and Bank of Montreal, effective September 30, 2015, is hereby incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Filing on Form 10-Q filed on November 6, 2015.
﻿10.8D
Second Amended and Restated Credit Agreement, dated September 30, 2016, by and among Century Resorts Alberta Inc., Century Casino Calgary Inc., Century Casino St. Albert Inc. and Bank of Montreal, is hereby incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 6, 2016.
﻿
			
		
			
		
﻿
* A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
﻿
† Filed herewith.
†† Furnished herewith.
PFiled on Paper
﻿
Item 16. Form 10-K Summary.
﻿
None.
			
		
SIGNATURES
﻿
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
﻿
﻿
						
CENTURY CASINOS, INC.
﻿
By:/s/ Erwin Haitzmann
By:/s/ Peter Hoetzinger
Erwin Haitzmann, Chairman of the Board and
Co-Chief Executive Officer
(Co Principal Executive Officer)
Peter Hoetzinger, Vice Chairman of the Board,
Co-Chief Executive Officer and President
(Co Principal Executive Officer)
﻿
﻿
Date: March 9, 2018
﻿
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 9, 2018.
﻿
﻿
						
						
						
Signature
Title
Signature
Title
						
						
						
/s/ Erwin Haitzmann
Erwin Haitzmann
Chairman of the Board and
Co-Chief Executive Officer
/s/ Gottfried Schellmann
Gottfried Schellmann
Director
/s/ Peter Hoetzinger
Peter Hoetzinger
Vice Chairman of the Board,
Co-Chief Executive Officer
and President
/s/ Dinah Corbaci
Dinah Corbaci
Director
/s/ Margaret Stapleton
Margaret Stapleton
Principal Financial/Accounting Officer
/s/ Eduard Berger
Eduard Berger
Director
﻿
			 		
			
		
			
		
Item 8. Financial Statements and Supplementary Data.
﻿
﻿
Financial Statements:
						
﻿Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP
﻿Consolidated Balance Sheets as of December 31, 2017 and 2016
﻿Consolidated Statements of Earnings for the Years Ended December 31, 2017, 2016 and 2015
﻿Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
﻿Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
﻿Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
﻿Notes to Consolidated Financial Statements
﻿
﻿
﻿
Financial Statement Schedules:
All schedules are omitted because they are not applicable or are insignificant, or the required information is shown in the consolidated financial statements or notes thereto.
﻿
﻿
			 		
-F1-
			
		
			
		
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
﻿
To the Shareholders and the Board of Directors of
Century Casinos, Inc.
Colorado Springs, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Century Casinos, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
﻿
/s/ Deloitte & Touche LLP
﻿
Denver, Colorado
March 8, 2018
We have served as the Company's auditor since 2013.
﻿
-F2-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
﻿
﻿
﻿
﻿
See notes to consolidated financial statements.
-F3-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
﻿
﻿
﻿
See notes to consolidated financial statements.
-F4-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
﻿
﻿
See notes to consolidated financial statements
-F5-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
﻿
﻿
See notes to consolidated financial statements.
﻿
			 		
-F6-
			
		
			
		
﻿
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
﻿
﻿
﻿
(1)
Cumulative effect of accounting change relates to the adoption of Accounting Standards Update 2016-09. See Note 2 of the consolidated financial statements for further details on the adoption of this accounting standard.
﻿
			 		
-F7-
			
		
			
		
﻿
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
﻿
﻿
-F8-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
﻿
See notes to consolidated financial statements.
-F9-
			
		
			
		
CENTURY CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
﻿
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
﻿
Century Casinos, Inc. (the “Company”) is an international casino entertainment company. As of December 31, 2017, the Company owned casino operations in North America; held a majority ownership interest in six casinos throughout Poland, a racetrack and entertainment center (“REC”) in Canada and the pari-mutuel off-track betting network in southern Alberta, Canada; managed cruise ship-based casinos on international waters and provided gaming services in Argentina.
﻿
The Company currently owns, operates and manages the following casinos through wholly-owned subsidiaries in North America:
﻿
·
The Century Casino & Hotel in Edmonton, Alberta, Canada
·
The Century Casino St. Albert in Edmonton, Alberta, Canada
·
The Century Casino Calgary in Calgary, Alberta, Canada
·
The Century Casino & Hotel in Central City, Colorado; and
·
The Century Casino & Hotel in Cripple Creek, Colorado
﻿
The Company currently has a controlling financial interest through its subsidiary Century Casinos Europe GmbH (“CCE”) in the following majority-owned subsidiaries:
﻿
·
The Company owns 66.6% of Casinos Poland Ltd. (“CPL” or “Casinos Poland”). As of December 31, 2017, CPL owned and operated six casinos throughout Poland. CPL is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. Polish Airports Company (“Polish Airports”) owns the remaining 33.3% of CPL, which is reported as a non-controlling financial interest.
﻿
·
The Company owns 75% of United Horsemen of Alberta Inc. dba Century Downs Racetrack and Casino (“CDR” or “Century Downs”). CDR operates Century Downs Racetrack and Casino, a REC in Balzac, a north metropolitan area of Calgary, Alberta, Canada. CDR is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. The remaining 25% is owned by unaffiliated shareholders and is reported as a non-controlling financial interest. The casino and racetrack at CDR opened in April 2015.
﻿
In March 2015, CCE converted CAD 11.0 million that it had loaned to CDR into an additional 60% ownership interest in CDR. As a result of the conversion, the Company recognized $0.6 million in additional paid-in-capital and $0.1 million in accumulated other comprehensive income that was previously attributed to non-controlling financial interest.
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·
The Company owns 75% of Century Bets! Inc. (“CBS” or “Century Bets”). CBS is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. Rocky Mountain Turf Club (“RMTC”) owns the remaining 25% of CBS, which is reported as a non-controlling financial interest. CBS began operating the pari-mutuel off-track betting network in southern Alberta in May 2015.
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The Company has the following concession, management and consulting service agreements:
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As of December 31, 2017, the Company operated 14 ship-based casinos through concession agreements with four cruise lines. In May 2017, the Company began operating the ship-based casino onboard the Mein Schiff 6, a new 2,500 passenger cruise ship. The concession agreements to operate the ship-based casinos onboard the Mein Schiff 1 and Mein Schiff 2 will end in the second quarter of 2018 and first quarter of 2019, respectively, when the ships are transferred from the TUI Cruises fleet to another cruise line.
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-F10-
			
		
			
		
In connection with a concession agreement with Diamond Cruise International Co., Ltd. (“Diamond”) for the operation of the ship-based casino onboard the Glory Sea, the Company had entered into a cooperation agreement with Dynamic Partners International, Ltd. (“Dynamic”) in 2016. In November 2017, both parties mutually agreed to terminate the cooperation agreement. Under this agreement, Dynamic marketed and promoted the casino to VIP players along with facilitating the concession agreement with Diamond. The Company will continue to operate the ship-based casino onboard the Glory Sea.
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In March 2015, the Company mutually agreed with Norwegian Cruise Line Holdings (“Norwegian”) to terminate its concession agreements with Oceania Cruises (“Oceania”) and Regent Seven Seas Cruises (“Regent”), indirect subsidiaries of Norwegian, effective June 1, 2015 (the “Termination Agreement”). The Company transitioned operations of the eight ship-based casinos that it operated onboard Oceania and Regent vessels to Norwegian in the second quarter of 2015. As consideration for the early termination of the concession agreements, the Company received $4.0 million in June 2015 and recorded this amount on its consolidated statement of earnings under operating revenue net of $0.6 million related to assets that were sold to Norwegian as part of the Termination Agreement.
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The Company also had a two-year consulting agreement, which became effective on June 1, 2015, under which the Company provided limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million, which was payable $250,000 per quarter through May 2017.
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The Company, through its subsidiary CCE, has a 7.5% ownership interest in Mendoza Central Entretenimientos S.A, an Argentina company (“MCE”). The shares are reported on the consolidated balance sheet using the cost method of accounting. MCE has an exclusive concession agreement with Instituto Provincial de Juegos y Casinos to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina and owned by the Province of Mendoza. In addition, CCE and MCE have entered into a consulting services agreement pursuant to which CCE provides advice on casino matters and receives a service fee consisting of a fixed fee plus a percentage of MCE’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). See Note 4 for additional information related to MCE.
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The Company had a management agreement to direct the operation of the casino at the Hilton Aruba Caribbean Resort & Casino from which the Company received a monthly management fee. The management agreement ended November 30, 2017.
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The Company also has additional projects under development, including the following, among others:
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The Company is building a horse racing facility in the Edmonton market area, which it is planning to operate as Century Mile Racetrack and Casino. Century Mile will be a one-mile horse racetrack and a multi-level REC. The project is located on Edmonton International Airport land close to the city of Leduc, south of Edmonton. The Company began construction on the Century Mile project in July 2017 and estimates that it will be completed in early 2019.
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In June 2017, the Company, through its subsidiary CCE, acquired casino licenses held by Saw Close Casino Ltd. (“SCCL”) in Bath, England (the “SCCL License Acquisition”). The Company is planning to develop and operate a 15,000 square foot casino using the casino licenses. The casino is expected to include approximately 35 slot machines, 18 table games and 24 automated live gaming terminals. The Company estimates that the casino will open in the second quarter of 2018, subject to the receipt of certain regulatory and governmental approvals.
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·
In August 2017, the Company announced that, together with the owner of the Hamilton Princess Hotel & Beach Club in Hamilton, Bermuda, it had submitted a license application to the Bermudan government for a casino at the Hamilton Princess Hotel & Beach Club. The casino will feature approximately 200 slot machines, 17 live table games, one or more electronic table games and a high limit area and salon privé. In September 2017, the Bermuda Casino Gaming Commission granted a provisional casino gaming license, which is subject to certain conditions and approvals including the adoption of certain rules and regulations by the Parliament of Bermuda. CCE has entered into a long-term management agreement with the owner of the hotel to manage the operations of the casino and receive a management fee if the license is awarded. CCE will also provide a $5.0 million loan for the purchase of casino equipment if the license is awarded.
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-F11-
			
		
			
		
2. SIGNIFICANT ACCOUNTING POLICIES
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Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company also consolidates CPL, CDR and CBS as majority owned subsidiaries for which the Company has a controlling interest. The portion of CPL, CDR and CBS that are not wholly-owned are reflected as non-controlling interests in the accompanying consolidated financial statements. All intercompany transactions and balances have been eliminated.
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Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Management’s use of estimates includes estimates for property and equipment, goodwill, intangible assets and income tax.
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Recently Issued Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard under US generally accepted accounting principle (“GAAP”) and International Financial Reporting Standards. ASU 2014-09 is effective for fiscal years and interim periods beginning after December 15, 2017. The standard permits retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The most significant impacts of adoption of the new accounting standard are as follows:
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Promotional Allowances: The Company will recognize revenue for goods and services provided to customers for free as an inducement to gamble as gross revenue with an offset to gaming revenue based on the stand-alone selling price rather than an offset to promotional allowances. This change will primarily result in a reclassification between revenue line items.
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Loyalty Accounting: Accounting for complimentary points earned through game play at the Company’s casinos will be identified as separate performance obligations and recorded as a reduction in gaming revenue when earned at the retail value of the benefits owed to the customer (less estimated breakage) and an increase to the loyalty program liability representing outstanding performance obligations. Such amounts will be recognized as revenue in the line item of the corresponding good or service provided when the performance obligation is fulfilled.
·
Estimated Cost of Promotional Allowances: The Company will no longer reclassify the estimated direct cost of providing promotional allowances from other expense line items to the gaming expense line item. This change will result in a reclassification between expense line items and will reduce gaming expense by $1.2 million, $1.1 million and $1.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, and increase hotel and food and beverage expenses. Refer to the Promotional Allowances section below for historical amounts that will be reclassified to each expense line item on future filings.
These changes, and other less significant adjustments that were required upon adoption, will not have an aggregate material impact on earnings from operations, net earnings or cash flows.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The objective of ASU 2016-02 is to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires lessees to account for leases as finance leases or operating leases. Both finance and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and, for operating leases, the lessee would recognize a straight-line lease expense. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2016-02 is permitted. The standard must be adopted by recognizing and measuring leases at the beginning of the earliest period being presented using a modified retrospective approach. The Company has begun analyzing its operating lease agreements, and management anticipates the Company’s assets and liabilities will increase proportionally after the adoption of ASU 2016-02. In addition, management expects an increase to interest expense will result from the new standard resulting from the new calculation of interest pertaining to operating leases. These changes to the Company’s consolidated balance sheet may be material.
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In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The objective of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including recording all excess tax benefits and tax deficiencies through income tax on the statement of earnings and eliminating the requirement that excess tax benefits be realized before they can be recognized. ASU 2016-09 also simplifies several other aspects of the accounting for employee share-based payments, including forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company has adopted ASU 2016-09 using the modified retrospective method. The Company has elected to account for forfeitures of share-based payments as they occur and recognized less than $0.1 million related to forfeitures as an adjustment to retained earnings for the year ended December 31, 2016.
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-F12-
			
		
			
		
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The objective of ASU 2016-15 is to reduce diversity in the classification of cash receipts and payments for specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied using a retrospective transition method. The Company adopted ASU 2016-15 in its consolidated financial statements for the year ended December 31, 2017. The standard did not impact the Company’s consolidated statement of cash flows.
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In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The objective of ASU 2016-16 is to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. ASU 2016-16 should be applied using a modified retrospective approach. The Company has not historically made a significant amount of intra-entity transfers of assets and adoption of the standard did not have a material impact on the Company’s results of operations.
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In November 2016, the FASB issued ASU 2016-18, Restricted Cash (“ASU 2016-18”). The objective of ASU 2016-18 is to require the statement of cash flows to include restricted cash in explaining the change during the period in the total of cash and cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption of ASU 2016-18 is permitted. ASU 2016-18 should be applied using a retrospective transition method for each period presented. The Company adopted ASU 2016-18 in its consolidated financial statements for the year ended December 31, 2017. The standard impacted the presentation of the Company’s consolidated statement of cash flows, and the Company added additional disclosure about its restricted cash balances to its discussion of cash and cash equivalents in this Note 2.
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In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). The objective of ASU 2017-01 is to add guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions or disposals of assets or of businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption was permitted for interim and annual periods in which the financial statements have not been issued or made available for issuance. The Company has adopted ASU 2017-01 and has used the guidance to evaluate the SCCL License Acquisition.
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In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The objective of ASU 2017-04 is to simplify the subsequent measurement of goodwill by entities performing their annual goodwill impairment tests by comparing the fair value of a reporting unit, including income tax effects from any tax-deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds fair value. ASU 2017-04 is effective for fiscal years beginning after December 31, 2021, and interim periods within those fiscal years. Early adoption of ASU 2017-04 is permitted on goodwill impairment tests performed after January 1, 2017. ASU 2017-04 should be applied on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2017-04; however, the standard is not expected to have a material impact on its consolidated financial statements.
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In March 2017, the FASB issued ASU 2017-09, Stock Compensation (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. Historically, the Company has not made frequent changes to the terms or conditions of its share-based payment awards, and adoption of the standard will not have a material impact on its consolidated financial statements.
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In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income (“ASU 2018-02”). The objective of ASU 2018-02 is to provide guidance on the impacts of the Tax Cuts and Jobs Act (“Tax Act”). The guidance permits the reclassification of certain income tax effects of the Tax Act from other comprehensive income to retained earnings (stranded tax effects). The guidance also requires certain new disclosures. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within that reporting period. Early adoption is permitted. Entities may adopt the guidance using one of two transition methods: retrospective to each period or periods in which the income tax effects of the Tax Act related to the items remaining in Other Comprehensive Income are recognized, or at the beginning of the period of adoption. The Company is currently evaluating the impact that the guidance may have on its consolidated financial statements.
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-F13-
			
		
			
		
Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
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A reconciliation of cash, cash equivalents and restricted cash as stated in the Company’s statement of cash flows is presented in the following table:
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For the year ended December 31, 2017, restricted cash included $1.0 million related to completion of leasehold improvements at SCCL. For the year ended December 31, 2017, restricted cash included $0.6 million in deposits and other related to a cash guarantee for the Company’s SCCL credit agreement and $0.1 million in deposits related to payments of prizes and giveaways for Casinos Poland.
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The prior period amounts within the Company’s consolidated statement of cash flows have been revised to reflect the new presentation of restricted cash after the adoption of ASU 2016-18. The information below presents the impact of this presentation change on the Company’s 2016 and 2015 consolidated statements of cash flows as previously reported.
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Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. Although the amount of credit exposure to any one institution may exceed federally insured amounts, the Company limits its cash investments to high quality financial institutions in order to minimize its credit risk.
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Inventories - Inventories, which consist primarily of food, beverage, retail merchandise and operating supplies, are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method.
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-F14-
			
		
			
		
Property and Equipment - Property and equipment are stated at cost. Depreciation of assets in service is determined using the straight-line method over the estimated useful lives of the assets. Leased property and equipment under capital leases are amortized over the lives of the respective leases or over the service lives of the assets, whichever is shorter. Estimated service lives used are as follows:
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Buildings and improvements
5-39 years
Gaming equipment
3-7 years
Furniture and non-gaming equipment
3-7 years
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The Company evaluates long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication of impairment, determined by the excess of the carrying value in relation to anticipated undiscounted future cash flows, the carrying amount of the asset is written down to its estimated fair value by a charge to operations. During the year ended December 31, 2017, the Company wrote down the leasehold improvements at Casinos Poland’s LIM Center casino in Warsaw based on the transfer of the casino license to the Hilton Warsaw casino and charged $0.1 million to operating costs and expenses. During the year ended December 31, 2016, the Company wrote down the leasehold improvements at Casinos Poland’s Katowice casino based on the expiration of the license for that location and charged $0.4 million to operating costs and expenses. No long-lived asset impairment charges were recorded for the year ended December 31, 2015.
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Goodwill-Goodwill represents the excess purchase price over the fair value of the net identifiable assets acquired related to third party business combinations. See Note 6.
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Intangible Assets-Identifiable intangible assets include trademarks and casino licenses. The Company’s trademarks, CDR’s licenses issued by the Alberta Gaming and Liquor Commission (“AGLC”) and Horse Racing Alberta (“HRA”), CSA’s license issued by the AGLC and SCCL’s licenses issued by the Great Britain Gambling Commission are indefinite-lived intangible assets and therefore are not amortized. The Company’s casino licenses related to CPL are finite-lived intangible assets and are amortized over their respective useful lives. See Note 6.
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Foreign Currency - The Company’s functional currency is the U.S. dollar (“USD” or “$”). Foreign subsidiaries with a functional currency other than the U.S. dollar translate assets and liabilities at current exchange rates at the end of the reporting periods, while income and expense accounts are translated at average exchange rates for the respective periods. The Company and its subsidiaries enter into various transactions made in currencies different from their functional currencies. These transactions are typically denominated in the Canadian dollar (“CAD”), Euro (“EUR”), Polish zloty (“PLN”) and British pound (“GBP”). Gains and losses resulting from changes in foreign currency exchange rates related to these transactions are included in non-operating income (expense) as they occur.
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The exchange rates to the U.S. dollar used to translate balances at the end of the reported periods are as follows:
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Comprehensive Income - Comprehensive income includes the effect of fluctuations in foreign currency rates on the values of the Company’s foreign investments.
-F15-
			
		
			
		
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Revenue Recognition - Casino revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for chips in the customer’s possession. Hotel, bowling, food and beverage revenue is recognized when products are delivered or services are performed. Pari-mutuel revenue is the aggregate difference between racing handle and payouts, with liabilities recognized for commissions. Management and consulting fees are recognized as revenue when services are provided. Revenue from advance deposits on rooms and advance ticket sales is deferred until services are provided to the customer. The incremental amount of unpaid progressive jackpots is recorded as a liability and a reduction of casino revenue in the period during which the progressive jackpot increases. Revenue is recognized net of incentives related to gaming play and points earned in point-loyalty programs.
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At CRA, CSA and CAL, the AGLC retains 85% of slot machine net win, of which 15% is allocated to charities designated by the AGLC and 70% is allocated to the Alberta Lottery Fund. At CDR, the AGLC retains 40% of slot machine net win, which is allocated to the Alberta Lottery Fund, and HRA retains 16.25% of slot machine net win, which is used to fund horse-racing programs. For all table games, excluding poker and craps, the casino is required to allocate 50% of its net win to a charity designated by the AGLC, with the exception of the Company’s St. Albert casino, which allocates 35% of its net win to a charity designated by the AGLC. For poker and craps, 25% of the casino’s net win is allocated to a charity. CRA, CSA, CAL and CDR record revenue net of the amounts retained by the AGLC, HRA, charities and the Alberta Lottery Fund.
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Promotional Allowances - Hotel accommodations and food and beverage furnished without charge to customers are included in gross revenue at retail value and are deducted as promotional allowances to arrive at net operating revenue. The Company issues coupons and downloadable promotional credits to customers for the purpose of generating future revenue. The value of coupons and downloadable promotional credits redeemed is applied against the revenue generated on the day of the redemption. The estimated cost of providing promotional allowances is included in casino expenses. For the years ended December 31, 2017, 2016, and 2015, the estimated direct cost of providing promotional allowances were as follows:
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Loyalty Programs - Members of the Company’s casinos’ player clubs earn points based on, among other things, their volume of play at the Company’s casinos. Players can accumulate points over time that they may redeem at their discretion under the terms of the program. The Company records a liability based on the redemption value of the points earned, and records a corresponding reduction in casino revenue. Points can be redeemed for cash, downloadable promotional credits and/or various amenities at the casino, such as meals, hotel stays and gift shop items. The value of the points is offset against the revenue in the period in which the points were earned. The value of unused or unredeemed points is included in accrued liabilities on the Company’s consolidated balance sheets. The expiration of unused points results in a reduction of the liability. As of December 31, 2017 and 2016, the outstanding balance of this liability on the Company’s consolidated balance sheet was $0.7 million.
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Stock-Based Compensation - Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The Company accounts for forfeitures as they occur. The Company uses the Black-Scholes option pricing model for all non-performance option grants and the Monte Carlo option pricing model for all performance stock unit grants related to total shareholder return to determine the fair value of all such grants. See Note 10.
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Advertising Costs - Advertising costs are expensed when incurred by the Company. Advertising costs were $2.1 million, $2.0 million and $1.7 million in the years ended December 31, 2017, 2016 and 2015, respectively.
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Income Taxes - The Company accounts for income taxes using the asset and liability method, which provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, at a rate expected to be in effect when the differences become deductible or payable. Recorded deferred tax assets are evaluated for impairment by reviewing internal estimates for future taxable income. During the third quarter of 2017, the Company released its $5.7 million valuation allowance on its deferred tax assets, resulting in a tax benefit
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-F16-
			
		
			
		
The Tax Act, which was enacted on December 22, 2017, included significant changes to the Internal Revenue Code, including, among other items, a reduction of the federal corporate tax rate to 21%, a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, and the creation of new taxes on certain foreign earnings. The Company has not completed its analysis of the tax impact resulting from the enactment of the Tax Act. However, where possible, the Company has estimated the effects on its existing deferred tax balances and the one-time transition tax. See Note 11 for more discussion of the provisional amounts recorded by the Company related to the Tax Act.
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Earnings Per Share - The calculation of basic earnings per share considers the weighted average outstanding common shares in the computation. The calculation of diluted earnings per share also gives effect to all potentially dilutive securities. The calculation of diluted earnings per share is based upon the weighted average number of common shares outstanding during the period, plus, if dilutive, the assumed exercise of stock options using the treasury stock method. Weighted average shares outstanding for the years ended December 31, 2017, 2016 and 2015 were as follows:
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The following stock options are anti-dilutive and have not been included in the weighted-average shares outstanding calculation:
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3. ACQUISITIONS
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Apex Acquisition
On October 1, 2016, the Company’s subsidiary, Century Casino St. Albert Inc., acquired 100% of the issued and outstanding shares of Casino St. Albert Inc. (“CSAI”), Action ATM Inc. (“AAI”) and MVP Sports Bar Ltd. (“MVP”), collectively operating the Apex Casino in St. Albert, Edmonton, Canada and acquired the related land and real property held by Game Plan Developments Ltd. (the “Apex Acquisition”). The Company merged CSAI, AAI and MVP with Century Casino St. Albert Inc., the surviving company, and renamed the casino Century Casino St. Albert.
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The Company paid total consideration of CAD 31.9 million ($24.3 million) for the acquisition, using additional financing from the second amended and restated credit agreement with the Bank of Montreal (the “BMO Credit Agreement”) (see Note 7).
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As of October 1, 2016, the Company began consolidating Century Casino St. Albert Inc. as a wholly-owned subsidiary. CSA contributed $8.8 million in net operating revenue and $1.1 million in net earnings attributable to Century Casinos, Inc. shareholders for the year ended December 31, 2017 and $2.0 million in net operating revenue and $0.3 million in net earnings attributable to Century Casinos, Inc. shareholders for the year ended December 31, 2016.
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The Company accounted for the transaction as a business combination, and accordingly, CSA’s assets of $22.4 million (including $3.1 million in cash) and liabilities of $1.7 million were included in the Company’s consolidated balance sheet at October 1, 2016. Goodwill of $3.6 million is attributable to the business expansion opportunity for the Company. The acquisition leverages the Company’s management specialties and expertise in the gaming industry, expands the Company’s casino offerings in the Edmonton market and creates operational synergies. Goodwill is not a tax deductible item for the Company.
-F17-
			
		
			
		
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The fair value of the assets acquired and liabilities assumed (excluding cash received) was determined to be $21.2 million as of the acquisition date. The fair value was determined using the following methods, which the Company believes provide the most appropriate indicators of fair value:
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·
multi-period excess earnings method;
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cost method;
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capitalized cash flow method;
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discounted cash flow method; and
·
direct market value approach.
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Details of the purchase in the table below are based on estimated fair values of assets and liabilities as of October 1, 2016. The measurement period to make any adjustment to the fair value of the assets and liabilities recognized as a result of the acquisition ended on October 1, 2017, one year after the date of acquisition. The Company did not make any adjustments to the fair value of the assets and liabilities recognized during the year ended December 31, 2017.
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The following table details the purchase consideration net cash outflow.
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Acquisition-related costs
The Company incurred acquisition costs of approximately $0.2 million for the year ended December 31, 2016 in connection with the Apex Acquisition. These costs include legal and accounting fees and have been recorded as general and administrative expenses in the Corporate Other segment.
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-F18-
			
		
			
		
Pro forma results (Unaudited)
The following table provides unaudited pro forma information of the Company as if the Apex Acquisition had occurred at the beginning of the earliest comparable period presented. This pro forma information is not necessarily indicative either of the combined results of operations that actually would have been realized had the acquisition been consummated during the periods for which the pro forma information is presented, or of future results.
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4. COST INVESTMENT
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Mendoza Central Entretenimientos S.A.
On October 31, 2014, CCE entered into an agreement (the “MCE Agreement”) with Gambling and Entertainment LLC and its affiliates, pursuant to which CCE purchased 7.5% of the shares of MCE, a company formed in Argentina, for $1.0 million. Pursuant to the MCE Agreement, CCE is working with MCE to utilize MCE’s exclusive concession agreement with Instituto Provincial de Juegos y Casinos to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina, and owned by the Province of Mendoza. MCE may also pursue other gaming opportunities. Under the MCE Agreement, CCE appointed one director to MCE’s board of directors and had a three-year option through October 2017 to purchase up to 50% of the shares of MCE, which the Company did not exercise. The Company accounts for the $1.0 million investment in MCE using the cost method.
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5. PROPERTY AND EQUIPMENT
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Property and equipment at December 31, 2017 and 2016 consisted of the following:
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Depreciation expense was $8.6 million, $8.0 million and $7.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
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-F19-
			
		
			
		
6. GOODWILL AND INTANGIBLE ASSETS
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Goodwill
The Company tests goodwill for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. Testing compares the estimated fair values of the reporting units to the reporting units’ carrying values. The reporting units with goodwill balances as of December 31, 2017 include CRA, CDR, CSA and CPL. The Company considers a variety of factors when estimating the fair value of its reporting units, including estimates about the future operating results of each reporting unit, multiples of earnings, various market analyses, and recent sales of comparable businesses, if such information is available to the Company. The Company makes a variety of estimates and judgments about the relevance and comparability of these factors to the reporting units in estimating their fair values. If the carrying value of a reporting unit exceeds its estimated fair value, the fair value of each reporting unit is allocated to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill and whether impairment is necessary. No impairment charges related to goodwill related to CRA, CDR, CSA or CPL have been recorded.
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Changes in the carrying amount of goodwill related to CRA, CDR, CSA and CPL are as follows:
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Intangible Assets
Trademarks
The Company currently owns two trademarks, the Century Casinos trademark and the Casinos Poland trademark, which are reported as intangible assets on the Company’s consolidated balance sheets. Changes in the carrying amount of the trademarks are as follows:
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The Company has determined both trademarks have indefinite useful lives and therefore the Company does not amortize trademarks. Rather, the Company tests its trademarks for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. The Company tests trademarks for impairment using the relief-from-royalty method. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company would recognize an impairment charge equal to the difference. No impairment charges related to the Company’s Century Casinos and Casinos Poland trademarks have been recorded.
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-F20-
			
		
			
		
Licenses
Casino licenses at December 31, 2017 and 2016 consisted of the following:
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Poland
As of December 31, 2017, Casinos Poland had nine casino licenses, each with an original term of six years, which are reported as finite-lived intangible assets and are amortized over their respective useful lives. Changes in the carrying amount of the Casinos Poland licenses are as follows:
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As of December 31, 2017, estimated amortization expense for the CPL casino licenses over the next five years was as follows:
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These estimates do not reflect the impact of future foreign exchange rate changes or the continuation of the licenses following their expiration. The weighted average period before the next license expiration is 2.7 years. In Poland, gaming licenses are not renewable. Once a gaming license has expired, any gaming company can apply for the license.
﻿
-F21-
			
		
			
		
Canada and Corporate and Other
The licenses at CDR, CSA and SCCL are infinite-lived intangible assets that are not amortized. CDR holds licenses from the AGLC and from the HRA, CSA holds a license from the AGLC, and SCCL holds licenses from the Great Britain Gambling Commission. No impairment charges related to the licenses have been recorded. Changes in the carrying amount of the licenses are as follows:
﻿
﻿
7. LONG-TERM DEBT
﻿
Long-term debt and the weighted average interest rates at December 31, 2017 and 2016 consisted of the following:
﻿
﻿
﻿
Credit Agreement - Bank of Montreal
In May 2012, the Company, through its Canadian subsidiaries, entered into the CAD 28.0 million credit agreement with the Bank of Montreal (“BMO”). On August 15, 2014, the Company, through its Canadian subsidiaries, entered into an amended and restated credit agreement with BMO that increased the Company’s borrowing capacity to CAD 39.1 million. In September 2016, the Company through its Canadian subsidiaries, entered into a second amended and restated credit agreement to finance the Apex Acquisition that increased the Company’s borrowing capacity to CAD 69.2 million with an interest rate of BMO’s floating rate plus a margin. As discussed further below, the Company has entered into interest rate swap agreements to fix the interest rate paid related to a portion of the outstanding balance on the BMO Credit Agreement. As of December 31, 2017, the Company had borrowed CAD 63.9 million, of which the outstanding balance was CAD 47.9 million ($38.2 million based on the exchange rate in effect on December 31, 2017) and the Company had approximately CAD 6.2 million ($4.9 million based on the exchange rate in effect on December 31, 2017) available under the BMO Credit Agreement. In addition, the Company is using CAD 3.0 million ($2.4 million based on the exchange rate in effect on December 31, 2017) from Credit Facility E for the interest rate swap agreements discussed below.
﻿
The BMO Credit Agreement consists of the following five credit facilities:
﻿
1.
Credit Facility A is a CAD 1.1 million revolving credit facility with a term of five years that expires in August 2019. Credit Facility A may be used for general corporate purposes, including for the payment of costs related to the BMO Credit Agreement, ongoing working capital requirements and operating regulatory requirements. As of December 31, 2017, the Company had CAD 1.1 million ($0.9 million based on the exchange rate in effect on December 31, 2017) available for borrowing under Credit Facility A.
﻿
-F22-
			
		
			
		
2.
Credit Facility B is an approximately CAD 24.1 million committed, non-revolving, reducing standby facility with a term of five years that expires in August 2019. The Company used borrowings under Credit Facility B primarily to repay the Company’s mortgage loan related to CRA, pay for the additional 33.3% investment in CPL, pay for development costs related to CDR and for working capital and general corporate purposes. Once the principal amount of an advance has been repaid, it cannot be re-borrowed. As of December 31, 2017, the Company had no additional available borrowings under Credit Facility B.
﻿
3.
Credit Facility C is a CAD 11.0 million revolving credit facility with a term of five years that expires in August 2019. Credit Facility C may be used as additional financing for the development of CDR. The Company may re-borrow the principal amount within the limits described in the BMO Credit Agreement. As of December 31, 2017, the Company had CAD 5.1 million ($4.1 million based on the exchange rate in effect on December 31, 2017) available for borrowing under Credit Facility C.
﻿
4.
Credit Facility D is a CAD 30.0 million committed, reducing term credit facility with a term of five years that expires in September 2021. The Company used CAD 30.0 million to pay for the Apex Acquisition. Once the principal amount of an advance has been repaid, it cannot be re-borrowed. As of December 31, 2017, the Company had no additional available borrowings under Credit Facility D.
﻿
5.
Credit Facility E is a CAD 3.0 million treasury risk management facility. The Company may use this facility to hedge interest rate risk or currency exchange rate risk. Credit Facility E has a term of five years. The Company is currently utilizing Credit Facility E to hedge interest rate risk as discussed below. This facility has a term of five years that expires in August 2019.
﻿
Any funds not drawn down under the BMO Credit Agreement are subject to standby fees ranging from 0.50% to 0.75% payable quarterly in arrears. Standby fees of less than CAD 0.1 million (less than $0.1 million based on the exchange rate in effect on December 31, 2017) were recorded as interest expense in the consolidated statement of earnings for the year ended December 31, 2017. The shares of the Company’s subsidiaries that own CRA, CAL and CSA and the Company’s 75% interest in CDR are pledged as collateral for the BMO Credit Agreement. The BMO Credit Agreement contains a number of financial covenants applicable to the Canadian subsidiaries, including restricting their incurrence of additional debt, a debt to EBITDA ratio less than 3:1, a fixed charge coverage ratio greater than 1.2:1, maintenance of a CAD 50.0 million equity balance and a capital expenditure limit of CAD 4.0 million per year. The Company was in compliance with all financial covenants of the BMO Credit Agreement as of December 31, 2017.
﻿
The Company has entered into interest rate swap agreements to partially hedge the risk of future increases in the variable rate debt under the BMO Credit Agreement. The interest rate swap agreements are not designated as hedges for accounting purposes. As a result, changes in fair value of the interest rate swaps are recognized in interest expense on the Company’s consolidated statements of earnings. The interest rate is calculated as the fixed rate plus an applicable margin. As of December 31, 2017, the Company had the following interest rate swap agreements set at a Canadian Dollar Offered Rate (“CDOR”):
﻿
·
Notional amount of CAD 7.8 million ($6.2 million based on the exchange rate in effect on December 31, 2017) with a rate of 4.17% expiring in August 2019.
·
Notional amount of CAD 7.8 million ($6.2 million based on the exchange rate in effect on December 31, 2017) with a rate of 4.14% expiring in August 2019.
·
Notional amount of CAD 13.1 million ($10.4 million based on the exchange rate in effect on December 31, 2017) with a rate of 4.33% expiring in December 2021.
﻿
Deferred financing costs consist of the Company’s costs related to the financing of the BMO Credit Agreement. The Company recognized $0.3 million in deferred financing costs related to the BMO Credit Agreement for the year ended December 31, 2016. Amortization expenses relating to deferred financing charges were $0.1 million for each of the years ended December 31, 2017, 2016 and 2015. These costs are included in interest expense in the consolidated statements of earnings (loss).
﻿
-F23-
			
		
			
		
Casinos Poland
As of December 31, 2017, CPL had a short-term line of credit with BPH Bank used to finance current operations. The bank line of credit bears an interest rate of WIBOR plus 1.85% with a borrowing capacity of PLN 13.0 million, of which PLN 2.0 million may only be used to secure bank guarantees. The credit facility is secured by a building owned by CPL in Warsaw, Poland. In March 2017, the term of the credit facility was extended from February 11, 2018 to March 20, 2019. The credit facility had no outstanding amount as of December 31, 2017 and approximately PLN 11.0 million ($3.2 million based on the exchange rate in effect on December 31, 2017) was available for borrowing as of December 31, 2017. The credit facility contains a number of financial covenants applicable to CPL, including covenants that restrict the incurrence of additional debt by CPL and require CPL to maintain certain debt to EBITDA ratios. CPL was in compliance with all financial covenants of this credit facility as of December 31, 2017.
﻿
Under Polish gaming law, CPL is required to maintain PLN 3.6 million in the form of deposits or bank guarantees for payment of casino jackpots and gaming tax obligations. mBank issued guarantees to CPL for this purpose totaling PLN 3.6 million ($1.0 million based on the exchange rate in effect as of December 31, 2017). The mBank guarantees are secured by land owned by CPL in Kolbaskowo, Poland as well as a deposit of PLN 0.7 million ($0.2 million based on the exchange rate in effect as of December 31, 2017) with mBank and terminate on October 31, 2019. In addition, CPL is required to maintain deposits or provide bank guarantees for payment of additional prizes and giveaways at the casinos. The amount of these deposits varies depending on the value of the prizes. CPL maintained PLN 0.5 million ($0.1 million based on the exchange rate in effect as of December 31, 2017) in deposits for this purpose as of December 31, 2017. These deposits are included in deposits and other on the Company’s consolidated balance sheet for the year ended December 31, 2017.
﻿
Saw Close Casino Ltd.
In August 2017, the Company’s subsidiary SCCL entered into a GBP 2.0 million term loan with UniCredit Bank Austria AG (“UniCredit”). The loan matures in September 2023 and bears interest at the London Interbank Offered Rate (“LIBOR”) plus 1.625%. Proceeds from the loan are being used for construction and fitting out of the Company’s Bath casino project. As of December 31, 2017, the amount outstanding on the loan was GBP 2.0 million ($2.7 million based on the exchange rate in effect on December 31, 2017). SCCL has no further borrowing availability under the loan agreement. Repayment of the loan will begin in December 2018. The loan is guaranteed by a $0.6 million cash guarantee by CCE. This guarantee is included in deposits and other on the Company’s consolidated balance sheet as of December 31, 2017.
﻿
Century Downs Racetrack and Casino
CDR’s land lease is a financing obligation to the Company. Prior to the Company’s acquisition of its ownership interest in CDR, CDR sold a portion of land on which Century Downs is located and then entered into an agreement to lease back a portion of the land sold. The Company accounts for the lease using the financing method by accounting for the land subject to lease as an asset and the lease payments as interest on the financing obligation. Under the land lease, CDR has four options to purchase the land. The first option is on July 1, 2023. Due to the nature of the CDR land lease financing obligation, there are no principal payments due until the Company exercises its option to purchase the land. Lease payments are applied to interest only, and any change in the outstanding balance of the financing obligation relates to foreign currency translation. As of December 31, 2017, the outstanding balance on the financing obligation was CAD 19.5 million ($15.5 million based on the exchange rate in effect on December 31, 2017).
﻿
Capital Lease Agreements
As of December 31, 2017, the Company had the following capital leases:
·
CRA had two capital lease agreements for surveillance and general equipment with an outstanding balance of CAD 0.2 million ($0.1 million based on the exchange rate in effect on December 31, 2017);
·
CAL had two capital lease agreements for general equipment with an outstanding balance of CAD 0.1 million ($0.1 million based on the exchange rate in effect on December 31, 2017);
·
CDR had six capital lease agreements for surveillance, kitchen and racing-related equipment with an outstanding balance of CAD 0.3 million ($0.2 million based on the exchange rate in effect on December 31, 2017);
·
CSA had a capital lease agreement for general equipment with an outstanding balance of less than CAD 0.1 million (less than $0.1 million based on the exchange rate in effect on December 31, 2017); and
·
the Century Mile project had a capital lease agreement for trailers with an outstanding balance of CAD 0.1 million ($0.1 million based on the exchange rate in effect on December 31, 2017).
﻿
-F24-
			
		
			
		
As of December 31, 2017, scheduled maturities related to long-term debt were as follows:
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﻿
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﻿
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8. OTHER BALANCE SHEET AND STATEMENT OF EARNINGS CAPTIONS
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Accrued liabilities include the following as of December 31, 2017 and 2016:
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﻿
﻿
Accrued commissions (AGLC) include the portion of slot machine net sales and table game wins owed to the AGLC as of December 31, 2017 and 2016.
﻿
Taxes payable include the following as of December 31, 2017 and 2016:
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﻿
Other operating revenue includes the following for the years ended December 31, 2017, 2016 and 2015:
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﻿
﻿
-F25-
			
		
			
		
9. SHAREHOLDERS’ EQUITY
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In March 2000, the Company’s board of directors approved a discretionary program to repurchase the Company’s outstanding common stock. In November 2009, the Company’s board of directors increased the amount available to be repurchased to $15.0 million. The Company did not repurchase any shares of its common stock during 2017 and 2016. The total remaining authorization under the repurchase program was $14.7 million as of December 31, 2017. The repurchase program has no set expiration or termination date.
﻿
The Company has not declared or paid any dividends. Declaration and payment of dividends, if any, in the future will be at the discretion of the board of directors. At the present time, the Company intends to use any earnings that may be generated to finance the growth of its business.
﻿
The Company does not have any minimum capital requirements related to its status as a U.S. corporation in the state of Delaware.
﻿
10.STOCK-BASED COMPENSATION
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At the 2005 annual meeting of stockholders, stockholders of the Company approved an equity incentive plan (as amended, the “2005 Plan”). The 2005 Plan expired in June 2015. There are options issued under the 2005 Plan that remain outstanding. The 2005 Plan provided for the grant of awards to eligible individuals in the form of stock, restricted stock, stock options, performance units or other stock-based awards, all as defined in the 2005 Plan. The 2005 Plan provided for the issuance of up to 2,000,000 shares of common stock to eligible individuals, including directors, through the various forms of permitted awards. The Company was not permitted to issue stock options at an exercise price lower than fair market value at the date of grant. All stock options were required to have an exercise period not to exceed ten years. The Company had granted awards of incentive stock options and non-qualified stock options under the 2005 Plan, all of which had exercise prices that were not less than the fair market value at the date of grant. Options granted had six-month, one-year, three-year or four-year vesting periods. All outstanding options were issued at market value as of the date of the grant.
﻿
Stockholders of the Company approved the 2016 Equity Incentive Plan (the “2016 Plan”) at the 2016 annual meeting of stockholders. The 2016 Plan will expire in June 2026. The 2016 Plan provides for the grant of awards to eligible individuals in the form of stock, restricted stock, stock options, performance units or other stock-based awards, all as defined in the 2016 Plan. The 2016 Plan provides for the issuance of up to 3,500,000 shares of common stock to eligible individuals, including directors, through the various forms of permitted awards. The Company is not permitted to issue stock options at an exercise price lower than fair market value at the date of grant. All stock options are required to have an exercise period not to exceed ten years. As of December 31, 2017, the Company has granted 167,968 target performance stock units (“PSUs”) under the 2016 Plan. Any committee as delegated by the board of directors has the power and discretion to, among other things, prescribe the terms and conditions for the exercise of, or modification of, any outstanding awards in the event of merger, acquisition or any other form of acquisition other than a reorganization of the Company under the United States Bankruptcy Code or liquidation of the Company. The 2016 Plan also allows limited transferability of any stock options to legal entities that are 100% owned or controlled by the optionee or to the optionee’s family trust.
﻿
PSUs
The PSUs vest subject to market and performance conditions. The conditions are weighted 25% based on market conditions and 75% based on performance conditions. Market conditions are based on the Company’s total shareholder return (“TSR”) relative to a select group of peer companies at the end of a three year performance period. Performance conditions are based on the Company’s actual Adjusted EBITDA over the three year performance period compared to forecasted Adjusted EBITDA over the same period. Depending on the TSR and Adjusted EBITDA at the end of the performance period, anywhere from 0% to 200% of the target grant may vest. Expense is recognized on a straight-line basis over the performance period beginning on the date of grant. Probability is assessed quarterly on the performance conditions and compensation expense is adjusted accordingly. Actual forfeitures are recognized as they occur.
-F26-
			
		
			
		
Activity in the Company’s stock-based compensation plan for the PSUs was as follows:
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﻿
At December 31, 2017, there was a total of $0.9 million of total unrecognized compensation expense related to the PSUs. The cost is expected to be recognized over a weighted-average period of 2.0 years.
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The weighted-average fair value of the PSUs granted is estimated on the date of grant using the Monte Carlo model with the following assumptions:
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﻿
Stock Options
Activity related to options in the Company’s stock-based compensation plans for employee stock options was as follows:
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﻿
As of December 31, 2017, there were 72,950 options outstanding to independent directors of the Company with a weighted-average exercise price of $5.09. At December 31, 2017, there was no unrecognized compensation expense.
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The following table summarizes information about employee stock options outstanding and exercisable at December 31, 2017:
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﻿
The aggregate intrinsic value represents the difference between the Company’s closing stock price of $9.13 per share as of December 31, 2017 and the exercise price multiplied by the number of options outstanding or exercisable as of that date.
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-F27-
			
		
			
		
Activity in the Company’s stock-based compensation plan for nonvested employee stock options was as follows:
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﻿
In addition, 18,750 options granted to the Company’s independent directors vested during the year ended December 31, 2017. The total fair value of options vested was $0.9 million, $1.1 million and $0.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
﻿
The following table includes additional information related to cash exercises of stock options:
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﻿
The intrinsic value of options exercised through net share settlement was $0.1 million for the year ended December 31, 2017. The tax benefit from option exercises was less than $0.1 million for the year ended December 31, 2017.
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Stock-based compensation expense was recognized in general and administrative expenses on the Company’s consolidated statement of earnings as follows:
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-F28-
			
		
			
		
11. INCOME TAXES
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The Company’s provision for income taxes is summarized as follows:
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The Company’s effective income tax rate differs from the statutory federal income tax rate as follows:
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﻿
﻿
The Company’s current year effective income tax rate was impacted by a decrease in pre-tax income in Canada, Mauritius and Poland. The comparison of pre-tax income of $12.5 million for the year ended December 31, 2017, compared to pre-tax income of $15.6 million for the year ended December 31, 2016 should be considered when comparing tax rates year over year. The overall effective tax rate of 36.6% was significantly driven by the full release of the U.S. valuation allowance in 2017 and the Tax Act. A majority of the earnings recognized by the Company during the year ended December 31, 2017 were from the Company’s properties in Canada, which accounted for 47.6% of the total tax expense recorded.
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The Tax Act, which was enacted on December 22, 2017, makes significant changes to the Internal Revenue Code effective for 2018, although certain provisions affected the Company’s 2017 financial results. The changes impacting 2017 results include, but are not limited to, the write-down of net deferred tax assets resulting from the reduction in the U.S. federal corporate income tax rate from 35% to 21% and imposing a one-time deemed transition tax on certain unremitted earnings of foreign subsidiaries. Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period that may not extend beyond one year from the Tax Act enactment date to complete the accounting for the impact of the Tax Act. SAB 118 allows the Company to provide provisional estimates of the impact of the Tax Act in its financial statements for the year ended December 31, 2017. The Company has not completed its analysis of the tax impact resulting from the enactment of the Tax Act and the provisional amounts will be refined as needed during the measurement period allowed by SAB 118. While the Company believes that it has made reasonable estimates of the impact of the U.S. corporate income tax rate reduction and the one-time deemed transition tax on unremitted earnings of foreign subsidiaries, these estimates could change as the Company continues to analyze IRS guidance related to the Tax Act as it is released. Further changes could result as the Company refines its calculations surrounding the remeasurement of its deferred tax balances, as well as its calculations of earnings and profits as used in the computation of the transition tax.
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-F29-
			
		
			
		
Provisional amounts
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·
Deferred tax assets and liabilities: The Company remeasured deferred tax assets and liabilities using the rates at which they are expected to reverse in the future, which would be a blended rate of 24.66%, comprised of a 21% federal rate and a 3.66% state income tax rate net of federal benefit. The provisional amounts recorded for the remeasurement of the Company's deferred tax assets and liabilities was an income tax expense of $0.3 million. However, this remeasurement is based on estimates as of the enactment date of the Tax Act and the Company’s current analysis of the numerous complex tax law changes in the Tax Act. As the Company finalizes its analysis of the tax law changes in the Tax Act, including the impact on its current year tax return filing positions, the Company will update provisional amounts for this remeasurement. Additionally, due to the size and nature of the one-time transition tax, any change in the one-time transition tax provisional estimate could directly impact the remeasurement of deferred tax assets and liabilities.
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·
U.S. taxation on foreign earnings: A key component of the Tax Act includes a one-time transition tax applied to foreign earnings that were not previously subject to U.S. tax. This one-time transition tax is based on total post-1986 foreign earnings and profits that were previously deferred from U.S. income taxes. The Company recorded a provisional amount of $5.1 million for the one-time transition tax liability based on its estimates of post-1986 foreign earnings and profits. Previously, the Company had not recorded a deferred tax liability related to these post-1986 foreign earnings because management did not expect to repatriate these earnings and subject them to U.S. taxation due to the nature of the Company’s foreign operations. Because the Tax Act does not address certain aspects of the calculation of the transition tax, leaving them open to interpretation, the U.S. Treasury Department is expected to issue regulations to provide clarification on calculating the transition tax. Additionally, the Company continues to gather post-1986 foreign earnings and profits support as well as substantiation for historical tax pool data, which will impact the provisional amount. The Company expects to update its provisional amount following the issuance of regulations on the Tax Act by the U.S. Treasury Department and additional data gathering efforts.
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The Tax Act creates a new requirement that certain income, such as global intangible low-taxed income (“GILTI”), earned by a controlled foreign corporation (“CFC”) must be included currently in the gross income of the CFC’s U.S. shareholder, effective in 2018. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends not only on its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements for the period ended December 31, 2017, and the Company has not made a policy choice regarding whether to record deferred taxes on GILTI. The Company will continue to analyze the effects of the Tax Act on its financial statements. Additional impacts from the enactment of the Tax Act will be recorded as they are identified during the measurement period as allowed in SAB 118.
﻿
The Company assesses the continuing need for a valuation allowance that results from uncertainty regarding its ability to realize the benefits of the Company’s deferred tax assets. During 2017, the Company released its $5.7 million U.S. valuation allowance on its U.S. deferred tax assets, resulting in a tax benefit. The Company analyzed the likelihood of future realization of the U.S. deferred tax assets, including recent cumulative earnings by taxing jurisdiction, expectations of future taxable income or loss, the amount of net operating loss carryforwards not subject to limitations, the number of periods it will take to realize the net operating loss carryforwards and other relevant factors. Based on this analysis, the Company concluded that operations in the U.S. had attained a sustained level of profitability sufficient to reduce its valuation allowance.
﻿
The Company records deferred tax assets and liabilities based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted statutory tax rate in effect for the year these differences are expected to be taxable or reversed. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. The recorded deferred tax assets are reviewed for impairment on a quarterly basis by reviewing the Company’s internal estimates for future taxable income.
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-F30-
			
		
			
		
The Company’s deferred income taxes at December 31, 2017 and 2016 are summarized as follows:
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-F31-
			
		
			
		
The Company has analyzed filing positions in all of the U.S. federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its U.S. federal tax return, its state tax return in Colorado and its foreign tax returns in Canada and Poland as “major” tax jurisdictions, as defined by the Code.
﻿
The Canadian Taxing Authority is currently conducting an income tax audit of CRA. The Company does not maintain a valuation allowance related to CRA and, as a result, any adjustment made by the taxing authority could have an impact on the effective tax rate.
﻿
The Company’s income tax returns for the following periods are subject to examination:
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﻿
The Company had income tax net operating loss carryforwards related to its domestic and international operations of approximately $14.9 million as of December 31, 2017. The Company had recorded $3.5 million of deferred tax assets related to the net operating loss carryforwards, excluding the impact of the adjustment of unrecognized tax benefits. The deferred tax assets expire as follows:
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﻿
Certain net operating loss carryforwards in the Company’s filed income tax returns include unrecognized tax benefits. The deferred tax assets recognized for those net operating loss carryforwards are presented net of these unrecognized tax benefits.
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As of December 31, 2017, the Company’s undistributed foreign earnings have become subject to a one-time transition tax resulting from the Tax Act. The Company continues to consider its foreign earnings indefinitely reinvested. Based on the Company’s capital, debt and liquidity position, there is no expected need for cash repatriation from foreign subsidiaries, and all cash held in foreign jurisdictions is considered permanently reinvested. These foreign earnings could become subject to additional taxes if they are repatriated to the United States.
﻿
As of December 31, 2017, the Company’s unrecognized tax benefit totaled $0.8 million. A portion of this adjustment has been recorded as a component of taxes payable, and a portion of this adjustment has been recorded as a reduction to deferred tax assets in the accompanying consolidated balance sheet as of December 31, 2017. The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company’s total amount of unrecognized tax benefit is summarized in the table below:
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The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued penalties and interest of less than $0.1 million during 2017 and 2016. The $0.8 million balance of unrecognized tax benefits, if recognized, would affect the effective tax rate.
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-F32-
			
		
			
		
The Company’s U.S. and foreign pre-tax income is summarized in the table below:
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12. FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS REPORTING
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Fair Value Measurements
The Company follows fair value measurement authoritative accounting guidance for all assets and liabilities measured at fair value. That authoritative accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:
﻿
·
Level 1 - quoted prices in active markets for identical assets or liabilities
·
Level 2 - quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
·
Level 3 - significant inputs to the valuation model are unobservable
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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
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Recurring Fair Value Measurements
The estimated fair value and basis of valuation of the Company’s financial liabilities that are measured at fair value on a recurring basis were as follows:
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﻿
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The Company determines the fair value of its interest rate swap agreements based on the notional amount of the swaps and the forward rate CAD-CDOR curve provided by Bloomberg and zero-coupon Canadian spot rates as of the valuation date. The Company classifies these instruments as Level 2 because the inputs into the valuation model can be corroborated utilizing observable benchmark market rates at commonly quoted intervals.
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Nonrecurring Fair Value Measurements
The Company applies the provisions of the fair value measurement standard to its non-recurring, non-financial assets and liabilities measured at fair value. During 2017, the Company transferred the LIM Center casino license at Casinos Poland to the Hilton Warsaw Hotel and, as a result, charged $0.1 million related to LIM Center leasehold improvements to operating costs and expenses during the year ended December 31, 2017. During 2016, the Company determined that the fair value of the Katowice leasehold improvements was zero based on the expiration of the license for that casino. As a result, $0.4 million was charged to operating costs and expenses during the year ended December 31, 2016.
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-F33-
			
		
			
		
Long-Term Debt - The carrying value of the Company’s BMO Credit Agreement approximates fair value based on the variable interest paid on the obligation. The carrying value of the Company’s SCCL credit agreement approximates fair value based on the completion of the financing arrangement in September 2017 and the variable interest paid on the obligation. The estimated fair values of the outstanding balances under the BMO Credit Agreement and SCCL credit agreement are designated as Level 2 measurements in the fair value hierarchy based on quoted prices in active markets for similar liabilities. The fair values of the Company’s capital lease obligations approximate fair value based on the similar terms and conditions currently available to the Company in the marketplace for similar financings. The fair value of CDR’s land lease was CAD 28.6 million ($22.8 million based on the exchange rate in effect on December 31, 2017) as of December 31, 2017. The estimated fair values of the outstanding balances related to the Company’s capital lease obligations and CDR’s land lease are designated as Level 3 measurements based on the unobservable nature of the inputs used to evaluate such liabilities.
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Other Estimated Fair Value Measurements - The estimated fair values of other assets and liabilities, such as cash and cash equivalents, accounts receivable, inventory, accrued payroll and accounts payable, have been determined to approximate carrying value based on the short-term nature of those financial instruments. As of December 31, 2017 and 2016, the Company had no cash equivalents.
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Derivative Instruments Reporting
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In April 2016, the Company began using interest rate swaps to mitigate the risk of variable interest rates under its BMO Credit Agreement. The interest rate swaps were not designated as accounting hedges. These interest rate swaps reset monthly, and the difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. See Note 7 for details of the Company’s three interest rate swap agreements.
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Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreements are recognized in interest expense on the Company’s consolidated statement of earnings. The location and effects of derivative instruments in the consolidated statements of earnings were as follows:
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The location and fair value amounts of the Company’s derivative instruments in the consolidated balance sheets were as follows:
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13. SEGMENT AND GEOGRAPHIC INFORMATION
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The Company reports its financial performance in three reportable segments based on the geographical locations in which its casinos operate: the United States, Canada and Poland. Operating segments are aggregated within reportable segments based on their similar economic characteristics, types of customers, types of services and products provided, the regulatory environments in which they operate, and their management and reporting structure. The Company added Century Mile Racetrack and Casino and Saw Close Casino Ltd. to its operating segments based on the characteristics that both properties will have once operational. The Company’s operations related to concession, management and consulting agreements and certain other corporate and management operations have not been identified as separate reportable segments; therefore, these operations are included in Corporate and Other in the following segment disclosures to reconcile to consolidated results. All intercompany transactions are eliminated in consolidation.
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The table below provides information about the aggregation of the Company’s operating segments into reportable segments:
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The Company’s chief operating decision maker is a management function comprised of two individuals. These two individuals are the Company’s Co-Chief Executive Officers. The Company’s chief operating decision makers and management utilize Adjusted EBITDA as a primary profit measure for its reportable segments. Adjusted EBITDA is a non-GAAP measure defined as net earnings (loss) before interest expense (income), net, income taxes (benefit), depreciation, amortization, non-controlling interest (earnings) losses and transactions, pre-opening expenses, acquisition costs, non-cash stock-based compensation charges, asset impairment costs, (gain) loss on disposition of fixed assets, discontinued operations, (gain) loss on foreign currency transactions and other, gain on business combination and certain other one-time transactions. Intercompany transactions consisting primarily of management and royalty fees and interest, along with their related tax effects, are excluded from the presentation of net earnings (loss) and Adjusted EBITDA reported for each segment. Non-cash stock-based compensation expense is presented under Corporate and Other in the tables below as the expense is not allocated to reportable segments when reviewed by the Company’s chief operating decision makers.
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The following tables provide summary information regarding the Company’s segments for the years ended December 31, 2017, 2016 and 2015:
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(1)
Net operating revenue for Corporate and Other primarily relates to the Company’s cruise ship operations.
(2)
Capital expenditures in 2017 included purchases of property and equipment of $4.6 million related to Century Mile in the Canada segment and $1.5 million related to Saw Close Casino in the Corporate and Other segment.
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(1)
Net operating revenue for Corporate and Other primarily relates to the Company’s cruise ship operations.
(2)
Capital expenditures for Canada in 2016 included purchases of property and equipment of $9.5 million related to the Apex Acquisition (Note 3).
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(1)
Net operating revenue for Corporate and Other primarily relates to the Company’s cruise ship operations.
(2)
Other one-time income for Corporate and Other relates to $3.4 million for the termination agreement with Norwegian.
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14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
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Litigation - From time to time, the Company is subject to various legal proceedings arising from normal business operations. The Company does not expect the outcome of such proceedings, either individually or in the aggregate, to have a material effect on its financial position, cash flows or results of operations, except for the proceedings involving the Polish Internal Revenue Service (“Polish IRS”) described below.
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Casinos Poland
Since 2011, the Polish IRS has conducted a series of tax audits of CPL to review the calculation and payment of personal income tax by CPL employees for periods ranging from 2007 to 2013. The Polish IRS has asserted that CPL should calculate, collect and remit to the Polish IRS personal income tax on tips received by CPL employees from casino customers and has prevailed in several court challenges by CPL. Through December 31, 2017, CPL has paid PLN 9.4 million ($2.9 million) to the Polish IRS related to these audits. As a result of one court decision currently on appeal, which is scheduled to be heard in April 2018, CPL’s tax records for 2009 remain open for audit.
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The Polish IRS did not conduct a tax audit for the period from January 1, 2010 to November 30, 2010, and the statute of limitations has passed for an audit to be conducted. As a result, the Company adjusted its contingent liability related to the CPL taxes to remove the estimated taxes accrued for the 2010 tax year. The adjustment reduced the contingent liability by PLN 3.4 million ($0.9 million) in December 2015 and was recorded as gain on foreign currency transactions, cost recovery income and other on the Company’s consolidated statement of earnings for the year ended December 31, 2015.
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In June 2017, the Polish IRS began conducting a tax audit of 2012 and 2013. The audit was completed in August 2017. CPL estimates that it will be required to pay PLN 4.8 million ($1.4 million based on the exchange rate in effect on December 31, 2017) related to this audit. The Polish IRS has not issued an official decision on this audit. CPL plans to file an appeal if the tax decision would result in a payment to the Polish IRS.
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The balance of the estimated potential contingent liability on the Company’s consolidated balance sheet for all open periods as of December 31, 2017 is PLN 6.3 million ($1.8 million based on the exchange rate in effect on December 31, 2017). The Company has evaluated the contingent liability recorded on its consolidated balance sheet as of December 31, 2017 and has concluded that it is properly accrued in light of the Company’s estimated obligation related to personal income tax on tips as of December 31, 2017. Additional court decisions and other proceedings by the Polish IRS may expose the Company to additional employment tax obligations in the future. Any additional tax obligations are not probable or estimable and the Company has not recorded any additional obligation related to such taxes as of December 31, 2017. Additional tax obligations assessed in the future as a result of these matters, if any, may be material to the Company’s financial position, results of operations and cash flows.
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In October 2016, the Company filed a motion for arbitration in Poland against LOT Polish Airlines, which previously owned a 33.3% interest in CPL that it sold to the Company in 2013. The Company is seeking to collect amounts owed to the Company by LOT Polish Airlines in connection with the payments made to the Polish IRS for the tax periods December 1, 2007 to December 31, 2008 and January 1, 2011 to January 31, 2011 pursuant to an agreement with LOT Polish Airlines under which the Company acquired the additional 33.3% interest in CPL. In June 2017, the arbitrator awarded the Company PLN 1.2 million ($0.3 million based on the exchange rate in effect on December 31, 2017) related to its claim for the periods indicated. LOT Polish Airlines is appealing the decision.
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Distribution to Non-Controlling Interest - The Company purchased a portion of its ownership interest in CDR in November 2013. Prior to the Company’s acquisition of its ownership interest in CDR, the non-controlling shareholders built infrastructure in the land surrounding CDR. When funds for the use of this infrastructure are received by CDR from unrelated parties, they are distributed to CDR’s non-controlling shareholders through non-controlling interest. The Company distributed $0.6 million and $1.6 million related to the infrastructure to CDR’s non-controlling shareholders during the years ended December 31, 2017 and 2016, respectively.
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Employee Benefit Plans - The Company provides its employees in Colorado with a 401(k) Savings and Retirement Plan (the “401K Plan”). The 401K Plan allows eligible employees to make tax-deferred cash contributions that are matched on a discretionary basis by the Company up to a specified level. Participants become fully vested in employer contributions over a six-year period. For the year ended December 31, 2017, the Company contributed $0.1 million to the 401K Plan. For each of the years ended December 31, 2016 and 2015, the Company contributed less than $0.1 million to the 401K Plan.
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The Company provides its employees in Canada with two registered retirement plans: the Registered Savings Plan (the “RSP Plan”) and Registered Pension Plan (the “RPP Plan”, and collectively the “RSP and RPP Plans”). The RSP and RPP Plans allow eligible employees to make tax-deferred cash contributions that are matched on a discretionary basis by the Company up to a specified level. Participants in the RPP Plan become fully vested in employer contributions over a two-year period, and participants in the RSP Plan become fully vested in employer contributions immediately. The Company contributed $0.2 million, $0.2 million and $0.1 million to the RSP and RPP Plans during each of the years ended December 31, 2017, 2016 and 2015, respectively.
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Operating Lease Commitments- The Company has entered into certain noncancelable operating leases for real property and equipment. Rental expenses, including month-to-month rentals, were $4.6 million, $3.9 million, and $3.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
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Following is a summary of noncancelable operating lease commitments over the next five years:
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15. TRANSACTIONS WITH RELATED PARTIES
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The Company has entered into separate management agreements with Flyfish Management & Consulting AG (“Flyfish”), a management company controlled by Co CEO Erwin Haitzmann, and with Focus Lifestyle and Entertainment AG (“Focus”), a management company controlled by Co CEO Peter Hoetzinger’s family trust/foundation, to secure the services of each officer and related management company. Both Co CEOs are responsible for planning, directing, and controlling the activities of the Company. Included in the consolidated statements of earnings (loss) are charges from both Flyfish and Focus for a total of $0.7 million for each of the years ended December 31, 2017, 2016 and 2015.
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16. UNAUDITED SUMMARIZED QUARTERLY DATA
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Summarized quarterly financial data for 2017 and 2016 are as follows:
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(1)
The Company released a $5.7 million U.S. valuation allowance on its U.S. deferred tax assets, resulting in a tax benefit and increasing net earnings and net earnings attributable to Century Casinos, Inc. shareholders by the same amount.
(2)
The Company recognized tax expense of $5.4 million related to the Tax Act, increasing net loss and net loss attributable to Century Casinos, Inc. shareholders by the same amount.
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(1)
In October 2016, operations began at CSA. In addition, the Company released its $2.2 million Canadian valuation allowance on CDR’s deferred tax assets, resulting in a tax benefit and increasing net earnings and net earnings attributable to Century Casinos, Inc. shareholders.
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17. SUBSEQUENT EVENTS
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The Company evaluated subsequent events and accounting and disclosure requirements related to including material subsequent events in its consolidated financial statements and related notes. The Company did not identify any material subsequent events impacting its financial statements in this report.
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