UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



☑  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2016



OR



 ☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ____________ to ___________



Commission file number          0-22900



CENTURY CASINOS, INC.

(Exact name of registrant as specified in its charter) 





455 E. Pikes Peak Ave., Suite 210, Colorado Springs, Colorado 80903

(Address of principal executive offices, including zip code)



(719) 527-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑  No ☐    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐  No ☑ 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

24,434,571 shares of common stock, $0.01 par value per share, were outstanding as of July 27, 2016.



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INDEX







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PART I – FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



See notes to condensed consolidated financial statements.





Continued -

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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)







See notes to condensed consolidated financial statements.

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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)







See notes to condensed consolidated financial statements.

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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)







See notes to condensed consolidated financial statements.











 

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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)









See notes to condensed consolidated financial statements.

 

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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to condensed consolidated financial statements.





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CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)



See notes to condensed consolidated financial statements.







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CENTURY CASINOS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION



Century Casinos, Inc. (“CCI” or the “Company”) is an international casino entertainment company. As of June 30, 2016, the Company owned casino operations in North America; held a majority ownership interest in nine 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; managed a casino in Aruba and provided gaming services in Argentina.



The Company currently owns, operates and manages the following casinos through wholly-owned subsidiaries in North America:





The Company currently has a controlling financial interest through its subsidiary Century Casinos Europe GmbH (“CCE”) in the following majority-owned subsidiaries:





In July 2016, the casino license at the Katowice casino expired. The Company has applied for the license and expects a decision in September 2016. Until the license is awarded, the casino operations at the Katowice casino have been moved to the Sosnowiec casino. See Note 5 for additional information related to Casinos Poland’s casino licenses.





On March 20, 2015, CCE converted CAD 11 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 interest.

 



The Company has the following concession, management and consulting service agreements:





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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 on its condensed consolidated statement of earnings (loss) under operating revenue net of $0.6 million related to assets that were sold to Norwegian as part of the Termination Agreement.



The Company also entered into a two-year consulting agreement, which became effective on June 1, 2015, under which the Company is providing limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million, which is payable $250,000 per quarter.







The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial reporting, the rules and regulations of the Securities and Exchange Commission which apply to interim financial statements and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated.



In the opinion of management, all adjustments considered necessary for the fair presentation of financial position, results of operations and cash flows of the Company have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the period ended June 30, 2016 are not necessarily indicative of the operating results for the full year.



Presentation of Foreign Currency Amounts



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”) and Polish zloty (“PLN”).  Gains and losses resulting from changes in foreign currency exchange rates related to these transactions are included in income from operations 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:







The average exchange rates to the U.S. dollar used to translate balances during each reported period are as follows:







Correction of Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015

The Company identified errors within its statements of cash flows for the six months ended June 30, 2015. The Company inadvertently failed to remove the effects of a portion of unpaid purchases of property and equipment from the change in accounts payable and purchases of property and equipment in the preparation of the statements of cash flows. This error resulted in the understatement of net cash provided by operating activities of $1.2 million and a corresponding understatement of net cash used in investing activities of $1.2 million, for the six months ended June 30, 2015. The prior period amounts within the condensed consolidated statements of cash flows for the six months ended June 30, 2015 have been revised to reflect the correct balances.



















2. 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 GAAP and International Financial Reporting Standards. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; provided, however, that in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of ASU 2014-09 for one year. ASU 2015-14 is effective for fiscal years and interim periods beginning after December 15, 2017. The standards permit 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. In addition, the FASB has issued four related ASUs on principal versus agent guidance (ASU 2016-08), identifying performance obligations and the licensing implementation guidance (ASU 2016-10),  a revision of certain SEC Staff Observer comments (ASU 2016-11) and implementation guidance (ASU 2016-12).  The Company is currently evaluating the impact of adopting these ASUs, including the transition method to be applied; however, the standards are not expected to have a material impact on its consolidated financial statements.



In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). The objective of ASU 2014-15 is to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and annual and interim periods thereafter. The Company is currently evaluating the impact of adopting ASU 2014-15; however, the standard is not expected to have a material impact on its consolidated financial statements.



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In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The objective of ASU 2015-11 is to simplify the current guidance under which an entity must measure inventory at the lower of cost or market by requiring entities to measure most inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2015-11 is permitted.  The Company is currently evaluating the impact of adopting ASU 2015-11; however, the standard is not expected to have a material impact on its consolidated financial statements.



In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). The objective of ASU 2015-16 is to simplify the accounting for measurement-period adjustments for acquisitions by eliminating the requirement to retrospectively adjust provisional amounts recognized in a business combination during the measurement period.  ASU 2015-16 requires adjustments to the provisional amounts that are identified during the measurement period to be recognized when they are identified. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of ASU 2015-16 is permitted. ASU 2015-16 could have a material impact on the Company’s consolidated financial statements  if we close the Apex Acquisition (see Note 3).



In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The objective of ASU 2015-17 is to simplify the presentation of deferred taxes in a classified statement of financial position. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2015-17 is permitted. The Company is currently evaluating the impact of adopting ASU 2015-17; however, the standard is not expected to have a material impact on its consolidated financial statements.



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 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 Company is currently evaluating the impact of adopting ASU 2016-02. Adoption of this standard may have a material impact on the Company’s consolidated financial statements.



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 withholdings 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. Early adoption of ASU 2016-09 is permitted. The Company is currently evaluating the impact of adopting ASU 2016-09.



3.APEX ACQUISITION



In June 2016, the Company’s subsidiary, CCE, entered into an agreement to acquire 100% of the issued and outstanding shares and related land of Game Plan Developments Ltd., Casino St. Albert Inc., Action ATM Inc. and MVP Sports Bar Ltd., collectively operating the Apex Casino (“Apex”) in St. Albert, Edmonton, Canada (the “Apex Acquisition”). Apex is a 34,500 square foot casino facility located on approximately seven acres of land. The casino facility includes 382 slot machines, 11 live table games, a restaurant, a bar, a lounge and a banquet facility that can accommodate up to 175 guests.



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The Apex Acquisition, which is expected to close in the fourth quarter of 2016, is subject to, among other things, the Company’s obtaining financing for the acquisition and customary closing conditions, including the receipt of necessary regulatory and governmental approvals, as well as the completion of due diligence by the Company. The total consideration for the Apex Acquisition is CAD 29.9 million subject to adjustment for the closing date working capital of Apex. Payments for the Apex Acquisition include the following:





4.COST INVESTMENT



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 has appointed one director to MCE’s board of directors and has the right to appoint additional directors to MCE’s board of directors based on its ownership percentage of MCE. In addition, CCE has a three-year option through October 2017 to purchase up to 50% of the shares of MCE.   The option can be exercised by CCE in tranches of shares, with each tranche representing not less than ten percent of the total outstanding shares of MCE. The exercise price of the shares is based upon the value of MCE at the time the option is exercised, which value is determined by a multiple of MCE’s EBITDA less certain debt. There are no conditions that limit CCE’s ability to exercise this option. The Company accounts for the $1.0 million investment in MCE using the cost method.







5.GOODWILL AND INTANGIBLE ASSETS



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 our reporting units to the reporting units’ carrying values. The reporting units with goodwill balances as of June 30, 2016 include the Edmonton casino property and the CDR and CPL operations. 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. 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. There have been no indications of impairment at the Company’s Edmonton property, CDR or CPL since the Company’s last annual analysis that would necessitate additional impairment testing by the Company.

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Changes in the carrying amount of goodwill related to the Company’s Edmonton property, CDR and CPL are as follows:





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 condensed consolidated balance sheets. Changes in the carrying amount of the trademarks are as follows:



The Company has determined both trademarks have indefinite useful lives and therefore the Company does not amortize the trademarks. Rather, the Company tests its trademarks for impairment annually 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 Century Casinos and Casinos Poland trademarks have been recorded.

Casino Licenses

Casino licenses consist of the following:





Casinos Poland

As of June 30, 2016, Casinos Poland had nine casino licenses, each with an original term of six years, which are 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 June 30, 2016, estimated amortization expense for the CPL casino licenses over the next five years was as follows:







Such estimates do not reflect the impact of future foreign exchange rate changes or the extension of the current licenses. The weighted average period before the current casino licenses expire is 1.4 years.  In Poland, gaming licenses are not renewed. Once a gaming license has expired, any gaming company can apply for the license. On July 7, 2016, the casino license at the Katowice casino expired. The Company has applied for the license and expects a decision in September 2016.  Until the license is awarded, the casino operations at the Katowice casino have been moved to the Sosnowiec casino. If the license is not granted, the Company will continue operations at the Sosnowiec casino until its license expires in May 2017. The casino license at the Lim Center casino in Warsaw will expire in September 2016. The Company has applied for the license and expects a decision  in September 2016. 



Century Downs Racetrack and Casino

CDR currently has two licenses, one from the AGLC and one from HRA. The licenses are indefinite-lived intangible assets and therefore are not amortized.  No impairment charges related to the CDR licenses have been recorded. Changes in the carrying amount of the CDR licenses are as follows:















6.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 provided promotional allowances is included in casino expenses. The costs of providing promotional allowances were as follows:





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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 condensed consolidated balance sheets. The expiration of unused points results in a reduction of the liability. As of June 30, 2016 and December 31, 2015, the outstanding balance of this liability was $0.7 million.



 

7. LONG-TERM DEBT



Long-term debt and the weighted average interest rates as of June 30, 2016 and December 31, 2015 consisted of the following:







Bank of Montreal Credit Agreement

In May 2012, the Company, through its Canadian subsidiaries, entered into the CAD 28.0 million credit agreement with BMO. On August 15, 2014, the Company, through its Canadian subsidiaries, entered into an amended and restated BMO Credit Agreement that increased the Company’s borrowing capacity to CAD 39.1 million with an interest rate of BMO’s floating rate plus a margin on the debt that is not included in the interest rate swap agreements. As of June 30, 2016, the Company had borrowed CAD 33.9 million, of which the outstanding balance was CAD 26.6 million ($20.4 million based on the exchange rate in effect on June 30, 2016) and the Company had approximately CAD 5.2 million ($4.0 million based on the exchange rate in effect on June 30, 2016) available under the BMO Credit Agreement. The outstanding borrowings cannot be re-borrowed once they are repaid. The Company has used borrowings under the BMO Credit Agreement primarily to repay the Company’s mortgage loan related to the Edmonton property, pay for the additional 33.3% investment in CPL and pay for development costs related to CDR. The Company can also use the proceeds to pursue the development or acquisition of new gaming opportunities and for general corporate purposes. 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 rates in effect on June 30, 2016 and 2015) were recorded as general and administrative expense in the condensed consolidated statements of earnings for each of the three and six months ended June 30, 2016 and June 30, 2015.  The BMO Credit Agreement has a term of five years through August 2019 and is guaranteed by the Company. The shares of the Company’s subsidiaries in Edmonton and Calgary 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 covenants restricting their incurrence of additional debt, a debt to EBITDA ratio, a fixed charge coverage ratio, a requirement to maintain a CAD 28.0 million equity balance and a capital expenditure limit of CAD 2.0 million per year. The Company was in compliance with all covenants of the BMO Credit Agreement as of June 30, 2016.  



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In April 2015, the Company entered into two interest rate swap agreements to partially hedge the risk of future increases in the variable rate debt under the Company’s BMO Credit Agreement. The Company’s two interest rate swap agreements are set at a Canadian Dollar Offered Rate (“CDOR”) of 3.92% and 3.89%, respectively. The notional amount for each of the interest rate swap agreements was CAD 9.7 million ($7.5 million based on the exchange rate in effect on June 30, 2016).  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 condensed consolidated statements of earnings.



Deferred financing costs consist of the Company’s costs related to the financing of the BMO Credit Agreement. Amortization expenses relating to deferred financing charges were less than $0.1 million for each of the three months ended June 30, 2016 and 2015. These costs are included in interest expense in the condensed consolidated statements of earnings.



Edmonton

As of June 30, 2016, Edmonton had a capital lease agreement totaling CAD 0.4 million ($0.3 million based on the exchange rate in effect on June 30, 2016) for surveillance equipment.  



Casinos Poland

As of June 30, 2016, CPL had debt totaling PLN 3.5 million ($0.9 million based on the exchange rate in effect on June 30, 2016) under two credit agreements and one capital lease agreement. CPL also had a credit facility that had no outstanding balance as of June 30, 2016.



The first credit agreement is with mBank (formerly known as BRE Bank). Under this credit agreement, CPL entered into a three year term loan in November 2013 at an interest rate of Warsaw Interbank Offered Rate (“WIBOR”) plus 1.75%. Proceeds from the loan were used to repay the balance of the Bank Pocztowy loan related to the CPL properties, invest in slot equipment and relocate the Company’s Poznan, Poland casino. The mBank credit agreement is secured by a building owned by CPL in Warsaw, Poland. As of June 30, 2016, the amount outstanding on the term loan was PLN 2.0 million ($0.5 million based on the exchange rate in effect on June 30, 2016). CPL has no further borrowing availability under the loan, and the loan matures in November 2016. The mBank credit agreement contains a number of financial covenants applicable to CPL, including covenants that restrict the incurrence of additional debt and require CPL to maintain debt ratios and current liquidity ratios of 0.6 or higher. On March 26, 2015, CPL and mBank amended the credit agreement to lower the current liquidity ratio to 0.5. CPL was in compliance with all covenants of this mBank agreement as of June 30, 2016.  



The second credit agreement is also with mBank. Under this credit agreement, CPL entered into a three year term loan on September 15, 2014 at an interest rate of WIBOR plus 1.70%. Proceeds from the loan were used to repay balances outstanding under a prior credit agreement that matured in September 2014 and to finance current operations. The mBank credit agreement is secured by a building owned by CPL in Warsaw, Poland. As of June 30, 2016, the amount outstanding on the term loan was PLN 1.5 million ($0.4 million based on the exchange rate in effect on June 30, 2016). CPL has no further borrowing availability under the loan, and the loan matures in September 2017. The mBank credit agreement contains a number of financial covenants applicable to CPL, including covenants that restrict the incurrence of additional debt and require CPL to maintain debt ratios and current liquidity ratios of 0.6 or higher. On March 26, 2015, CPL and mBank amended the credit agreement to lower the current liquidity ratio to 0.5. CPL was in compliance with all covenants of this mBank agreement as of June 30, 2016.



The credit facility is 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 terminates on February 11, 2018.  The BPH Bank line of credit is secured by a building owned by CPL in Warsaw, Poland. As of June 30, 2016, there was no outstanding amount on the credit facility, and CPL had approximately PLN 11.0 million ($2.8 million based on the exchange rate in effect on June 30, 2016) available under the agreement. The BPH Bank facility contains a number of financial covenants applicable to CPL, including covenants that restrict the incurrence of additional debt and debt to EBITDA ratios. CPL was in compliance with all covenants of the BPH Bank line of credit as of June 30, 2016.



CPL’s remaining debt is a capital lease agreement for a vehicle. As of June 30, 2016, the amount outstanding was less than PLN 0.1 million (less than $0.1 million based on the exchange rate in effect on June 30, 2016).



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In addition, 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 ($0.9 million based on the exchange rate in effect on June 30, 2016). The mBank guarantees are secured by land owned by CPL in Kolbaskowo, Poland 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 $0.2 million in deposits for this purpose as of June 30, 2016. These deposits are included in deposits and other on the Company’s condensed consolidated balance sheets.





Century Downs Racetrack and Casino

As of June 30, 2016, CDR had debt totaling CAD 20.3 million ($15.6 million based on the exchange rate in effect on June 30, 2016). The debt includes CDR’s land lease and five capital lease agreements.



CDR’s land lease is a financing obligation of the Company. Prior to the Company’s acquisition of its ownership interest in CDR, CDR sold a portion of the land on which the REC project 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 date is 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 June 30, 2016, the outstanding balance on the financing obligation was CAD 19.5 million ($15.0 million based on the exchange rate in effect on June 30, 2016) and the implicit interest rate was 10.0%.  



CDR’s remaining debt consists of five capital lease agreements for equipment used in the operation of CDR. As of June 30, 2016, the amount outstanding was CAD 0.8 million ($0.6 million based on the exchange rate in effect on June 30, 2016).



As of June 30, 2016, scheduled maturities related to long-term debt were as follows:







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8.COMMITMENTS AND CONTINGENCIES



Litigation

Casinos Poland

In March 2011, the Polish Internal Revenue Service (“Polish IRS”) began conducting a series of tax audits of CPL to review the calculation and payment of personal income tax by CPL employees. Based on the March 2011 audit, the Polish IRS concluded that CPL should calculate, collect and remit to the Polish IRS personal income tax on tips received by CPL employees from casino customers.  The Polish IRS has conducted tax audits for the periods from December 1, 2007 to December 31, 2008, January 1, 2009 to December 31, 2009 and January 1, 2011 to January 31, 2011. CPL has paid PLN 6.4 million ($2.1 million) related to these audits.



Following multiple appeals by CPL, the Supreme Administrative Court issued an oral decision in March 2016, which was confirmed in a written decision issued in May 2016, finding in favor of the Polish IRS for the tax periods of December 1, 2007 to December 31, 2008 and January 1, 2011 to January 31, 2011. In October 2015, the Voivodship Administrative Court found in favor of CPL for the tax period from January 1, 2009 to December 31, 2009 on procedural grounds that the prior tax proceedings were not conducted by the appropriate taxing authority. However, the court also found that CPL’s tax records for 2009 remain open for audit by a different tax authority. CPL appealed this decision to the Supreme Administrative Court in December 2015 and expects a decision in 2018.



A tax audit was not conducted 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 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 and other on the Company’s consolidated statement of earnings (loss) during the fourth quarter of the year ended December 31, 2015.



The balance of the potential liability on the Company’s condensed consolidated balance sheet for all open periods as of June 30, 2016 is estimated at PLN 8.6 million ($2.2 million based on the exchange rate in effect on June 30, 2016). The Company has evaluated the contingent liability recorded on its condensed consolidated balance sheet as of June 30, 2016 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 June 30, 2016.  The decision rendered by the Supreme Administrative Court in March 2016 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 June 30, 2016.  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.  To address these issues, the Company expects changes to the payroll and withholding processes for Casinos Poland will be implemented in the third quarter of 2016. The Company anticipates payroll costs to increase by approximately PLN 5.0 million per year ($1.3 million based on the exchange rate in effect on June 30, 2016). 



Distribution to Non-Controlling Interest

Century Downs

CDR has an agreement with its non-controlling shareholders to distribute any funds received by CDR related to infrastructure built during the development of the REC project. Following CCE’s conversion of CAD 11 million that it had loaned to CDR into an additional 60% ownership interest in CDR, all funds received related to the infrastructure are distributed to CDR’s non-controlling shareholders as stated in the Credit Agreement between CCE and CDR. The Company distributed $0.5 million related to the infrastructure to CDR’s non-controlling shareholders in the second quarter of 2015 and $1.6 million in the second quarter of 2016.

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9.INCOME TAXES



Income tax expense is recorded relative to the jurisdictions that recognize book earnings. During the six months ended June 30, 2016, the Company recognized income tax expense of $1.6 million on pre-tax income of $8.1 million, representing an effective income tax rate of 19.5% compared to an income tax expense of less than $0.1 million on pre-tax income of $9.1 million, representing an effective income tax rate of 0.3% for the same period in 2015.  



The difference between the income taxes expected at the U.S. federal statutory income tax rate of 34% and the reported income tax expense are impacted by a number of items. The Company’s effective tax rate is lower because there is a lower statutory tax rate in the countries where the Company pays taxes, such as Austria, Mauritius, Canada and Poland, when compared to the United States. There is also a lower effective tax rate for the Company’s Canadian and Polish operations due to exchange rate benefits.  The Company continues to maintain a full valuation allowance on all of its U.S. deferred tax assets and on certain Canadian deferred tax assets.





10.EARNINGS PER SHARE



The calculation of basic earnings per share considers only weighted average outstanding common shares in the computation. The calculation of diluted earnings per share gives effect to all potentially dilutive stock options. 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 three and six months ended June 30, 2016 and 2015 were as follows:









The following stock options are anti-dilutive and have not been included in the weighted average shares outstanding calculation:







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11. FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS REPORTING



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:





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. 



Recurring Fair Value Measurements

The estimated fair value and basis of valuation of our financial liabilities that are measured at fair value on a recurring basis were as follows:







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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Non-Recurring 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. There were no assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2016 and December 31, 2015.



Long-Term Debt – The carrying value of the Company’s long-term debt approximates fair value because it bears interest at the lender’s variable rate for the debt related to the BMO Credit Agreement, the CPL credit agreements and CPL credit facility as of June 30, 2016 and December 31, 2015. The estimated fair values of the outstanding balances under the BMO Credit Agreement and CPL debt are designated as Level 2 measurements in the fair value hierarchy due to quoted prices in active markets for similar liabilities. 



Other Estimated Fair Value Measurements – The estimated fair value of the Company’s 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 June 30, 2016 and December 31, 2015, the Company had no cash equivalents.



Derivative Instruments Reporting

As of April 2015, the Company began using interest rate swaps to mitigate the risk of variable interest rates under its BMO Credit Agreement. As of June 30, 2016,  the Company had two interest rate swap agreements, each with a notional amount of CAD 9.7  million ($7.5 million based on the exchange rate in effect on June 30, 2016) at a fixed CDOR rate of 3.92% and 3.89%, respectively, which were not designated as accounting hedges. These interest rate swaps reset monthly and expire on August 15, 2019. 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. 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 condensed consolidated statement of earnings. The location and effects of derivative instruments on the condensed 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 condensed consolidated balance sheets were as follows:













12.SEGMENT INFORMATION



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 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’s casino properties provide gaming, hotel accommodations, dining facilities and other amenities to the Company’s customers. 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.



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 our 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-U.S. 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 items. 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.



The following tables provide information regarding the Company’s segments for the three and six months ended June 30, 2016 and 2015:









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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.



Forward-Looking Statements, Business Environment and Risk Factors



This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. In addition, Century Casinos, Inc. (together with its subsidiaries, the “Company”) may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and future expectations of the Company and other matters that do not relate strictly to historical facts and are based on certain assumptions by management at the time such statements are made.  These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015. We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.



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 and the term “PLN” refers to Polish zloty. Certain terms used in this Item 2 without definition are defined in Item 1.



Amounts presented in this Item 2 are rounded. As such, rounding differences could occur in period over period changes and percentages reported throughout this Item 2.



EXECUTIVE OVERVIEW



Overview

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.



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: Canada, United States and Poland. 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.



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The table below provides information about the aggregation of the Company’s operating segments into reportable segments:





The following operating segments are owned, operated and managed by us through wholly-owned subsidiaries:





We have controlling financial interests through our subsidiary CCE in the following operating segments:







* Operations at the Sosnowiec casino were suspended as of June 30, 2014. The casino reopened on a limited basis in February 2015. On July 7, 2016, the casino license at the Katowice casino expired. We have applied for the license and expect a decision in September 2016.  Until the license is awarded, the casino operations at the Katowice casino have been moved to the Sosnowiec casino. If the license is not granted, we will continue operations at the Sosnowiec casino until our license expires in May 2017.

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The casino license at the Lim Center casino in Warsaw will expire in September 2016. We have applied for the license and expect a decision in September 2016.







The following agreements make up the operating segment Cruise Ships & Other in the Corporate and Other reportable segment:







In June 2016, we began operating the ship-based casinos onboard the Mein Schiff 5, a new 2,500 passenger cruise ship, and the TUI Discovery, a 2,067 passenger cruise ship. Under an agreement with Diamond Cruise International Co., Ltd., a subsidiary of Chinese travel conglomerate Suzhou Taihu International Travel Agency, we began operating the ship-based casino onboard Glory Sea, a 1,200 passenger cruise ship, in July 2016. Glory Sea, which has 40 slot machines and 16 tables games, will focus on the Chinese cruise market with four-day trips between China, South Korea and Japan. Under an amended concession agreement with TUI Cruises, we also plan to operate the ship-based casino onboard Mein Schiff 6, a new 2,500 passenger cruise ship scheduled to begin operations in the third quarter of 2017. 



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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. 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.



In March 2015, we entered into a two-year consulting agreement with Norwegian that became effective on June 1, 2015. Under the consulting agreement, we are providing 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.







Additional Project Under Development



In June 2016, our subsidiary, CCE, entered into an agreement to acquire 100% of the issued and outstanding shares and related land of Game Plan Developments Ltd., Casino St. Albert Inc., Action ATM Inc. and MVP Sports Bar Ltd., collectively operating the Apex Casino (“Apex”) in St. Albert, Edmonton, Canada (the “Apex Acquisition”). Apex is a 34,500 square foot casino facility located on approximately seven acres of land. The casino facility includes 382 slot machines, 11 live table games, a restaurant, a bar, a lounge and a banquet facility that can accommodate up to 175 guests.



The Apex Acquisition, which is expected to close in the fourth quarter of 2016, is subject to, among other things, our obtaining financing for the acquisition and customary closing conditions, including the receipt of necessary regulatory and governmental approvals as well as the completion of due diligence by us. The total consideration for the Apex Acquisition is CAD 29.9 million subject to adjustment for the closing date working capital of Apex. Payments for the Apex Acquisition include the following:





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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:







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.

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DISCUSSION OF RESULTS

Century Casinos, Inc. and Subsidiaries











Factors that impact comparability between periods include the following:



Century Downs contributed $4.4 million in net operating revenue and $0.6 million in net earnings and $4.7 million in net operating revenue and $0.9 million in net earnings for the quarters ended June 30, 2016 and 2015, respectively. Century Downs contributed $8.0 million in net operating revenue and $1.2 million in net earnings and $4.7 million in net operating revenue and $0.9 million in net earnings for the six months ended June 30, 2016 and 2015, respectively. Century Downs is reported in the Canada reportable segment.



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Century Bets contributed $1.2 million in net operating revenue and $0.1 million in net earnings and $0.8 million in net operating revenue and $0.1 million in net earnings for the quarters ended June 30, 2016 and 2015, respectively. Century Bets contributed $2.2 million in net operating revenue and ($0.2) million in net losses and $0.9 million in net operating revenue and $0.1 million in net earnings for the six months ended June 30, 2016 and 2015, respectively. Century Bets is reported in the Canada reportable segment.







Net operating revenue decreased by ($2.7) million, or (7.1%), and by ($0.5) million, or (0.8%), for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015. Following is a breakout of net operating revenue by segment for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015:  





Operating costs and expenses increased by $0.6 million, or 2.1%, and by $1.5 million, or 2.5%, for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015. Following is a breakout of total operating costs and expenses by segment for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015: 





Earnings from operations decreased by ($3.3) million, or (42.1%), and by ($2.0) million, or (20.3%), for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015. Following is a breakout of earnings from operations by segment for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015: 





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Net earnings decreased by ($4.3) million, or (65.9%), and by ($4.3) million, or (50.9%), for the three and six months ended June 30, 2016, respectively, compared to the three and six months ended June 30, 2015. 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.



Non-GAAP Measures – Adjusted EBITDA



We define Adjusted EBITDA 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 items. 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 GAAP. Adjusted EBITDA is not considered a measure of performance recognized under US GAAP.



Management believes that Adjusted EBITDA is a valuable measure of the relative 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 operating 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.



The reconciliation of Adjusted EBITDA to net earnings (loss) is presented below.











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Reportable Segments

The following discussion provides further detail of consolidated results by reportable segment.







Three Months Ended June 30, 2016 and 2015



The following discussion highlights results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Results in U.S. dollars were impacted by a 4.8% exchange rate decrease in the average rate between the U.S. dollar and Canadian dollar for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.



Revenue Highlights



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Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.



Six Months Ended June 30, 2016 and 2015



The following discussion highlights results for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The increased revenue and expenses in our Canada segment primarily relate to the operations of Century Downs and Century Bets throughout the six-month period ended June 30, 2016. Century Downs began operations in April 2015 and Century Bets began operations in May 2015.



Results in U.S. dollars were impacted by a 7.7% exchange rate decrease in the average rate between the U.S. dollar and Canadian dollar for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.  



Revenue Highlights



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Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.

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Three Months Ended June 30, 2016 and 2015



The following discussion highlights results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.



Market Share Highlights



Revenue Highlights



Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.





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Six Months Ended June 30, 2016 and 2015



The following discussion highlights results for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.



Market Share Highlights



Revenue Highlights



Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.

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Three Months Ended June 30, 2016 and 2015



Results in U.S. dollars were impacted by a 4.7% exchange rate decrease in the average rate between the U.S. dollar and Polish zloty for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The following discussion highlights results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.



Revenue Highlights



Operating Expense Highlights



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Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.



Six Months Ended June 30, 2016 and 2015



Results in U.S. dollars were impacted by a 5.5% exchange rate decrease in the average rate between the U.S. dollar and Polish zloty for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The following discussion highlights results for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.



Revenue Highlights



Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.



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In March 2011, the Polish Internal Revenue Service (“Polish IRS”) began conducting a series of tax audits of CPL to review the calculation and payment of personal income tax by CPL employees. Based on the March 2011 audit, the Polish IRS concluded that CPL should calculate, collect and remit to the Polish IRS personal income tax on tips received by CPL employees from casino customers.  The Polish IRS has conducted tax audits for the periods from December 1, 2007 to December 31, 2008, January 1, 2009 to December 31, 2009 and January 1, 2011 to January 31, 2011. On March 9, 2016, CPL received an oral decision from the Supreme Administrative Court for the tax periods of December 1, 2007 to December 31, 2008 and January 1, 2011 to January 31, 2011. The court found in favor of the Polish IRS. CPL received the written decision from the court in the second quarter of 2016 that confirmed the oral decision. See Note 8, “Commitments and Contingencies,” to our condensed consolidated financial statements included in this report.



The balance of the potential liability on our condensed consolidated balance sheet for all open periods as of June 30, 2016 is estimated at PLN 8.6 million ($2.2 million based on the exchange rate in effect on June 30, 2016). We have evaluated the contingent liability recorded on our condensed consolidated balance sheet as of June 30, 2016 and have concluded that it is properly accrued in light of our estimated obligation related to personal income tax on tips. The decision rendered by the Supreme Administrative Court in March 2016 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 June 30, 2016. 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. To address these issues, we expect changes to the payroll and withholding processes for Casinos Poland will be implemented in the third quarter of 2016. We anticipate payroll costs to increase by approximately PLN 5.0 million per year ($1.3 million based on the exchange rate in effect on June 30, 2016).



















Three Months Ended June 30, 2016 and 2015



We terminated our concession agreements with Oceania and Regent, indirect subsidiaries of Norwegian, effective June 1, 2015. We transitioned operations of the eight ship-based casinos that we operated onboard Oceania and Regent vessels to Norwegian during the second quarter of 2015. As consideration for the early termination of the concession agreements, we received $4.0 million in June 2015 and recorded this on our condensed 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. We also entered into a consulting agreement with Norwegian effective June 1, 2015, under which we are providing limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million that is payable in eight quarterly installments of $250,000 that commenced in July 2015.



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The following discussion highlights results for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.



Revenue Highlights



Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.





Six Months Ended June 30, 2016 and 2015



The following discussion highlights results for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.



Revenue Highlights



Operating Expense Highlights



Additional Items Impacting Net Income



A reconciliation of net earnings to Adjusted EBITDA can be found in the “Non-GAAP Measures – Adjusted EBITDA” discussion above.





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Non-Operating Income (Expense)

Non-operating income (expense) for the three and six months ended June 30, 2016 and 2015 was as follows:









Interest income

Interest income is directly related to interest earned on our cash reserves.



Interest expense

Interest expense is directly related to interest owed on our credit agreement with the Bank of Montreal (the “BMO Credit Agreement”), the fair value adjustments for our interest rate swap agreements, our CPL borrowings, and interest expense related to CDR’s land lease and Edmonton’s and CDR’s capital lease agreements. Prior to the acquisition of our ownership interest in CDR, CDR sold a portion of the land on which the REC project is located and then entered into an agreement to lease back a portion of the land sold. We account for the lease using the financing method, accounting for the land subject to the lease as an asset and the lease payments as interest on the financing obligation.



Gain on Foreign Currency Transactions and Other

Gain on foreign currency transactions and other includes $1.6 million and $0.5 million received by CDR related to infrastructure built during the development of the REC project for the three and six months ended June 30, 2016 and June 30, 2015, respectively. The distribution to CDR’s non-controlling shareholders through non-controlling interest is part of the credit agreement between CCE and CDR.



Taxes

Income tax expense is recorded relative to the jurisdictions that recognize book earnings. During the six months ended June 30, 2016, we recognized income tax expense of $1.6 million on pre-tax income of $8.1 million, representing an effective income tax rate of 19.5% compared to an income tax expense of less than $0.1 million on pre-tax income of $9.1 million, representing an effective income tax rate of 0.3% for the same period in 2015.



The difference between the income taxes expected at the U.S. federal statutory income tax rate of 34% and the reported income tax expense are impacted by a number of items. Our effective tax rate is lower because there is a lower statutory tax rate in the countries where we pay taxes, such as Austria, Mauritius, Canada and Poland, when compared to the United States. There is also a lower effective tax rate for our Canadian and Polish operations due to exchange rate benefits. We continue to maintain a full valuation allowance on all of our U.S. deferred tax assets and on certain Canadian deferred tax assets. 





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LIQUIDITY AND CAPITAL RESOURCES

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.



As of June 30, 2016, our total debt under bank borrowings and other agreements net of $0.2 million related to deferred financing costs was $37.0 million, of which $33.2 million was long-term debt and  $3.8 million was short-term debt. The short-term debt relates to payments due within one year under our BMO Credit Agreement, CPL’s two credit agreements and other capital lease agreements.  We intend to repay the short-term debt obligations with available cash.



Net debt, which is total principal minus cash and cash equivalents, was $5.9 million as of June 30, 2016.  For a description of our debt agreements, see Note 7, “Long-Term Debt,” to our condensed consolidated financial statements included in this report.



The following table lists the amount of 2016 maturities of our debt:







Cash Flows

At June 30, 2016, cash and cash equivalents totaled $31.3 million, and we had working capital (current assets minus current liabilities) of $15.1 million compared to cash and cash equivalents of $29.4 million and working capital of $11.2 million at December 31, 2015.  The increase in cash and cash equivalents from December 31, 2015 is due to $8.9 million of net cash provided by operating activities, less than $0.1 million from the exercise of stock options and $0.4 million in exchange rate changes. The cash provided by these activities was offset by $3.8 million used to purchase property and equipment, $1.6 million used for a distribution to non-controlling interests, and $2.0 million used for principal repayments on our long-term debt net of proceeds. 



We identified errors within the condensed consolidated statements of cash flows for the six months ended June 30, 2015. We inadvertently failed to remove the effects of a portion of unpaid purchases of property and equipment from the change in accounts payable and purchases of property and equipment in the preparation of the statements of cash flows. This error resulted in the understatement of net cash provided by operating activities of $1.2 million and a corresponding understatement of net cash used in investing activities, in the same amount, for the six months ended June 30, 2015. The prior period amounts within the condensed consolidated statement of cash flows for the six months ended June 30, 2015 have been revised to reflect the correct balances.



Net cash provided by operating activities was $8.9 million for the six months ended June 30, 2016 and $8.4 million for the six months ended June 30, 2015.  Net cash provided by operating activities for the six months ended June 30, 2015 included $3.4 million from the termination of the concession agreements. 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 to the condensed consolidated statements of cash flows in Part I, Item 1 of this Form 10-Q and to management’s discussion of the results of operations above in this Item 2 for a discussion of earnings from operations.

 

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Net cash used in investing activities of $3.8 million for the six months ended June 30, 2016 consisted of $1.1 million in various projects for Century Downs including construction of a second barn and parking lots and landscaping, $0.1 million in capital lease equipment for Century Downs, $0.7 million to renovate the Edmonton casino, $0.3 million in capital lease equipment for Century Downs, $0.4 million in gaming equipment and furniture for three new cruise ships, $0.1 million to purchase new slot machines for our Cripple Creek property, $0.1 million to purchase new slot machines for our Central City property, $0.1 million for hotel upgrades for our Central City property, $0.4 million to purchase new slot machines and table games for Casinos Poland and $0.5 million in other fixed asset additions at our properties, offset by less than $0.1 million in proceeds from the disposition of fixed assets.  



Net cash used in investing activities of $12.3 million for the six months ended June 30, 2015 consisted of $10.7 million for development costs related to the REC project, $0.4 million to purchase new slot machines and table equipment for the casinos operated by Casinos Poland, $0.1 million in improvements to the casinos in Poznan and Katowice 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, $0.1 million to purchase new surveillance equipment at our Cripple Creek property, $0.1 million in sound equipment for the showroom and $0.1 million in parking lot repairs at our Edmonton property and $0.7 million in cumulative additions at our properties, offset by $0.7 million in proceeds from the disposition of assets.



Net cash used in financing activities of $3.6 million for the six months ended June 30, 2016 consisted of $2.0 million of principal repayments on our long-term debt net of proceeds and a $1.6 million distribution to non-controlling interests, offset by less than $0.1 million received from the exercise of stock options.



Net cash provided by financing activities of $8.6 million for the six months ended June 30, 2015 consisted of $9.0 million cash received under 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.  



Common Stock Repurchase Program



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 during the six months ended June 30, 2016. The total amount remaining under the repurchase program was $14.7 million as of June 30, 2016. The repurchase program has no set expiration or termination date.



Potential Sources of Liquidity, Short-Term Liquidity



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.



We expect that the primary source of cash will be from our gaming operations and additional borrowings under the BMO Credit Agreement. 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, payments for the Apex Acquisition, and potential new projects or dividends, if declared by the board of directors. We are currently seeking to amend the BMO Credit Agreement to obtain the financing needed to complete the Apex Acquisition. If necessary, we may seek to obtain additional term loans, mortgages or lines of credit with commercial banks or other debt or equity financings to supplement our working capital and investing requirements.



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We believe that our cash at June 30, 2016, as supplemented by cash flows from operations and additional borrowings under the BMO Credit Agreement, 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 will continue to evaluate our planned capital expenditures at each of our existing locations in light of the operating performance of the facilities at such locations. From time to time we expect to have cash needs for the development or purchase of new properties, including the Apex Acquisition, that exceed our current borrowing capacity and we may be required to seek additional debt, equity or bank financing.



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 for operations, capital expenditures or significant discretionary activities such as acquisitions of 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, which could have adverse tax consequences, as we have not accrued taxes for un-repatriated earnings of our foreign subsidiaries. We estimate that approximately $26.6 million of our total $31.3 million in cash and cash equivalents at June 30, 2016 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.



Item 3.    Quantitative and Qualitative Disclosures about Market Risk. 



We had no material changes in our exposure to market risks from that previously reported in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 4.    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, for the period covered by this report. Based on such evaluation, our principal executive officers and principal financial/accounting officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.



Changes in Internal Control Over Financial Reporting –There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

In March 2000, our board of directors approved 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 repurchase program has no set expiration or termination date and had approximately $14.7 million remaining as of June 30, 2016. There were no repurchases of common stock during the six months ended June 30, 2016.  



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Item 6.    Exhibits



* Filed herewith.

** Furnished herewith.



SIGNATURES



Pursuant to the requirements 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.













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CENTURY CASINOS, INC.

INDEX TO EXHIBITS

* Filed herewith.

** Furnished herewith.

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