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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 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 No.:  000-25244

 


 

TRANS WORLD CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

 

Nevada

 

13-3738518

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

545 Fifth Avenue, Suite 940

 

 

New York, New York

 

10017

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (212) 983-3355

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

 


 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES ☐ NO ☒

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES ☐ NO ☒

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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 Rule12b-2 of the Securities Exchange Act of 1934.

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer (Do not check if a smaller reporting company) ☐

Smaller reporting company ☒

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES ☐ NO ☒

 

The aggregate market value of the Common Stock of the Registrant held by non-affiliates as of June 30, 2016, based upon the average bid and asked price of $3.70 as reported on the OTCQB on that date, was $3,713,786.00.  As of March 7, 2017, there were 8,854,011 shares of Common Stock of the Registrant deemed outstanding.

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  YES ☐ NO ☐

 

Documents incorporated by reference: Portions of the definitive Proxy Statement prepared for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part II and III of this Form 10-K.

 

 

 


 

 

TRANS WORLD CORPORATION
FORM 1O-K

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

PART I.

 

 

 

 

Item 1.

Business

1

 

 

General Development of Business

1

 

 

Corporate Information

2

 

 

Description of Business

2

 

 

Market Overview and Competition

2

 

 

Costs and Effects of Environmental Compliance

3

 

 

Research and Development

3

 

 

Available Information - Internet Access

3

 

 

Our Facilities

4

 

 

Intellectual Property

5

 

 

Long Range Objectives

5

 

 

Marketing and Sales

5

 

 

Regulations and Licensing

6

 

 

Iran Sanctions Disclosure

8

 

 

Taxation

8

 

 

Our Employees

11

 

Item 1A.

Risk Factors

11

 

Item 1B.

Unresolved Staff Comments

17

 

Item 2.

Properties

18

 

 

Our Corporate Offices

19

 

 

Czech Republic

19

 

 

Germany

19

 

Item 3.

Legal Proceedings

20

 

Item 4.

Mine Safety Disclosures

20

 

 

 

 

PART II. 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

 

 

Return Analysis

21

 

 

Market Prices and Liquidity

22

 

 

Dividends

22

 

 

Sales of Unregistered Equity Securities; Use of Proceeds from Registered Securities

22

 

Item 6.

Selected Financial Data

24

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Forward-Looking Statements

25

 

 

Performance Measures and Indicators

25

 

 

Exchange Rates

26

 

 

Critical Accounting Policies

27

 

 

Results of Operations

28

 

 

Our Business Units

30

 

 

Liquidity and Capital Resources

31

 

 

Our Plan of Operations

32


 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33

 

Item 8.

Financial Statements and Supplementary Data

35

 

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

65

 

Item 9A.

Controls and Procedures

65

 

Item 9B.

Other Information

66

 

 

 

 

PART III. 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

67

 

Item 11.

Executive Compensation

67

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

67

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

67

 

Item 14.

Principal Accountant Fees and Services

67

 

 

 

 

PART IV. 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

68

 

Item 16.

Form 10-K Summary

73

 

 

EXHIBITS INDEX 

68

SIGNATURES 

73

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

35

 

 

 

 

 


 

Forward Looking Statements

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the Safe Harbor provisions created by that statute. Reference is made to Part I, Item 1A “Risk Factors” and to Part II, Item 7 “Management’s  Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements” for a discussion of the Registrant’s qualifications with respect to certain information presented in this Annual Report on Form 10-K.

All references to “$” or “USD” means U.S. dollars, “€” or “EUR” means euros, and “Kč” or “CZK” means Czech korunas.  Unless noted otherwise, all USD equivalents of foreign currency amounts are converted at the year-end, December 31, 2016 exchange rates.

 

 

Item 1.     Business.

General Development of Business

Trans World Corporation (hereinafter referred to as “we,” “us,” the “Company,” or “TWC” or terms of similar import) was organized as a Nevada corporation in October 1993 for the acquisition, development and management of gambling establishments, to the extent permitted by applicable local laws, featuring live and mechanized gaming, including video gaming devices such as video poker machines, primarily in Louisiana.

In 1998, we revised our operating strategy by shifting our focus to the casino market in Europe.  Furthermore, as a means of diversification of our business, we have also expanded our growth strategy to develop and/or acquire small-to-mid-size hotels of 80-250 rooms located in or near key metropolitan and resort areas in Europe, which may also include gambling operations.

Today, we own and operate three full-service casinos and four hotels, three of which are four-star rated and one is three-star rated, as per the ratings from the German Hotel and Restaurant Association for our German-based hotels and the Czech Association of Hotels and Restaurants for our Czech-based hotel.  Our European operating units are organized under two reportable segments: a casino segment and a hotel segment.  

Our casinos are all in the Czech Republic (also “CZ” or “Czechia”) and are part of the casino segment, located in Ceska Kubice (“Ceska”), Hate (“Route 59”), and Dolni Dvoriste (“Route 55”). The Czech casinos, which conduct business under our registered brand name, American Chance Casinos (“ACC”), are situated at border locations and draw the majority of their customers from Germany and Austria.

ACC’s operating strategy centers on differentiating its products and services from its direct competitors.  We operate our establishments with an emphasis on high customer service and attention to details.  We strive to create gambling environments with casual and exciting atmospheres, highlighting entertainment, state-of-the-art equipment, and professionalism.

Our hotels include the Hotel Savannah and Spa, a 77-room, four-star deluxe hotel, located in Hate, Czechia, and is part of our casino segment as it is physically attached to our Route 59 casino; the Hotel Columbus, a 117-room, four-star property located in Seligenstadt, Germany; the Hotel Freizeit Auefeld, a 93-room four-star hotel located in Hannoversch Münden (“Hann. Münden”), Germany; and the recently acquired Hotel Kranichhöhe, a 107-room three-star hotel located in Much, Germany (see below for more details). All three German hotels comprised our hotel segment.

Two of our units, the Hotel Savannah and Spa and the Route 59 casino, operate as complementary businesses and are referred to jointly herein as the “Route 59 Complex.”  In addition to the gaming area, guest rooms, and the spa, which is operated by an independent contractor, the Complex features eight banquet halls for meetings and special events as well as two full-service restaurants and two bars.

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On December 21, 2016, TWHG acquired the Lindner Sport & Aktivhotel Kranichhöhe, and subsequently rebranded the hotel as the Hotel Kranichhöhe, a 107-room hotel with extensive meeting space and recreational amenities located in Much, Germany, for a purchase price of €4.9 million, or $5.3 million at the acquisition date.  The assets acquired by TWHG include: the hotel building and its contents; three food and beverage outlets; 18 meeting rooms; a wellness center and spa; a fitness center with an indoor swimming pool; an adjoining tennis complex with two indoor courts and two outdoor courts; and a beach volleyball court.  The new hotel is located approximately two hours driving time from the Company’s Hotel Columbus in Seligenstadt, near Frankfurt, and three hours driving time from its Hotel Freizeit Auefeld in Hann. Münden.  We intend to invest approximately $1.6 million in 2017 to update and partially renovate the hotel, with the objective of upgrading it to a four-star hotel.

 

TWC’s hotel operating strategy centers on offering both business and leisure travelers attractive facilities, professional service, comfortable accommodations, and a wide range of amenities, including food and beverage services, conference, and recreational facilities.   The Company uses multiple channels to actively market its hotels to both business and leisure travelers.  Further, management strives to foster strong relationships with local businesses and communities, which primarily support the hotels’ food and beverage, conference and banquet, and recreation facilities.

While our principal executive offices are located in New York City, we have no operating presence in the United States. 

Corporate Information

Our corporate offices are located at 545 Fifth Avenue, Suite 940, New York, New York 10017, our telephone number is (212) 983-3355, our website is www.transwc.com and the ACC website is www.acc.cz.  Neither website is a part of this Form 10-K.

Description of Business

TWC is engaged in the acquisition, development and management of niche casino operations in Europe, which feature gaming tables and mechanized gaming devices, such as video slot machines, as well as the acquisition, development and management of small-to-mid-size, four-star hotels, which may include casino facilities.  Our expansion into the hotel industry is founded on management’s belief that hotels in the small-to-mid-size class are complementary to our casino brand, that opportunities in one of these two industries often lead to, or are tied to, opportunities in the other industry, and that a more diversified portfolio of assets gives us greater stability and makes TWC more attractive to potential investors.  TWC’s top management executives include individuals with extensive experience in both the casino and hotel industries.

Market Overview and Competition

Historically, casinos in Germany and Austria have been characterized by formal atmospheres and a sense of exclusivity.  While this dynamic has changed across Europe over time, ACC was at the forefront of the movement towards more relaxed casino atmospheres.  This, coupled with our emphasis on integrating live entertainment into the gambling experience and creating strong customer loyalty programs, allowed us to become a preferred alternative for many of our patrons.  Further, we have established ACC as a reputable casino company in Czechia through our more than fifteen years of high service standards, consistent professionalism and strict adherence to all local gaming regulations.

As of December 31, 2016, five casinos operate in direct competition with our Ceska casino.  Each of our Route 59 and Route 55 casinos currently has two direct competitors.  Some of these competitors are larger and have financial and/or other resources that are greater than ours.

While we do not consider our gambling business to be seasonal, it is occasionally impacted by extreme weather conditions and major sporting events, such as the FIFA World Cup (“World Cup”) and the UEFA Euro Cup (“Euro Cup,”), which have and can negatively impact attendance at our casinos.  See also Item 1A “Risk Factors — Climate impact.”

We compete for guests based primarily on brand name recognition and reputation, location, customer satisfaction, quality of service, amenities, quality of the gaming experience, quality of our accommodations,  room rates, 

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security and the ability to earn and redeem loyalty program points.  We believe that increased gambling in other locations in or near the markets areas in which we operate, and the increase in popularity of internet gambling, could create additional competition for us and could adversely affect our casino operations and development plans.  Further, the gaming industry in Eastern Europe faces competition from a variety of sources for discretionary consumer spending, including spectator sports and other entertainment and gaming options. Competitive gambling activities include traditional casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized gaming. We anticipate competition in this area will become more intense as the industry consolidates and new web-based ventures enter the industry.

With respect to our hotel segment, in Germany, our Hotel Columbus has six hotel competitors in the Seligenstadt area and surrounding region that it serves, four of which are privately-owned and two of which are part of German hotel chains.  Our Hotel Freizeit Auefeld is the largest hotel in Hann. Münden and no hotel chains are represented in that market.  However, Hotel Freizeit Auefeld does compete with eight smaller, privately-owned, hotel competitors in the Hann. Münden area. Our recently acquired Hotel Kranichhöhe has no direct major competitors in the city of Much or in the surrounding areas.

Owing to our quality product, adherence to high standards of hospitality and customer service, professionalism and strict compliance with all local hotel regulations and governances, we believe that we can compete effectively with these hoteliers.

Costs and Effects of Environmental Compliance

We incurred no material costs or effects due to environmental compliance for the years ended December 31, 2016 and 2015.

Research and Development

The Company does not engage in research and development other than internal market research for general business development, does not account for research expenditures separately under generally accepted accounting principles, and did not incur any separate research and development expense for 2016 or 2015.

Available Information - Internet Access

TWC is a “smaller reporting company” under the rules of the Securities and Exchange Commission (“SEC”). Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on or through our website (www.transwc.com) as soon as reasonably practicable after we electronically file the material with the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers (including the Company) that file electronically with the SEC.

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Our Facilities

Picture 3

Ceska — The Ceska casino, which is located approximately one hour’s driving time from Regensburg, Germany, was acquired through a lease in March 1998 in conjunction with the Company’s entry into the casino market in Europe.  On November 23, 2011, TWC purchased the Ceska casino building, associated land and an adjacent outbuilding and related plot from the town of Ceska Kubice, from which TWC had been renting the facilities.  The acquisition allowed us to undertake much needed capital improvements to the building, as competition in the Ceska area has increased dramatically in recent years.  As of February 28, 2017, the two-story Ceska casino offered 14 gaming tables, including seven card tables, six roulette tables, and a 10-position, Slingshot, multi-win roulette table.  The casino also features 110 video slot machines and a dedicated stage area for live performances.  Amenities also include a separate dining facility and five luxurious hotel guest rooms. The address of our Ceska casino is Ceska Kubice 64, Ceska Kubice 345 32, Czech Republic.

Route 59 — Located approximately one hour’s driving time from Vienna, Austria, and opened in December 1999, Route 59 was constructed by the Company on land that had been acquired by TWC in conjunction with our entry into the European casino market in 1998.  On February 22, 2016, we completed the expansion and reconfiguration of the casino’s existing slot area and introduced 32 additional video slot machines.  As of February 28, 2017, our Route 59 casino operated 25 gaming tables, consisting of 12 card tables, 12 roulette tables, and a 16-position, Slingshot multi-win roulette table, as well as 190 video slot machines.  Route 59 is located at 199 American Way, Hate-Chvalovice, Znojmo 669 02, Czech Republic.

Route 55 — Located approximately 45 minutes driving time from Linz, Austria, and opened in December 2004, Route 55 was constructed by the Company on a parcel of land that had been purchased by TWC in April 2002.  As of February 28, 2017, the two-story Route 55 offered 21 tables, including 12 card tables, 8 roulette tables, a 16-position, Slingshot multi-win roulette table, as well as 150 video slot machines.  On the mezzanine level, the casino features an Italian restaurant, an open buffet area, and three luxurious hotel guest rooms.  Similar to the five guest rooms at Ceska, these rooms, when not used as free courtesy accommodations for our VIP players and guests, can be rented to other customers.  Route 55 is located at Grenzubergang Wullowitz, Dolni Dvoriste 382 72, Czech Republic.

Hotel Savannah — As a complement to our Route 59 gaming operations, in January 2009, we built and opened Hotel Savannah, a 77-room, four-star deluxe hotel, attached to Route 59 by the hotel’s restaurant, on land that had been acquired by TWC in conjunction with our entry into the European casino market in 1998.  In conjunction with opening the hotel, we also launched a full-service spa, the Spa at Hotel Savannah, which is attached to the hotel and is sub-contracted to a local operator who pays TWC a percentage of its gross revenues.  The Spa features a large, 22 x 8 meter, indoor pool and Ayurvedic therapy facility.  Hotel Savannah also features eight banquet halls for meetings and events.  The creation of the Route 59 Complex has attracted additional business to the casino, contributing incremental cash, and enhancing the Company’s overall results.

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Hotel Columbus — We acquired the Hotel Columbus, a four-star 117-room hotel, located in Seligenstadt, a town that is approximately 25 minutes equidistant from Frankfurt city center and the Frankfurt International Airport in September 2014.  Hotel Columbus features five meeting rooms; a restaurant and separate breakfast room, each with its own kitchen; two bars; a 37-space parking garage; and 43 surface lot parking places, including a satellite parking area located across the street from the Hotel.  With the coming withdrawal of the United Kingdom from the European Union, the city of Frankfurt is aggressively soliciting British financial institutions to relocate their European operations in the city.  Hotel Columbus is located at Am Reitpfad 4, 63500 Seligenstadt-Froschhausen, Germany.

Hotel Freizeit Auefeld — The Hotel Freizeit Auefeld, a 93-room, four-star hotel with extensive meeting space and recreational amenities located in Hann. Münden, Germany was acquired in June 2015.  The hotel features three food and beverage outlets; ten meeting rooms; an adjoining 13,000 square foot event hall; an adjoining tennis complex with four indoor courts; and several additional recreation areas.  An independent townhouse comprised of one four-room and one six-room apartment was also included in the assets associated with the deal.  Hotel Freizeit Auefeld is located at Hallenbadstrasse 33, 34346 Hann. Münden, Germany.

Hotel Kranichhöhe — The Hotel Kranichhöhe, a 107-room, three-star hotel includes extensive meeting space and recreational amenities located in Much, Germany.  It features three food and beverage outlets; 18 meeting rooms; a wellness center and spa; a fitness center with an indoor swimming pool; an adjoining tennis complex with two indoor courts and two outdoor courts; and a “beach” volleyball court.  The Company intends to invest approximately $1.6 million in 2017 to update and partially renovate the hotel, with the objective of upgrading it to a four-star hotel.  Hotel Kranichhöhe is located at Boevingen 129, 53804 Much, Germany.

Our casinos each offer free parking, restaurant and lounge areas, and multiple bars while our Hotel Columbus and Hotel Freizeit Auefeld each offer free outdoor parking, and our Hotel Kranichhöhe offers outdoor parking at a nominal cost, available garage parking, restaurant and lounge areas, bars, and meeting rooms. Our Hotel Savannah, Hotel Freizeit Auefeld and Hotel Kranichhöhe also offer extensive recreational facilities.  With the exception of the long-term ground lease for the land on which Hotel Freizeit Auefeld stands, we own the land and buildings that comprise our casino and hotel assets.

Intellectual Property

In the highly competitive gaming and hospitality industries in which we operate, our trade names and logos are important to the success of our business. All of our casinos operate under the trademarked trade name “American Chance Casinos,” which we believe has become synonymous in our markets with our reputation for excellence in service, casual fun, international presence and state-of-the-art gaming equipment. In addition, the Hotel Savannah’s flowering tree logo has come to represent luxury and convenience for our overnight guests at our Route 59 Complex. The Company also maintains separate websites for our casinos and four hotels that provide users with updated information about news and events, and for the hotels, the ability to make room reservations online.

Long Range Objectives

With the acquisitions of Hotel Columbus, Hotel Freizeit Auefeld and Hotel Kranichhöhe in 2014, 2015 and 2016, respectively, our current operations consist of three casinos and four hotels, with four units located in Czechia and three units located in Germany.  Our recent geographic and industry diversification is consistent with our long-range objective of positioning TWC as an international hotel and casino company.

TWC, the senior management of which is composed of individuals who have extensive experience in both the hotel and casino industries, continues to explore ways to expand the Company’s operations through the acquisition and/or development of complementary gaming and hotel business units, while continuing to maximize the potential of the Company’s existing operations.  Future additions may include stand-alone operations, or complexes with integrated hotel and casino operations, such as our Route 59 Complex.

Marketing and Sales

During the year ended December 31, 2016, we maintained and enhanced our marketing and promotional programs for our casinos, focusing primarily on internal and customer-oriented loyalty reward programs and greater use

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of social media and digital communication methods.  In 2016, we strove to offer higher-value amenities and more giveaways and also to provide live entertainment, in an ongoing effort to secure and enhance our competitive position in the markets that we serve.  The casinos’ event calendars concentrated on key, player-tested, popular events and holidays, while simultaneously focusing on higher player-incentive games designed to reward existing players with redeemable points via our Player’s Loyalty Program, and thereby promote customer loyalty.  In addition, we continued to be a benefactor in a number of community and social programs during the year as a way to further promote our image and make a positive contribution to the communities in which we operate.  We also continued our popular, cultural-themed and holiday-related parties, which feature live entertainment, raffles and complimentary grand buffets.  Further, we aggressively targeted key cities in our media campaigns, most notably Vienna, Linz and Regensburg and the areas surrounding these cities for our casinos and Hotel Savannah.  With respect to our three German hotels, we focused our sales efforts on targeting corporate business and other market segments from the surrounding areas and neighboring countries, and worked to cultivate existing and new local and regional business relationships.

Regulations and Licensing

We are subject to numerous foreign international, national and local government laws and regulations, including those relating to the operation of a casino business, the operation of our hotel business, the preparation and sale of food and beverages, building and zoning requirements, data privacy and general business license and permit requirements, in the various jurisdictions in which we own and operate our properties.  Our ability to acquire and/or develop new casino and/or hotel properties and to remodel, refurbish or add to existing properties is also dependent on obtaining permits from local authorities.  We are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions, hiring and firing, non-discrimination for disabilities and other individual characteristics, work permits and benefit offerings.  Compliance with these various laws and regulations can affect the revenues and profits of the properties we own and could adversely affect our operations.  We believe that our businesses are conducted in compliance with all applicable laws and regulations.

On June 7, 2016, the President of Czechia signed the 2017 Gambling Act (186/2016 Coll.) (the “Gambling Act”) and the 2017 Gambling Tax Act (187/2016 Coll.) (the “2017 Gambling Tax Act”) (collectively referred to as the “Gambling Acts”).  The Gambling Acts became law on June 15, 2016, when they were published in the official Collection of Laws, maintained by the Czech Ministry of the Interior.  The 2017 Gambling Tax Act became effective on January 1, 2017, and raised the gaming tax rate on technical game (i.e. slot machine or electromechanical roulette or dice) revenues to a “minimum tax,” and raises the tax rate from 28% to 35%, and eliminates the per diem fixed fee of

Kč 80 (approximately $3.12) on each slot machine. 

 

The 2017 Gambling Act introduces many new changes, requirements and conditions, that take effect at various times, some taking effect on the date of enactment, some on January 1, 2017 and certain provisions taking effect upon the renewal of the casino operator’s gambling licenses.  Although TWC’s 10-year gambling license expires in September 2018, and its slot operating one-year license expires at the end of 2017, the Company has begun to take steps to conform to these requirements for when it applies for its slot and other technical game license renewals, which is due to expire at the end of 2017.  The Company is also awaiting the Ministry of Finance of the Czech Republic’s (the “MOF”) final interpretation of these new measures, some of which were clarified in August 2016 and others are awaiting further clarifications from the MOF.  The notable changes and requirements are as follow:

 

·

Upon the effective date of the Gambling Act, any gambling operator may apply for a gambling license if it meets all of the following conditions, having: (i) an office in Czechia, in another European Union Member state or in a state that is a party to the Agreement on the European Economic Area; (ii) an organizational chart that sets clear and comprehensive definitions of jurisdictions and decision-making powers; (iii) an established board of directors or similar control body; (iv) equity of at least of €2,000,000 ($2.1 million); (v) a transparent and unobjectionable origin of its financial resources; and (vi) transparent ownership structure.  During the licensing process, confirmation of corporate ownership of the Czech entity and required documents (e.g. criminal and tax records, etc.) from all members of the board of directors and representatives from all levels of the company structure must be furnished to the MOF.  TWC is currently preparing a list of the required documentation to submit for its slot and technical game license renewal at the end of 2017.

·

A basic, general gambling license from the MOF will be issued for a maximum of six (6) years and a gambling

6


 

license for each location at which live game and technical game operations will be conducted (will be issued from local municipality councils) for a maximum of three (3) years. (Previously, the MOF general gambling licenses for live games had been issued for ten (10) years and for one (1) year for technical games). Licenses can be issued and/or renewed if the Company meets the following pre-existing conditions:  (i) maintains a clean criminal record and all necessary certifications; (ii) pays its taxes on time; (iii) stays in good standing; and, (iv) confirms its ability to comply with all technical and supervisory standards required by the new law.  As of December 31, 2016 and the date hereof, TWC was and is in compliance with these conditions.   

·

Individual municipalities and their local councils will be entitled to issue decrees to prohibit or restrict gambling operations, to set permissible hours of gambling operations and designate locations of operations within their respective jurisdictions.  Previously, municipalities, by decree, have been allowed to ban gambling operations or set the locations of gambling operations within their respective jurisdictions.  As of December 31, 2016 and the date hereof, TWC was and is in good standing with all of the municipalities in which it operates.

·

Gambling operations will not be permitted in certain premises such as schools, children’s leisure facilities, health and social care facilities, churches or religious societies.  As of December 31, 2016 and the date hereof, TWC’s existing casinos were and are in compliance with this requirement.

·

Gambling operators will be required to follow certain self-restricting measures put in place by individual players.  For instance, an operator must create an individual account for each player, which the player can use to manage his/her gaming expenditures and frequency of play, including a maximum number of casino visits per month.  These accounts must also allow players to set individual limits on gambling activities, including setting maximum bets per day or per calendar month or a maximum amount of net loss per day or per calendar month. Each customer’s identity must be checked against the MOF’s central database of individuals excluded from the participation of gambling (i.e. black-listed).  For expats, the individual account would be valid for only 90 days, following which a reapplication would be required to setup the account.  Some of these provisions will not become effective until one year after the MOF has set up their central database, but the self-restriction provisions will become effective immediately after new licenses are obtained.  In order to meet these self-restricting measures, the Company will implement a new casino management system, that is currently being evaluated and tested by local management and will be implemented prior to September 2017.

·

Gambling operators will also be required to bar from entry individuals flagged by the MOF and registered in its central database as black-listed or noted as being “destitute” and on public assistance, bankrupt, are subject to an order banning them from gambling under Czech criminal law or are a compulsive gambler. No one under age 18 will be allowed on the casino floor.  As of December 31, 2016 and the date hereof, TWC was and is in compliance with this requirement.

·

Gambling operators will not be able to provide for free, or at a reduced price, any benefits to a player, including food, beverages, tobacco products or “stimulating substances.”  TWC anticipates that it will be in compliance with this requirement when its slot and technical license renewal application is being reviewed during autumn 2017.

·

Gambling operators will be required to post a sign on each technical game warning that gambling is “harmful,” advising of the amount of the player’s net losses and how long the player has been playing, with a requirement that there be a 15 minute break every 2 hours of play.  TWC anticipates that it will be in compliance with this requirement when its slot and technical license renewal application is being reviewed during autumn 2017.

·

All customer transactions, such as exchanging money for gambling chips, must be logged and such records be kept for 10 years, up from five years under the previous law.  TWC will extend its record archiving to 10 years to comply with this requirement.

·

The required retention period of all required real time color audio/visual surveillance recordings will increase from three months to 24 months.  The Company is currently evaluating new surveillance systems that will meet this requirement.

·

Maximum bets for technical games will be increased to Kč 1,000 (about $41) from the current amount of

Kč 675 (about $28) and maximum win (or jackpot) per slot machine will be decreased to Kč 500,000 (approximately $20,500) from the current amount of Kč 675,000 (approximately $27,700).  Slot and electromechanical machine vendors/suppliers will be required to incorporate these limit changes to all slots and technical games that they sell/service to the casinos.  Further, a new anti-money laundering regulation imposes a maximum daily transaction of €10,000 (or $10,500) on purchases and/or cash transactions.  Any slot jackpot payouts exceeding this limit on any given day, can only be paid either directly to the player’s bank account or

7


 

in two per diem payments where the player can pick up the remainder amount on the following day.  TWC anticipates that it will be in compliance with this requirement when its slot and technical license renewal application is being reviewed in autumn 2017.

·

Casinos must have a minimum of three live games tables and 30 technical games available during operating hours. For each live game table, a casino may operate an additional 10 slot or technical game machines.  If a casino has more than 10 live game tables, there is no limit on number of slot or technical game machines permitted.  All of TWC’s existing casinos each have more than 10 live game tables in operation, thereby are already in compliance with this requirement.

·

A gaming bond equal to Kč 10 million (approximately $410,000) will be required to be paid by a casino operator to the MOF for each of its casino units. For operators owning multiple casinos, a minimum bond of Kč 20 million (approximately $820,000) is required, up to a maximum of Kč 50 million ($2.0 million) for any licensee, regardless of the number of casinos owned and operated beyond five casino units.  Previously, only one gaming bond of Kč 22 million ($900,000) was required, which is used for the existing licenses.   When TWC renews its gaming license, it will have to provide a new gaming bond of Kč 30 million ($1.2 million), to meet the new bond requirements for its three casinos, resulting in a net increase of Kč 8 million (approximately $330,000) from its existing bond.  However, a casino operator cannot access the funds underlying the old bond until the expiration of one year after the termination of the old bond.  Therefore, the casino operator must initially pledge additional funds to secure the new bond requirement, which for TWC, will amount to Kč 30 million ($1.2 million). TWC will make the additional bond payment upon its license renewal application.

·

Any marketing advertisements, beginning January 1, 2017, must have a written warning label in the Czech language about the damage gambling can do to participants and that participants must be older than 18 years of age.

·

Failure to comply with the new Gambling Act could result in a misdemeanor punishable by fines up to

Kč 1,000,000 (approximately $41,000) or an administrative offense punishable by an injunction against the violative practice, fines up to Kč 50,000,000 ($2.0 million) and/or asset forfeiture to, or confiscation by, the government.

 

We have been, and are currently, in compliance with all such conditions that are currently in effect. See also “Taxation,” below.

 

There can be no assurance that such licenses, approvals or findings of suitability will be obtained or will not be revoked, suspended or conditioned, or that we will be able to obtain the necessary approvals for our future activities.

Iran Sanctions Disclosure

Pursuant to Section 13(r) of the Exchange Act, if during 2016, TWC or any of its affiliates have engaged in certain transactions with Iran or with persons or entities designated under certain executive orders, we would be required to disclose information regarding such transactions in our Annual Report as required under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA.  Certain of the Iran sanctions were lifted on January 16, 2016.  During 2016, the Company did not engage in any of the law’s enumerated transactions with Iran or with persons or entities related to Iran. 

Taxation

Gaming Taxes

As noted above, we are subject to legislative changes that, at times, result in material adverse effects on our results of operations and financial condition. 

On June 7, 2016, the President of Czechia signed the Gambling Acts.  The 2017 Gambling Tax Act became effective on January 1, 2017.  The new law raised the gaming tax rate on technical game (i.e. slot machine or electromechanical roulette or dice) revenues to the greater of a “minimum tax,” or 35%, and eliminated the per diem fixed fee of Kč 80 (approximately $3.12) on each slot machine. 

8


 

This new “minimum tax” on technical games is equal to the product of: (x) the sum of all gambling positions of individual approved terminal devices (such as slot machines, electromechanical roulette and dice machines) permitted for the location of the gambling premises, times (y) Kč 9,200 (approximately $359).  Therefore, if the aggregate tax amount collected from the 35% gaming tax on technical game revenues is lower than the computed “minimum tax,” then the casino operator must pay the “minimum tax” and not the aggregate tax amount collected from the 35% gaming tax.  Otherwise, if the aggregate tax amount collected from the 35% gaming tax on technical game revenues is greater than the computed “minimum tax,” then the casino operator need only pay the aggregate tax amount collected from the 35% gaming tax and not the “minimum tax.”  The gaming tax rate on live game (i.e. cards, roulette or dice) revenues remains unchanged at 23%.  Further, the 2017 Gambling Tax Act modified the tax revenue allocation between the federal government and local municipalities.  A summary table of the 2017 Gambling Tax Act is shown below:

 

 

 

 

 

2017 Gambling Tax Act

(in actual amounts)

 

(Effective from January 1, 2017)

Live Games

    

23% gaming tax from revenue earned from live games (70% of tax allocated to the federal government; 30% of tax allocated to the local municipality).

 

 

 

Slot and other technical games

 

The greater of either: (a) the aggregate amount collected from 35% gaming tax from revenue earned from slot and other technical games (35% of tax allocated to the federal government; 65% of tax allocated to the local municipality), or (b) a "minimum tax," calculated as the product of the sum of all gambling positions of individual approved terminal devices referred to in the permit for the location of the gambling premises times Kč 9,200 (approximately $359).

 

 

 

Net Income

 

No change from the 19% corporate income tax noted below.

 

The Company currently estimates that if the 2017 Gambling Tax Act were in effect for the full year ended December 31, 2016, it would have resulted in an annual reduction of approximately $1.3 million to the Company’s consolidated earnings before income taxes, assuming all other factors remained constant.  The total impact of the 2017 Gambling Act cannot be quantified or estimated pending the interpretation and enforcement of these measures by the MOF and their eventual implementation into the Company’s gambling operations.  See also, Part I, Item 1A. “Risk Factors — Potential changes in legislation and regulation of our operations.”

 

On December 15, 2015, the President of Czechia signed an amendment to the Gaming Law that increased gaming tax rates payable by all gaming operators, including TWC, effective January 1, 2016 (the “2016 Gaming Tax Amendment”).  (See TWC’s Form 8-K, dated December 21, 2015).  As a result of this amendment, gaming taxes on live game revenues increased from 20% to 23% and gaming taxes on slot revenues increased from 20% to 28%.  In addition, the amendment increased the fee per slot machine per day to CZK 80 (approximately $3.12) from CZK 55 (approximately $2.25). The amendment became law on December 28, 2015, when it was published as Act No. 380/2015 Coll. in the official Collection of Laws, maintained by the Czech Ministry of the Interior. 

9


 

 

 

 

 

 

 

2016 Gaming Tax Amendment

(in actual amounts)

 

(Effective from January 1, 2016 to December 31, 2016)

Live Games

    

23% gaming tax from revenue earned from live games (70% of tax allocated to the federal government; 30% of tax allocated to the local municipality).

 

 

 

Slots

 

28% gaming tax from revenue earned from slot games (20% of tax allocated to the federal government; 80% of tax allocated to the local municipality); and a per diem fixed fee of Kč 80 (approximately $3.12) per slot machine (allocated to the federal government).

 

 

 

Net Income

 

No change from the 19% corporate income tax noted below.

 

In December 2011, the Czech parliament passed sweeping gaming tax legislation (“2012 Gaming Tax Law”), which took effect on January 1, 2012.  Our Czech gaming operations were subject to the 2012 Gaming Tax Law through the year ended December 31, 2015.  Thereafter, those operations will be subject to the 2016 Gaming Tax Amendment (see below) and thereafter until the law is further revised.  The changes in the gaming tax law are summarized below:

 

 

 

 

 

 

2012 Gaming Tax Law

 

(in actual amounts)

 

(Effective from January 1, 2012 to December 31, 2015)

 

Live Games

    

20% gaming tax from revenue earned from live games (70% of tax allocated to the federal government; 30% of tax allocated to the local municipality).

 

 

 

 

 

Slots

 

20% gaming tax from revenue earned from slot games (20% of tax allocated to the federal government; 80% of tax allocated to the local municipality); and a per diem fixed fee of Kč 55 (approximately $2.15) per slot machine (allocated to the federal government).

 

 

 

 

 

Net Income

 

19% corporate income tax on adjusted net income earned in Czechia, net of exemptions (allocated to the federal government).

 

TWC’s gaming-related taxes and fees for the years ended December 31, 2016 and 2015 are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

(amounts in thousands)

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Gaming revenues (excl. ancillary revenues)

 

$

44,967

 

$

35,682

 

 

 

 

 

 

 

 

 

Gaming taxes

 

$

12,398

 

$

7,441

 

Gaming taxes as % of gaming revenues (above)

 

 

27.6

%  

 

20.9

%

Gaming taxes are payable by the 25th day following the end of each calendar quarter, while corporate income tax is paid by June 30th of the subsequent year.  Estimated quarterly income tax payments are also required since the third quarter of 2013.  TWC was current on all of its Czech tax payments at December 31, 2016 and through the date of this report.

 

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Corporate Income Taxes

Effective January 1, 2012, in conjunction with other changes to gaming tax rates, the Czech government instituted an effective corporate income tax, currently 19.0%, on all income, including gaming income. Prior to the law change, our Czech casino operations were subject only to gaming taxes.  The income tax rate in Germany is approximately 30.0%.  We have no gambling operations in Germany as of the date of the Annual Report.  For the year ended December 31, 2016, the Company incurred an net income tax expense of approximately $2.7 million, inclusive of a deferred income tax benefit of $130,000.  The prior year income tax expense of approximately $1.4 million included a deferred income tax benefit of $266,000.   We did not incur any corporate income taxes in Germany from our hotel operations for the years ending December 31, 2016 and 2015, due to the consolidated losses associated with acquisition-related closing costs incurred in these two years.

Value Added Taxes

In conformity with the European Union (“EU”) taxation legislation, Czechia’s value added tax (“VAT”) has gradually increased from 5%, when that country joined the EU in 2004, to 21%, the effective rate since 2013.  Unlike in other industries, VATs are not recoverable for gaming operations.  The recoverable VAT under the Hotel Savannah, Hotel Columbus and Hotel Freizeit Auefeld operations was not material for the years ended December 31, 2016 and 2015, respectively.

Our Employees

As of December 31, 2016, we had a total of 605 employees, of which 90 work in Ceska; 174 in Route 59; 144 in Route 55; 44 in Hotel Savannah; 33 in Hotel Columbus; 44 in Hotel Freizeit Auefeld; 51 in Hotel Kranichhöhe; 20 in our shared services offices, located at our Ceska Casino; and five in the Company’s headquarters in New York.  None of our employees are represented by a union nor are we a party to any labor contract.

 

 

Item 1A.   Risk Factors.

We have described below what we currently believe to be the material risks and uncertainties in our business.

Before making an investment decision with respect to our Common Stock, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. We also face other risks and uncertainties beyond what is described below.  Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.  Further, past financial performance may not be a reliable indication of future performance and historical trends should not be used to anticipate results or trends in future periods. This Annual Report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. If this were to happen, the value of our Common Stock could decline significantly. You could lose all or part of your investment.

Regulation and licensing

Our gambling operations are subject to regulation by each federal and local jurisdiction in which we operate. Each of our officers may be subject to strict scrutiny and approval from the gaming commission or other regulatory body of each jurisdiction in which we conduct gambling operations.  Furthermore, the operations of our casinos are contingent upon maintaining all necessary regulatory licenses, permits, approvals, registrations, findings of suitability, orders and authorizations. The laws, regulations and ordinances requiring these licenses, permits and other approvals generally relate to the operations of the casinos, the payment of taxes, the responsibility, financial stability and character of the owners and managers of gambling operations, as well as persons financially interested or involved in gambling operations.  All of our casinos are duly licensed by the MOF, and we are subject to ongoing regulation to maintain these operations.

Czech regulatory authorities have broad powers to request detailed financial and other information, to limit, condition, suspend or revoke a registration, gaming license or related approval and to approve changes in our operations.

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The suspension or revocation of any license which may be granted to us could significantly harm our business, financial condition, results of operations and prospects.  Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming licenses could require us to make substantial expenditures or could otherwise negatively affect our gambling operations.

Potential changes in legislation and regulation of our operations

Laws and regulations governing the conduct of gambling activities and the obligations of gaming companies in any jurisdiction in which we have or in the future may have gambling operations are subject to change and could impose additional operating, financial or other burdens on the way we conduct our business.

In early January 2016, the MOF imposed a ban on certain types of marketing and promotional events, under the stipulation that the operation of these promotional events were in violation of gaming law. The ban affected all casinos operating in Czechia.  In late September 2016, the MOF reversed its position and removed the ban for all casino operators.  Although the temporary ban did not materially affect the Company’s casino operating results, any other similar actions by the MOF could have a negative impact on the Company’s business, operating results and prospects.

Moreover, legislation to prohibit, limit, or burden our gambling business may be introduced in the future in Czechia or elsewhere where gambling has been legalized. In addition, from time to time, legislators and special interest groups (which may include our competitors) have proposed legislation that would expand, restrict or prevent gambling operations or which may otherwise adversely impact our operations in the jurisdictions in which we operate. Any expansion of gambling or restriction on or prohibition of our gambling operations, increase in gaming taxes, or enactment of other adverse regulatory changes could have a material adverse effect on our business, financial condition, operating results and prospects.

In addition to the Gambling Acts that were passed on June 7, 2016 and effective for the calendar year 2017 and forward, there may be other proposed legislation and/or amendments to these Gambling Acts that may further increase the constraints and limitations on our operations. We cannot, as of the date of this report, specifically predict any proposed legislation or its effect on the results of operations or financial condition or business prospects of the Company. 

Taxation of gambling operations

Gambling operators are typically subject to significant taxes, which may increase at any time. Material increases in these taxes or fees would adversely affect our business, results of operations, financial condition and prospects. Czechia currently has a number of laws related to various taxes imposed by governmental authorities. Applicable taxes include VAT, gaming tax, corporate income tax, and payroll (social) taxes.  In December 2011, the Czech government passed sweeping gaming tax legislation that became effective in 2012.  In this new tax law, the government eliminated the “charity contribution tax” scheme and, in lieu of it, changed the existing revenue-based, tiered rate gaming tax structure to a flat 20% gaming tax on all gambling revenues, plus an applicable corporate income tax of 19% on adjusted net income derived from any revenue sources, including gambling.  These tax law changes have negatively and materially impacted our results of operations since 2012.

In December 2015, the Czech government passed an amendment to the gaming tax law which effectively and significantly raised the gaming tax rates.  The amendment is effective for the calendar year 2016 and forward. See also “Gaming Tax” section under “Taxation” above. These tax law changes, together with other legal compliance areas (for example, customs and currency control matters) are subject to review and investigation by a number of different Czech governmental authorities, which are authorized by law to impose fines, penalties and interest charges.  These reviews may create additional tax risks that, if applied to TWC, could have a material adverse effect on our business, results of operations, financial condition and prospects.

On June 7, 2016, the President of Czechia signed the Gambling Acts.  The Gambling Acts became law on June 15, 2016, when they were published in the official Collection of Laws, maintained by the Czech Ministry of the Interior.  The 2017 Gambling Tax Act became effective on January 1, 2017, raised the gaming tax rate on technical game (i.e. slot machine or electromechanical roulette or dice) revenues to a “minimum tax,” raised the tax rate from 28% to 35%, and eliminated the per diem fixed fee of Kč 80 (approximately $3.12) on each slot machine.  See “Taxation – Gaming

12


 

Taxes,” above.  This new tax law will have a material adverse effect on our net income for our fiscal year ended December 31, 2017. 

General economic trends are unfavorable

The recent worldwide economic downturn in 2009 and the anemic economic growth that followed as well as the current debt and immigrant and terrorism crises in the EU, has, and may, in the future, continue to have a negative impact on our financial performance.  Lingering adverse conditions in local, regional, national and global markets could negatively impact our operations in the future. During periods of economic contraction like that recently experienced, certain costs can remain fixed or even increase, while revenues decline. The gambling services we provide are similar to other leisure activities in that they depend on personal discretionary expenditures, which are likely to decline during economic downturns. Continued adverse developments affecting economies throughout the world, and particularly in Europe, including a general tightening of the availability of credit, unemployment, deflation, political or economic turmoil, government debt crises, acts of war or terrorism, natural disasters, declining consumer confidence or significant declines in world stock markets could lead to a further reduction in discretionary spending on entertainment and leisure activities, which could adversely affect our business, financial condition, results of operations and prospects.  In some cases, even the perception of an impending economic downturn or the continuation of a recessionary climate can be enough to discourage consumers from spending on leisure activities. We cannot predict at this time what the full effect and extent of a possible global recession and the subsequent extended period of slow-growth in Europe will be on our business, financial condition, or results of operations.

We face significant competition

We operate in the highly competitive gaming industry with a large number of participants, many of which have financial and other resources that are greater than ours. The gaming industry faces competition from a variety of sources for discretionary consumer spending including spectator sports and other entertainment and gaming options, as well as home entertainment alternatives. Competitive gambling activities include traditional casinos, video lottery terminals, internet gaming, sports betting, state-sponsored lotteries and other forms of legalized gaming in Czechia, Germany, Austria and in other jurisdictions.  Moreover, these established gambling jurisdictions could award additional gaming licenses or permit the expansion of existing gambling operations. If additional gaming opportunities become available near our operations, such gaming opportunities could have a material, adverse impact on our business, financial condition, results of operations and prospects.

Additionally, internet gaming and wagering is growing rapidly and is affecting competition in our industry.  Web-based businesses may offer consumers a wide variety of events to wager on, including other games, racetracks and sporting events. Unlike most web-based gaming companies, we pay taxes in the jurisdictions in which we operate and our operations require ongoing capital expenditures for both their continued smooth operations, maintenance, renovation and growth. We could also face significantly greater costs in operating our business compared to these “virtual” internet gaming companies. We cannot offer the same number of gaming options as internet-based gaming companies. Many internet-based gaming companies are located off-shore and avoid regulation under applicable Czech laws. These companies may divert wagering dollars from live wagering venues, such as our casinos. The continued growth and success of these on-line ventures could have a material, adverse impact on our business, financial condition, results of operations and prospects.

Our principal hotel competitors are other operators of full-service and select-service properties, including other major hospitality chains with well-established and recognized brands.  We also compete against smaller hotel chains and privately owned hotels.  If we are unable to compete successfully, our revenues or profits may decline or our ability to maintain or increase our market share may be diminished.  We compete for guests based primarily on location, customer satisfaction, room rates, quality of service, amenities, and quality of accommodations.  Most of our competitors are larger than we are, based on the number of properties they manage, franchise or own, or based on the number of rooms or geographic locations where they operate.  Many of our competitors also have recognizable brands, participate with online travel merchants and have a large number of members participating in their guest loyalty programs which may enable them to attract more customers and more effectively retain such guests.  Our competitors generally also may have greater financial and marketing resources than we do, which could allow them to improve their properties and expand their marketing efforts in ways that could affect our ability to compete for guests effectively.  If we are unable to

13


 

successfully compete against competitors in our market areas, it will have a material adverse effect on our business, financial condition, results of operations and business prospects.

Fluctuations in currency exchange rates could adversely affect our business

Our facilities in Czechia represent a significant portion of our business, and the revenue generated is generally denominated in EUR and the expenses incurred by these facilities are largely denominated in CZK, while revenues and expenses from our three hotels in Germany are denominated in EUR.  The potential depreciation in the value of either of these currencies against the USD would adversely impact the revenue and operating profit from our operations when translated into USD, which would have a corresponding effect on our consolidated results of operations.  (See also “Item 7A. Quantitative and Qualitative Disclosure about Market Risk — Foreign Currency Exchange Rate Risk”).  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, if we subsequently choose to do so in the future.

We are subject to the business, financial and operating risks inherent to the hospitality industry

Our hotel segment is subject to a number of business, financial and operating risks inherent to the hospitality industry, including:

·

changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

·

the costs and administrative burdens associated with complying with applicable laws and regulations;

·

the costs or desirability of complying with local practices and customs;

·

the availability and cost of capital necessary for us to fund acquisitions, investments, capital expenditures and service debt obligations;

·

delays in or cancellations of planned or future acquisition or development projects;

·

foreign exchange rate fluctuations;

·

changes in operating costs, including, but not limited to, energy, food, workers’ compensation, benefits, insurance and unanticipated costs resulting from statutory requirements and/or force majeure events;

·

increases in cost for healthcare coverage for employees and potential government regulation in respect of health coverage;

·

shortages of labor or labor disruptions;

·

shortages of desirable locations for acquisition or development;

·

unrealistic purchase prices set by sellers; and

·

the ability of third-party internet travel intermediaries to attract customers for our properties.

Any of these factors could substantially increase our costs of doing business or limit or reduce the prices we charge for our hospitality products or services, including the rates our properties charge for accommodations. These factors can also affect our ability to develop or acquire new properties or maintain and operate our existing properties. As a result, any of these factors can reduce our profits and limit our opportunities for growth.

Need to diversify

Prior to 2014, all of our operations were primarily located in Czechia.  Therefore, any future adverse legislation in Czechia may have an adverse impact on our Czech operations, financial results, financial condition and prospects.  To counteract this risk, we acquired the Hotel Columbus in Seligenstadt, Germany, in September 2014, the Hotel Freizeit Auefeld in Hann. Münden, Germany, in June 2015, and the Hotel Kranichhöhe in Much, Germany, in December 2016.  We have earmarked a sizable portion of the Company’s cash reserves for expansion and are currently seeking to develop and/or acquire additional interests in gambling operations and/or hotels in other European countries.  However, there can be no assurance that we will be able to develop or acquire such new operations in the future.

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Need for additional financing

Pursuant to our growth strategies, we may require additional debt and/or equity financing for the acquisition and development of new businesses or business units.  We may also need to access the capital markets or otherwise obtain additional funds to finance acquisitions, the continuing maintenance, renovation, or re-theming of currently owned facilities or the development of new operations.  There is no guarantee that we will be able to obtain such financing or funds in the future on favorable terms to us, or at all.

Dependence upon key personnel

Our ability to successfully implement our strategy of expansion, manage the existing casinos, and maintain a competitive position will continue to depend, in large part, on the services of Mr. Rami S. Ramadan, the Company’s President and Chief Executive Officer (“CEO”).  The Company is also dependent upon other key employees, casino managers, and consultants, whom we retain from time to time.

International activities

Our operations are completely outside of the United States. Operating internationally involves additional risks including, but not limited to currency exchange rates, different legal or regulatory environments, political and economic risks relating to the stability or predictability of foreign governments, differences in the manner in which different cultures do business, difficulties in staffing and managing foreign operations, differences in financial reporting, operating difficulties, terrorism, different types of criminal threats and other factors. The occurrence of any of these risks, if severe enough, could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Climate impact

The operations of our facilities are subject to disruptions or reduced patronage as a result of severe weather conditions, natural disasters and other casualty events, including loss of service due to casualty, forces of nature, mechanical or electrical or telecommunications failure, traffic and road conditions, extended or extraordinary maintenance, flood, wind, snow, ice or other severe weather conditions.  As the majority of our casino clientele travel from German and Austrian border regions by automobile, we are highly dependent on the volume and frequency of these players’ visitations.  Inclement weather conditions on the roads to our casinos can serve to substantially reduce the number of visitations, which occurred in the first and second quarter of 2013.  On the other hand, warm and favorable outdoor weather can also divert players to alternative activities, such as family outings.  The frequency and strength of any of these aforementioned climate conditions could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Liability insurance

We may not have sufficient insurance coverage in the event of a catastrophic property or casualty loss. We may also suffer disruption of our business in the event of a terrorist attack (at our premises or elsewhere), or other catastrophic property or casualty loss, or be subject to claims by third parties injured or harmed while visiting our locations. While we currently carry adequate general liability insurance and business interruption insurance, such insurance may not be sufficient to cover all losses in such event.

No dividends

We have not paid any dividends to date on our Common Stock.  Currently, our plan is to retain future earnings, if and when generated, for investment in our current operations and for future project developments.  Any future determination to pay dividends will be at the discretion of TWC’s Board of Directors (our “Board”) and will depend on our financial condition, capital requirements, restrictions contained in current or future financing instruments and such other factors as our Board deems relevant. See the “Dividend” section of Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividends.”

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Dilutive effect of options, restricted stock and deferred stock compensation

As of February 28, 2017, there were options outstanding to purchase 665,000 shares of our Common Stock, plus 626,028 shares issuable under the Company’s Deferred Compensation Plan and 50,000 shares of performance-tied restricted stock, which, if all were vested and exercised, would represent 12.9% of the 10,195,039 fully-diluted shares outstanding as of such date.  The issuance of such securities would have a dilutive effect on any earnings per share that we may generate when the earnings per share are evaluated on a fully-diluted basis.

Possible adverse effect of issuance of preferred stock

Our Articles of Incorporation authorize the issuance of 4,000,000 shares of “blank check” preferred stock, with designations, rights and preferences to be determined from time to time by our Board. Accordingly, our Board is empowered, without further stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the dividend rights and/or voting power or other rights of the holders of the Common Stock. In the event of issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.  Our Board has no current plans to issue any shares of preferred stock. However, there can be no assurance that preferred stock will not be issued at some time in the future.

Failure to maintain the security of personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of the Company’s privacy and security policies with respect to such information

In connection with our business, we collect and retain large volumes of certain types of personally-identifiable, financial and other information pertaining to our customers, stockholders and employees. Such information includes, but is not limited to, large volumes of customer identity and credit and payment card information. The legal, regulatory and contractual environment surrounding information security and privacy is constantly evolving and under increasing attack by cyber-criminals in the U.S. and Europe. A significant actual or potential theft, loss, fraudulent use or misuse of customer, employee or our corporate data by cybercrime or otherwise, non-compliance with our contractual or other legal obligations regarding such data, or a violation of our privacy and security policies with respect to such data could adversely impact our reputation, business integrity, and ultimately, our business prospects, and could result in fines, litigation or regulatory action against us.

 

We are subject to Anti-Money Laundering laws or regulations and the Foreign Corrupt Practices Act, violations of which could adversely affect our business.

 

We deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering laws and regulations. Recently, U.S. governmental authorities have evidenced an increased focus on the gaming industry and compliance with anti-money laundering laws and regulations.

 

Further, because all of the Company’s revenue is derived from customers, outside of the United States, the Company is subject to regulations imposed by the Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws that generally prohibit U.S. companies and their intermediaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in criminal and civil sanctions as well as other penalties and the Securities and Exchange Commission (“SEC”) and U.S. Department of Justice have increased their enforcement activities with respect such laws and regulations.

 

Internal control policies and procedures and employee training and compliance programs that we have implemented to prevent prohibited practices may not be effective in deterring our directors, employees, contractors or agents from violating or circumventing our policies and the law. If we or our directors, employees or agents fail to comply with applicable laws or Company policies governing our operations, the Company may face investigations, prosecutions and other legal proceedings and actions which could result in civil penalties, administrative remedies and criminal sanctions. Any such government investigations, prosecutions or other legal proceedings or actions could adversely affect our business, performance, prospects, value, financial condition, and results of operations.

16


 

Any violation of applicable Anti-Money Laundering laws or regulations or the FCPA could adversely affect our business, financial condition, results of operations and prospects.

 

 

Three stockholders exert control over the Company

 

Three stockholders, Value Partners, Ltd., the Wynnefield Funds and the Miller Funds own more than 88% of our voting common stock and each has representation on our Board of Directors. Accordingly, these stockholders exert a controlling interest on all matters relating to the future operations and direction of the Company, including the approval of significant corporate transactions.

 

 

Item 1B.   Unresolved Staff Comments.

None.

 

 

17


 

Item 2.     Properties.

A summary of our properties as of February 28, 2017 is presented below in square feet and in square meters:

 

 

 

 

 

 

 

 

 

 

 

 

Property Name

    

City/Town

    

Country

    

Owned/Leased

    

Square Feet

    

Square Meters

 

TWC Corporate Offices

 

New York

 

United States

 

Leased

 

1,915

 

178

 

 

 

 

 

 

 

 

 

 

 

 

 

Ceska (1)

 

Ceska Kubice

 

Czech Republic

 

 

 

 

 

 

 

Total Plot #1 - Casino & Land

 

 

 

 

 

Owned

 

40,221

 

3,738

 

Casino Building (footprint)

 

 

 

 

 

 

 

25,426

 

2,363

 

Parking & Landscape

 

 

 

 

 

 

 

6,596

 

613

 

Vacant Land

 

 

 

 

 

 

 

8,199

 

762

 

Parking & Landscape

 

 

 

 

 

Leased

 

64,366

 

5,982

 

Staff Housing

 

 

 

 

 

Leased

 

15,871

 

1,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Folmova Vacant Land (1)

 

Folmova

 

Czech Republic

 

Owned

 

210,175

 

19,533

 

 

 

 

 

 

 

 

 

 

 

 

 

Route 55 (1)

 

Dolni Dvoriste

 

Czech Republic

 

 

 

 

 

 

 

Total Plot #1 - Casino & Land

 

 

 

 

 

Owned

 

365,410

 

33,960

 

Casino Building (footprint)

 

 

 

 

 

 

 

20,315

 

1,888

 

Vacant Land

 

 

 

 

 

 

 

345,095

 

32,072

 

Total Plot #2 - Vacant Land (total 14,497 m2) (50% owned by Czech Federal Government)

 

 

 

 

 

50% Owned

 

77,999

 

7,249

 

Total Plot #3 - Vacant Land

 

 

 

 

 

Owned

 

352,153

 

32,728

 

Parking & Landscape

 

 

 

 

 

Owned

 

176,604

 

16,413

 

Staff Housing I

 

 

 

 

 

Leased

 

4,756

 

442

 

Staff Housing II

 

 

 

 

 

Leased

 

6,155

 

572

 

 

 

 

 

 

 

 

 

 

 

 

 

Route 59 Complex (1)

 

Hate/Znojmo

 

Czech Republic

 

 

 

 

 

 

 

Total Plot #1 - Casino & Land

 

 

 

 

 

Owned

 

476,916

 

44,323

 

Casino Building (footprint)

 

 

 

 

 

 

 

25,512

 

2,371

 

Parking & Landscape

 

 

 

 

 

 

 

53,628

 

4,984

 

Vacant Land

 

 

 

 

 

 

 

397,776

 

36,968

 

Total Plot #2 - Hotel Savannah

 

 

 

 

 

Owned

 

91,923

 

8,543

 

Hotel Building (footprint)

 

 

 

 

 

 

 

32,463

 

3,017

 

Parking & Landscape

 

 

 

 

 

 

 

48,700

 

4,526

 

The Spa at the Hotel Savannah (footprint)

 

 

 

 

 

 

 

10,760

 

1,000

 

Staff Housing

 

 

 

 

 

Leased

 

17,151

 

1,594

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Columbus (2) (3)

 

Seligenstadt

 

Germany

 

 

 

 

 

 

 

Total Plot #1 - Hotel & Land

 

 

 

 

 

Owned

 

37,638

 

3,498

 

Hotel Building (footprint)

 

 

 

 

 

 

 

18,303

 

1,701

 

Parking & Landscape

 

 

 

 

 

 

 

7,693

 

715

 

Vacant Land

 

 

 

 

 

 

 

11,642

 

1,082

 

Total Plot #2 - Columbus Parking

 

 

 

 

 

Owned

 

11,298

 

1,050

 

Parking & Landscape

 

 

 

 

 

 

 

7,532

 

700

 

Vacant Land

 

 

 

 

 

 

 

3,766

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Freizeit Auefeld (2) (4)

 

Hann. Münden

 

Germany

 

 

 

 

 

 

 

Total Plot #1 - Hotel & Land

 

 

 

 

 

 

 

306,520

 

28,487

 

Hotel Building - footprint

 

 

 

 

 

Owned

 

38,930

 

3,618

 

Hotel Parking & Landscaping

 

 

 

 

 

Leased

 

220,440

 

20,487

 

Event Hall

 

 

 

 

 

Owned

 

12,912

 

1,200

 

Indoor Tennis

 

 

 

 

 

Owned

 

25,824

 

2,400

 

Townhouse

 

 

 

 

 

Owned

 

3,863

 

359

 

Fitness center

 

 

 

 

 

Owned

 

4,551

 

423

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Kranichhöhe (2) (5)

 

Much

 

Germany

 

 

 

 

 

 

 

Total Plot - Hotel & Land

 

 

 

 

 

 

 

259,209

 

24,090

 

Hotel Building - footprint

 

 

 

 

 

Owned

 

111,151

 

10,330

 

Hotel Parking & Landscaping

 

 

 

 

 

Owned

 

95,387

 

8,865

 

Spa/massage room

 

 

 

 

 

Owned

 

1,076

 

100

 

Pool and sauna

 

 

 

 

 

Owned

 

3,067

 

285

 

Tennis hall

 

 

 

 

 

Owned

 

44,116

 

4,100

 

Fitness center

 

 

 

 

 

Owned

 

4,412

 

410

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Square Feet/Meters Owned:

 

 

 

 

 

 

 

2,185,626

 

203,125

 

Total Square Feet/Meters under control:

 

 

 

 

 

 

 

2,514,365

 

233,677

 


(1)

Casino segment.

(2)

Hotel segment.

18


 

(3)

This property is subject to a bank loan from Bank Sparkasse Langen-Seligenstadt.  See Note 4 of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8.

(4)

TWC owns all buildings and facilities, but all underlying land is leased from the County of Göttingen.  This property is subject to two loans: Bank Sparkasse Hann. Munden bank loan and a seller-carried loan.  See Note 4 of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8.

(5)

This property is subject to a bank loan from Bank Kreissparkasse Köln.  See Note 4 of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8.

 

Our Corporate Offices

Our corporate offices are located at 545 Fifth Avenue, Suite 940, New York, New York, occupying 1,915 square feet of office space pursuant to a five-year lease, expiring in March 2020.

We believe that our existing office and other operating properties are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.

Czech Republic

On November 23, 2011, we acquired the Ceska casino building and associated land and an adjacent outbuilding and related parcel of land from the town of Ceska Kubice, from which we had been renting the facilities.  We built out the casino by constructing an annex building to it, making it the largest casino by size we own to date.  See Part I, Item 1, “Our Facilities” above for more details.

We also own a parcel of raw land in the town of Folmova, Czech Republic, near the German border, approximately a quarter mile away from our Ceska casino.

In Hate, we own the casino building and a parcel of land upon a portion of which the casino building sits.  On another portion of this land, we constructed and opened Hotel Savannah and the Spa on January 14, 2009, which are connected to the Route 59 casino, thereby creating the Route 59 Complex.  The combined facilities have become a thriving entertainment complex that has attracted visitors and regular guests and players from the surrounding region.

In April 2002, we acquired a parcel of land in Dolni Dvoriste, Czech Republic.  On this parcel and on a portion of a piece of land we co-owned 50% with the federal government of the Czech Republic (representing approximately 18% of the total land we own and control in Dolni Dvoriste), we constructed what was at the time, our largest casino, Route 55, which was completed and opened in December 2004.  (See “Properties” table above).

On an annual basis, we also lease accommodations for staff in Ceska Kubice, Hate (Route 59) and in Dolni Dvoriste (Route 55).

Germany

In September 2014, we acquired a four-star 117-room hotel, the Hotel Columbus, located in the suburbs of Seligenstadt, Germany, about a 20-minute, equidistant drive from Frankfurt city center and the Frankfurt International Airport.  Hotel Columbus was constructed in 2001 and was operated profitably at the time of purchase by a private family primarily as a business hotel.  Hotel Columbus currently has 99 single rooms and 18 double rooms.  It also features six meeting rooms, a spacious restaurant and separate breakfast room, each with its own kitchen, two bars, a 37-place parking garage and 43 surface lot parking places.

In June 2015, we acquired a 93-room four-star hotel, Hotel Freizeit Auefeld, located in Hann. Münden, Germany.  The hotel includes extensive meeting space and recreational amenities and features three food and beverage outlets, ten meeting rooms, an adjoining 12,912 square foot event hall, and an adjoining tennis complex with four indoor courts; several additional recreation areas; and an independent townhouse comprised of one four-room and one six-room

19


 

apartment.   The Company owns all the buildings and facilities, but the underlying land is leased from the County of Göttingen.

 

In December 2016, we acquired a 107-room three-star hotel, Hotel Kranichhöhe, located in Much, Germany.  The hotel includes three food and beverage outlets; 18 meeting rooms; a wellness center and spa; a fitness center with an indoor swimming pool; an adjoining tennis complex with two indoor courts and two outdoor courts; and a beach volleyball court.  The Company intends to invest approximately $1.6 million in 2017 to update and partially renovate the hotel, with the objective of upgrading it to a four-star hotel.

 

 

Item 3.     Legal Proceedings.

We may be, from time to time, a party to various legal proceedings and administrative actions, all arising from the ordinary course of our business.  We are not currently involved in any material legal proceeding nor were we involved in any material litigation during the year ended December 31, 2016 and through the date of the filing of this report.

 

 

Item 4.     Mine Safety Disclosures

Not applicable.  

20


 

 

PART II

 

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Common Stock is quoted on the Over-The-Counter Markets Group (“OTCQB”) under the symbol “TWOC.”

Return Analysis

The stock performance graph and related information presented below is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

The following graph illustrates a five-year comparison of cumulative total return performance of our Common Stock from December 31, 2011 through December 31, 2016, and compares it to the cumulative total return of the “NASDAQ Composite” and the “S&P SmallCap 600” indices.   The comparison assumes a $100 investment on December 31, 2011, in our Common Stock and in each of the foregoing indices, and assumes reinvestment of dividends, if any.  We paid no dividends during this period.

Picture 1

The above table is not intended to forecast future performance of our Common Stock.

21


 

Market Prices and Liquidity

As of February 28, 2017, our stock price was $6.37.  The following table sets forth the high and low prices of the Company’s Common Stock for fiscal years 2015 and 2016 as quoted on OTCQB. All such quotations reflect inter-dealer prices, without retail mark up, mark down or commission, and may not represent actual transactions.  There is minimal market liquidity for our Common Stock, as 88.2% of the stock was, as of February 28, 2107, held by institutional investors.  Thus, infrequent and minor trades can occur, which typically precipitate wide spreads in the “bid” and “ask” quotes of our Common Stock, on any given day.

 

 

 

 

 

 

 

 

Common Stock

    

High

    

Low

 

2015

 

 

 

 

 

 

 

First Quarter

 

$

3.23

 

$

2.75

 

Second Quarter

 

$

3.08

 

$

2.62

 

Third Quarter

 

$

3.00

 

$

2.55

 

Fourth Quarter

 

$

3.10

 

$

2.52

 

2016

 

 

 

 

 

 

 

First Quarter

 

$

3.02

 

$

2.25

 

Second Quarter

 

$

3.76

 

$

2.85

 

Third Quarter

 

$

4.75

 

$

3.52

 

Fourth Quarter

 

$

6.00

 

$

4.25

 

As of February 28, 2017, there were 8,854,011 outstanding shares of Common Stock held of record by approximately 300 shareholders and outstanding options to purchase an aggregate of 665,000 shares of Common Stock, of which 297,500 are exercisable.  At such date, there were also 50,000 shares of restricted stock, 25,000 of which are in process to be vested.  In addition, there are 626,028 shares of Common Stock issuable under the Company’s Deferred Compensation Plan at February 28, 2017.

Dividends

We have not paid any dividends to date on our Common Stock.  Currently, our plan is to retain future earnings, if and when generated, for investment in our current operations and for future project developments.  Any future determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, capital requirements, restrictions contained in current or future financing instruments and such other factors as our Board deems relevant.

Sales of Unregistered Equity Securities; Use of Proceeds from Registered Securities

On August 15, 2014, we issued to each of Mr. Julio E. Heurtematte, Jr. and Mr. Geoffrey B. Baker (the “Former Directors”) 6,985 (or a total of 13,970) authorized but unregistered shares of the Common Stock, plus to each a check for approximately $38 representing the cumulative residual balance of their quarterly deferments. These stock and cash issuances were in full satisfaction of TWC’s obligation (which amounted to an aggregate of approximately $70,000) to them under the Company’s Deferred Compensation Plan, as a result of their separation of service as a director of the Company.

On November 2, 2015, we issued to Mr. Malcolm M.B. Sterrett, a former director, 7,806 shares of the Common Stock, plus a check for $43 representing the cumulative residual balance of his quarterly deferments, resulting from his separation of service as a director pursuant to the terms of the Company’s Deferred Compensation Plan.  These shares were registered under the Company’s Form S-8, which became effective immediately upon its filing on September 18, 2015.  As such shares were issued in lieu of cash for director’s fees, no proceeds were received by TWC.

On August 8, 2016, upon achieving the designated earnings per share targets pursuant to the terms of his July 2005 restricted stock grant, Mr. Rami S. Ramadan, the Company’s CEO, was issued 25,000 shares of the Company’s Common Stock.  As this was a compensatory stock grant, there were no proceeds to the Company.

22


 

The issuance of the shares of the Company’s Common Stock to the Former Directors and to Mr. Ramadan were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and in Section 4(a)(2) of the Securities Act, based on the following: (a) the Former Directors and Mr. Ramadan confirmed to the Company that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) the Former Directors and Mr. Ramadan confirmed to the Company that they were acquiring the Common Stock for their separate personal accounts and not with a view towards distribution or sale thereof; (c) there was no public offering, advertising or general solicitation with respect to the issuance of the Common Stock; (d) the Company instructed its Transfer Agent and Registrar to issue share certificates representing the Common Stock to the Former Directors and to Mr. Ramadan that contain a legend putting the public on notice that such shares are “restricted securities;” and (e) the Former Directors and Mr. Ramadan confirmed in writing to the Company that the shares of Common Stock being issued have not been registered under the Securities Act or any state securities laws, and are “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and the Common Stock can only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

 

23


 

Item 6.     Selected Financial Data.

The selected financial data below has been derived from our audited consolidated financial statements (except for the variance data) and should be read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K, which provide for a detailed discussion of the accounting policies that we believe require complex and subjective judgments that could potentially affect reported results.  Variances are presented according to the impact to the respective year’s Consolidated Statements of Operations and are unaudited.  Our historical results are not necessarily indicative of the results expected for any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

(in thousands)

    

2016

    

2015

    

Variance $

    

Variance %

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

Revenues, by department:

 

 

 

 

 

 

 

 

 

 

 

 

Gaming

 

$

46,556

 

$

37,102

 

$

9,454

 

25.5

%

Rooms

 

 

3,771

 

 

2,994

 

 

777

 

26.0

%

Food & beverage

 

 

2,598

 

 

1,996

 

 

602

 

30.2

%

Spa and other departments

 

 

132

 

 

132

 

 

 —

 

 —

%

Other revenue

 

 

181

 

 

162

 

 

19

 

11.7

%

Total revenues

 

 

53,238

 

 

42,386

 

 

10,852

 

25.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues, by department

 

 

 

 

 

 

 

 

 

 

 

 

Gaming

 

 

24,764

 

 

18,820

 

 

5,944

 

31.6

%

Rooms

 

 

1,307

 

 

1,037

 

 

270

 

26.0

%

Food & beverage

 

 

2,351

 

 

1,687

 

 

664

 

39.4

%

Spa and other departments

 

 

145

 

 

122

 

 

23

 

18.9

%

Other costs

 

 

106

 

 

81

 

 

25

 

30.9

%

Total cost of revenues

 

 

28,673

 

 

21,747

 

 

6,926

 

31.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross operating profit

 

 

24,565

 

 

20,639

 

 

3,926

 

19.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Overhead expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Marketing, general and administrative

 

 

8,839

 

 

9,625

 

 

(786)

 

(8.2)

%

Corporate expense

 

 

4,396

 

 

3,842

 

 

554

 

14.4

%

Depreciation and amortization

 

 

2,220

 

 

1,863

 

 

357

 

19.2

%

Total overhead expenses

 

 

15,455

 

 

15,330

 

 

125

 

0.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

9,110

 

 

5,309

 

 

3,801

 

71.6

%

Interest expense

 

 

(243)

 

 

(206)

 

 

(37)

 

18.0

%

Other income

 

 

124

 

 

149

 

 

(25)

 

(16.8)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

8,991

 

 

5,252

 

 

3,739

 

71.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

(2,668)

 

 

(1,394)

 

 

(1,274)

 

91.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,323

 

$

3,858

 

$

2,465

 

63.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

66,104

 

$

55,239

 

 

 

 

 

 

Total liabilities

 

$

20,448

 

$

15,070

 

 

 

 

 

 

Stockholders’ equity

 

$

45,656

 

$

40,169

 

 

 

 

 

 

 

24


 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Information set forth in this discussion and analysis (as well as in other sections of this Form 10-K) contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently. The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) provides certain “safe harbor” provisions for forward-looking statements.  All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the PSLRA. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from expectations include those factors described in Item 1A, “Risk Factors” of this Annual Report on Form 10-K.  Forward-looking statements speak only as of the date the statement was made.  We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. 

Further information on potential factors that could affect our financial condition, results of operations and business are included in this Annual Report and our other filings with the SEC.  You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us. You should read this discussion with the financial statements and other financial information included in this report.  Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Performance Measures and Indicators

In discussing the consolidated results of operations, we may use or refer to performance measures and indicators that are common to the gaming industry, such as: (i) total drop, the dollar value of gaming chips purchased in a given period; (ii) drop per head (“DpH”), the per guest average dollar value of gaming chips purchased; (iii) slot revenue per head, the per guest average dollar value of revenue generated in our slot machines; (iv) our net win, the difference between gaming wagers and the amount paid out to patrons; and (v) our win percentage (“WP”), the ratio of net win to total drop, or commonly referred to as “hold percentage.”  We may also use or refer to performance measures and indicators common to the hospitality industry, such as: (i) occupancy rate, the percentage derived from rooms sold to available rooms; (ii) average daily rate (“ADR”), the average of room rental rates paid per day; and (iii) revenue per available room (“RevPAR”), revenue generated per available room.  In this report and in our quarterly and annual earnings releases, we may use or refer to another performance measure, earnings before income taxes, depreciation and amortization (“EBITDA”).  All of these measures and indicators are non-GAAP financial measures that we believe provide useful information to investors and potential investors, as well as to others who might be interested in purchasing shares of our Common Stock. This belief is based on conversations and meetings our management has had with our investors where the substance of these talks has typically centered on historical and prospective EBITDA measurements. Based on management’s observations, even though the EBITDA and other noted measurements are not “GAAP,” they do enhance investors’ understanding of the Company’s business. In short, these performance measurements give an analytic view of the Company’s operational earnings and EBITDA, in particular, reflects earnings on a cash-basis, excluding the impact of debt obligations, taxes and (non-cash) depreciation and amortization.

New Gambling Acts and their Impact

On June 7, 2016, the President of Czechia signed the Gambling Acts.   In addition to the gambling tax rate increase imposed by the 2017 Gambling Tax Act, the 2017 Gambling Act sets other conditions in order to obtain a gambling license and subsequent compliances to maintain such license.  These new laws have and will have broad impact on the Company’s daily operations and results of operations.  The Company cannot determine the full impact of

25


 

these Gambling Acts until they are fully implemented by the MOF.  (See also sections “Taxation” and “Regulations and Licensing” in Item 1. “Business.”

 

Exchange Rates

 

Due to the fact that the Company’s operations are located principally in two European countries, Czechia and Germany, our financial results are subject to the influence of fluctuations in foreign currency exchange rates.  The revenue generated by our Czech operations is generally denominated in EUR and the majority of the expenses incurred by these facilities are generally denominated in the local currency, the CZK, while both the revenue and expenses from our three German hotels are denominated in EUR.  As our primary reporting subsidiary, TWH&E, is a Czech entity, all revenues and expenses, regardless of sources of origin, including those of the German hotels, are recognized in the Czech currency and translated to USD for reporting purposes.  A substantial change in the value of either the CZK and/or the EUR in relation to each other and/or to the value of the USD would have an impact on the results from our operations when translated into USD.  In other words, the higher the value of the foreign currency, the greater the positive impact on the Company’s results of operations and vice versa.  We do not hedge our foreign currency holdings (see also “Item 7A - Quantitative and Qualitative Disclosures about Market Risk”).

 

The actual 2016 and 2015 operating results in local currency for the Czech casino units and Hotel Savannah were converted to USD using the average of the daily exchange rates of each month in the reporting periods, while the monthly operating results of the German hotel operation, Hotel Columbus, Hotel Freizeit Auefeld and Hotel Kranichhöhe, were converted from EUR to CZK, then converted to USD, using the respective average of the daily exchange rates of each month in the reporting periods.  The monthly average exchange rates for the CZK versus the USD and EUR, respectively, are presented in the following graphical chart.

 Picture 2

26


 

The balance sheet totals of our foreign subsidiaries at December 31, 2016 were converted to USDs using the prevailing interbank exchange rates, as found at www.oanda.com, which are depicted in the following table.

 

 

 

 

 

 

 

 

As Of

    

USD

    

CZK

    

EUR

 

December 31, 2016

 

1.00

 

25.639

 

0.950

 

December 31, 2015

 

1.00

 

24.824

 

0.917

 

Critical Accounting Policies

Our Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain of the accounting policies require management to apply significant judgment in defining the estimates and assumptions for calculating financial estimates. These judgments are subject to an inherent degree of uncertainty. Management’s judgments are based on our historical experience, terms of various past and present agreements and contracts, industry trends, and information available from other sources, as appropriate. There can be no assurance that actual results will not differ from those estimates. Changes in these estimates could adversely affect our financial position or our results of operations.

We have determined that the following accounting policies and related estimates are critical to the preparation of our Consolidated Financial Statements:

Goodwill

Goodwill represents the excess of the cost of the Company’s subsidiaries over the fair value of their net assets at the date of acquisition.  In the CZ, this consisted of the Ceska casino and a parcel of land in Hate (upon a portion of which the Route 59 Casino and Hotel Savannah are situated).  In Germany, it consists of the Hotel Freizeit Auefeld.  Goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.  Goodwill impairment tests require the Company to first assess qualitative factors, which include macroeconomic conditions, financial performance, and industry and market considerations, to determine whether it is necessary to perform a two-step quantitative goodwill impairment test.  TWC assesses the potential impairment of goodwill annually, as of September 30th, and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Upon completion of such review, if impairment is found to have occurred, a corresponding charge to earnings will be recorded.  In light of the recent acquisition of German assets, TWC’s allocation of its Czech goodwill over two geographical reporting units, which are components of the casino segment, have been renamed and classified as the “Pilsen reporting unit” (“PRU”), which consists of the Ceska casino, and the “South Moravia reporting unit” (“SMRU”), which consists of the land in Hate. The German goodwill is derived from the newly-acquired Hotel Freizeit Auefeld, and is represented by the “Lower Saxony reporting unit” (“LSRU”).

As required, we performed the required annual assessment at September 30, 2016 and 2015, respectively, and determined that goodwill was not impaired in either assessment.  There were no indicators of impairment present during the fourth quarter of 2016 and 2015; therefore we determined that there was no need to perform a goodwill impairment test at December 31, 2016 and 2015.  We expect to perform our next required annual assessment of goodwill during the third quarter of 2017.  (See also the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8).

Other Significant Accounting Policies

Our other significant accounting policies are disclosed as follows:

·

Income Taxes - Note 2 “— Income Taxes” of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8.

·

Business Acquisitions - Note 2 “— Business Acquisitions” of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8.

27


 

Results of Operations

The following discussion and analysis relates to our consolidated results of operations for the years ended December 31, 2016 and 2015.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

(in thousands)

    

2016

    

2015

    

Variance $

    

Variance %

 

 

 

 

 

 

 

 

 

 

 

Revenues, by reporting segment:

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

48,262

 

$

38,762

 

$

9,500

 

24.5

%

Hotel

 

 

4,976

 

 

3,624

 

 

1,352

 

37.3

%

Total revenue

 

 

53,238

 

 

42,386

 

 

10,852

 

25.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

25,879

 

 

19,839

 

 

6,040

 

30.4

%

Hotel

 

 

2,794

 

 

1,908

 

 

886

 

46.4

%

General and administrative

 

 

8,839

 

 

9,625

 

 

(786)

 

(8.2)

%

Corporate expenses

 

 

4,396

 

 

3,842

 

 

554

 

14.4

%

Depreciation and amortization

 

 

2,220

 

 

1,863

 

 

357

 

19.2

%

Total operating expenses

 

 

44,128

 

 

37,077

 

 

7,051

 

19.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

9,110

 

 

5,309

 

 

3,801

 

71.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(243)

 

 

(206)

 

 

(37)

 

18.0

%

Other income

 

 

124

 

 

149

 

 

(25)

 

(16.8)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before foreign income tax

 

 

8,991

 

 

5,252

 

 

3,739

 

71.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

(2,668)

 

 

(1,394)

 

 

(1,274)

 

91.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,323

 

$

3,858

 

$

2,465

 

63.9

%

For the year ended December 31, 2016, we generated $53.2 million in consolidated total revenues, which was 25.6%, or approximately $10.9 million, higher than in the previous year, attributable in large part to the operations of all three casinos that comprise the casino segment.  Total revenue was aided also by the full year operation of Hotel Freizeit Auefeld, which was acquired on June 1, 2015 and one-month’s revenue from Hotel Kranichhöhe, beginning on December 1, 2016, when it was acquired.  The casino revenue improvements were supported by year-over-year (“YOY”) attendance increases in both live games and slot games. Consolidated live game revenue rose 19.0%, when compared with the prior year, due primarily to a 9.6% improvement in DpH and a 0.5 percentage point (“ppt”) increase in our consolidated WP, when compared to last year.  Our consolidated slot revenue increased by 29.4% YOY, further boosting total revenue.  The Hotel Savannah and Spa saw a 2.9% YOY increase in total revenue, mainly from a stronger ADR and  a 2.3 ppt occupancy rate increase.  Our hotel segment, which consists of the three German hotels, contributed approximately $5.0 million, or 9.3%, of our consolidated total revenue for 2016. 

The operating expenses of the casino segment increased by 30.4% over the prior year, largely from both volume-driven costs and revenue-driven gaming taxes, which proportionally increased as a result of the higher gaming tax rates imposed by the 2016 Gaming Tax Amendment.   Our slot lease expense was $2.4 million versus $2.3 million in 2015 due to a net addition of 60 slot machines on lease, over the course of the operating year.  Operating expenses for the hotel segment increased by 46.4%, largely due to the full year operation of Hotel Freizeit Auefeld, which operated only seven months in the 2015 calendar year when it was acquired on June 1, 2015, and to the one-month operation of Hotel Kranichhöhe, which was began on December 1, 2016.  We also incurred non-capitalizable expenses related to renovations of the guest rooms, restaurant and kitchen facilities at Hotel Freizeit Auefeld in 2016. 

28


 

Unlike in U.S.-based casinos, visitors to the TWC’s casinos are required by Czech law to register at the entrance reception by presenting acceptable forms of picture identification, which effectively permits the Company to track the frequency of their visits and, to a limited extent, the duration of each visit.  As an incentive to its players, the Company offers a Premium Club card, which is a “loyalty” card program, whereby players earn points (i.e. Loyalty Points”), according to the volume and duration of their play that are redeemable for prizes, food and beverage (“F&B”), and/or additional play.  In addition to these general amenities, TWC also issues different classes of loyalty cards, depending on the relative level of play time. These loyalty cards entitle the holders and a set number of the holders’ guests to various additional benefits.  These cards are granted based on the frequency of players’ visits and the aggregate total drop for a pre-determined number of visits.  The Company also grants certain other privileges to its VIP players, at the casino management’s discretion, such as ordering free a la carte meal from our restaurant facilities, opening private gaming tables, extending a casino’s operating hours, and/or providing free hotel or room accommodations.  Further, TWC provides complimentary drinks and buffets to all of its casino guests.  The complimentary F&B and hotel accommodations costs were recognized in the gaming departmental expenses, which totaled $2.8 million, or 6.1% of gaming revenues, for the year ended December 31, 2016, versus $2.5 million, or 6.9% of gaming revenues a year ago.  General gifts and giveaways, which were also recognized in the gaming department expenses, excluding personal gifts, represented $865,000 or 1.9% of gaming revenues for 2016, compared with $836,000, or 2.3% of gaming revenues, for 2015.  The Gambling Acts also prohibit casino operators from providing complimentary F&B and other benefits to its customers, which will reduce these operational costs for us for the year ended December 31, 2017.

The complimentary year-end personal gifts, mainly consisting of Loyalty Points, were booked as special promotions expenses under marketing department expenses and totaled approximately $61,000 for 2016, versus $103,000 for 2015.

General and administrative expenses decreased by 8.2%, or $787,000, in part due to the ban of certain marketing and promotional events imposed by the MOF on all casino operators from the beginning of January to the end of September. (See “Potential changes in legislation and regulation of our operations” in Item 1A. “Risk Factors,” above).  This savings was partially offset by overhead expenses related to the full-year operation of Hotel Freizeit Auefeld and one-month operation of Hotel Kranichhöhe.

Corporate expenses were up 14.4%, or $554,000, from the year-ago period, largely due to several factors, including higher stock option expenses, greater professional consultations, and higher employee incentive-related expenses as a result of significantly better operating results achieved in 2016.

Depreciation expense increased by 19.2%, largely from the full year’s depreciation expense for Hotel Freizeit Auefeld and one month’s depreciation of Hotel Kranichhöhe.

Interest expense in 2016 included the full year’s interest payments on both the Bank Sparkasse Hann. Münden loan (the “Sparkasse Hann. Münden Loan”) and the seller-financed loan (the “Seller Loan”) on the Hotel Freizeit Auefeld as well as the full year’s interest payments on the Bank Sparkasse Langen-Seligenstadt loan (the “Sparkasse Seligenstadt Loan”) .  In 2015, interest expense consisted of the full year’s interest on the Sparkasse Seligenstadt Loan and seven months of interest on the Sparkasse Hann. Münden Loan.

Other income consists of the gains from bargain purchases of the Hotel Kranichhöhe and Hotel Columbus in 2016 and 2015, respectively.

The increase of approximately $1.3 million, or 91.4%, in income taxes, was primarily due to a higher taxable income base for our Czech operations and from alternative minimum taxes paid in the U.S. for intercompany dividends used principally to retire intercompany loans.  There was no income tax liability incurred from the TWHG entity, the Germany holding company of the three German hotels, due to the carry-over losses associated with acquisition costs incurred for Hotel Columbus in 2014, Hotel Freizeit Auefeld in 2015 and Hotel Kranichhöhe in 2016.

Therefore, for the year ended December 31, 2016, we achieved a net income of $6.3 million, an approximately $2.5 million, or 63.9%, increase over the prior year’s approximately $3.9 million.

During the past nine years, inflation has not been a major factor that has materially affected the Company’s operating results. We have generally recovered costs associated with any nominal inflation through price adjustments in

29


 

our food and beverage and hotel room pricing, and in 2017, we expect to continue to apply the same principle uniformly throughout our operations. However, primarily due to competitive market and other economic pressures, any such future increases in costs associated with our casino or hotel operations and maintenance of our properties may not be completely recovered by the Company.

Our Business Units:

Casino Segment

Ceska, Czech Republic

For 2016, Ceska posted a 3.0% total revenue increase versus 2015, despite a 6.1% decrease in overall attendance, due to the negative impact from 2016 UEFA Champion soccer tournament held during mid-June to mid-July, as well as a 2.1 ppt reduction in the WP.  The improved revenue was due to a 12.5% increase in players’ DpH, which contributed to a 3.6% increase in total drop.  Slot revenue increased by 6.5% from the prior year, even with a 3.7% decrease in slot attendance.  Operating expenses were down by 12.0% from a year ago, mainly from lower amenity expenses, which include complimentary F&B and giveaways. Overhead expenses were down 21.9% compared to last year, largely due to significantly lower marketing and promotional activities, which were temporarily banned from January 2016 to September 2016 by the MOF under the premise that the operation of these promotional events were in violation of the law, as interpreted by the MOF.   The suspension affected all casinos operating in Czechia.  In late September 2016, the MOF reversed its position and removed the suspension for all casino operators.  Neither Ceska nor its sister casinos were materially affected by the ban. 

Route 55, Czech Republic

In 2016, Route 55’s revenue increased by 23.4% from the previous year, due to a combination of a 13.9% increase in overall attendance, higher DpH of 5.8%, and a 2.0 ppt rise in the WP.  The continuing shift in the casino’s clientele mix from live games toward slots is reflected in the 69.0% slot revenue composition of total revenue, compared with 67.7% in the prior year.  Despite the shift in business, both live game revenue and slot revenue increased year-over-year by double-digits, 21.2% and 25.7%, respectively.  Operating costs were up largely due to volume-based costs and revenue-based gaming taxes, while overhead expenses were down by 16.2%, due to lower marketing and promotional expenditures, as a result of the MOF’s temporary suspension noted above, and to lower utility expenses, from a milder winter and cooler summer.

Route 59, Czech Republic

In 2016, Route 59’s overall attendance was up by 12.3% from last year, resulting from an effective players’ loyalty program and superior customer service.  DpH increased by 10.1% while total drop rose by 22.7% over the prior year.  The casino posted a 35.5% increase in total revenue, despite the approximately nine-month promotional ban by the MOF, which had no discernible impact on its business and operations, as the ban applied equally to all Czech casino operators. Operating costs in 2016 increased primarily from volume-based costs and revenue-based gaming taxes.  Overhead costs were down by 13.8% due principally to the lower marketing and promotional expenses, and to lower utility expenses.  The business improvement was also, in part, attributable to the synergic operation of the adjoining Hotel Savannah and the Spa, which supports and enhances the casino operation.

Hotel Savannah and the Spa, Czech Republic

In 2016, Hotel Savannah posted a YOY occupancy increase of 2.3 ppts and a 4.0% improvement in ADR.  These improvements contributed to 2.9% increase in total revenue. The business improvement was in spite of a weaker regional hospitality market, and competitive online booking venues.  Lower overhead costs, principally in payroll and utility expense from a milder weather year, contributed to improved earnings.  The Hotel Savannah continues to play a crucial role as part of the Route 59 Complex by helping to attract new and existing players to the casino.

30


 

Hotel Segment

Hotel Columbus, Germany

Occupancy rate rose by 0.3% over the prior year, while ADR improved by 2.6%, thereby contributing to a 5.8% increase in total revenue over the prior year.  When compared with last year, operating costs were 2.3% higher while overhead expenses were 11.7% lower, thanks to lower payroll and lower repairs and maintenance costs. 

Hotel Freizeit Auefeld, Germany

The hotel had its first full year of operation in 2016, and underwent several renovations in the year, which encompassed guest rooms, restaurant and the main kitchen facilities and select public areas.  Although the renovations did not materially affect the hotel operations, which was open throughout this period, the unseasonably cold and rainy weather deterred significant business arrivals. Therefore, occupancy rate fell 3.1 ppts from last year, which only included the period from June to December.  Despite the weaker business, the hotel was able to boost ADR by 8.2% over the prior year’s seven-month period.   Operating and overhead expenses included non-capitalizable costs associated with aforementioned renovations and higher utility expenses due to the colder weather. 

Hotel Kranichhöhe, Germany

Acquired in December 2016, the hotel will undergo a $1.6 million renovation in 2017 to address product deficiencies, subsequent to which it will be repositioned from a three-star to four-star rated hotel in 2018. The renovation scope will include complete refurbishment of approximately 50% of the guest rooms; partial renovation of the remaining guest rooms; update of all guest room corridors; minor refurbishments of public areas; upgrade of some meeting rooms, including audio/visual equipment; and improvements to the heating, ventilation, and other technical installations.  (See also Note 13 - “Acquisition and Purchase Price Allocation” of the Notes to the Consolidated Financial Statements, included in this Annual Report in Part II, Item 8).

Liquidity and Capital Resources

At December 31, 2016, we had a working capital surplus of approximately $8.4 million, compared with a working capital surplus of $4.0 million at December 31, 2015.  Excluding for the impact of the timing variance of Kreissparkasse Köln bank loan receivable, which was funded on January 25, 2017, we would have had a working capital surplus of $4.1 million. 

For the year ended December 31, 2016, our net cash provided by operating activities was $10.9 million, which primarily consisted of $6.3 million from net income; $2.2 million from depreciation and amortization; increases in Czech gaming tax accrual of $1.2 million, accrued expenses and other current liabilities aggregating $1.5 million, that included an accrual of $277,000 for the Hotel Kranichhöhe’s real estate transfer tax and an additional $255,000 in employee incentive-related accrual from the stronger earnings achieved, plus $358,000 in stock and options expenses, which included $93,750 for the common stock issued for vested restricted stock award to Mr. Ramadan, pursuant to achievement of earnings per share targets in his employment agreement.  These increases were partially offset by decreases in other current assets, deferred tax assets, deposits and other assets, as well as the gain of $124,000 from a bargain purchase of said hotel, plus a small gain on assets disposal.

Our net cash used in investing activities totaled approximately $7.9 million, which included $2.7 million in capital improvements to our properties and the investment and advance totaling approximately $5.2 million for acquisition of Hotel Kranichhöhe, which were partially offset by approximately $38,000 of proceeds from the sale of assets.

Our net cash used in financing activities consisted of principal payments on the Sparkasse Seligenstadt Loan, the Sparkasse Hann. Münden Loan and the Seller Loan, and capital lease payments.

31


 

We are also obligated under various contractual commitments.  The following is a summary of our contractual commitments over the next five years, as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except in the footnotes)

    

    

 

    

Within

    

    

Years

    

    

Years

    

    

 

 

Contractual Obligations

 

Total