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.
			
		
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
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.
			
		
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
			
		
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
			
		
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:
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changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;
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the costs and administrative burdens associated with complying with applicable laws and regulations;
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the costs or desirability of complying with local practices and customs;
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the availability and cost of capital necessary for us to fund acquisitions, investments, capital expenditures and service debt obligations;
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delays in or cancellations of planned or future acquisition or development projects;
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foreign exchange rate fluctuations;
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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;
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increases in cost for healthcare coverage for employees and potential government regulation in respect of health coverage;
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shortages of labor or labor disruptions;
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shortages of desirable locations for acquisition or development;
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unrealistic purchase prices set by sellers; and
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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.
			
		
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.”
			
		
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.
			
		
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.
Item 1B. Unresolved Staff Comments.
None.
			
		
Item 2.
Item 2. Properties.
A summary of our properties as of February 28, 2017 is presented below in square feet and in square meters:
(1)
Casino segment.
(2)
Hotel segment.
			
		
(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
			
		
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.
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.
Item 4. Mine Safety Disclosures
Not applicable.
			
		
PART II
Item 5.
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.
The above table is not intended to forecast future performance of our Common Stock.
			
		
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.
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.
			
		
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.
			
		
Item 6.
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.
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
			
		
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
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. TWC does not maintain any instruments in a trading portfolio to offset or to hedge market risk.
Interest Rate Risk
The interest rate on our Hotel Columbus bank debt of $3.3 million at December 31, 2016, represented by the Sparkasse Seligenstadt Loan, is based on a fixed rate of 3.1% per annum, for the first ten years of a 15-year loan term, maturing on September 9, 2029. The terms of the loan agreement stipulate that the interest rate in the last five remaining years of the term will be based upon the prevailing market-based fixed rate for this type of commercial loan, which may be higher than it is today. The Hotel Freizeit Auefeld was acquired with the assistance of the Sparkasse Hann. Münden Loan and the Seller Loan. TWC assumed the hotel’s outstanding five bank loans from Sparkasse Hann. Münden. The assumed bank debt was converted in November 2015, as per mutual agreement, to a single loan of approximately €2.0 million, or $2.1 million, with the same lender, at a mutually agreed-upon 2.99% annual interest, fixed for 10 years, and paid over 15 years. The Hotel Freizeit Auefeld was acquired also through a seller-financed loan of €2.2 million, or $2.3 million, with terms of 3.0% annual fixed interest, amortized over 10 years, with a no-interest first two-month grace period. The interest rate on our Hotel Kranichhöhe bank debt of $4.2 million at December 31, 2016, represented by the Kreissparkasse Köln Loan, is based on a fixed rate of 1.95% per annum, for the first ten years of a 13-year loan term, maturing on November 21, 2029. The terms of the loan agreement stipulate that the interest rate in the last three remaining years of the term will be based upon the prevailing market-based fixed rate for this type of commercial loan. Therefore, our interest expense in year 11 could increase as a result of this factor. However, we cannot predict with any certainty the long-term direction of the local and national economy of Germany nor the impact of the world economy on interest rates. Any movement toward higher interest rates in year 11 could have a material effect on our interest expense. We would have an interest rate risk exposure upon our remaining principal at that time of approximately $1.4 million for Hotel Columbus, approximately $760,000 for Hotel Freizeit Auefeld and $1.3 million for Hotel Kranichhöhe. We have not in the past and do not currently engage in interest-rate swap agreements or other types of interest-rate hedging activities. Our Company’s management evaluates our exposure to market risk by monitoring interest rates in the marketplace to determine the best course of action, if needed.
Foreign Currency Exchange Rate Risk
The information in this section should be read in conjunction with information related to changes in the exchange rates of foreign currency in “Part I, Item 1A. Risk Factors.” Changes in foreign currency exchange rates could materially adversely affect our consolidated results of operations and/or financial condition.
Due to the fact that our operations are all located overseas, our overall results are subject to the impact of fluctuations in foreign currency exchange (“FX”) rates. Pursuant to the January 2002 adoption of the EUR by Germany and Austria (but not Czechia) as the sole trading currency by all European Union member nations that had previously tied their local currencies to it, our operations conducted business in EURs and CZKs. Because the vast majority of our customers are German and Austrian, our revenues are generally received in EUR. However, because our operations are situated in the CZ, the majority of our expenses are denominated in CZKs. As our primary reporting subsidiary, TWH&E, is a Czech entity, all revenues and expenses, regardless of sources of origin, are recognized in the Czech currency and translated to USD for reporting purposes.
			
		
Based on our sensitivity analysis, as of the year ended December 31, 2016, we determined that hypothetical 10% movements in the two functional currencies, the CZK, when converted to the USD, and the EUR, when converted to the CZK, would have resulted in the following changes to our operating results:
·
A hypothetical 10% strengthening of the USD to the CZK would have decreased our operating results before tax by an approximate $1.3 million;
·
A hypothetical 10% weakening of the USD to the CZK would have increased our operating results before tax by an approximate $1.6 million;
·
A hypothetical 10% strengthening of the EUR to the CZK would have increased our operating results before tax by an approximate $3.4 million; and
·
A hypothetical 10% weakening of the EUR to the CZK would have decreased our operating results before tax by an approximate $3.4 million.
In real world situations, the impact of the FX on our operating results could be positive or negative, depending on the combination, the variability and intensity of the above probabilities, coupled with the strength of the correlation of the functional currencies to the USD, among other factors. We have not in the past, and do not currently, hedge our currency holdings or transactions.
			
		
Item 8.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2016 and 2015
Consolidated Statements of Operations and Comprehensive Income, Years Ended
December 31, 2016 and 2015
Consolidated Statements of Stockholders’ Equity, Years Ended
December 31, 2016 and 2015
Consolidated Statements of Cash Flows, Years Ended
December 31, 2016 and 2015
Notes to Consolidated Financial Statements
			
		
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Trans World Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Trans World Corporation and Subsidiaries (collectively, the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the years ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans World Corporation and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years ended December 31, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ WithumSmith+Brown PC
Morristown, New Jersey
March 7, 2017
			
		
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(in thousands, except for share data)
See accompanying notes to consolidated financial statements.
			 		
			
		
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Years Ended December 31, 2016 and 2015
(in thousands, except for share and per share data)
See accompanying notes to consolidated financial statements.
			
		
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2016 and 2015
(in thousands, except for share data)
See accompanying notes to consolidated financial statements.
			
		
TRANS WORLD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016 and 2015
(in thousands)
See accompanying notes to consolidated financial statements.
			 		
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
NOTE 1 - Nature of Business
Trans World Corporation and Subsidiaries (collectively, “TWC” or the “Company”), a Nevada corporation, is primarily engaged in the gambling business in the Czech Republic (“CZ” or “Czechia”) and in the hospitality business in Germany (“DE”).
TWC owns and operates three full-service casinos and four hotels. The Company’s operating units are organized under two reportable segments: a casino segment and a hotel segment. The three casinos operate under its registered brand, American Chance Casinos (“ACC”). One casino is located in the western part of the CZ, close to the German border, in Ceska Kubice (“Ceska”), which currently has 14 gaming tables and 102 slot machines. The other two casinos are located in the southern part of the CZ, close to the Austrian border. The larger of these two, “Route 55,” located in Dolni Dvoriste, has 21 gaming tables and 150 slot machines. The other casino, “Route 59,” is located in Hate, near Znojmo, and currently has 25 gaming tables and 190 slot machines. In addition to the Czech casinos, TWC also owns and operates a 77 -room, European four-star deluxe hotel, the Hotel Savannah, which is physically connected to our Route 59 casino, and also a full-service spa, the Spa at Savannah (the “Spa”), which is operated by an independent contractor and is attached to the hotel. The three casinos and the Hotel Savannah comprised the Company’s casino segment.
The Hotel Columbus is a 117-room, four-star hotel, located in Seligenstadt, Germany, near Frankfurt. The Hotel Freizeit Auefeld, is a 93-room, four-star hotel, located in Hann. Münden, Germany, about a two-hour drive north of Frankfurt. Although the Company acquired the hotel on June 16, 2015, the signing parties agreed to set the acquisition date retroactive to June 1, 2015, which had no impact on the purchase price. The Company also acquired Hotel Kranichhöhe, a 107-room three-star hotel, located in Much, Germany, near Cologne, Germany. It is about a two-hour drive south-east to the Hotel Columbus and a three-hour drive east to Hotel Freizeit Auefeld. Although the Company acquired the hotel on December 21, 2016, the signing parties agreed to set the date of acquisition retroactive to December 1, 2016, which had no impact on the purchase price. The three German hotels comprised the Company’s hotel segment.
NOTE 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation - The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) and Regulation S-X.
The functional currency of the Czech subsidiaries is the local Czech koruna ("CZK") and the functional currency of the German subsidiary is the euro currency ("EUR"). However, as our primary reporting subsidiary, TWH&E, is a Czech entity, all transactions, regardless of sources of origin, are recognized (and in the case of the German hotel operation, are recognized first) in the Czech currency and translated to USD for reporting purposes.
All intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash in hand; current balances with banks and similar institutions; term deposits of three months or less with banks and similar institutions. The carrying amounts of cash at banks and in-hand and term bank deposits approximate their fair values.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
Property and Equipment - Property and equipment is stated at cost less accumulated depreciation and amortization. TWC capitalizes the cost of improvements that extend the life of the asset and expenses maintenance and repair costs as incurred. The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives:
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. 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 hotel segment goodwill is derived from the Hotel Freizeit Auefeld, and is represented by the “Lower Saxony reporting unit” (“LSRU”).
Goodwill impairment tests allow the Company to first assess qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company 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 will be recorded.
Based on TWC’s own assessment of qualitative factors which included an analysis of macroeconomic conditions, financial performance, industry and market considerations, and other factors, the Company concluded that it was not necessary to perform a two-step quantitative goodwill impairment test and that the goodwill of the Company was not impaired as of September 30, 2016, its annual assessment date. There were no triggering factors during the fourth quarter of 2016, hence, no additional goodwill impairment testing was warranted as of December 31, 2016.
Comprehensive Income (Loss) - The Company complies with requirements for reporting comprehensive income (loss). Those requirements establish rules for reporting and display of comprehensive income (loss) and its components. Furthermore, they require the Company’s change in the foreign currency translation adjustments to be included in other comprehensive income (loss). There were no other components of the Company’s comprehensive income (loss) in 2016 and 2015.
Foreign Currency Translation - The Company complies with requirements for reporting foreign currency translation, which require that for foreign subsidiaries whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and resulting translation adjustments are included in “accumulated other comprehensive income.” Statement of income accounts are translated by applying monthly averages of daily exchange rates on the respective monthly local statement of operations accounts for the year.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
The impact of foreign currency translation on goodwill is presented below:
(1)
Goodwill was amortized over 15 years until the Company started to comply with revised GAAP requirements, as of January 1, 2002. This balance represents the remaining, unamortized goodwill, after an impairment charge was taken prior to January 1, 2003.
(2)
USD residual balance translated to CZK at June 30, 1998, the date of acquisition of such assets, with the date of acquisition CZK to USD FX rate of 33.883.
(3)
EUR balance translated to CZK at June 1, 2015, the date of acquisition of the Hotel Freizeit, with the date of acquisition FX rate of 27.245 from CZK to EUR.
(4)
FX central bank foreign exchange rates taken from www.CNB.CZ.
Earnings Per Common Share - The Company complies with accounting and disclosure requirements regarding earnings per share. Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the dilutive effect of Common Stock equivalents on an average basis during the period. As of December 31, 2016, the Company’s Common Stock equivalents include 665,000 unexercised stock options, 50,000 shares of restricted stock, and 626,028 shares issuable under the Company’s Deferred Compensation Plan. As of December 31, 2015, the Common Stock equivalents included 635,000 unexercised stock options, 75,000 shares of restricted stock, and 436,842 deferred compensation shares. These shares for the respective years were included in the computation of diluted earnings per common share, if such unexercised stock options, restricted stock, and deferred compensation stock were vested and/or “in-the-money,” as the case may be.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
A table illustrating the impact of dilution on earnings per share, based on the treasury stock method, is presented below:
Revenue Recognition - Casino revenue is defined as the net win from gambling activities, which is the difference between gaming wagers and the amount paid out to patrons, and is recognized on the day it is earned. Revenues generated from ancillary services include hotel room rentals, sales of F&B, spa services, and sales of casino logo merchandise and are recognized at the time the related services are performed or goods sold, as shown in the table below, as a percentage of total revenue.
Revenue segment as percentage of total revenue:
Business Acquisitions - Assets acquired and liabilities assumed in business combinations are recorded on the Company’s consolidated balance sheets as of the respective agreed acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the consolidated statements of income since their respective dates of acquisition. In certain circumstances, the purchase price allocations may be based
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision until the Company receives final information and other analyses during the measurement period ending a year after the date of acquisition.
Segment Reporting  On September 1, 2014, the Company acquired Hotel Columbus and after this acquisition, the Company determined, due to the significance of the assets acquired and pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, that the Company had two reportable segments, a casino segment and a hotel segment. ASC 280 designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company is including this segment reporting under Note 14 - “Segment Information,” below.
Promotional Allowances  Promotional allowances primarily consist of the provision of complimentary food and beverages and, to certain of its valuable players, hotel or room accommodations. For the years ended December 31, 2016 and 2015, revenues do not include the aggregate of retail amount of food and beverages (“F&B”) and hotel or room accommodations of $7,496 and $6,688, respectively, provided at no-charge to customers. The retail value of the F&B given away is determined by dividing the F&B costs charged to the gaming operation of $2,655 and $2,404, for the respective periods, by the average percentage of cost of F&B sold. The cost of hotel or room accommodations is either the out-of-pocket expenses paid to other hotels to accommodate TWC’s customers or the retail charge of room accommodations at the Company’s Hotel Savannah and at its VIP guest rooms at Ceska and at Route 55.
The promotional allowances are summarized below:
External Advertising - The Company complies with the accounting and reporting requirements for reporting on advertising costs. External advertising expenses are charged to operations as incurred and were $140 and $175 for the years ended December 31, 2016 and 2015, respectively, as recorded in the selling, general and administrative expenses of the consolidated statements of operations.
Fair Value of Financial Instruments - The fair values of the Company’s assets and liabilities that qualify as financial instruments, mainly the debts underlying the assets of the three German hotels, approximate their carrying amounts presented in the accompanying consolidated balance sheets at December 31, 2016 and 2015, respectively.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets - The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived assets, or by the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable market value. There were no impairment losses for long-lived assets recorded for the years ended December 31, 2016 and 2015, respectively.
Stock-based Compensation The Company accounts for stock options using the modified prospective method in accordance with FASB ASC 718-10, “Compensation-Stock Compensation.” Under this method, compensation costs include the estimated grant date fair value of the awards amortized over the options’ vesting period.
The Company currently utilizes the Black-Scholes option pricing model to measure the fair value of stock options granted to certain key management employees (“KMEs”). Stock-based compensation was approximately $358 and $78 for the years ended December 31, 2016 and 2015, respectively, and is included in selling, general and administrative expenses in the consolidated statements of operations.
Czech Gaming Taxes - In December 2011, the Czech parliament passed sweeping gaming tax legislation, which was then signed by the Czech president into law. The gaming tax law (“2012 Gaming Tax Law”) law took effect on January 1, 2012. The gaming tax law is summarized below, in actual monetary amounts (not in thousands):
In December 2015, the President of the Czech Republic signed an amendment to the Gaming Tax Law (“2016 Gaming Tax Amendment”) that effectively raised the rates of these gaming taxes. The amendment became effective on January 1, 2016 and the new rates in the gaming tax law are as follow:
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
Gaming taxes are payable by the 25th day following the end of each calendar quarter, while corporate income tax obligation is paid by June 30th of the subsequent year. The Company is also required to make estimated quarterly income tax payments. TWC was current on all of its Czech tax payments at December 31, 2016 and through the date of this report.
TWC’s gaming-related taxes and fees, which are recognized in the Gaming Department’s expenses, for the years ended December 31, 2016 and 2015 are summarized in the following table:
In conformity with the European Union (“EU”) taxation legislation, the Czech Republic’s 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 gambling operations. The recoverable VAT under the Hotel Savannah and Hotel Columbus operations was not material for the years ended December 31, 2016 and 2015, respectively.
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, which is took effect on January 1, 2017, 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 actual amount of Kč 80 (approximately $3.12) on each slot machine. 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
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between the federal government and local municipalities. A summary table of the 2017 Gambling Tax Act is shown below:
The 2017 Gambling Act introduces many new changes, requirements and conditions, that will take effect at various times in the future, 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 renewal of its slot and other technical game license. The Company is also awaiting the Czech Ministry of Finance’s (“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 summarized in the section, “New Gambling Acts and their Impact” in in Item 7. “Management Discussion and Analysis.”
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 $1,300 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 of these measures by the MOF and their eventual implementation into the Company’s gambling operations.
Income Taxes - The Company complies with accounting and reporting requirements with respect to accounting for U.S. federal and foreign income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and the tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities. The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have
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(Figures in thousands, except for statistics and share data)
been recognized as of and for the years ended December 31, 2016 and 2015. However, management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.
Effective January 1, 2012, the Czech government instituted an effective corporate income tax of 19% on income derived from gaming revenues, which prior to the law changes were subject only to gaming taxes. See Note 10 - “Income Taxes,” below.
Germany had an effective corporate income tax rate of approximately 30% for the years ended December 31, 2016 and 2015. The Company’s German hotel operations were not subject to income tax due to a net operating loss for the years ended December 31, 2016 and 2015, respectively.
Recent Accounting Pronouncements - In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The guidance clarifies the principles for recognizing revenue and establishes a common revenue standard for US GAAP and International Financial Reporting Standards. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted. Retrospective application is required. The Company is currently evaluating the impact of adopting and does not expect the standard to have any material impact on its consolidated financial statements.
In June 2014, the FASB issued guidance on stock compensation that requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. The guidance is effective for annual reporting periods beginning after December 31, 2015, with early adoption permitted. The Company’s adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued guidance on the presentation of financial statements for a going concern. The aim is to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for fiscal years ending after December 15, 2016, and annual and interim periods thereafter. The Company’s adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued amended accounting guidance that changes the balance sheet presentation of debt issuance costs. Under the amended guidance, debt issuance costs will be presented on the balance sheet as a direct deduction from the related debt liability rather than as an asset. For public companies, the new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015 (including interim periods within those fiscal years), and is required to be applied on a retrospective basis. The impact of the adoption did not have an effect on the Company’s consolidated financial statements.
In September 2015, the FASB issued updated guidance on business combinations. GAAP required that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, this update eliminates the requirement to retrospectively account for those adjustments. For public companies, the updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015. This update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company adopted this guidance in 2016, which did not have any material impact on its consolidated financial statements.
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(Figures in thousands, except for statistics and share data)
In November 2015, the FASB issued updated guidance on income taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, this update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this update. For public companies, the updated guidance is effective for financial statements issued for annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is reflected in the Company’s consolidated financial statements.
In February 2016, the FASB issued updated guidance to increase transparency and comparability among organizations by reporting lease assets and lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing arrangements. For public companies, the updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. The Company has not adopted this guidance for 2016 and is currently evaluating the impact of adopting this standard. The adoption of this standard would require the Company to report its leases on slot machines in assets and liabilities of its consolidated balance sheets.
In March 2016, the FASB issued updated guidance, as part of its Simplification Initiative, which covers several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this updated guidance are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of adopting and does not expect the standard to have any material impact on its consolidated financial statements.
In January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Under the current implementation guidance, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The updated guidance provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the Board has developed more stringent criteria for sets without outputs. Lastly, the updated guidance narrows the definition of the term output so that the term is consistent with how outputs are described in another guidance regarding revenue from contracts with customers. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. This updated guidance should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company is currently evaluating the impact of adopting and does not expect the standard to have any material impact on its consolidated financial statements.
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(Figures in thousands, except for statistics and share data)
In January 2017, the FASB issued updated guidance to simplify the subsequent measurement of goodwill, by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity must perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. An entity should apply this updated guidance in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is an SEC filer should adopt this updated guidance for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not adopted this updated guidance for 2016 and is currently evaluating the impact of adopting this standard.
NOTE 3 - Property and Equipment
At December 31, 2016 and 2015, property and equipment consisted of the following:
Depreciation and amortization expense for the years ended December 31, 2016 and 2015 were approximately $2,220 and $1,863, respectively.
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(Figures in thousands, except for statistics and share data)
NOTE 4 - Long-Term Debt
At December 31, 2016 and 2015, long-term debt consisted of the following:
(1)
On September 9, 2014, the Company received a €3,600, or approximately $3,800, 15-year, amortized loan granted by a local German bank, Bank Sparkasse Langen-Seligenstadt (the “Sparkasse Seligenstadt Loan”) to purchase the Hotel Columbus. The loan terms provide for a fixed interest rate of 3.1% for the first ten years, followed by a prevailing market-based fixed rate for this type of commercial loan for the remaining five years of the term. The loan is secured by the Hotel Columbus’ assets as well as a cash deposit of €300, or $316, equaling approximately one year’s principal and interest payments and is held in a savings account with, and a mortgage on the hotel in favor of, the lender. The loan terms require monthly payments of principal and interest at the end of each month and the loan will mature on September 9, 2029.
(2)
On June 16, 2015, as part of its Hotel Freizeit Auefeld acquisition, TWC assumed five bank loans from Bank Sparkasse Hann. Münden (the “Sparkasse Hann. Münden Loan”), aggregating €2,018, or approximately $2,127, with an average fixed interest rate of 4.94%. The assumed bank debt was converted in November 2015 to a single loan with the same lender, at 2.99% annual interest, fixed for 10 years, and amortized over 15 years. The loan is secured by the Hotel Freizeit Auefeld’s assets as well as a cash deposit of €250, approximately $264, equaling approximately one year’s principal and interest payments and is held in a savings account with, and a mortgage on the hotel in favor of, the lender. The loan terms required monthly payments of principal and interest at the end of each month and the loan will mature on November 30, 2030.
(3)
On June 16, 2015, as part of its Hotel Freizeit Auefeld acquisition, TWC was also granted a seller-financed loan of €2,232, or approximately $2,353 (the “Freizeit Auefeld Seller Loan”), with terms of 3.0% annual fixed interest, to be repaid monthly over 10 years, with a first two-month no-interest grace period. The loan is also secured by the Hotel Freizeit Auefeld’s assets.
(4)
On December 21, 2016, the Company signed for a €4,000, or $4,200, 13-year, amortized loan granted by a local German bank, Bank Kreissparkasse Köln (the “Kreissparkasse Köln Loan”) to purchase the Hotel Kranichhöhe. The loan was funded on January 25, 2017. In December 2016, the Company advanced €4,000 of the loan, or $4,215, in addition to its equity investment, for the purchase and recognized the loan proceeds as a receivable. The loan terms provide for a fixed interest rate of 1.95% for the first ten years, followed by a prevailing market-based fixed rate for this type of commercial loan for the remaining three years of the term. The loan is secured by the Hotel Kranichhöhe’s assets as well as a cash deposit of €709, or $747, equaling approximately two years’ principal and interest payments, which will be deposited in January 2017 and is to be held in a savings account with, and a
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(Figures in thousands, except for statistics and share data)
mortgage on the hotel in favor of, the lender. The loan terms require monthly payments of principal and interest at the end of each month and the loan will mature on November 21, 2029.
Principal payments due on long-term debt are as follows:
NOTE 5 - Accrued Expenses and Other Current Liabilities
At December 31, 2016 and 2015, accrued expenses and other current liabilities consisted of the following:
NOTE 6 - Commitments and Contingencies
Lease Obligations - The Company is obligated under several operating leases, excluding leased slot machines. Rent expense under these operating and financial leases, which include: (i) the ground lease at Hotel Freizeit Auefeld; (ii) the Company’s corporate office lease in New York City, the lease of which was renewed for another five years, through March 31, 2020, and (iii) the employee housing leases, which can be terminated anytime with a six-month prior notice, was approximately $175 and $164 for the years ended December 31, 2016 and 2015, respectively. Future aggregate minimum annual rental payments under all of these leases for the lesser of five years or until their expiration dates are as follows:
The Company is also obligated under a number of five-year, slot equipment operating leases, the projected costs of which are not included in the table above due to fluctuating inventory, expiring over staggered years, which provide for a monthly fixed rental fee per slot machine, and an annual option for replacement with different/newer machines during the term of the lease. For the years ended December 31, 2016 and 2015, the Company’s slot lease expense was $2,436 and $2,321, respectively. All slot leases can be terminated at any time, subject to an early-termination penalty equal to three-month lease payments for each leased slot machine.
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(Figures in thousands, except for statistics and share data)
Employment Agreements - The Company’s employment agreement with its Chief Executive Officer (“CEO”), Mr. Rami S. Ramadan, absent the intervention of either party by September 30th of each year, renewed automatically for another calendar year, ending, as of February 28, 2017, on December 31, 2017. In addition to a perpetually renewable employment term of one year absent the intervention of either party, the agreement provides for annual compensation, plus participation in the Company’s benefits programs and equity incentive plans. Annual compensation of $450 will be paid in 2017, pursuant to the evergreen renewal terms of said employment agreement, excluding any bonus awards that were earned in 2016 but payable in 2017 or may be or have been granted in 2017 at the discretion of TWC’s Board of Directors (the “Board”).
On November 11, 2014, the Board of Director’s Compensation Committee approved an amendment (the “Amendment”) to the Amended and Restated Employment Agreement dated November 18, 2008 for Mr. Ramadan. The Amendment provides that if, within 120 days prior to, or twenty-four months after a Change of Control (as defined in the Employment Agreement), (i) Mr. Ramadan is terminated by the Company other than for cause (and not due to his death or disability), or (ii) he provides the Company with written notice of his Voluntary Termination for Good Reason (as defined in the Employment Agreement), or (iii) he is in the employ of the Company on the closing date of a Change in Control of the Company, then the Company will pay to him: (A) an amount equal to two times his Base Salary (as defined in the Employment Agreement) as of the date of termination; and, (B) any accrued but unpaid (1) base salary; (2) sick pay; (3) vacation pay; and (4) health insurance benefits as described in the Employment Agreement for the period ending on the earlier of: (x) the date Mr. Ramadan obtains subsequent employment where medical insurance coverage is available to him, or (y) two years after the date of termination or Change in Control, as applicable. If the above benefits are paid to him as a result of (iii) above, they cannot be paid to him again as a result of either (i) or (ii), above, for the same Change in Control event. The Amendment also includes a description of what actions TWC and Mr. Ramadan will take in the event that the aggregate payment or benefits to be paid to him as described above are deemed by the Internal Revenue Service to be “excess parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”).
The Company has a 3-year evergreen employment agreement, dated June 1, 2005, with its Managing Director of Operations and Development, Mr. Paul Benkley. Unless communicated to Mr. Benkley within 60 days prior to the expiration of his employment agreement, which currently expires on December 31, 2019, it will renew automatically for another three-year term. In the event of termination without cause, excluding disability and retirement, he will be entitled to one year of severance at the annual salary in effect at the time of termination. In the event of non-renewal of this employment contract, he will receive severance equal to three months’ salary based on the salary in effect on the date of expiration of the contract.
Change of control agreements - On October 3, 2014, the Company entered into severance agreements with four KMEs that provide for the lump sum payment of one year’s salary and up to one year’s health insurance coverage in the event of a change of control of the Company, or if the employee voluntarily leaves the Company for any reason (other than death or disability) within one year after such a change of control event.
Taxing Jurisdiction - The Czech Republic and Germany currently has a number of laws related to various taxes imposed by governmental authorities, including gaming tax (for the Czech casinos), VAT, and payroll (social) taxes and corporate income tax. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters) are subject to review and investigation by a number of Czech and German governmental authorities, which are enabled by law to impose fines, penalties and interest charges, and, ultimately, create tax risks for the Company in these countries in which it operates. Management believes that it has adequately provided for its tax liabilities.
Legal Matters - The Company may be, from time to time, a party to various legal proceedings and administrative actions, all arising from the ordinary course of business. The Company was not, as of the date of this report, involved in any material legal proceeding nor was it involved in any material litigation during the year ended December 31, 2016 and through the date of this filing.
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(Figures in thousands, except for statistics and share data)
NOTE 7 - Risks and Uncertainties
Regulation and Licensing  The Company’s operations are subject to regulation by each federal and local jurisdiction in which it operates. Each of the Company’s officers may be subject to strict scrutiny and approval from the gaming commission or other regulatory body of each jurisdiction in which TWC conducts gambling operations. Furthermore, the operations of its 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 TWC’s Czech casinos are duly licensed by the MOF, the national governmental authority that regulates gambling in the Czech Republic. The Company is also subject to ongoing regulation and oversight 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 the Company’s operations. Substantial fines for violations of gaming laws or regulations may be levied. The suspension or revocation of any license which may be granted to the Company or the levy of substantial fines for violations could significantly harm its business, financial condition and results of operations. Furthermore, compliance costs associated with gaming laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to its business or a violation of any current or future laws or regulations applicable to its business or gaming licenses could require the Company to make substantial expenditures or could otherwise negatively affect its gambling operations.
Moreover, legislation to further prohibit, limit, or add burdens to its business, such as the Gambling Acts, previously mentioned, may be introduced in the future in the Czech Republic or elsewhere where gambling has been legalized. In addition, from time to time, legislators and special interest groups (which may include its competitors) have proposed legislation that would expand, restrict or prevent gambling operations or which may otherwise adversely impact its operations in the jurisdictions in which the Company operate. Any expansion of gambling or restriction on or prohibition of its gambling operations, increase in gaming taxes, or enactment of other adverse regulatory changes could have a material adverse effect on the Company’s business, financial condition, operating results and prospects.
Foreign Activities - The Company’s operations are entirely outside of the United States of America. Operating internationally involves additional risks relating to such things as currency exchange rates, different legal and regulatory environments, political and economic risks relating to the stability or predictability of foreign governments, differences in the manner in which different cultures conduct business, difficulties in staffing and managing foreign operations, differences in financial reporting, operating difficulties, 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 the consolidated financial position, results of operations and cash flows of the Company.
Cash and cash equivalents - Cash and cash equivalents consists of cash and short-term deposits in banks and on hand. The Company maintains a substantial portion of its cash balances in financial institutions that are outside the United States of America or that may exceed the Federal Deposit Insurance Corporation (“FDIC”) coverage of $250 per account. The Company has not experienced any losses in such accounts and believes it is not subject to any significant credit risk on cash. In addition, the FDIC does not insure the Company’s foreign cash, which totaled $13,723 and $10,172 at December 31, 2016 and 2015, respectively. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.
NOTE 8 - Stockholders’ Equity
For the years ended December 31, 2016 and 2015, the Company recognized stock-based compensation expense of approximately $264 and $78, respectively, for the vesting of granted stock options. The Company also recorded in 2016
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(Figures in thousands, except for statistics and share data)
an expense of approximately $94 for the issuance of common stock for vested restricted stock award to its CEO, pursuant to reaching designated earnings per share targets as stipulated in his restricted stock grant.
As part of their participation in the Company’s Deferred Compensation Plan, each member of the Board agreed to receive a portion or all of his annual retainer in shares of the Company’s Common Stock, aggregating $100 and $71 for the entire board, for the years ended December 31, 2016 and 2015, respectively. KME contribution to the Deferred Compensation Plan was $425 and $350 for the year ended December 31, 2016 and 2015, respectively.
NOTE 9 - Deposits and Other Assets
Restricted Deposits - Restricted deposits include the bond deposit for the Czech gaming license of CZK 22,000, or $858 and $886 at December 31, 2016 and 2015, respectively. In addition, restricted deposits include a loan security deposit of €300, or approximately $316, related to the Company’s Sparkasse Seligenstadt Loan, a loan security deposit of €250, or approximately $264, related to the Company’s Sparkasse Hann. Münden Loan and $24 as security deposit on the Company’s corporate office lease.
NOTE 10 - Income Taxes
The Company files income taxes in the following jurisdictions: United States, Czech Republic and Germany. In the Czech Republic, prior to January 1, 2012, gaming income was not subject to corporate income tax. In lieu of income taxes, gaming income was subject to other taxes in the Czech Republic, including gaming and charity taxes, which were primarily based on percentages of gaming revenues. Foreign net operating loss carry-forwards (disclosed below) were derived from non-gaming activities and could only be applied against non-gaming activities. Effective January 1, 2012, the Czech government instituted a corporate income tax rate of 19.0% on income. For the year ended December 31, 2016, the Company recorded an income tax provision of $2,668, which includes a $130 deferred income tax benefit resulting from foreign book tax differences on fixed assets and other temporary items. For the year ended December 31, 2015, the Company recorded an income tax provision of $1,394, which included $266 deferred income tax benefit resulting from foreign book tax differences on fixed assets and other temporary differences. Corporate income tax is payable by the end of June of the subsequent year. In compliance with new tax regulations, the Company began making quarterly, estimated Czech corporate income tax payments beginning for the quarter ended September 30, 2013.
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(Figures in thousands, except for statistics and share data)
Domestic and foreign income taxes, included in the consolidated statements of operations, for the years ended December 31, 2016 and 2015 are summarized below:
The Company’s provision (benefit) for income taxes at December 31, 2016 and 2015 is summarized as follows:
The Company’s effective income tax rate differs from the statutory federal income tax rate as follows:
The Company’s current year effective income tax rate was impacted due to losses in the United States for which no benefit has been recorded. A majority of the earnings recognized by the Company during the year ended December 31, 2016 were at our properties in the Czech Republic. Based on permanent items and the impact of foreign currency exchange rates, the earnings in the Company’s Czech properties accounted for nearly 100% of the total tax expense recorded.
The Company records deferred tax assets and liabilities based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted statutory tax rate in effect for the year these differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. The recorded deferred tax assets are reviewed for impairment on a quarterly basis by reviewing the Company’s internal estimates for future taxable income.
The Company assesses the continuing need for a valuation allowance that results from uncertainty regarding its ability to realize the benefits of the Company’s deferred tax assets. The Company has a valuation allowance of $13,406 on its U.S. deferred tax assets as of December 31, 2016 due to the uncertainty of future taxable income. The ultimate realization of deferred income tax assets depends on generation of future taxable income in the jurisdictions where the assets are located during the periods in which those temporary differences become deductible. If the Company concludes that its prospects for the realization of its deferred tax assets are more likely than not, the Company will then reduce its valuation allowance as appropriate and credit income tax.
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(Figures in thousands, except for statistics and share data)
At December 31, 2016, the Company had U.S., state and foreign net operating loss carry forwards (NOL’s), of approximately $35,077, $13,078 and $358, respectively, available to offset certain future taxes payable. However, certain historical events may have triggered significant limitations on pre-existing U.S. NOL’s pursuant to Section 382 of the Internal Revenue Code. A full valuation allowance has been established for these deferred tax assets since their realization is considered uncertain. The Company’s NOLs will begin to expire in 2017.
The Company’s deferred income taxes at December 31, 2016 and 2015 are summarized as follows:
In November 2015, the FASB issued guidance on balance sheet classification of deferred taxes, requiring that all tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for annual reporting periods beginning after December 15, 2016. The Company has early adopted this guidance. This did not result in a change to the Company’s classification of deferred tax assets and liabilities.
The Company has analyzed filing positions in all of the U.S. federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its U.S. federal tax return, its state tax return in New York and its foreign tax returns in Czech Republic and Germany, where it owns and operated casinos and hotels, as “major” tax jurisdictions, as defined by the Code.
The Company’s tax returns for the following periods are subject to examination:
The Company has not recognized any tax liability for uncertain income tax positions on any of its returns. The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
Based on the Company’s capital, debt and liquidity position, there is no expected need for cash repatriation from foreign subsidiaries, and all cash held in foreign jurisdictions is considered permanently reinvested. These earnings could become subject to income taxes if they are remitted as dividends, are loaned to the Company or any of the Company’s subsidiaries located in the United States, or if the Company sells its stock in the foreign subsidiaries.
NOTE 11 - Stock Options
The activity in the Company’s stock option plan was as follows for the dates indicated:
On November 11, 2014, pursuant to the Company’s 2014 Equity Incentive Plan, Mr. Ramadan was granted five-year options to purchase 200,000 shares of Common Stock that vest in four equal parts, with the options to acquire 50,000 shares vesting immediately upon the date of grant and options to acquire 50,000 shares vesting subsequently upon each anniversary of the grant date. The fair value of this grant was $234, or $1.17 per option. The exercise price of all these options was initially set at $3.20 per share, the closing stock price on the date of grant, and will escalate by 4.0% annually on each anniversary date. As of December 31, 2016, 150,000 options had vested and are exercisable at the escalated price of $3.46 per share.
On April 15, 2015, pursuant to the Company’s 2014 Incentive Equity Plan, the Compensation Committee recommended and the Board approved a grant to all six members of the Board at that time, each five-year options to purchase 10,000 shares of Common Stock that vest in four equal parts, with the options to acquire 2,500 shares vesting immediately upon the date of grant and options to acquire 2,500 shares vesting subsequently upon each anniversary of the grant date. The exercise price of these options was initially set at $2.75 per share, the closing stock price on the date of grant, and will escalate by 4.0% annually on each anniversary date. The fair value of this grant was $76, or $1.27 per option. As of December 31, 2016, 12,500 options had vested and are exercisable. The 10,000 options grant to Mr. Malcolm M.B. Sterrett, a former director, who stood down for re-election at the Company’s annual meetings of shareholders on June 26, 2015, expired on July 30, 2015, thirty days after his departure from the Board on June 30, 2015.
On January 29, 2016, the Compensation Committee recommended and the Board of Directors (or the “Board”) approved a grant to Mr. Ramadan, our Chief Executive Officer, pursuant to the Company’s 2014 Equity Incentive Plan,of five-year stock options to purchase 75,000 shares of Common Stock that vest in four equal parts, with the options to acquire 18,750 shares vesting immediately upon the date of grant and options to acquire 18,750 shares vesting subsequently
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
upon each anniversary of the grant date. The exercise price of all these options was initially set at $2.59 per share, the closing stock price on the date of grant, and will escalate by 4.0% annually on each anniversary date. The fair value of the grant was approximately $78, or $1.04 per option.
On June 2, 2016, the Compensation Committee recommended and the Board approved five-year stock option grants to eight KMEs, of an aggregate of 340,000 shares of Common Stock, pursuant to the Company’s 2014 Equity Incentive Plan. These options vest in four equal parts, with the first portion vesting immediately upon the date of grant and remaining equal portions vesting subsequently upon each anniversary of the grant date. The exercise price of all these options was set at $3.50 per share, the closing stock price on the date of grant, and will escalate by 4.0% annually on each anniversary date. The fair value of the entire grant was approximately $382, or $1.12 per option.
As of December 31, 2016, there was $318 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans, which will be amortized over the weighted average remaining requisite service period of three years. Of the $318 of total unrecognized compensation cost, the Company expects to recognize approximately $170 for 2017 and $148 for 2018.
In each instance, the option exercise price per share was equal to or above the market value of the underlying stock on the date of grant. Options are generally granted with terms between five and ten years after the date of grant or earlier upon termination of employment, as defined in the plan or agreements.
The fair value of each option grant given in 2015 and 2016 was estimated on the date of grant using the Black-Scholes option pricing model with the below assumptions related to risk-free interest rates, expected dividend yield, expected lives (i.e. life term of the grant) and expected stock price volatility.
Other than the grants described above, there were no other grants issued in 2015 and 2016.
Additional information about the Company’s outstanding stock options at December 31, 2016 is as follows:
Warrants - There were no warrants outstanding as of December 31, 2016 and 2015.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
NOTE 12 - Compensation Plans
2014 Equity Incentive Plan - In April 2014, the Board unanimously adopted the 2014 Equity Incentive Plan (“2014 Equity Plan”), which was subsequently approved by the shareholders of the Company at its Annual Meeting held in June 2014. The 2014 Equity Plan supercedes the 2004 Equity Incentive Plan, which expired in May 2014.
The 2014 Equity Plan provides that certain awards made under the plan may be eligible for designation as “qualified performance-based compensation” which may be exempt from the $1,000 deduction limit imposed on publicly-held corporations by Section 162(m) of the Internal Revenue Code. The type of awards that may be granted, under the 2014 Equity Plan, by the Compensation Committee of the Board, in its discretion from time to time, include stock options, stock appreciation rights, restricted stock and restricted stock units, other stock-based awards and performance awards.
The 2014 Equity Plan provides the Committee with the discretion to grant to any participant annually any awards not to exceed 200,000 shares of Common Stock and/or any restricted stock or restricted stock units that are not subject to the achievement of a performance target or targets covering more than an aggregate of 150,000 shares. The plan stipulates the authorized number of shares available with respect to which awards may be granted under the plan shall be 660,750. On June 2, 2016, an amendment to the 2014 Equity Plan was approved by the shareholders at the Company’s Annual Meeting, adding 250,000 to the plan, raising the total available awards to 910,750, of which 245,750 remained available for issuance as of December 31, 2016. See also Note 11 “Stock Options,” above.
Additionally, option awards will be available for grants to the executive officers and non-employee directors as well as other key employees, except that non-employee directors are eligible to receive only awards of non-qualified stock options.
The 2014 Equity Plan also contains the following provisions: (i) no stock option repricings (without the approval of the Company’s shareholders); (ii) limitations on shares other than for stock options; (iii) no discounts on stock options; (iv) minimum three year vesting periods for restricted stock and other stock-based awards; (v) no “evergreen” provisions; and (vi) conformity to Section 409A of the Internal Revenue Code.
401 (k) Plan - The Company maintains a contributory 401(k) plan. This plan is for the benefit of all U.S.-based, eligible corporate employees, who may have a portion of their salary withheld, not to exceed the maximum federally allowed amount. The Company makes an employer-matching contribution of 60 cents for each employee dollar contributed, which totaled $50 and $48 for the years 2016 and 2015, respectively. These costs were recognized in the selling, general and administrative expenses of the consolidated statements of operations.
2016 Profit Sharing Plan - The 2016 Profit Sharing Plan was recommended by the Compensation Committee of the Board and approved by the Board on February 26, 2016. The 2016 Profit Sharing Plan permits designated KMEs to share in the profits of the Company. The profit sharing pool was calculated based on 12.5% of consolidated year-end net income before taxes, the pool distribution of which will be determined annually as a percentage of each participating KME relative to the aggregate of the annual salaries of the KMEs. Each KME is required, pursuant to the 2016 Profit Sharing Plan, to defer 50% of his or her annual profit sharing award into the Deferred Compensation Plan. For the years ended December 31, 2016 and 2015, a pool of $1,126 and $850 was reserved respectively, in accordance with the terms of the plan. Pursuant to the terms of the 2016 and 2015 Profit Sharing Plans, 50%, or approximately $563 and $425, respectively, of the Profit Sharing Plan awards, will be and were deferred, respectively, into the Deferred Compensation Plan.
Deferred Compensation Plan
On May 17, 2006, the Compensation Committee of the Board unanimously recommended, and the Board approved and adopted, TWC’s Deferred Compensation Plan (the “Deferred Plan”), which provides certain key employees and non-employee directors the opportunity to defer receipt of specified portions of their compensation and to have such deferred amounts treated as if invested in the Common Stock of the Company.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
The Company adopted the Deferred Plan with the intention that it shall at all times be characterized as a “top hat” plan of deferred compensation maintained for a select group of management, as described under the Employee Retirement Income Security Act of 1974 (“ERISA”) Sections 201(2), 301(a)(3) and 401(a)(1). The Deferred Plan shall at all times satisfy Section 409A of the Internal Revenue Code. Pursuant to a participant’s election, the unfunded Deferred Plan obligations are payable in the form of Common Stock and cash upon the earlier of: (i) a designated, in-service distribution date which must be a minimum of three years from the year of the first deferral; (ii) separation from service; (iii) disability; (iv) change in control of the Company; or (v) death. A participant’s election form must specify whether the payments will be made by lump sum or by installments, and the number of annual installments (with a minimum of two and a maximum of five installments).
NOTE 13 - Acquisition and Purchase Price Allocation - Hotel Kranichhöhe
On December 21, 2016, TWHG acquired the Lindner Sport & Aktivhotel Kranichhöhe (subsequently rebranded as “Hotel Kranichhöhe”), a 107-room hotel with extensive meeting space and recreational amenities located in Much, Germany, for a purchase price of approximately $5.3 million, excluding closing costs and a real estate transfer tax. There was no relationship between TWHG, the Company or their respective directors or officers, or any affiliate or associate thereof, and the seller of this property in this transaction.
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 Company accounted for its Hotel Kranichhöhe acquisition under the acquisition method of accounting as indicated in FASB ASC 805, Business Combinations, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed, and establishes the acquisition date as the fair value measurement point. Accordingly, the Company identified and recorded assets acquired and liabilities assumed in this business combination, based on fair value estimates as of the date of acquisition, agreed to be as of December 1, 2016. The purchase price allocation process requires an analysis and valuation of acquired assets, which included fixed assets, technologies, customer contracts and relationships, trade names and liabilities assumed, including contractual commitments and legal contingencies. Based on an asset evaluation performed by an independent, certified appraiser, the Company determined that there was no material fair value in the technologies, customer contracts and relationships, and trade names in the acquisition of the Hotel Kranichhöhe and that the acquisition was considered a “bargain purchase,” for which the fair value of the net assets acquired exceeded the price paid for the acquisition. Thus, the excess value of €117, or approximately $124, was recognized as a gain in Other Income in the Company’s consolidated statement of operations for the year ended December 31, 2016. ASC 805 also requires that prior to recognizing the gain, the acquirer must reassess whether it has correctly identified all of the assets acquired and liabilities assumed and recognize any additional assets or liabilities that result from that review. TWC has reviewed the measurement procedures used in valuing the assets acquired and liabilities assumed and determined that all assets and liabilities have been correctly identified and recognized.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
Thus, the Company allocated the fair value of all acquired assets, before depreciation, as follows:
The following unaudited pro forma results of operations for the years ended December 31, 2016 and 2015 presented are provided for illustrative purposes only and assume the acquisition occurred as of January 1, 2015 and do not assume any cost savings from TWC’s management of the operations. The unaudited pro forma financial results do not purport to be indicative of the results of operations for future periods or the results that actually would have been realized had TWC operated the Hotel Columbus during these periods. The unaudited pro forma results are presented in thousands, except share and per share information.
NOTE 14 - Segment Information
Effective since the acquisition of the Hotel Columbus as of September 1, 2014, the Company recognized two reporting segments (a casino segment and a hotel segment) and a category called “corporate” (which, for accounting purposes, is not considered to be a separate “segment”). The casino segment is entirely in the Czech Republic, while the hotel segment is comprised of Hotel Columbus, Hotel Freizeit Auefeld and Hotel Kranichhöhe, all of which are in Germany. The Hotel Savannah and Spa, as part of the Route 59 Complex, is reported under the casino segment.
TRANS WORLD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Figures in thousands, except for statistics and share data)
Below is a presentation of the reporting segments:
NOTE 15 - Subsequent Event
On March 1, 2017, TWC acquired 100% of the shares of Hotel Donauwelle Betriebsgesellschaft M.B.H, which owns a four-star business hotel located in Linz, Austria. The hotel is situated on the banks of the Danube River in Linz, approximately 35 minutes driving time from our Route 55 Casino. The assets acquired include the ground lease rights through the year 2061 on the plot upon which the hotel building stands, and the building contents. The hotel features 176 rooms, six meeting/banquet rooms, a 120-seat restaurant, a 40-seat bar, a 100-seat terrace, and a spa and gym room. The total acquisition cost was €4,933, or $5,199, inclusive of the €4,263, or $4,493, purchase price. TWC paid cash of €1,000, or $1,054, and the balance was financed through the assumption of an existing 5-year bank loan in the amount of €3,933, or $4,145, from Erste Bank, Austria, with a fixed-interest rate of 2.95%, paid quarterly, ending December 31, 2021, pursuant to which the €1,933, or $2,037, remaining balance will be either paid off or financed.
			 		
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Included in this Annual Report on Form 10-K are certifications of Mr. Ramadan, our CEO and Mr. Hung D. Le, our Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Exchange Act. This section includes information concerning the controls and controls evaluation referred to in the certifications.
Evaluation of Disclosure Controls and Procedures.
We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, which is designed to provide reasonable assurance that information, which is required to be disclosed in our reports filed pursuant to the Exchange Act, is accumulated and communicated to management in a timely manner. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our CEO and CFO individually concluded that, as of the date of such evaluation, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting.
As part of our normal operations, we update our internal controls as necessary to accommodate any modifications to our business processes or accounting procedures. During the fourth quarter of 2016, there were no significant changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive officer, Mr. Ramadan, and principal financial officer, Mr. Le, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our Company’s consolidated subsidiaries.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. Based on this assessment, management believes that, as of December 31, 2016, our internal control over financial reporting was effective.
This annual report does not include an attestation report by our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to permanent exemption to the rules of the SEC that permit smaller reporting companies to provide only a management assessment in this annual report.
Item 9B.
Item 9B. Other Information.
Subsequent Event - On March 1, 2017, we acquired 100% of the shares of Hotel Donauwelle Betriebsgesellschaft M.B.H, which owns a four-star business hotel located in Linz, Austria. The hotel is situated on the on the banks of the Danube River in Linz, approximately 35 minutes driving time from our Route 55 Casino. The assets acquired include the ground lease rights through the year 2061 on the plot upon which the hotel building stands, and the building contents. The hotel features 176 rooms, six meeting/banquet rooms, a 120-seat restaurant, a 40-seat bar, a 100-seat terrace, and a spa and gym room. The total acquisition cost was €4.9 million, or approximately $5.2 million, inclusive of the approximately €4.3 million, or approximately $4.5 million, purchase price. TWC paid cash of €1.0 million, or approximately $1.1 million, and the balance was financed through the assumption of an existing 5-year bank loan in the amount of €3.9 million, or $4.1 million, from Erste Bank, Austria, with a fixed-interest rate of 2.95%, paid quarterly, ending December 31, 2021, pursuant to which the €1.9 million, or $2.0 million, remaining balance will be either paid off or financed. We plan extensive renovations to the guest rooms, lobby, restaurant, and meeting rooms, which will be conducted in phases over the course of 2017 and 2018.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our definitive proxy statement (our “2017 Proxy Statement”) for our Annual Meeting of Stockholders, expected to be held on June 8, 2017, to be filed with the SEC within 120 days after the end of our fiscal year.
Item 11.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our 2017 Proxy Statement, to be filed with the SEC within 120 days after the end of our fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to our 2017 Proxy Statement, to be filed with the SEC within 120 days after the end of our fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our 2017 Proxy Statement, to be filed with the SEC within 120 days after the end of our fiscal year.
Item 14.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to our 2017 Proxy Statement, to be filed with the SEC within 120 days after the end of our fiscal year.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)Exhibits
Reference is made to the Exhibit Index hereinafter contained.
A copy of any exhibits listed or referred to herein will be furnished at a reasonable cost to any person who was a shareholder of our Company as of February 28, 2017, upon written request from any such person. Requests should be sent to: Jill A. Yarussi, Corporate Secretary, Trans World Corporation, 545 Fifth Avenue, Suite 940, New York, New York 10017.
TRANS WORLD CORPORATION
EXHIBITS INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
Item No
Item
Method of Filing
3.1(a)
Articles of Incorporation
Incorporated by reference to Exhibit 3.1 contained in the registration statement on Form SB-2 (File No. 33-85446-A).
3.1(b)
Certificate of Amendment to Articles of Incorporation
Incorporated by reference to Exhibit 3.1 contained in the Form 10-KSB for the fiscal year ended December 31, 2000 (File No. 0-25244).
3.1(c)
Certificate of Amendment to Articles of Incorporation
Incorporated by reference to Exhibit 3.1 contained in the Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25244).
3.2(a)
Bylaws
Incorporated by reference to Exhibit 3.2 contained in the registration statement on Form SB-2 (File No. 33-85446-A).
3.2(b)
Amended Bylaws, dated February 5, 2015
Incorporated by reference to Exhibit 3.2(b) contained in the Form 8-K filed on February 6, 2015 (File No. 0-25244).
4.1
Specimen Common Stock Certificate
Incorporated by reference to Exhibit 4.1 contained in the registration statement on Form SB-2 (File No. 33-85446-A).
4.2
Indenture dated March 31, 1998, as supplemented on October 29, 1998. October 15, 1999 and September 10, 2001, among the registrant, TWC International U.S. Corporation, TWC Finance Corp. and U.S. Trust Company of Texas, N.A.
Incorporated by reference to Exhibit 4(1) contained in the Form 8-K filed on April 14, 1998 (File No.0-25244).
Item No
Item
Method of Filing
4.3
Indenture dated March 31, 1998, as supplemented on October 29, 1998, October 15, 1999 and September 10, 2001, between TWC International U.S. Corporation and U.S. Trust Company of Texas, N.A.
Incorporated by reference to Exhibit 4(III) contained in the Form 8-K filed on April 14, 1998 (File No. 0-25244).
4.4
Series A Warrant to Purchase Common Stock dated March 31, 1998
Incorporated by reference to Exhibit 4(VI) contained in the Form 8-K filed on April 14, 1998 (File No. 0-25244).
4.5
Series B Warrant to Purchase Common Stock dated March 31, 1998
Incorporated by reference to Exhibit 4(VII) contained in the Form 8-K filed on April 14, 1998 (File No. 0-25244)..
4.6
Series C Warrant to Purchase Common Stock dated March 31, 1998
Incorporated by reference to Exhibit 4(II) contained in the Form 8-K filed on April 14, 1998 (File No. 0-25244).
4.7
Series G Warrant to Purchase Common Stock dated March 31, 1999
Incorporated by reference to Exhibit 10.49 contained in the Form 10-KSB filed on May 30, 2000 (File No. 0-25244).
4.8
Agreement to Amend Warrants dated March 31, 1998 among the Company and the named Holders
Incorporated by reference to Exhibit 4(VIII) contained in the Form 8-K filed on April 14, 1998 (File No. 0-25244).
10.1
1993 Incentive Stock Option Plan
Incorporated by reference to Exhibit 10.13 contained in the registration statement on Form SB-2 (File No. 33-85446-A).
10.2
Loan Agreement dated June 11, 1997 between the Company and Value Partners
Incorporated by reference to Exhibit 10.36 contained in the Form 8-K filed on June 17, 1997 (File No. 0-25244).
10.3
Loan Agreement dated October 27, 1997, between Value Partners, and the Company
Incorporated by reference to Exhibit 10.39 contained in the Form 10-QSB for the quarter ended September 30, 1997, filed on November 12, 1997 (File No. 0-25244).
10.4
Employment Agreement between the Company and Rami S. Ramadan dated July 12, 1999
Incorporated by reference to Exhibit 10.1 contained in the Form 8-K filed on July 13, 1999 (File No. 0-25244).
10.5
Amendment to Employment Agreement between the Company and Rami S. Ramadan dated July 1, 2002
Incorporated by reference to Exhibit 10.5 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.6
1998 Incentive Stock Option Plan
Incorporated by reference to Exhibit 10.46 contained in the Form 10-KSB filed on May 26, 2000 (File No. 0-25244).
Item No
Item
Method of Filing
10.7
1999 Non-Employee Director Stock Option Plan
Incorporated by reference to Exhibit 10.47 contained in the Form 10-KSB filed on May 26, 2000 (File No. 0-25244).
10.8
Form 12% Secured Senior Note due March 2005
Incorporated by reference to Exhibit 10.48 contained in the Form 10-KSB filed on May 26, 2000 (File No. 0-25244).
10.9
English Restatement of the Spanish Agreement of Sale of Casino de Zaragoza
Incorporated by reference to Exhibit 99.2 contained in the Form 8-K filed on January 9, 2002 (File No. 0-22544).
10.10
Form of Fourth Supplemental Trust Indenture by and among Trans World Corporation, TWG International U.S. Corp., TWG Finance Corp. and the Bank of New York Trust Company of Florida, N.A. (as Trustee)
Incorporated by reference to Exhibit 10.10 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.11
Waiver and Forbearance of Covenant Violations (Interest) - Primary Indenture
Incorporated by reference to Exhibit 10.11 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.12
Waiver and Forbearance of Covenant Violations (Interest) - Finance Indenture
Incorporated by reference to Exhibit 10.12 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.13
Indemnification Agreement by and between Value Partners, Ltd., Trans World Corporation and TWG International U.S. Corporation dated February 12, 2003
Incorporated by reference to Exhibit 10.13 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.14
Agreement and Plan of Recapitalization dated June 25, 2003 between the Company and the named Holders
Incorporated by reference to Exhibit 4.9 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.15
Form of 8% Rate Promissory Note due 2006
Incorporated by reference to Exhibit 4.10 contained in the Registration Statement on Form S-4 (File No. 333-101028).
10.16
Form of Variable Rate Promissory Note due 2010
Incorporated by reference to Exhibit 4.11 contained in the Registration Statement on Form S-4 (File No. 333-101028).
Item No
Item
Method of Filing
10.17
2004 Equity Incentive Plan, as amended
Incorporated by reference to Appendix E contained in the Proxy Statement for the 2004 Annual Meeting and from the discussion contained at page 12-14 of the proxy statement for the 2005 Annual Meeting, at page 14-15 of the proxy statement for the 2006 Annual Meeting, and at page 14-15 of the proxy statement for the 2007 Annual Meeting (File No. 0-25244).
10.18
Renewal and Amendment of Employment Agreement between the Company and Rami S. Ramadan, Effective as of July 1, 2005
Incorporated by reference to Exhibit 10.18 contained in the Form 10-KSB filed on March 17, 2006 (File No. 0-25244).
10.19
Renewal and Amendment of Employment Agreement between the Company and Rami S. Ramadan, Effective as of July 1, 2008
Incorporated by reference to Exhibit 99.1 contained in the Form 8-K filed on November 21, 2008 (File No. 0-25244).
10.20
Shareholder Agreement to add Director Nominees to the slate for the 2014 Annual Meeting of Stockholders, Effective as of April 21, 2014
Incorporated by reference to Exhibit 10.20 contained in the Form 8-K filed on April 22, 2014 (File No. 0-25244).
10.21
2014 Equity Incentive Plan, Adopted on June 25, 2014
Incorporated by reference to Exhibit 10.21 contained in the Form 8-K filed on June 27, 2014 (File No. 0-25244).
10.22
Change to the Company’s Registered Certified Accountants, Effective as of July 2, 2014
Incorporated by reference to Exhibit 10.22 contained in the Form 8-K filed on July 7, 2014 (File No. 0-25244).
10.23
Partnership Interest Purchase Agreement to acquire the Hotel Columbus, dated September 10, 2014
Incorporated by reference to Exhibit 10.23 contained in the Form 8-K filed on September 15, 2014 (File No. 0-25244).
10.24
Amendment of Employment Agreement between the Company and Rami S. Ramadan, Effective as of November 11, 2014
Incorporated by reference to Exhibit 10.24 contained in the Form 8-K filed on November 14, 2014 (File No. 0-25244).
10.25
2006 Deferred Compensation Plan,
Amended and Restated, effective
November 18, 2008
Incorporated by reference to Exhibit 99.3 contained in the Form 8-K filed on November 21, 2008 (File No. 0-25244).
10.26
Partnership Interest Purchase Agreement dated June 2, 2015
Incorporated by reference to Exhibit 10.26 contained in the Form 8-K filed on June 19, 2015 (File No. 0-25244).
10.27
2014 Equity Incentive Plan, as amended
Incorporated by reference to Exhibit 10.27 contained in the discussion at page 26-27 of the 2016 Proxy Statement and in Exhibit 99.2 of the Form S-8 filed on July 12, 2016 (File No. 0-25244).
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
Item 16. Form 10-K Summary.
The Company has opted not to include a summary of information required by this Form 10-K as permitted by this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANS WORLD CORPORATION
(Registrant)
Dated: March 7, 2017
By:
/s/ Rami S. Ramadan
Rami S. Ramadan
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant on March 7, 2017 in the capacities indicated.