LISTING CIRCULAR NOT FOR GENERAL CIRCULATION IN THE UNITED STATES €100,000,000 Cirsa Funding Luxembourg S.A. a finance subsidiary of Cirsa Gaming Corporation, S.A. 8.750% Senior Notes due 2018 guaranteed by Cirsa Gaming Corporation, S.A. and certain of its Subsidiaries We issued €100,000,000 aggregate principal amount of 8.750% senior notes due 2018 through our direct wholly owned finance subsidiary, Cirsa Funding Luxembourg S.A. (the “Issuer”). Interest on the offered notes will be paid semi- annually on each May 15 and November 15, commencing May 15, 2013. The offered notes will be issued as additional notes under an existing indenture dated May 5, 2010 (the “Indenture”) and will be part of the same series as our currently outstanding €680,000,000 aggregate principal amount of 8.750% senior notes issued under the Indenture. At any time on or after May 15, 2014, the notes may be redeemed in whole or in part by paying a specified premium. At any time prior to May 15, 2014, we may redeem all or part of the notes by paying a “make-whole” premium. In addition, on or before May 15, 2013, up to 35% of the notes may be redeemed with the net proceeds from specified equity offerings. The notes will be general senior obligations of the Issuer and, subject to the terms of the intercreditor agreement, will rank equally in right of payment with all its existing and future senior indebtedness. Cirsa Gaming Corporation, S.A. (“Cirsa”) and certain of its subsidiaries (with Cirsa, the “Guarantors”) will guarantee the notes (the “Guarantees”). Local laws may limit your rights to enforce certain guarantees, and, in addition, your rights with respect to the notes and the guarantees will be subject to an intercreditor agreement entered into with lenders under the revolving credit facility. The Issuer is a direct wholly-owned subsidiary of Cirsa, and the Issuer’s only significant assets will be funding loans to Cirsa equal to the aggregate principal amount of the notes issued pursuant to the indenture. If Cirsa undergoes a change of control or it sells certain of its assets, the Issuer may be required to offer to purchase the notes from you. The offered notes will be treated as a single class together with the outstanding €400,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “Initial Notes”) (€25,510,000 pursuant to Rule 144A and €374,490,000 pursuant to Regulation S) and €280,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “First Additional Notes”) (€12,750,000 pursuant to Rule 144A and €267,250,000 pursuant to Regulation S) for purposes of the indenture dated May 5, 2010 and will become fully fungible with the outstanding notes following the termination of certain U.S. selling restrictions. For a period of one year after the issue date of this offering, the offered notes issued pursuant to Rule 144A will not be fungible with the Initial Notes and the First Additional Notes issued pursuant to Rule 144A. The Initial Rule 144A Notes and the First Additional Rule 144A Notes will be listed and admitted to trading on the Euro MTF Market on the date of this Listing Circular and will be fungible with the offered Rule 144A Notes on February 6, 2014. For forty days after the issue date of this offering, the offered notes issued pursuant to Regulation S were not fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S, but thereafter offered notes issued pursuant to Regulation S were generally fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S. Application has been made to list the offered notes on the Official List of the Luxembourg Stock Exchange for trading on the Euro MTF Market. The notes were delivered in book-entry form through Euroclear and Clearstream, on February 5, 2013, against payment in immediately available funds. This Listing Circular constitutes a prospectus for the purposes of the Luxembourg Law dated July 10, 2005 on Prospectuses for Securities, as amended. This prospectus may be used only for the purposes for which it has been published.
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LISTING CIRCULAR NOT FOR GENERAL CIRCULATION
IN THE UNITED STATES
€100,000,000
Cirsa Funding Luxembourg S.A.
a finance subsidiary of Cirsa Gaming Corporation, S.A.
8.750% Senior Notes due 2018
guaranteed by
Cirsa Gaming Corporation, S.A.
and certain of its Subsidiaries
We issued €100,000,000 aggregate principal amount of 8.750% senior notes due 2018 through our direct wholly owned finance subsidiary, Cirsa Funding Luxembourg S.A. (the “Issuer”). Interest on the offered notes will be paid semi-annually on each May 15 and November 15, commencing May 15, 2013. The offered notes will be issued as additional notes under an existing indenture dated May 5, 2010 (the “Indenture”) and will be part of the same series as our currently outstanding €680,000,000 aggregate principal amount of 8.750% senior notes issued under the Indenture. At any time on or after May 15, 2014, the notes may be redeemed in whole or in part by paying a specified premium. At any time prior to May 15, 2014, we may redeem all or part of the notes by paying a “make-whole” premium. In addition, on or before May 15, 2013, up to 35% of the notes may be redeemed with the net proceeds from specified equity offerings.
The notes will be general senior obligations of the Issuer and, subject to the terms of the intercreditor agreement, will rank equally in right of payment with all its existing and future senior indebtedness. Cirsa Gaming Corporation, S.A. (“Cirsa”) and certain of its subsidiaries (with Cirsa, the “Guarantors”) will guarantee the notes (the “Guarantees”).
Local laws may limit your rights to enforce certain guarantees, and, in addition, your rights with respect to the notes and the guarantees will be subject to an intercreditor agreement entered into with lenders under the revolving credit facility.
The Issuer is a direct wholly-owned subsidiary of Cirsa, and the Issuer’s only significant assets will be funding loans to Cirsa equal to the aggregate principal amount of the notes issued pursuant to the indenture. If Cirsa undergoes a change of control or it sells certain of its assets, the Issuer may be required to offer to purchase the notes from you.
The offered notes will be treated as a single class together with the outstanding €400,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “Initial Notes”) (€25,510,000 pursuant to Rule 144A and €374,490,000 pursuant to Regulation S) and €280,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “First Additional Notes”) (€12,750,000 pursuant to Rule 144A and €267,250,000 pursuant to Regulation S) for purposes of the indenture dated May 5, 2010 and will become fully fungible with the outstanding notes following the termination of certain U.S. selling restrictions. For a period of one year after the issue date of this offering, the offered notes issued pursuant to Rule 144A will not be fungible with the Initial Notes and the First Additional Notes issued pursuant to Rule 144A. The Initial Rule 144A Notes and the First Additional Rule 144A Notes will be listed and admitted to trading on the Euro MTF Market on the date of this Listing Circular and will be fungible with the offered Rule 144A Notes on February 6, 2014. For forty days after the issue date of this offering, the offered notes issued pursuant to Regulation S were not fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S, but thereafter offered notes issued pursuant to Regulation S were generally fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S.
Application has been made to list the offered notes on the Official List of the Luxembourg Stock Exchange for trading on the Euro MTF Market. The notes were delivered in book-entry form through Euroclear and Clearstream, on February 5, 2013, against payment in immediately available funds. This Listing Circular constitutes a prospectus for the purposes of the Luxembourg Law dated July 10, 2005 on Prospectuses for Securities, as amended. This prospectus may be used only for the purposes for which it has been published.
Investing in the notes involves a high degree of risk. See “Risk Factors” beginning on page 17.
The notes have not been registered under the U.S. Federal securities laws or the securities laws of any
other jurisdiction. The initial purchaser named below is offering the offered notes only to qualified institutional
buyers in accordance with Rule 144A of the U.S. Securities Act of 1933, as amended, and to persons outside the
United States in accordance with Regulation S of the U.S. Securities Act of 1933, as amended. See “Notice to
Investors” for additional information about eligible offerees and transfer restrictions.
Price: 99.75% plus accrued interest from November 15, 2012 to the issue date.
Sole Bookrunner
Deutsche Bank
The date of this listing circular is April 12, 2013
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IMPORTANT INFORMATION ABOUT THIS LISTING CIRCULAR
You should not assume that the information contained in this listing circular is accurate as of any date other than the date of this listing circular. Our business, financial condition, results of operations and prospects may have changed since that date.
You are responsible for making your own examination of us and your own assessment of the merits and risks of investing in the notes. You should consult with your own advisors as needed to assist you in making your investment decision and to advise you whether you are legally permitted to purchase the notes. By purchasing the notes, you will be deemed to have acknowledged that:
• you have reviewed this listing circular;
• you have had an opportunity to request all additional information that you need from us; and
• Deutsche Bank AG, London Branch (the “Initial Purchaser”) is not responsible for, and is not making any representation to you concerning, our future performance or the accuracy or completeness of this listing circular.
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Neither the notes nor the Guarantees have been and will be registered under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”), or the securities laws of any state of the United States and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the U.S. Securities Act (“Regulation S”)) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act.
The notes are being offered and sold outside the United States in reliance on Regulation S and within the United States to “qualified institutional buyers” (“QIBs”) in reliance on Rule 144A under the U.S. Securities Act (“Rule 144A”). Prospective purchasers are hereby notified that the sellers of the notes may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act provided by Rule 144A. For a description of these and certain other restrictions on offers, sales and transfers of the notes and the distribution of this listing circular, see “Notice to Investors.”
The notes have not been approved or disapproved by the U.S. Securities and Exchange Commission (the
“SEC”), any state securities commission in the United States or any other U.S. regulatory authority, nor have any
of these authorities passed upon or endorsed the merits of this offering or the accuracy or adequacy of this listing
circular. Any representation to the contrary is a criminal offense in the United States.
Further, no securities authority in Luxembourg has approved or disapproved of these notes or determined whether this listing circular is truthful or complete.
The notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the U.S. Securities Act and applicable state securities laws pursuant to registration thereunder or exemption therefrom. You should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time.
This listing circular does not constitute an offer to sell or an invitation to subscribe for or purchase any of the notes in any jurisdiction in which such offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation. Laws in certain jurisdictions may restrict the distribution of this listing circular and the offer and sale of the notes. Persons into whose possession this listing circular or any of the notes are delivered must inform themselves about and observe those restrictions. Each prospective purchaser of the notes must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells the notes or possesses or distributes this document. In addition, each prospective purchaser must obtain any consent, approval or permission required under the regulations in force in any jurisdiction to which it is subject or in which it purchases, offers or sells the notes. Neither the Issuer nor the Initial Purchaser shall have any responsibility for obtaining such consent, approval or permission.
We have summarized certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents for a more complete understanding of the matters we discussed in this document. You should not consider any information in this document to be legal, business or tax advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the notes. In making an investment decision, you must rely on your own examination of our business and the terms of this offering and the notes, including the merits and risks involved.
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We accept responsibility for the information contained in this listing circular. We have made all reasonable inquiries and confirm to the best of our knowledge, information and belief that the information contained in this listing circular with regard to us, our subsidiaries and affiliates and the notes is true and accurate in all material respects, that the opinions and intentions expressed in this listing circular are honestly held and that we are not aware of any other acts the omission of which would make this listing circular or any statement contained herein misleading in any material respect.
We reserve the right to withdraw this offering of the notes at any time. We and the Initial Purchaser also reserve the right to reject any offer to purchase the notes in whole or in part for any reason or no reason and to allot to any prospective purchaser less than the full amount of the notes sought by it.
In connection with this issue, Deutsche Bank AG, London Branch or persons acting on its behalf may over-
allot or effect transactions with a view to supporting the market price of the notes at a level higher than that which
might otherwise prevail. However, Deutsche Bank AG, London Branch is under no obligation to do this. Such
stabilizing, if commenced, may be discontinued at any time and must be brought to an end after a limited period.
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NOTICE TO INVESTORS IN THE EUROPEAN ECONOMIC AREA
This listing circular has been prepared on the basis that all offers of the notes will be made pursuant to an exemption under the Prospectus Directive, as amended, as implemented in member states of the European Economic Area (“EEA”), from the requirement to produce a prospectus for offers of securities. Accordingly, any person making or intending to make any offer within the EEA or any of its member states of the notes which are the subject of the offering contemplated in this listing circular, should only do so in circumstances in which no obligation arises for the Issuer or the Initial Purchaser to produce a prospectus for such offer. Neither the Issuer nor the Initial Purchaser has authorized, nor do they authorize, the making of any offer of the notes through any financial intermediary, other than offers made by the Initial Purchaser, which constitute the final offering of the notes contemplated in this listing circular.
In relation to each member state of the EEA which has implemented the Prospectus Directive (each, a “Relevant Member State”), the Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of the notes to the public in that Relevant Member State prior to the publication of a prospectus in relation to the notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the notes to the public in the Relevant Member State at any time:
(i) to any legal entity which is a “qualified investor” as defined in the Prospectus Directive;
(ii) to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive; or
(iii) in any other circumstances falling within Article 3(2) of the Prospectus Directive.
For the purposes of this restriction, the expression an “offer of the notes to the public” in relation to any notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the notes to be offered so as to enable an investor to decide to purchase or subscribe for the notes, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State. The expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
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NOTICE TO CERTAIN OTHER EUROPEAN INVESTORS
United Kingdom
This listing circular is for distribution only to, and is only directed at, persons who (i) are outside the United Kingdom, (ii) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Financial Promotion Order”),
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(iii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Financial Promotion Order or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any notes may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This listing circular is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this listing circular relates is available only to relevant persons and will be engaged in only with relevant persons. The notes are being offered solely to “qualified investors” as defined in the Prospectus Directive and accordingly the offer of notes is not subject to the obligation to publish a prospectus within the meaning of the Prospectus Directive.
France
This listing circular has not been prepared and is not being distributed in the context of an offer to the public of financial securities in France within the meaning of Article L.411-1 of the French Code monétaire et financier and Title 1 of Book II of the Réglement Général de l’Autorité des Marchés Financiers, and has not been approved by, registered or filed with the Autorité des marchés financiers (the “AMF”). Therefore, the notes may not be, directly or indirectly, offered or sold to the public in France and this listing circular has not been and will not be released, issued or distributed or caused to be released, issued or distributed to the public in France or used in connection with any offer for subscription or sales of the notes to the public in France. Offers, sales and distributions have only been and shall only be made in France to: (i) providers of investment services relating to portfolio management for the account of third parties (personnes fournissant le service d’investissement de gestion de portefeuille pour le compte de tiers), (ii) qualified investors (investisseurs qualifiés) acting for their own account and/or (iii) a limited group of investors (cercle restreint d’investisseurs) acting solely for their own account, all as defined in and in accordance with Articles L.411-2, D.411-1 to D.411-4, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier. Prospective investors are informed that (a) this listing circular has not been and will not be submitted for clearance to the AMF, (b) in compliance with Articles L.411-2 and D.411-1 through D.411-4 of the French Code monétaire et financier, any investors subscribing for the notes should be acting for their own account and (c) the direct and indirect distribution or sale to the public of the notes acquired by them may only be made in compliance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 through L. 621-8-3 of the French Code monétaire et financier.
Germany
The offering of the notes is not a public offering in the Federal Republic of Germany. The notes may be offered and sold in the Federal Republic of Germany only in accordance with the provisions of the Securities Prospectus Act of the Federal Republic of Germany (the “Securities Prospectus Act,” Wertpapierprospektgesetz WpPG) and any other applicable German law. Consequently, in Germany the notes will only be available to, and this listing circular and any other offering material in relation to the notes is directed only at, persons who are qualified investors (qualifizierte Anleger) within the meaning of Section 2 No. 6 of the Securities Prospectus Act. Any resale of the notes in Germany may only be made in accordance with the Securities Prospectus Act and other applicable laws.
Spain
This offering has not been registered with the Comisión Nacional del Mercado de Valores and therefore the notes may not be offered or sold or distributed in Spain except in circumstances which do not qualify as a public offer of securities in Spain in accordance with article 30 bis of the Securities Market Act (Ley 24/1988, de 28 de julio, del Mercado de Valores) as amended and restated, or pursuant to an exemption from registration in accordance with Royal Decree 1310/2005 (Real Decreto 1310/2005, de 4 de noviembre, por el que se desarrolla parcialmente la Ley 24/1988, de 28 de julio, del Mercado de Valores, en materia de admisión a negociación de valores en mercados secundarios
oficiales, de ofertas públicas de venta o suscripción y del folleto exigible a tales efectos), each recently amended and respectively restated by Law 9/2012, of November 14, 2012 on the restructuring and resolution of credit institutions (“Ley 9/2012, de 14 de noviembre, de reestructuración y resolución de entidades de crédito”), and Royal Decree 1698/2012, of December 21, 2012, amending the existing legislation on the necessary prospectuses and transparency requirements in issues of securities as a result of the transposition of Directive 2010/73/EU (“Real Decreto 1698/2012, de 21 de diciembre, por el que se modifica la normativa vigente en materia de folleto y de requisitos de transparencia
exigibles en las emisiones de valores por la transposición de la Directiva 2010/73/UE”), and any regulations developing it which may be in force from time to time.
Italy
This offering has not been registered with the Commissione Nazionale per le Società e la Borsa (“CONSOB”) pursuant to Italian securities legislation and, accordingly, no offered notes may be offered, sold or delivered, nor may copies of this listing circular or of any other document relating to the offered notes be distributed in the Republic of Italy, except: (i) to qualified investors (investitori qualificati), as defined pursuant to Article 100 of Italian Legislative Decree
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No. 58 of 24 February 1998, as amended (the “Italian Financial Services Act”) and Article 34-ter, first paragraph, letter b) of Regulation No. 11971 of 14 May 1999, as amended from time to time (“Regulation No. 11971”); or (ii) in other circumstances which are exempted from the rules on public offerings pursuant to Article 100 of the Italian Financial Services Act and Article 34-ter of Regulation No. 11971. Any offer, sale or delivery of the notes, or distribution of copies of this listing circular or any other document relating to the offered notes in the Republic of Italy under (i) or (ii) above must be: (a) made by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with the Italian Financial Services Act, CONSOB Regulation No. 16190 of 23 October 2007 and Italian Legislative Decree No. 385 of September 1, 1993 (in each case, as amended from time to time); and (b) in compliance with any other applicable laws and regulations, or requirement imposed by CONSOB or any other Italian authority.
Investors should note that, in accordance with Article 100-bis of the Italian Financial Services Act, where no exemption from the rules on public offerings applies under paragraphs (i) and (ii) above, the subsequent distribution of the offered notes on the secondary market in Italy must be made in compliance with the public offer and the prospectus requirement rules provided under the Italian Financial Services Act and the Regulation No. 11971. Furthermore, where no exemption from the rules on public offerings applies, the offered notes which are initially offered and placed in Italy or abroad to professional investors only but in the following year are “systematically” distributed on the secondary market in Italy become subject to the public offer and the prospectus requirement rules provided under the Italian Financial Services Act and the Regulation No. 11971. Failure to comply with such rules may result in the sale of such offered notes being declared null and void and in the liability of the intermediary transferring the financial instruments for any damages suffered by the purchasers of offered notes who are acting outside of the course of their business or profession.
Luxembourg
In relation to the Grand Duchy of Luxembourg (“Luxembourg”), which has implemented the Prospectus Directive by the law of July 10, 2005 relative aux prospectus pour valeurs mobilières, as amended (the “Prospectus Law”), the notes may not be offered to the public in Luxembourg, except that the notes may be offered to the public in Luxembourg at any time:
(i) to any person or legal entity which is a qualified investor as defined in the Prospectus Law; or
(ii) to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Law); or
(iii) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 5 of the Prospectus Law.
For the purposes of this provision, the expression an “offer of notes to the public” in relation to any notes in Luxembourg means the communication to persons in any form and by any means presenting sufficient information on the terms of the offer and the offered notes so as to enable an investor to decide to purchase or subscribe for the offered notes and the expression “Prospectus Directive” means Directive 2003/71/EC, as amended.
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NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE
OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF
NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS
PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR
CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
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CERTAIN DEFINITIONS
In this listing circular:
• “2012 Notes” refers to the 7.875% Senior Notes due 2012 issued by Cirsa Capital and fully redeemed in 2011;
• “2014 Notes” refers to the 8.75% Senior Notes due 2014 issued by Cirsa Finance and fully redeemed in 2010;
• “Cirsa” refers to Cirsa Gaming Corporation S.A a sociedad anónima incorporated under the laws of Spain under Barcelona Commerce Register page number B-380, sheet 102 and volume 42002;
• “Cirsa Capital” refers to Cirsa Capital Luxembourg S.A., a société anonyme incorporated and existing under the laws of the Grand Duchy of Luxembourg, the issuer of the 2012 Notes having its registered office at 58, rue Charles Martel, L-2134 Luxembourg and registered with the Register of Trade and Companies of Luxembourg under number B 108008;
• “Cirsa Finance” refers to Cirsa Finance Luxembourg S.A., a société anonyme incorporated and existing under the laws of the Grand Duchy of Luxembourg, the issuer of the 2014 Notes having its registered office at 58, rue Charles Martel, L-2134 Luxembourg and registered with the Register of Trade and Companies of Luxembourg under number B 100354 (dissolved pursuant to resolution of its sole shareholder on December 30, 2010);
• “Cirsa Funding” or the “Issuer” refers to Cirsa Funding Luxembourg S.A., a société anonyme incorporated and existing under the laws of the Grand Duchy of Luxembourg, the issuer of the notes having its registered office at 58, rue Charles Martel, L-2134 Luxembourg and registered with the Register of Trade and Companies of Luxembourg under number B 149519;
• “EU” refers to the European Union;
• the “First Additional Notes” refers to the €280.0 million of 8.750% Senior Notes due 2018 issued on January 18, 2011;
• “IFRS” refers to International Financial Reporting Standards;
• the “Initial Notes” refers to the €400.0 million of 8.750% Senior Notes due 2018 issued on May 5, 2010;
• the “notes” or the “2018 Notes” refers to €780.0 million aggregate principal amount of the Initial Notes, the First Additional Notes and the offered notes, except where the context otherwise requires;
• the “offered notes” refers to the €100.0 million of 8.750% Senior Notes due 2018 to be issued by Cirsa Funding in this offering;
• “offering” means the offering of €100,000,000 aggregate principal amount of notes;
• “Revolving Credit Facility” refers to the senior secured revolving credit facility dated May 5, 2010, among Cirsa, Deutsche Bank AG, London Branch and other parties thereto as amended, extended, restated or refinanced from time to time;
• “Spanish GAAP” refers to generally accepted accounting principles in Spain;
• “United States” or the “U.S.” refer to the United States of America
• “VLT” refers to Video Lottery Terminals; and
• “we,” “our,” “us,” and other similar terms collectively refer to Cirsa and its consolidated subsidiaries, except where the context otherwise requires.
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INDUSTRY AND MARKET INFORMATION
We have generally obtained the market and competitive position data in this listing circular from industry publications and from surveys or studies conducted by third-party sources that we believe to be reliable. Unless otherwise noted, statistical data relating to the Spanish gaming market cited in this listing circular has been published by the Spanish National Gaming Commission (Comisión Nacional del Juego). However, we cannot assure you of the accuracy and completeness of such information and we have not independently verified such market and position data. We do, however, accept responsibility for the correct reproduction of this information.
In addition, in many cases we have made statements in this listing circular regarding our industry and our position in the industry based on our experience and our own investigation of market conditions. We cannot assure you that any of these assumptions are accurate or correctly reflect our position in the industry, and none of our internal surveys or information has been verified by any independent sources.
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PRESENTATION OF FINANCIAL INFORMATION
This listing circular includes our audited consolidated financial statements as of and for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, along with the comparative financial information as of and for the year ended December 31, 2008. These consolidated financial statements are prepared in accordance with IFRS, as adopted by the European Union (“IFRS—EU”) and were audited by our independent auditors, Ernst & Young S.L. and Cortés, Pérez y Cía. Auditores S.L.P. This listing circular also includes our unaudited financial statements for the nine months ended September 30, 2012. These consolidated financial statements are prepared in accordance with IFRS—EU.
This listing circular also presents summary financial information for the year ended December 31, 2008 and for the year ended December 31, 2007, which has been derived from our audited consolidated financial statements as of and for the year ended December 31, 2008 prepared in accordance with IFRS—EU. Our financial statements as of and for the year ended December 31, 2008 are not included in this listing circular. Commencing January 1, 2008, we have prepared our financial statements in accordance with IFRS—EU. Prior to January 1, 2008, we prepared our audited consolidated financial statements in accordance with Spanish GAAP. As a result, the financial information for the year ended December 31, 2007 prepared in accordance with Spanish GAAP restated in IFRS—EU as comparative financial data is derived from the comparative information for 2007 included in the financial statements as of and for the year ended December 31, 2008.
In this listing circular, also presented for the information of investors is summary financial information derived from our audited financial statements for the years ended December 31, 2006 and 2005, which consolidated financial statements are not included in this listing circular. These consolidated financial statements are prepared in accordance with Spanish GAAP.
We prepare our financial statements in euro.
This listing circular contains references to certain non-IFRS measures, including to the measure EBITDA. We define EBITDA as profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets. We present EBITDA in this listing circular because we believe that EBITDA provides useful information regarding a company’s ability to service and incur indebtedness and management uses it as a measure of evaluating our performance. EBITDA and EBITDA margin (which we define as EBITDA divided by operating revenue) are not measurements of operating performance under IFRS, and should not be considered a substitute for operating income, net income, cash flows from operating activities or other income statement data, or as a measure of profitability or liquidity, and do not necessarily indicate whether cash flow will be sufficient or available for cash requirements. Therefore, EBITDA, EBIT, EBITDA margin and other related ratios should be viewed as supplementary to our audited IFRS financial statements included elsewhere in this listing circular and may not be indicative of our historical operating results nor are they meant to be predictive of potential future results. Because all companies do not calculate such measures identically, the presentation may not be comparable to similarly entitled measures of other companies and you are cautioned not to place undue reliance on such financial information.
This listing circular contains references to pro forma financial information, which has been derived by applying pro forma adjustments to Cirsa’s historical consolidated financial statements included elsewhere in this listing circular. The summary pro forma financial information gives effect to the offering and the application of the estimated proceeds therefrom as though they had occurred on October 1, 2011 for the pro forma profit and loss account information and on September 30, 2012 for the pro forma balance sheet information. The adjustments necessary to present fairly the summary pro forma financial information have been made based on available information and assumptions that we
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believe are reasonable. The summary pro forma financial information is for informational purposes only and does not purport to present what our results would actually have been had these transactions actually occurred on the dates presented or to project what our results would actually have been had these transactions actually occurred on the dates presented or to project our results of operations or financial position for any future period.
Some financial information in this listing circular has been rounded and, as a result, the numerical figures shown as totals in this listing circular may vary slightly from the exact arithmetic aggregation of the figures that precede them.
________________
CURRENCY PRESENTATION
In this listing circular:
• “$,” “U.S. dollar” or “dollars” refer to the lawful currency of the United States;
• “€” or “euro” refer to the single currency of the participating Member States in the Third Stage of European Economic and Monetary Union of the Treaty Establishing the European Community, as amended from time to time;
• “Ps.” or “Argentine Peso” refer to the lawful currency of Argentina; and
• “Colombian Peso” refers to the lawful currency of Colombia.
________________
FORWARD LOOKING STATEMENTS
This listing circular includes forward looking statements. These forward looking statements can be identified by the use of forward looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward looking statements include all matters that are not historical facts. They appear in a number of places throughout this listing circular and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward looking statements contained in this listing circular. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward looking statements contained in this listing circular, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause those differences include, but are not limited to:
• the impact of the economic downturn in Spain and other markets in which we operate;
• risks associated with our other operations outside of Spain;
• adverse developments in our Argentine business;
• the actions of our counterparties in our strategic partnerships, joint ventures and alliances;
• our ability to comply with the current gaming regulatory framework and to adapt to any regulatory changes and increases in the taxation of gaming;
• the impact of anti-smoking laws;
• our ability to comply with on-line gaming rules and regulations;
• our failure to keep current with technological developments in the on-line gaming market;
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• our failure to comply with regulations regarding the use of personal data;
• risks associated with hacker intrusion, distributed denial of service attack, malicious viruses and other cyber crime attacks;
• our ability to manage growth in our business;
• our ability to provide secure gaming products and services and to maintain the integrity of our employees in order to attract customers;
• competition from other companies in our industry and our ability to retain our market share;
• changes in consumer preferences in relation to our gaming offerings;
• risks associated with a disruption of operations at our manufacturing facilities;
• risks relating to taxes;
• our dependence on our founder, principal shareholder and chairman, Manuel Lao Hernández;
• risks associated with security issues in the countries in which we operate;
• risks associated with terrorist attacks and other acts of violence or war; and
• our significant leverage, which may make it difficult to operate our business.
We urge you to read the sections of this listing circular entitled “Risk Factors,” “Operating and Financial Review and Prospects” and “Business” for a more complete discussion of the factors that could affect our future performance and the industry in which we operate. In light of these risks, uncertainties and assumptions, the forward looking events described in this listing circular may not occur.
We undertake no obligation to publicly update or publicly revise any forward looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this listing circular.
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SUMMARY
The following summary highlights certain significant aspects of our business and this offering, but you should
read this entire listing circular, including the financial statements and the related notes, before making an investment
decision. You should carefully consider the information set forth under the heading “Risk Factors.” In the listing
circular, the words “we,” “our” and “us” collectively refer to Cirsa and its consolidated subsidiaries. Revenue and
EBITDA figures by division and geographic area included in the listing circular are calculated before structure costs
(and intercompany consolidation) and, therefore, the total figures by division and geographic area may not equal our
total consolidated figures. See “Operating and Financial Review and Prospects.”
Our Company
We are one of the leading gaming companies in Spain, Italy and Latin America engaged in the operation of slot machines, casinos and bingo halls and the manufacture of slot machines for the Spanish market. In Spain, we are the leader in the €14.9 billion Spanish private gaming market, where our key activities include: the operation of slot machines, in which, as of September 30, 2012, we are the #1 operator with over 21,400 slot machines operated; the operation of four casinos; the operation of bingo halls, in which our Bingo Division is the #1 operator with 49 bingo halls; and the manufacture of slot machines, where we are the #1 manufacturer, with over 26,000 slot machines and gaming kits manufactured in the twelve months ended September 30, 2012.
In Italy, we have established a strong presence in the slot machine market with over 14,000 slot machines situated in approximately 2,850 locations across central and northern Italy. As of September 30, 2012, we have also completed the deployment of 2,170 of the 2,583 Video Lottery Terminals (“VLTs”) planned for installation in Italy.
In Argentina, we operate eight casinos, including two riverboat traditional casinos in the city of Buenos Aires with 130 gaming tables and 1,545 slot machines and a traditional casino located in Rosario with 80 gaming tables and 2,820 slot machines. Our five electronic casinos in the Province of Mendoza operate 1,619 casino-style slot machines.
In Colombia, we operate 19 traditional casinos with 2,674 slot machines and 48 electronic casinos with a total of 3,315 slot machines.
In Panama, we operate one traditional casino in Panama City with 29 tables and 380 slot machines and 26 electronic casinos with a total of 7,300 slot machines.
In Mexico, we operate 20 bingo halls that also have a casino-style slot machine offer.
For the twelve months ended September 30, 2012, we had net operating revenues and EBITDA of €1,331.1 million and €315.0 million, respectively. During the twelve months ended September 30, 2012, 58.2% of our net operating revenues and 39.9% of our EBITDA were generated in Spain and Italy, and 41.8% of our net operating revenues and 60.1% of our EBITDA were generated from our other international activities. We have also made significant efforts to reduce our net leverage ratio (net debt/EBITDA) which decreased from 5.0x in 2005 to 2.8x as of September 30, 2012.
The following table shows a breakdown of our EBITDA for the year ended December 31, 2011 and the twelve months ended September 30, 2012, by country in which we operate:
Europe ................................................................................................................ 41.2 39.9 Argentina ................................................................................................................ 22.3 22.2 Colombia ................................................................................................................ 15.2 16.0 Panama ................................................................................................................... 14.6 16.2 Mexico .................................................................................................................... 4.2 4.1 Other ....................................................................................................................... 2.5 1.6
Latin America ..................................................................................................... 58.8 60.1
100.0% 100.0%
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Our Divisions
We have organized our company into five business divisions: Slots, Casinos, Bingo, Business-to-Business (B2B) and On-Line Gaming:
• Slots. (EBITDA €97.4 million for the twelve months ended September 30, 2012): Our Slots Division owns and manages slot machines in bars, cafes, restaurants and arcades in Spain and is a network operator for slot machines and VLTs in Italy. This division also includes our Sportium joint venture with Ladbrokes PLC, a British betting operator, to operate and further develop a region-based sports betting business in Spain.
• In Spain, we directly, or indirectly through slot machine sub operators, controlled 21,439 slot machines located in approximately 14,000 sites in Spain, as of September 30, 2012, primarily in bars. We plan to continue to optimize our slot machine portfolio located in arcades, and as of September 30, 2012, we own and operate 114 arcades, with an average of 14 slot machines per arcade.
• In Italy, we operated 10,271 slot machines and acted as a network provider to 4,379 third-party slot machines as of September 30, 2012. We also operate VLTs, and as of September 30, 2012, had installed 2,170 of the 2,583 VLTs planned for installation in Italy and expect to complete the deployment of the remaining VLTs planned for installation during 2013.
• Our joint venture, which operates under the Sportium name, commenced operations in May 2008. As of September 30, 2012, Sportium offered sport betting products through outlets installed in 119 slot arcades and bingo halls in Madrid and 64 slot arcades and bingo halls in Aragon and 47 in Valencia. We also have 13 Sportium dedicated sports betting locations in Madrid.
• Casinos. (EBITDA €196.5 million for the twelve months ended September 30, 2012): Our Casinos Division operates four traditional casinos in Spain and 28 traditional casinos internationally and 82 electronic casinos (casinos with only electronic gaming machines) in Latin America.
• In Spain, our casinos are located in Marbella, Valencia, La Toja and Puçol. Our newly constructed Casino de Valencia is the third largest Spanish casino based on revenues for 2011, followed by our Marbella casino. We commenced operations at the newly-constructed Casino de Valencia in August 2010. We own certain of our casinos outright and others we own and operate with partners.
• In Latin America, we operate eight casinos in Argentina, including two riverboat casinos in the city of Buenos Aires and a casino in Rosario, 19 traditional and 48 electronic casinos in Colombia and one traditional and 26 electronic casinos in Panama, as well as casinos in the Dominican Republic and Peru.
• Bingo. (EBITDA €20.9 million for the twelve months ended September 30, 2012): Our Bingo Division operates 79 bingo halls across Spain, Mexico and Italy.
• In Spain we are the leader of the bingo market, with, as of September 30, 2012, a total of 49 bingo halls, of which 35 are operated and majority owned by us. The remaining 14 bingo halls, in which we hold less than a majority interest, are operated by local partners.
• In Mexico, we own and operate 20 bingo halls which provide a wide entertainment offer, including slot machines and casino-style gaming machines.
• In Italy, we hold minority interests in companies (joint ventures with local partners) that own and operate 10 bingo hall businesses.
• Business-to-Business. (EBITDA €21.6 million for the twelve months ended September 30, 2012): Our Business-to-Business (B2B) Division engages in the development of interactive gaming systems, concentrating on ready-to-market products such as interconnected slot machines, linked bingo products and electronic on-line lotteries and also designs, manufactures and distributes slot machines and gaming kits for the Spanish market.
• On-Line Gaming. (EBITDA €(2.9) million for the twelve months ended September 30, 2012): Our On-Line Gaming Division commenced operations in Spain and Italy during the third quarter of 2012 after obtaining the necessary permissions and licenses. Our offer includes sports betting, roulette, blackjack, “punto y banca”, poker and bingo. We expect that it will take approximately three years to reach EBITDA break even. Our on-line gaming plans do not contemplate any material investments because our operating platform is based on technology partnerships with global suppliers.
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Our Strengths
We believe a number of key factors give us a strong competitive advantage, including:
• Business and Geographic Market Diversification. We are a well diversified gaming company with five distinct and complementary business divisions within the industry and operations in seven countries outside of Spain. We believe that the diversity of our revenue stream helps improve the stability of our cash flow profile by reducing our dependence on any single geographic market, economy or business segments in the gaming industry. In addition, our diversified operations allow us to identify opportunities for growth in known markets by using our operating experience across the gaming industry in Spain, Italy and Latin America.
• Corporate Synergies. We are a leading integrated manufacturer, distributor and operator of slot machines in Spain. Our Slots Division provides us with information regarding evolving customer preferences and tendencies, which helps us to design and manufacture popular games in a timely manner. In the twelve months ended September 30, 2012, we manufactured four of the top ten revenue-generating slot machine models in Spain. Our strong manufacturing capabilities, in turn, support demand for our slot machines and facilitates access to new successful games for our Slots Division. We believe that our integrated manufacturing, distribution and operating capabilities give us cost and service advantages not enjoyed by many of our competitors.
• Barriers to Entry. We believe that there are significant barriers to entry in our principal business divisions, including regulatory, financial and technological barriers, the need for operational expertise and the need for a proven track record in order to obtain the trust and confidence of regulators, customers, partners and suppliers. In certain jurisdictions in which our Casinos Division operates casino licenses are generally awarded after a competitive public tender process. In our Slots Division, we typically enter into five-year exclusivity agreements to place our slot machines in a given location, and many of these agreements have been consistently renewed for the past twenty years. Additionally, in our Slots Division and B2B Division, we believe a new competitor would need significant financial resources, operating expertise and a qualified workforce to build profitable operations. We believe that barriers to entry in our principal business divisions help protect our leading market position and profitability by limiting the number of new competitors in our core business segments.
• Leading Market Position and Economies of Scale in Spain. We are a leader in Spanish slot machine operations and manufacturing, as well as bingo hall operations. We believe that this leadership position enables us to identify and manage trends in the private gaming industry in Spain. The Spanish slot machine operator and bingo segments are highly fragmented, and we are substantially larger than our competitors. We believe that our size allows us to benefit from economies of scale in many of our businesses. For example, in our slot machine operations, we can spread the cost of providing coin collection services and rapid response to repair calls (minimizing machine downtime) over our more than 21,400 slot machines, which helps us to realize a lower operational cost per machine and to have a more developed internal control system as compared to our competitors.
• Demonstrated Financial Performance. We have a strong financial profile, combining increasing EBITDA and a decrease of our overall level of leverage in recent years. Our EBITDA grew by more than 2.7 times in recent years, from €114.1 million in 2005 to €315.0 million in the twelve months ended September 30, 2012. Over the same period, we have made significant efforts to reduce our leverage ratio, which decreased from 5.0x in 2005 to 2.8x as of September 30, 2012.
• Seasoned Management Team. We are led by an experienced and professional management team with a track record of managing complex operations, developing new products inside and outside the gaming industry and delivering upon its commitments. A portion of the compensation of our senior management team is based on achieving financial targets.
Our Strategy
Our strategic objective is to continue to consolidate our businesses and to achieve sustainable profitable growth through the following three strategic pillars:
• Continue to improve EBITDA through revenue mix management and cost optimization. We will focus on strengthening EBITDA through various revenue mix management and cost optimization initiatives in our core business segments and geographic markets. We will seek to ensure that our EBITDA maintains geographical and business segment diversification. We will seek to enhance our casino, slot and bingo
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operations through the selective expansion of existing halls and operations and increased slot machine density. We will seek to improve our products mix and realize investments that are accretive to EBITDA and meet other key criteria. In our B2B business, we will focus on increasing the sales of higher-margin products. In Italy, our priority will be the continued development of the VLT business and, in Spain, we will actively work to reduce our base cost expenses through the closure of underperforming sites and operations. Our focus on EBITDA improvement should enable us to continue to reduce our leverage ratio; we strive to maintain a target leverage ratio of between 2.5x to 3.0x.
• Enhance productivity programs across businesses and geographies. We will also build upon the productivity initiatives and synergies achieved in prior periods. We will continue to implement best practices across our markets to improve productivity. In our slots business, this will entail further enhancing the profitability of our slot machine portfolio, including through opportunistic slot machine rotations and replacements. In our casinos division, we intend to implement player tracking and coinless systems throughout our casinos. In our bingo business, we will seek to close underperforming halls and increase market share through strategic acquisitions. We will also continue to divest or exit other non-performing businesses and assets.
• Make selective investments with focus and rigor. Our investment program in the short- to medium- term is subject to rigorous investment criteria, strategic planning and control of capital expenditures. We will continue to review and analyze investment opportunities in our core business segments with a view to executing investments on an opportunistic basis that enhance our cash flow and positively contribute to EBITDA. In our B2B business, we will continue to focus our research and development efforts on maintaining our leadership in the Spanish slots market.
Recent Developments
Trading Update
On a preliminary basis, for the year ended December 31, 2012, we expect that our EBITDA will be at the upper end of our prior guidance for the year, which was between 8% to 11% higher than our EBITDA of €290.0 million for the year ended December 31, 2011. Our actual financial results for the year ended December 31, 2012 may differ from our preliminary estimated results and remain subject to our normal end of year audit process.
Extension of Revolving Credit Facility
At the time of the issuance of the Notes in this offering, we intend to enter into an amendment and restatement agreement for our Revolving Credit Facility pursuant to which, among other things, the final termination date of the Revolving Credit Facility will be extended from May 15, 2015 to January 31, 2018. The effectiveness of the amendment and restatement agreement and therefore the amendement effected by it, including the extension of the termination date will be subject to the satisfaction of customary documentary conditions precedent.
Gaming Tax Increases in Italy
With effect from January 1, 2013, gaming tax on our VLTs increased 1.0% on amount wagered from 4.0% to 5.0%. Similarly, gaming tax on our slot machines increased from 11.8% on amount wagered to 12.7% as of such date.
Principal Shareholder
Our principal shareholder is our founder, chairman and managing director, Mr. Manuel Lao Hernández. Manuel Lao Hernández owns 96.37% of the ordinary shares of Nortia Business Corporation (“Nortia,” formerly known as Leisure & Gaming Corporation, or L&G). Members of his immediate family own the remaining 3.63%. Nortia owns 52.92% of the ordinary shares of Cirsa and Manuel Lao Hernandez owns 47.08% of the ordinary shares of Cirsa (in each case, excluding treasury shares). Accordingly, Manuel Lao Hernández beneficially owns 100% of Cirsa’s ordinary shares. Mr. Lao Hernández, who founded Cirsa in 1978, is considered one of the pioneers in the Spanish gaming market, with over 30 years of experience in the gaming industry. In addition to owning 52.92% of the share capital of Cirsa, Nortia owns and manages real estate, some of which is leased to Cirsa, and has non-controlling investments in other leisure and gaming companies which it does not operate. See “Principal Shareholders” and “Certain Relationships and Related Party Transactions.”
Summary Financing Structure
The following diagram summarizes our corporate structure and indebtedness after giving effect to this offering and the application of the proceeds therefrom, including the refinancing of our existing indebtedness under the Revolving
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Credit Facility. Please refer to the sections entitled “Capitalization,” “Description of Certain Indebtedness” and “Description of the Notes” for more detailed descriptions of this offering.
(1) The notes will be issued by Cirsa Funding Luxembourg S.A., a wholly owned Luxembourg finance subsidiary of Cirsa Gaming
Corporation, S.A. Cirsa Funding Luxembourg S.A. issued €400.0 million of 8.750% Senior Notes due 2018 on May 5, 2010 and €280.0 million of 8.750% Senior Notes due 2018 on January 18, 2011.
(2) A funding loan in respect of the offered notes will be made by Cirsa Funding Luxembourg S.A. to Cirsa Gaming Corporation, S.A. The funding loan will have the same aggregate principal amount and repayment terms as the offered notes. Cirsa Funding Luxembourg S.A. made a funding loan to Cirsa Gaming Corporation S.A. in respect of the Initial Notes on May 5, 2010 and in respect of the First Additional Notes on January 18, 2011.
(3) The notes will be unconditionally guaranteed by Cirsa Gaming Corporation, S.A.
(4) Certain of Cirsa Gaming Corporation, S.A.’s subsidiaries will unconditionally guarantee the notes. These subsidiaries accounted for 45.0% of the EBITDA of Cirsa Gaming Corporation, S.A. on a consolidated basis for the twelve months ended September 30, 2012.The EBITDA of the subsidiary guarantors together with the EBITDA of the subsidiaries of the subsidiary guarantors amounted to 97.0% of the EBITDA of Cirsa Gaming Corporation, S.A. on a consolidated basis for the twelve months ended September 30, 2012. The guarantee issued by our subsidiary Cirsa Italia S.p.A. is subject to specific limitations. See “Risk Factors—Fraudulent conveyance laws and other limitations on the enforceability and the amount of the Guarantees may adversely affect the validity and enforceability of the Guarantees.”
(5) We have additional bank and other debt, including the Revolving Credit Facility, which has been incurred and guaranteed by Cirsa Gaming Corporation, S.A. and various of our subsidiaries, including subsidiaries guaranteeing the notes. As of September 30, 2012, after giving pro forma effect to the offering and the application of the proceeds therefrom, we would have had €969.5 million of total debt, including the €100.0 million aggregate principal amount of the notes issued in this offering. See “Description of Certain Indebtedness.”
(6) Cirsa Gaming Corporation, S.A., is the borrower under the Revolving Credit Facility, which is guaranteed by the same subsidiaries that guarantee the notes and Global Bingo Corporation S.A. The Revolving Credit Facility is secured by certain share and quota pledges and the pledge of certain rights from current account agreements. We expect to enter into an amendment to the Revolving Credit Facility on or about the issue date of this offering providing for, subject to the satisfaction of certain conditions precedent, amongst other things, an extension of the termination date from May 15, 2015 to January 31, 2018. The aggregate committed amount under the Revolving Credit Facility is €50.0 million. The indenture for the notes and the intercreditor agreement permit up to €100.0 million to be drawn under a senior facility and for such facility to have the benefit of the intercreditor agreement as described herein. See “Description of Certain Indebtedness” for a description of the Revolving Credit Facility and the intercreditor agreement.
Parent Guarantee (3)
Subsidiary Guarantees(4)
100%
100%
Funding Loans (2)
2018 Notes(1)
Cirsa Gaming Corporation,
S.A.
Subsidiary
Guarantors (5),(6)
Cirsa Funding Luxembourg
S.A.
Revolving Credit
Facility(6)
2018 Noteholders
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The Offering
The following summary contains basic information about the notes. It is not intended to be complete and is subject to important limitations and exceptions. For a more complete understanding of the notes, including certain definitions of terms used in this summary, please refer to the section of this listing circular entitled “Description of the Notes.”
Issuer of the Notes ................................ Cirsa Funding Luxembourg S.A.
Notes Offered ....................................... €100.0 million aggregate principal amount of 8.750% Senior Notes due 2018. The offered notes will be issued as additional notes under an existing indenture dated May 5, 2010 and pursuant to which our €400,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “Initial Notes”) (€25,510,000 pursuant to Rule 144A and €374,490,000 pursuant to Regulation S) and €280,000,000 aggregate principal amount of outstanding 8.750% Senior Notes due 2018 (the “First Additional Notes”) (€12,750,000 pursuant to Rule 144A and €267,250,000 pursuant to Regulation S) were issued. For a period of one year after the issue date of this offering, the offered notes issued pursuant to Rule 144A will not be fungible with the Initial Notes and the First Additional Notes issued pursuant to Rule 144A. The Initial Rule 144A Notes and the First Additional Rule 144A Notes will be listed and admitted to trading on the Euro MTF Market on the date of this Listing Circular and will be fungible with the offered Rule 144A Notes on February 6, 2014. For forty days after the issue date of this offering, the offered notes issued pursuant to Regulation S were not fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S, but thereafter offered notes issued pursuant to Regulation S were generally fungible with the Initial Notes and the First Additional Notes issued pursuant to Regulation S.
Issue Date of Notes Offered ................. February 5, 2013.
Maturity Date ....................................... May 15, 2018.
Interest Payment Dates ....................... Semi-annually each May 15 and November 15, commencing May 15, 2013. Interest will accrue from November 15, 2012.
Guarantees ........................................... The notes will be unconditionally guaranteed, jointly and severally, by the Guarantors. A Guarantee may be released in the event of certain sales or disposals of the relevant Guarantor, in the event of certain enforcement actions under the Revolving Credit Facility and under certain other circumstances.
Guarantors ........................................... The Guarantors are operating and intermediate holding companies. The subsidiaries of Cirsa guaranteeing the notes represent 36.9% and 45.0% of our total consolidated assets and EBITDA, respectively, as of and for the twelve months ended September 30, 2012. These subsidiary guarantors together with the subsidiaries of these subsidiary guarantors represent 91.6% and 97.0% of our total consolidated assets and EBITDA, respectively, as of and for the twelve months ended September 30, 2012. For a list of the subsidiaries guaranteeing the notes, see “Description of the Notes—Certain Definitions—Subsidiary Guarantors.”
The notes will be general senior obligations of the Issuer and, subject to the terms of the intercreditor agreement, will rank equally in right of payment with all existing and future indebtedness of the Issuer. The notes will rank senior in right of payment to any other existing and future obligations of the Issuer expressly subordinated in right of payment to the notes.
The Guarantees will be general obligations of the Guarantors and, subject to the terms of the intercreditor agreement, will rank equally in right of payment with any existing and future unsecured debt of the Guarantors. The Guarantees will rank senior in right of payment to all existing and future obligations of the Guarantors expressly subordinated to the Guarantees. The Guarantees will be effectively subordinated in right of payment to all existing and future secured debt of any Guarantor to the extent of the value of the assets secured by such secured debt. See “Description of Certain Indebtedness—Intercreditor Agreement” for a description of certain terms affecting the notes and the Guarantees, including provisions relating to the release of Guarantees and turnover of proceeds following an enforcement event under the Revolving Credit Facility.
As of September 30, 2012, after giving pro forma effect to this offering and the application of the estimated proceeds therefrom, we would have had outstanding €969.5 million of indebtedness, including the notes, of which approximately €104.4 million would have been effectively senior to the notes due to being either secured indebtedness or indebtedness of subsidiaries that are not Guarantors. The Issuer would have had no debt other than the notes.
The Issuer is a special purpose finance subsidiary and has no assets or operations, other than in connection with the issuance of the notes, the Initial Notes and the First Additional Notes. Cirsa is a holding company conducting its operations primarily through its subsidiaries.
Optional Redemption .......................... The Issuer may redeem all or part of the notes on or after May 15, 2014, at the redemption prices listed in “Description of the Notes—Optional Redemption.”
At any time prior to May 15, 2014, the Issuer may redeem all or part of the notes by paying a “make whole” premium as described under “Description of the Notes—Optional Redemption.”
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On or before May 15, 2013, the Issuer may use the proceeds of specified equity offerings to redeem up to 35% of the original principal amount of the notes at a redemption price equal to 108.750% of their principal amount, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the aggregate principal amount of the notes remains outstanding after the redemption. See “Description of the Notes—Optional Redemption.”
The Issuer may also redeem the notes in whole, but not in part, at any time, upon giving proper notice, if changes in tax laws impose certain withholding taxes on amounts payable on the notes. If the Issuer decides to do this, it must pay you a price equal to the principal amount of the notes plus interest and certain other amounts. See “Description of the Notes—Optional Tax Redemption.”
Change of Control ............................... If Cirsa experiences a change of control, the Issuer will be required to offer to repurchase the notes at 101% of their principal amount plus accrued and unpaid interest. See “Description of the Notes—Change of Control.”
Covenants ............................................. The notes will be issued under the indenture which will limit, among other things, our ability to:
• incur additional indebtedness; • pay dividends or make other distributions; • make certain other restricted payments and investments; • create liens; • enter into any agreement that would limit the ability of Cirsa’s subsidiaries to pay
dividends or make other payments to Cirsa; • transfer or sell assets; • enter into transactions with affiliates; • enter into sale-leaseback transactions; and • merge or consolidate with other entities. Each of the covenants is subject to a number of important exceptions and qualifications. See
“Description of the Notes—Certain Covenants.”
Intercreditor Agreement ..................... The notes will be subject to an intercreditor agreement among Cirsa, the other Guarantors, the Issuer, the trustee for the notes, the lenders under the Revolving Credit Facility, the facility agent under the Revolving Credit Facility, the security trustee and other parties from time to time named therein. Pursuant to the intercreditor agreement, the trustee under the indenture relating to the notes and holders of the notes will agree, among other things, to turnover to the security trustee under the Revolving Credit Facility any proceeds received by them from the Issuer or the Guarantors at any time after an enforcement event under the Revolving Credit Facility has occurred and, in certain circumstances, to release the Guarantees.
Transfer Restrictions ........................... We have not registered the notes or the Guarantees under the U.S. Securities Act. The notes are subject to restrictions on transfer and may only be offered or sold in transactions that are exempt from or not subject to the registration requirements of the U.S. Securities Act. Furthermore, the notes and the Guarantees have not been registered under any other country’s securities laws. See “Notice to Investors.”
No Prior Market .................................. Because the offered notes have a different restricted trading period than the Initial Notes and the First Additional Notes, the offered notes will be new securities for which there is currently no market. Although the Initial Purchaser has informed us that it intends to make a market for the offered notes, it is not obligated to do so and it may discontinue market making at any time without notice. Accordingly, a liquid market for the notes may not be developed or maintained.
Tax Consequences ................................ The offered notes will have the same U.S. federal income tax characteristics as the Initial Notes and the First Additional Notes provided that the offered notes are issued in a “qualified reopening” for U.S. federal income tax purposes. While the matter is not free from doubt, the Issuer intends to take the position that the offered notes are being issued in a “qualified reopening.” Accordingly, the offered notes will have the same characteristics as the Initial Notes, and thus will be considered to have original issue discount (“OID”).
U.S. holders of the notes generally are required to include such OID in gross income for U.S. Federal income tax purposes as it accrues (regardless of their regular method of accounting), possibly in advance of the receipt of cash attributable to such income. U.S. holders of the offered notes may be entitled to reduce or eliminate any periodic inclusions of OID if, as expected, the price of the offered notes in the offering is greater than the adjusted issue price of the Initial Notes.
For a discussion of the U.S. Federal income tax consequences of an investment in the notes, see “Material Tax Considerations—Material U.S. Federal Income Tax Consequences to U.S. Holders.” As described in more detail in such section of this listing circular, the position of the Issuer with respect to the U.S. federal income tax treatment of the offered notes is not free from doubt. You should consult your own tax advisor to determine the U.S. Federal, state, local and other tax consequences of an investment in the notes.
Listing ................................................... The Issuer applied to list the offered notes on the Official List of the Luxembourg Stock Exchange and admit the offered notes for trading on the Euro MTF Market.
Governing Law .................................... The laws of the State of New York.
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Use of Proceeds .................................... We will use the proceeds from this offering to refinance approximately €70 million of existing indebtedness, including €50.0 million of our existing indebtedness under the Revolving Credit Facility, to pay commissions, fees and other expenses of this offering and for general corporate purposes which may include investments in our Latin American businesses. See “Use of Proceeds.”
Risk Factors ......................................... You should refer to the section entitled “Risk Factors” for an explanation of certain risks involved in investing in the notes.
Clearing Information........................... The offered notes sold pursuant to Regulation S and the offered notes sold pursuant to Rule 144A of the U.S. Securities Act have been accepted for clearance through the facilities of Euroclear and Clearstream.
The initial, temporary common code number and international securities identification number for the offered notes sold pursuant to Regulation S under the U.S. Securities Act are 088238486 and XS0882384869, respectively. After the expiration of the 40-day period following the issue date the common code number and international securities identification number for the offered notes sold pursuant to Regulation S under the U.S. Securities Act are 050659151 and XS0506591519, respectively.
The initial, temporary common code number and international securities identification number for the offered notes sold pursuant to Rule 144A under the U.S. Securities Act are 088243064 and XS0882430647, respectively. After the expiration of the one year period following the issue date the common code number and international securities identification number for the offered notes sold pursuant to Rule 144A the U.S. Securities Act are 050659313 and XS0506593135, respectively.
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Summary Consolidated Historical and Unaudited Consolidated Pro Forma Financial Information
The following summary profit and loss account data, balance sheet data and other data as of and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 have been derived from our audited consolidated financial statements for the years ended December 31, 2011, 2010, 2009 and 2008. The following summary profit and loss account data, balance sheet data and other data as of and for the nine months ended September 30, 2012 and 2011 have been derived from our unaudited consolidated financial statements for the nine months ended September 30, 2012. The following summary profit and loss account data, balance sheet data and other data as of and for the twelve months ended September 30, 2012 have been derived from our unaudited consolidated financial statements for the nine months ended September 30, 2012 and from our audited consolidated financial statements for the year ended December 31, 2011. Our consolidated financial statements for the years ended December 31, 2011, 2010, 2009 and 2008 and for the nine months ended September 30, 2012 have been prepared in accordance with IFRS—EU, which differs in certain significant respects from Spanish GAAP. Our consolidated financial statements as of and for the year ended December 31, 2008 are not included in this listing circular.
The following summary profit and loss account data, balance sheet data and other data as of and for the years ended December 31, 2006 and 2005 have been derived from our audited consolidated financial statements for the years ended December 31, 2006 and 2005, which consolidated financial statements are not included in this listing circular. Our consolidated financial statements for the years ended December 31, 2006 and 2005 have been prepared in accordance with Spanish GAAP, which differs in certain significant respects from IFRS—EU.
You should read our consolidated financial statements and the related notes included elsewhere in this listing circular.
The comparability of our results of operations and financial position as of and for the years ended December 31, 2011, 2010 and 2009 and as of and for the nine months ended September 30, 2012 and 2011 have been affected by the factors described in “Operating and Financial Review and Prospects—Overview.”
The following summary pro forma financial information has been derived by applying pro forma adjustments to Cirsa’s historical consolidated financial statements included elsewhere in this listing circular. The summary pro forma financial information gives effect to the offering and the application of the estimated proceeds therefrom as though they had occurred on October 1, 2011 for the pro forma profit and loss account information and on September 30, 2012 for the pro forma balance sheet information.
The adjustments necessary to present fairly the summary pro forma financial information have been made based on available information and assumptions that we believe are reasonable. The summary pro forma financial information is for informational purposes only and does not purport to present what our results would actually have been had these transactions actually occurred on the dates presented or to project what our results would actually have been had these transactions actually occurred on the dates presented or to project our results of operations or financial position for any future period.
The summary consolidated historical and unaudited consolidated pro forma financial information should be read in conjunction with the financial statements included elsewhere in this listing circular and the information set forth in “Summary,” “Business,” “Capitalization,” “Selected Consolidated Financial Information and Other Data,” “Operating and Financial Review and Prospects” and “Description of Certain Indebtedness.”
The following table summarizes our profit and loss account data, balance sheet data and other data as of and for the years ended December 31, 2011, 2010, 2009, 2008, 2007, 2006 and 2005, and for the twelve months ended September 30, 2012:
Spanish GAAP IFRS
Year ended
December 31, Year ended December 31,
Twelve months
ended
September 30,
2005 2006 2007 2008 2009 2010 2011 2012
(€ in millions)
Summary Profit and
Loss Account Data: Operating revenues ....... 1,556.6 1,657.1 1,670.3 1,703.9 1,648.3 1,774.2 1,746.8 1,803.5 Net profit attributable to
equity holders of the parent ........................ (34.6) (8.5) (5.6) 23.5 (5.0) (19.0) (25.4) 2.8
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Summary Balance
Sheet Data (at end
of period): Total assets ....................... 905.2 939.1 1,003.2 1,149.4 1,238.7 1,349.1 1,389.6 1,397.3 Total debt ...................... 631.5 690.9 736.4 785.9 830.7 898.2 936.7 942.3 Total net debt(1)(2) .......... 571.0 611.0 679.9 721.9 780.4 833.0 870.0 870.7 Total shareholders’
Other Financial Data: EBITDA(3)(4) ................. 114.1 143.4 164.3 192.6 208.6 260.0 290.0 315.0 Capital expenditures(5) .. 96.7 65.6 91.5 114.4 167.6 140.8 160.1 167.9 Ratio of total net debt to
(1) We define total net debt calculated using items determined under Spanish GAAP as total debt less cash and securities portfolio.
(2) We define total net debt calculated using items determined under IFRS as total debt less cash and cash equivalents.
(3) EBITDA for the years ended December 31, 2006 and 2005 calculated using items determined under Spanish GAAP represents operating profit before depreciation, amortization of fixed assets and variation in operating provisions.
The following table presents the calculation of EBITDA under Spanish GAAP:
Year ended
December 31,
2005 2006
Operating profit ...................................................................................................................................................................................... 50.6 75.6 Depreciation and amortization of fixed assets ........................................................................................................................................ 52.3 59.6 Variation in operating provisions ........................................................................................................................................................... 11.2 8.2
(4) EBITDA represents profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets. We believe that it is widely accepted that EBITDA provides useful information regarding a company’s ability to service and incur indebtedness. EBITDA is not a measurement of operating performance under IFRS, and should not be considered a substitute for operating income, net income, cash flows from operating activities or other income statement data, or as a measure of profitability or liquidity, and EBITDA does not necessarily indicate whether cash flow will be sufficient or available for cash requirements. EBITDA may not be indicative of our historical operating results nor is it meant to be predictive of potential future results. Because all companies do not calculate EBITDA identically, the presentation may not be comparable to similarly entitled measures of other companies. For a reconciliation of EBITDA to profit before tax in the years ended December 31, 2011, 2010 and 2009, the nine months ending September 30, 2012 and 2011 and the twelve months ending September 30, 2012, see footnote (3) to the following table.
(5) We define capital expenditures to include the following items from our consolidated cash flow statement: “Purchase and development of property, plant and equipment” and “Purchase and development of intangibles.”
The following table presents our profit and loss account data, balance sheet data and other data as of and for the years ended December 31, 2011, 2010 and 2009, the nine months ending September 30, 2012 and 2011 and the twelve months ending September 30, 2012.
Net profit .............................................................. (5.0) (19.0) (25.4) (25.6) 2.6 2.8
Selected Balance Sheet Data (at end of period): Cash and cash equivalents ..................................... 50.3 65.2 66.7 75.1 71.6 71.6 Total assets ............................................................ 1,238.7 1,349.1 1,389.6 1,320.4 1,397.3 1,397.3 Total debt(1) ............................................................ 830.7 898.2 936.7 910.4 942.3 942.3 Total net debt(2) ...................................................... 780.4 833.0 870.0 835.8 870.7 870.7 Total shareholders’ equity ..................................... 90.8 85.0 35.6 23.3 36.1 36.1
Other Financial Data: EBITDA(3) ............................................................. 208.6 260.0 290.0 214.9 240.0 315.0 Capital expenditures(4) ........................................... 167.6 140.8 160.1 103.6 111.4 167.9
Pro Forma Financial Data:(5) Cash and cash equivalents(6) .................................. 98.8 Total debt(7) ............................................................ 969.5 Net interest expense(8) ............................................ 85.6 Total net debt(9) ...................................................... 870.7 Ratio of total net debt to EBITDA ......................... 2.8x Ratio of EBITDA to net interest expense .............. 3.7x
(1) Total debt of €942.3 million as of September 30, 2012 was comprised of (i) bank debt of €172.8 million recorded under “Credit institutions”
as non-current liabilities and current liabilities, (ii) capital lease obligations of €29.9 million recorded under “Credit institutions” as non-current liabilities and current liabilities, (iii) gaming tax deferrals of €28.1 million recorded under “Tax authorities” as non-current liabilities and under “Other creditors” as current liabilities, (iv) promissory notes and other loans of €33.9 million recorded under “Other creditors” as non-current liabilities and current liabilities and (v) high yield notes of € 677.6 million recorded under “Bonds” as non-current liabilities and current liabilities.
(2) We define total net debt as total debt less cash and cash equivalents.
(3) EBITDA represents profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets. We believe that it is widely accepted that EBITDA provides useful information regarding a company’s ability to service and incur indebtedness. EBITDA is not a measurement of operating performance under IFRS, and should not be considered a substitute for operating income, net income, cash flows from operating activities or other income statement data, or as a measure of profitability or liquidity, and EBITDA does not necessarily indicate whether cash flow will be sufficient or available for cash requirements. EBITDA may not be indicative of our historical operating results nor is it meant to be predictive of potential future results. Because all companies do not calculate EBITDA identically, the presentation may not be comparable to similarly entitled measures of other companies.
The following table presents our calculation of EBITDA:
Year ended December 31, Nine months ended September 30,
2007 2008 2009 2010 2011 2011 2012
Twelve months
ended
September 30, 2012
(€ in millions) Profit before tax ............ 16.8 33.4 28.2 22.5 26.8 12.2 52.4 67.0 (Profit)/Loss on sale of
(4) We define capital expenditures to include the following items from our consolidated cash flow statement: “Purchase and development of property, plant and equipment” and “Purchase and development of intangibles.”
(5) The pro forma financial data gives pro forma effect to the offering of the notes and the expected application of the proceeds therefrom. See “Use of Proceeds” and “Capitalization.”
(6) Pro forma cash represents cash and cash equivalents of €71.6 million adjusted for the net proceeds from the issuance of the offered notes after the repayment of approximately €50.0 million of indebtedness under the
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Revolving Credit Facility and €20.0 million of other indebtedness and the payment of an estimated €2.5 million of debt issuance costs.
(7) Pro forma total debt represents total debt of € 942.3 million adjusted for the repayment of approximately €50.0 million of indebtedness under the Revolving Credit Facility and € 20.0 million of other indebtedness, and the issuance of the €100.0 million of offered notes (net of original issue discount), net of an estimated €2.5 million of debt issuance costs, in the offering.
(8) Pro forma net interest expense represents interest expense as adjusted for the interest expense in respect of the offered notes at an interest rate of 8.750% less the interest expense in respect of other indebtedness to be repaid with the proceeds of the offering.
(9) We define pro forma total net debt as pro forma total debt (€969.5 million) less pro forma cash and cash equivalents (€98.8 million).
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RISK FACTORS
An investment in the notes involves a high degree of risk. You should carefully consider the risk factors
described below and all other information contained in this listing circular. These risks and uncertainties are not the
only ones we face. We also face additional risks and uncertainties that are not currently known to us or that we currently
consider immaterial. The occurrence of the risks described below or such additional risks could have a material adverse
impact on our business, financial condition and results of operations, including our ability to make payments on the
notes or on the trading price of such notes. Various statements in this listing circular, including the following risk
factors, contain forward looking statements.
Risks Relating to the Gaming Industry and Our Business
Our business will be negatively impacted by the economic downturn in Spain and other markets in which we operate.
For the twelve months ended September 30, 2012, our operations in Spain accounted for 37.1% of our consolidated net operating revenues and 24.9% of our consolidated EBITDA. Spain is currently experiencing a significant economic downturn. Spain entered into a recession in the third quarter of 2008, and the effects of the global economic downturn have been exacerbated by a real estate crisis and pressures from a relatively high fiscal deficit and external indebtedness. Spain’s public debt has been downgraded by rating agencies on a number of occasions commencing in 2010. The unemployment rate was reported to be 25.0% at the end of September 2012 and the gross domestic product contracted by 3.7% during 2009, declined by a further 0.3% in 2010, grew by 0.4% in 2011 but has been projected to contract in 2012 and 2013. The economic downturn has had, and will likely continue to have, a number of negative impacts on our operations in Spain. For example, the aggregate number of visitors to our slots arcades and bingo and casino halls in Spain as well as their average visit length and amount wagered have decreased commencing in 2009, and have not yet recovered. The decrease in visitors and length of visit have, in turn, adversely affected our results of operations in 2009, 2010, 2011 and the nine months ended September 30, 2012. The economic downturn in Spain, the effects of the credit crisis and recent negative developments with respect to Eurozone financial markets have also adversely impacted the availability and cost of our bank financing in Spain, and we believe that these conditions will continue.
Our results of operations are also dependent on the economic conditions of other markets in which we operate, including Italy, Argentina and other parts of Latin America, some of which have experienced declines recently and during various periods in the past decade. Our business is particularly sensitive to reductions in discretionary consumer spending, which may be affected by such negative economic conditions. Economic contraction, economic uncertainty and the perception by our customers of weak or weakening economic conditions may cause a decline in demand for entertainment in the forms of the gaming services that we offer. In addition, changes in discretionary consumer spending or consumer preferences could be driven by factors such as an unstable job market or perceived or actual disposable consumer income and wealth. Economic downturns and volatility in the various markets in which we operate may adversely affect our results of operations and financial condition.
There are risks associated with our operations outside of Spain.
For the twelve months ended September 30, 2012, net operating revenues and EBITDA from our operations outside of Spain accounted for 62.9% of our consolidated net operating revenues and 75.1% of our consolidated EBITDA, respectively. We have operations in seven countries outside of Spain. Over the past ten years, we have expanded our operations into Latin America and Italy and may continue to expand selectively into new geographic markets. Pursuing this strategy has placed and may continue to place us in new markets and businesses in which the gaming industry and taxation and related regulatory environment are, in many cases, less developed than in Spain. See “Regulation.” Taxes on slot machines or other gaming activities may be created or increased or new and more detailed regulations may be enacted. These tax increases or regulatory changes could increase our cost of regulatory or tax compliance and could have a material adverse effect on our operations. In many international markets in which we operate, we invest in or enter into partnership arrangements with local gaming market operators. These investments and arrangements are subject to a number of risks.
A significant portion of our international presence, representing 60.1% of consolidated EBITDA, is in Latin America, including Argentina, Panama, Colombia, Mexico, Dominican Republic, Peru and, until recently, Venezuela and Ecuador. In these markets, we are often exposed to substantial political, economic and currency risks because the governments, economies and currencies of many of these countries are more volatile than the countries of the European Union. Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions to control inflation and other policies and regulations have often involved, among other measures, price controls, currency devaluations, capital controls and limits on imports. Our business may be adversely affected by this volatility.
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In addition, the costs and revenues of our operations outside the European Union are denominated in currencies other than the euro. Because our financial statements are denominated in euros, exchange rate movements between the euro and the relevant other currencies have in the past adversely impacted, and may continue to adversely impact, our results of operations. For example, our results of operations and financial position have been materially and adversely affected by the depreciation of the Argentine peso against the euro in 2009 and, to a lesser extent, in 2007, and 2008, as well as in earlier historical periods. During 2008, 2009, 2010 and 2011, our results of operations and financial position were also adversely affected by the depreciation of the U.S. dollar and local currencies in Venezuela, the Dominican Republic and Peru. We expect that our results of operations and financial condition will continue to be impacted by the effect of currency fluctuations in the future, particularly as we do not engage in, or have immediate plans to enter into, any currency hedging transactions. Moreover, these currency fluctuations may make period-to-period comparisons of our results from operations difficult to evaluate.
Our business in Argentina generates a significant amount of our revenues and EBITDA, and any adverse
developments with respect to it could negatively impact our financial condition and results of operations.
We currently depend, and we expect to continue to depend, on our Buenos Aires riverboat casino business to generate a significant portion of our revenues and EBITDA. Our main Argentine subsidiary, Casino Buenos Aires, contributed approximately 12.4% of our consolidated EBITDA in the twelve months ended September 30, 2012. In addition, we have made significant investments in our Rosario casino, in which we hold a 50% interest. The Rosario casino commenced operations in October 2009, and accounted for 8.4% of our consolidated EBITDA in the twelve months ended September 30, 2012. We are additionally party to certain strategic arrangements with another Argentine casino operator, Casino Club, with respect to our Argentina business. In November 2011, we acquired a 33% share of a bingo hall in Buenos Aires and in the future may increase our exposure to the Argentine market through further acquisitions and/or expansion. See “Business—Strategic Arrangements in Argentina” and “Risk Factors—We do not control certain of our businesses.”
Our businesses in Argentina are subject to a wide variety of risks, including the risk of adverse legal and regulatory developments, political, social or economic instability in Argentina, depreciation of the Argentine peso, restrictions on transfer of funds and various operational risks.
Legal and Regulatory Risk. The License. The validity of the license granted to us by the State Lottery of Argentina (Lotería Nacional del Estado) for the operation of our casinos in Buenos Aires has been subject to local governmental challenge and related litigation. The City of Buenos Aires alleged that the State Lottery of Argentina did not have the authority to issue the license. In 2003, the City of Buenos Aires and the State Lottery of Argentina entered into a settlement agreement, in which the parties agreed (i) that the State Lottery of Argentina has the regulatory authority over our casinos in Buenos Aires, (ii) a method for the distribution of gaming royalties and related fees between them, and (iii) to the termination of all pending litigation between them, in each case, without acknowledgement by either party of any underlying rights. The settlement agreement acknowledges the extension of the term of the license to 2019 and our right to open a second riverboat casino at the same site. The settlement agreement has a four-year renewable term, and either the State Lottery of Argentina or the City of Buenos Aires may terminate the settlement agreement by giving notice within 120 days prior to the expiration of any four-year period. Under, the settlement agreement, the current term expires in December 2015. If upon termination of the settlement agreement, the City of Buenos Aires decides to initiate new legal proceedings challenging the State Lottery of Argentina’s regulatory authority over our casinos in Buenos Aires, or otherwise interferes with its operation, we believe we may be able to prevent such interference under temporary restraining orders issued at our request and currently in force against the City of Buenos Aires, or by requesting new restraining orders in the future. However, we cannot assure you that any such temporary restraining orders will be granted or enforced. If upon termination of the settlement agreement, the City of Buenos Aires challenges the continuing validity of the license, we cannot assure you that the validity of the license will be upheld. Our Argentine counsel has advised us that proceedings challenging the validity of the license may take six to 10 years to conclude.
Our existing second riverboat casino, Princess Casino, commenced operations in January 2006 and has a license to operate which expires in 2019.
In March 2005, in response to a complaint brought by an individual against the City of Buenos Aires, a City court in the City of Buenos Aires ruled that the settlement agreement was void and that the law ratifying the settlement agreement was contrary to the constitution of the City of Buenos Aires, and ordered that our first riverboat casino in Buenos Aires, Estrella de la Fortuna, be closed. The City of Buenos Aires appealed this decision in proceedings to which we were not a party, and we additionally requested that the Argentine Federal Court issue injunctions against the Buenos Aires City court order. On March 27, 2006, the City court of the City of Buenos Aires ordered that our second riverboat, Casino Princess, be closed. Upon our urgent request, the Federal Court issued various orders upholding the ruling issued in the Federal Court case and ordering the immediate re-opening of the second riverboat. On October 6, 2006, the Supreme Court of the City of Buenos Aires (the highest court of the city of Buenos Aires) held that the legal proceedings pursuant to which the City court had declared void the settlement agreement between City of Buenos Aires and the State
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Lottery of Argentina were null and void. There can be no assurance that the settlement agreement between the City of Buenos Aires and the State Lottery of Argentina will not be challenged in a federal court. See “Business—Litigation.”
Municipal Turnover Tax. The City of Buenos Aires has claimed that the riverboat casinos in Buenos Aires are subject to a so-called municipal turnover tax and has made several attempts to inspect our premises in Buenos Aires in order to obtain the necessary evidence and information to be able to assess and collect such tax. We do not believe that we are subject to the turnover tax on a variety of grounds. Among other things, it is our position that the riverboat casinos are not located within the jurisdiction of the City of Buenos Aires. We also believe that the settlement agreement and temporary restraining orders prevent the City from making these claims. Nevertheless, if we were found to be subject to such tax and required to pay such tax, it could have a material adverse effect on our results of operations.
For a discussion of these and other legal proceedings and claims faced by our business in Argentina, see “Business—Litigation.”
Political and Currency Risk. Over the past decade, the Argentine economy has experienced a severe recession, as well as a political and social crisis, and the abandonment of U.S. dollar Argentine peso parity led to significant depreciation of the Argentine peso against major international currencies. For example, during 2002, even though the number of visitors to Casino Buenos Aires increased by over 40% as compared to 2001, revenues on a euro basis fell by half due largely to the effects of the depreciation of the Argentine peso. The Argentine peso depreciated significantly against the euro in 2009 and 2011. Furthermore, during the period from 2003 to 2008, the depreciation of the U.S. dollar, in which Casino Buenos Aires collects some of its revenues, against the euro, our reporting currency, had a negative impact on our revenues.
Since the abandonment of the U.S. dollar Argentine peso parity in January 2002, the Argentine government has implemented measures attempting to address its effects, recover access to financial markets, restore liquidity to the financial system, reduce unemployment and generally stimulate the economy. Although general political, economic and social conditions in Argentina improved since 2003, significant uncertainties remain regarding the country’s economic and political future. There have been a number of negative economic and political developments since 2008 and more recently that have increased the level of uncertainty. The country has experienced high rates of inflation in recent years and it is possible that Argentina will enter a deeper recession and experience higher levels of inflation, unemployment and social unrest in the future. Argentine government measures concerning the economy, including measures related to inflation, interest rates, foreign exchange controls, currency exchange rates and privatization measures have had and may continue to have a material adverse effect on private sector entities, including Casino Buenos Aires and the Rosario casino. For example, in recent years, the government of Argentina has taken various measures that have troubled foreign investors, including the nationalization of YPF S.A., one of the largest oil and gas producers in Argentina. In June 2012, there were reports in the Argentine media regarding the possible nationalization of the private sector gaming industry. We have not received any communication from the Argentine government in this regard and are unaware of any plans regarding a proposed change of ownership; however, we cannot guarantee the Argentine government will continue to permit private sector gaming in the country.
Restrictions on transfer of funds. Under current foreign exchange regulations, there are restrictions on the transfer of funds into and outside of Argentina. In 2001 and 2002, the Argentine government imposed a number of monetary and currency exchange control measures that included restrictions on the disposition of funds deposited with banks and restrictions on transferring funds abroad. In October 2011, the Argentine government introduced additional restrictions in connection with the transfer of funds. These measures require certain Argentine oil, gas and mining companies to repatriate 100% of their foreign currency earnings, insurance companies to sell all their foreign assets and repatriate the proceeds, and require official approval to buy U.S. dollars which approval is contingent on previous tax declarations proving the necessary income. There can be no assurance that the Argentine government will not impose new restrictions on the transfer of funds outside of Argentina. The current restrictions do not affect the payment of dividends to us by our Argentine businesses. However, the transfer of U.S. dollars out of Argentina requires prior government approval and is therefore subject to prevailing political and fiscal conditions at the time such transfer request is made. We also incur significant transactional costs transferring funds out of Argentina. Additionally, there is a possibility that the government could further restrict, either directly or indirectly, the transfer of dividends from local companies to their foreign shareholders in the future. If we were unable to repatriate funds from Argentina, we would not be able to use the cash flow from Casino Buenos Aires and our other Argentine businesses to finance our operating requirements elsewhere and satisfy our debt obligations, including the notes.
Furthermore, there are separate restrictions governing the transfer of funds into Argentina. Specifically, regulations impose obligations regarding minimum repayment terms and a mandatory one year deposit requirement for funds transferred into Argentina in connection with indebtedness of non-Argentine residents, certain investments made by non-Argentine residents, and the repatriation of funds by Argentine residents. Certain transactions are exempt from the mandatory one year deposit requirement, including: foreign loans to finance imports and exports, loans to the non-financial sector with an average term of at least two years (including principal and interest payments) if such funds are
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used exclusively for investments in non-financial assets, direct investments from non-residents and financing obtained to repay foreign financial debt when the proceeds of the loan are used to repay such foreign debt. There can be no assurance that these restrictions will not affect our ability to finance our operations in Argentina.
Operational Risks. Dockside and riverboat facilities are subject to risks, in addition to those associated with land-based casinos, relating to weather, flood or mechanical failure and must comply with applicable regulations. Gaming operations conducted on riverboat casinos or at dockside facilities could be lost from service for a variety of reasons, including terrorism, casualty, forces of nature, movement of vessels, mechanical failure, extended or extraordinary maintenance or labor disputes. Our riverboats must also comply with various regulatory requirements as to boat design, on-board facilities, equipment, personnel and safety. Between 2006 and 2008, our riverboat casinos were closed on multiple occasions for extended periods of time due to work stoppages by employees. See “Business—Employees.”
We do not control certain of our businesses.
We operate a number of our businesses through strategic partnerships, joint ventures and alliances. For example, we have entered into a Unión Transitoria de Empresas (“UTE”) agreement with a local partner with respect to the operation and development of our gaming operations in the City of Buenos Aires. We also hold a 50% ownership interest in the Rosario casino in Argentina and, in November 2011, we acquired a 33% share in a bingo hall in Buenos Aires. We have entered into a 50:50 joint venture with Ladbrokes PLC for sports betting in Spain, and we have a 50% interest in Majestic Casino in Panama. We are also operating a significant portion of our VLT business in Italy through a 50:50 joint venture arrangement. There can be no assurance that the arrangements will be successful and/or achieve their planned objectives. The performance of all such operations in which we do not have a controlling interest will depend on the financial and strategic support of the other shareholders. Such other shareholders may make ill-informed or inadequate management decisions, or may fail to supply or be unwilling to supply the required operational, strategic and financial resources, which could materially adversely affect these operations. If any of our strategic partners were to encounter financial difficulties, change their business strategies or no longer be willing to participate in these strategic partnerships, joint ventures and alliances, our business, financial condition and results of operations could be materially adversely affected. Moreover, in a number of these businesses, we do not have the power to control the payment of dividends or other distributions, so even if the business is performing well, we may not be able to receive payment of our share of any profits. Finally, there could be circumstances in which we may wish or be required to acquire the ownership interests of our partners, and there can be no assurance that we will have access to the funds necessary to do so, on commercially reasonably terms or at all. For example, under recent amendments to the Spanish Capital Companies Act (“Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital”) applicable to unlisted companies and entry expected to come into force on January 1, 2015, from the fifth financial year following registration of a Spanish company in the Commercial Registry, a member voting in favor of distribution of profits will be entitled to withdraw ownership if the general meeting does not resolve to distribute at least one third of legally distributable operating corporate profits obtained during the prior financial year. Under such circumstances, we might seek or be required to acquire the ownership interests of our partners.
The gaming industry is subject to extensive regulation and licensing requirements, and our business may be adversely
affected by our inability to comply with these extensive regulation and licensing requirements, regulatory changes and
increases in the taxation of gaming.
Our operations are subject to significant regulation and oversight and require licenses from gaming authorities and other governmental or regulatory bodies. These regulations, among other things, govern payouts and wagers for slot machines, the types of gaming tables permitted at casinos and permissible forms of bingo. In addition to limiting the scope of our permitted activities, these regulations may limit the number of slot machines, casinos or bingo halls we may operate. Gaming authorities, governments or other regulatory bodies may deny, revoke or suspend our licenses and impose fines or seize our assets if we are found to be in violation of any of these regulations.
For example, the Italian gaming authorities have asserted on a number of occasions that we and other slot market participants were not in compliance with various requirements relating to our slots licenses. An Italian judicial institution with responsibility for safeguarding public finances has brought proceedings against Cirsa Italia S.p.A., our Italian subsidiary, and other market participants based on an alleged failure to comply with certain obligations. The Italian judicial institution has made a claim against Cirsa Italia for damages to the Italian state of €3.3 billion, and similar claims against other slot market participants for damages in excess of €90 billion. The Italian judicial institution has ordered payment by Cirsa Italia of an amount equal to €120 million. Additionally, in March 2012 the Italian slots regulator, AAMS, ordered Cirsa Italia to pay €10.2 million in fines. We have appealed these rulings, however, there can be no assurance that our efforts will be successful and we cannot predict when or how the proceedings relating to the claim will ultimately be resolved. If our appeals are not successful, the requirement to pay such amount (including any attempt to enforce such claim against Cirsa Italia) could have a material adverse effect on the business and results of operations of Cirsa Italia. See “Regulation—Italy.”
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In the summer of 2011, the Venezuelan gaming authorities temporarily halted all casino operations in order to evaluate and determine the future of the gaming industry in the country. Our two casinos in Venezuela, Gran Casino Margarita and Gran Bingo Maracaibo, which together represented approximately 0.64% of our EBITDA in 2011, were affected by this decision and forced to cease operations. We cannot anticipate when, or if, our casinos in Venezuela will be allowed to resume operations. If our casinos are allowed to resume operations, their activities may nevertheless be curtailed or no longer profitable in light of applicable taxes or regulatory compliance costs, among other matters. In 2011, we recorded an impairment of €6.7 million in respect of our Venezuelan casinos. See “Regulation—Republic of Venezuela.”
Similarly, in May 2011, a referendum was held in Ecuador, the result of which was to ban all gaming activities in Ecuador, starting in March 2012. Our gaming activities in Ecuador, representing approximately 0.21% of our EBITDA in 2011, were affected by the result of this referendum and we permanently closed our Ecuador activities in 2012.
Likewise, in Panama, in August 2009 and September 2009, the Panamanian gaming regulator and the Panamanian government adopted legislation and implemented measures that resulted in the revocation of a number of the licenses used in our Panamanian electronic casino operations and the closure of the electronic casino halls that utilize such licenses, and threatened the revocation of additional licenses and the potential closure of further electronic casino halls. However, since the revocation of such licenses and the closure of such electronic casinos pursuant to the reforms in the legislation in 2009, there have been no further revocations of licenses or closure of electronic casino halls. See “Regulation—Republic of Panama.” There can be no assurance that regulators or governments in other countries in which we operate will not take actions similar to the measures implemented in Venezuela, Ecuador and Panama, which could require us to partially or completely halt our activities and close our facilities in the country.
We also from time to time experience delays in the renewal of our gaming licenses, which can result in our operating our businesses without valid licenses and could subject us to fines and penalties, including the temporary or final closure of our facilities.
In addition, changes in existing regulations, including regulations not relating to the gaming industry, such as anti-money laundering and labor laws, could impair our profitability and restrict our ability to expand our business. Future increases in national or regional taxation of slot machines, casinos and bingo halls could also affect our profitability. See “Regulation”.
Our business may be adversely affected by the implementation of anti-smoking laws.
The implementation of anti-smoking laws in the countries in which we operate may have a significant adverse effect on the number of visitors to our slots arcades and bingo halls, as well as on the length of their visits. Such anti-smoking laws may also require us to make certain investments, in particular to facilitate the access of our customers to smoking areas, or may result in the closure of bars, cafés and restaurants in which our slot machines are located. For example, the results of our Bingo Division have been adversely impacted by the introduction of an anti-smoking law in Spain in 2006, and we have been required to make significant capital investment in order for our bingo halls to comply with such legislation. As of January 2, 2011, a more stringent anti-smoking law took effect in Spain that bans all smoking in many types of establishments, including bars, restaurants and casinos. This new law has had an adverse impact on our revenues and we believe that it will continue to have an adverse impact in the future.
Failure to maintain our on-line gaming licenses or comply with on-line gaming rules and regulations could adversely
affect our business.
We started to expand our business into on-line internet gaming in Spain and Italy during the third quarter of 2012, after obtaining the necessary permissions and licenses. One of our competitors, Codere, has challenged the granting of our Spanish on-line gaming licenses, as well as those of thirteen other gaming operators. We cannot predict when the challenges made by Codere will be resolved or whether such challenges will be successful. See “Regulation—Spain—On-line Gaming.” Failure to maintain these licences could negatively impact our financial condition and results of operations. We are working together with third-party advisers and service providers to establish the necessary systems, controls and procedures to ensure that we are, or will be in compliance with applicable rules, laws and regulations in our Spanish and Italian operations and have technical systems and controls in place which seek to ensure that we do not offer our gaming products and services into certain restricted jurisdictions. However, the systems, controls and procedures adopted by us may not be sufficient to comply with all applicable on-line gaming rules, laws and regulations or we may not be able to successfully block users resident in countries which restrict or prohibit on-line gaming or in which we are not licensed to conduct on-line gaming operations, such as the United States, from accessing our on-line gaming sites. Failure to comply with such rules, laws and regulations or block such users could place us in breach of licenses or key contracts or result in civil, criminal or administrative proceedings, injunctions, fines and penalties and substantial litigation expenses that could strain our management resources and may adversely affect our results of operations and financial condition.
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Our failure to keep up with technological developments in the on-line gaming market could negatively impact our
business, results of operations and financial condition.
The market for on-line gaming products and services is characterized by rapid technological developments, frequent new product and service offerings and evolving industry standards. The emerging character of these products and services and their evolution requires us to use technologies effectively, enhance our current products and services and continue to improve the performance, features and reliability of our technology and information systems. In addition, the widespread adoption of new internet technologies or standards could require substantial expenditure to replace, upgrade, modify or adapt our technology and systems, which could negatively impact our business, results of operations and financial condition.
There can be no assurance that the technology we are currently using will be successful, or that it will not be rendered obsolete by new technologies and more advanced systems introduced in the industry. In addition, new technology we use may contain design flaws or other defects and require modifications and/or result in a loss of confidence in our products and services by our customers. Moreover, we depend on third-party technology providers for the development and maintenance of our systems, and any failure to maintain relationships with such providers would negatively impact our business, financial condition and results of operations.
Our failure to comply with regulations regarding the use of personal customer data could subject us to lawsuits or
result in the loss of goodwill of our customers.
We process sensitive personal customer data (including name, address, age, bank details and betting and gaming history) as part of our on-line business and therefore must comply with strict data protection and privacy laws in all jurisdictions in which we operate. Such laws restrict our ability to collect and use personal information relating to players and potential players including the marketing use of that information. We also rely on third party contractors to maintain our databases and we seek to ensure that procedures are in place to ensure compliance with the relevant data protection regulations. Notwithstanding such efforts, we are exposed to the risk that data could be wrongfully appropriated, lost or disclosed, or processed in breach of data protection regulation, by us or on our behalf. If we or any of the third party service providers on which we rely fail to transmit customer information on-line in a secure manner, or if any such loss of personal customer data were otherwise to occur, we could face liability under data protection laws. This could also result in the loss of the goodwill of our existing customers and deter new customers from using our services which would have a material adverse effect on our business, financial condition and results of operations.
Our systems may be vulnerable to hacker intrusion, distributed denial of service attack, malicious viruses and other
cyber crime attacks.
As with all on-line gaming and gambling companies, we may be vulnerable to cyber crime attacks which could adversely affect our business. Examples include distributed denial of service attacks (attacks designed to cause a network to be unavailable to its intended users) and other forms of cyber crime, such as attempts by computer hackers to gain access to our systems and databases for the purposes of manipulating results, which may cause systems failure, business disruption and have a materially adverse effect on our financial condition. While we will employ prevention measures, such attacks are by their nature technologically sophisticated and may be difficult or impossible to detect and defend. If our prevention measures should fail or be circumvented, our reputation may be harmed, which in turn could have a material adverse effect on our financial condition.
We may be materially and adversely affected by breaches of security and systems intrusion conducted for the purpose of stealing personal information of our customers. Any such activity would harm our reputation and deter current or potential customers from using our services, which could have a material adverse effect on our financial condition.
We may not be able to manage growth in our business.
We intend to pursue strategic acquisitions of operational assets in the gaming industry in Spain and Latin America as a part of our business plan and will expand our existing businesses on a selective basis into new gaming products and new geographic markets and new divisions. We started to expand our business into internet gaming in Spain and Italy during the third quarter of 2012. Growth can place significant strain on our management resources and financial and accounting control systems as it requires that management identify and execute upon appropriate investments and subsequently integrate, train and manage increased numbers of employees. Unprofitable investments or expansions or an inability to integrate or manage new investments or expansions could adversely affect our operating results. For example our acquisition of the Unidelca business in Colombia in May 2010 required management to allocate time and resources to the integration of the business and the execution of our synergy plans and the opening of our casino in Valencia in 2010 required significant resources and investment. In Italy, total costs for the VLT project through September 30, 2012 were approximately €49.0 million, of which our share was approximately €31.0 million, and we have experienced deployment delays due to delays in the regulatory and permitting process. More recently, we have made investments in our new On-
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line Gaming Division and we may unable to recoup our investment or achieve positive EBITDA within the expected timeframe or at all. We may experience cost overruns, delays and operational difficulties with respect to these and other future projects, which could have an adverse effect on our business and results of operation. Likewise, any future acquisitions or expansions also will involve risks regarding the potential inability to raise the required capital, difficulties in obtaining regulatory approvals and the lack of the necessary experience to enter new markets. We may not successfully overcome problems encountered in connection with potential acquisitions, completed acquisitions or other expansion, and such problems could have a material adverse effect on our operating results.
We are dependent upon our ability to provide secure gaming products and maintain the integrity of our employees in
order to attract customers, and any event damaging our reputation could adversely affect our business.
The real and perceived integrity and security of a gaming operation is critical to attracting gaming customers. We strive to set exacting standards of personal integrity for our employees and security for the gaming systems and devices that we provide to our customers, and our reputation in this regard is an important factor in our business dealings with customers and governmental authorities. For this reason, an allegation or a finding of improper conduct on our part, or on the part of one or more of our employees, or an actual or alleged system security defect or failure, could materially adversely affect our business and financial condition.
We are in a competitive business environment and, as a result, our market share and business position may be
adversely affected by factors beyond our control.
Each of our divisions faces intense competition from other industry participants.
Slots Division. Due to the fragmentation of the slot machine segment in Spain, we compete with a large number of regional and, generally, much smaller slot machine operators. There are, however, several significant competitors, including Codere and Orenes. As the market for slot machines is consolidating, we may compete with these companies to acquire new or existing slot machine sites. This competition is based on providing site operators with the best service and most attractive revenue sharing arrangements, and could adversely impact our strategy for optimizing our slot machine operations in Spain and reduce our future profit margins. In our other geographic market, Italy, we compete with a number of other slot and VLT operators, some of which are substantially larger than us.
Casinos Division. Although casino owners have had limited direct competition from other casinos due to the limited number of licensed casinos in Spain and Buenos Aires, we may face competition from other forms of gaming, such as bingo halls, lotteries and internet gaming. In Spain, the number of casino licenses issued may increase and, as a result, there may be an increase in direct competition between casinos. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities offered and the implementation of successful marketing programs. We cannot assure you that new licenses will not be issued to competitors, thus increasing our competition in that area.
Bingo Division. Although the domestic market in Spain is dominated by a few large companies, we compete with a large number of regional bingo hall operators. Our principal competitors, each of which is substantially smaller than us, are Grupo Bingo Reunidos, Grupo Ballesteros, Grupo Rank and Grupo Orenes Franco. In addition, we estimate that independent owners operate several hundred bingo halls throughout the country. In Mexico, we compete with other licensed and unlicensed bingo hall operators. Operators of bingo halls also face competition from other forms of gaming.
B2B Division. In the manufacturing of slot machines for Spain, there is a high level of competition between a small number of manufacturers who dominate the Spanish market. We believe that the Spanish slot machine market is a separate market from the international slot machine market due to consumer preferences and Spanish regulations which impose, among other matters, specific design requirements on slot machines that are not placed in casinos. In slot machine manufacturing, our main competitors in Spain are Recreativos Franco and SENTE.
Manufacturers of slot machines can be expected to continue to improve the design and performance of their slot machines and to introduce new popular games with greater revenue producing potential and more competitive prices. From time to time, one or more of our new games may prove unsuccessful, which may erode our market share and decrease our profitability. Although we have been successful in introducing popular new games in the past, we cannot assure you that we will continue to produce popular new games in the future.
Technological Change. Constant innovation is particularly important in the manufacture of slot machines, because they have a short commercial life. For instance, we believe that the average commercial life of an installed slot machine is approximately four to five years in Spain. In addition, because of a possible novelty effect whereby customers are initially more attracted to new slot machines, initial results from these machines may be higher than expected, but may not be sustained throughout the life of the machine. Moreover, existing technology (such as internet gaming), as well as proposed or as yet undeveloped technologies may become more popular in the future and render our products less
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profitable or even obsolete. We cannot assure you that the technology we currently possess and the technology we may develop in the future will allow us to continue to innovate and compete effectively.
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Other Factors. We believe that operators in each of the principal Spanish gaming markets (slot machine operators, casinos and bingo halls) are consolidating into larger diversified gaming companies and that this could lead to increased competition at the national and international levels. Some competitors, particularly potential foreign competitors, have greater financial and other resources than we do, especially with respect to a particular region or gaming activity, and we may not be able to compete successfully with them.
We compete to a limited extent with lotteries (the public gaming market), which comprise national (Lotería Nacional), regional (Entitat Autònoma de Jocs i Apostes which operates only in Catalonia) and charitable lotteries (ONCE).
Changes in consumer preferences could also harm our business.
Our business is dependent on the appeal of our gaming offering to our customers. Our gaming offerings compete with various other forms of gaming venues and opportunities. For example, the rapid expansion of internet gaming may render our products obsolete or oblige us to incur significant capital expenditures to meet customer demand. Changes in consumer preferences and any inability on our part to anticipate and react to such changes could result in reduced demand for our offerings and erosion of our competitive and financial position. Gaming competes with other leisure activities as a form of consumer entertainment, and may lose popularity as new leisure activities arise or as other leisure activities become more popular. The popularity and acceptance of gaming is also influenced by the prevailing social mores, and changes in social mores could result in reduced acceptance of gaming as a leisure activity. To the extent that the popularity of gaming in traditional gaming establishments declines as a result of either of these factors, the demand for our gaming offerings may decline and our business may be adversely affected.
Our results of operations could be adversely affected by a disruption of operations at our manufacturing facilities.
We conduct all of our slot machine manufacturing operations at facilities in Terrassa, Spain. Operations at these facilities are subject to a variety of risks, including:
• equipment failure;
• failure to comply with applicable regulations, including environmental regulations, and to maintain necessary permits and approvals;
• labor force shortages or work stoppages; and
• natural disasters.
Besides the revenues that we generate from selling the slot machines that we produce for third parties, our Slots Division purchases many of its products from our B2B Division. A disruption of operations at our manufacturing facilities could consequently adversely impact the results of operations of the Slots Division. Any significant disruptions in operations resulting from such events or other events may adversely affect our results of operations.
We are exposed to the risk of strikes, work stoppages and other industrial actions. We estimate that approximately 15% of our employees are members of labor unions. Nevertheless, in the future we may experience lengthy consultations with labor unions or strikes, work stoppages or other industrial actions. We are subject to different national and regional industry-wide collective bargaining agreements in each of the respective sectors in which we operate, except for our casinos in Marbella, Valencia, Puçol, La Toja and Buenos Aires, whose employees are party to collective bargaining agreements directly with us. In addition, we are a party to a collective bargaining agreement with the employees of Universal de Desarollos Electronicos, S.A., a slot machine manufacturing subsidiary, concerning hours of employment. Although we believe that we have good relations with our employees, strikes called by employees or unions could disrupt our operations. For example, during 2006, 2007 and 2008, the operations of our Buenos Aires riverboat casinos were adversely impacted by multiple industrial actions involving the labor unions that represent employees. Strikes and other industrial actions, as well as the negotiation of new collective bargaining agreements or salary increases in the future, could disrupt our operations and make it more costly to operate our facilities, which in turn could have a material adverse effect on our business, financial condition and results of operations.
We are subject to taxation which is complex and often requires us to make subjective determinations.
We are subject to many different forms of taxation including but not limited to income tax, gaming taxes, value added tax, social security and other payroll related taxes. Tax law and administration is complex and often requires us to make subjective determinations. The tax authorities may not agree with the determinations that are made by us with respect to the application of tax law. Such disagreements could result in lengthy legal disputes and, ultimately, in the
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payment of substantial amounts for tax, interest and penalties, which could have a material effect on our results of operations.
Our founder, principal shareholder and chairman, Manuel Lao Hernández, has a significant influence on our
business prospects and has participations in competing business interests.
We depend significantly on Manuel Lao Hernández to develop our existing businesses and to find new corporate opportunities. The loss of his services could adversely affect our business prospects. Manuel Lao Hernández is also the chairman of our board of directors. He has the power to elect the members of Cirsa’s board of directors, who in turn appoint managing directors who are responsible for the management of our day-to-day activities. Currently, the other directors on our board of directors are the son and daughter of Manuel Lao Hernández. He has significant influence on all matters to be decided by a vote of shareholders, including resolutions relating to corporate reorganizations, mergers, certain amendments to our articles of association and by-laws, the payment of dividends and the remuneration of the members of our board of directors.
Manuel Lao Hernández holds non-controlling stakes in other slot machine operators in Spain through his beneficial ownership of approximately 54.21% of Opesa Internacional, S.A. These slot machine operators, which are managed by third parties, collectively represent significant competition to our Slots Division. In addition, he and his immediate family own 100% of Nortia, one of our significant shareholders, with which we maintain intercompany loan arrangements and from which we lease a number of our properties, including our corporate headquarters. We also provide management, financial and other corporate services to Nortia and some of its subsidiaries, including Opesa Internacional, S.A.
We have in the past engaged, and expect in the future to engage, in transactions with affiliates of Manuel Lao Hernández, many of which may not have been, and may not be in the future, on an arm’s length basis. See “Certain Relationships and Related Party Transactions.”
Certain countries in which we operate have been subject to significant security issues in the past several years, and if
such issues continue or worsen, our operations could be materially adversely affected.
Certain countries in which we operate have been subject to significant security issues in the past several years, and if such issues continue or worsen, our operations and proposed expansion plans in such countries could be materially adversely affected. For example, in the past several years, Mexico has experienced increased criminal violence, primarily due to the activities of organized crime. High crime rates and violence resulting from organized crime are particularly acute in several areas of Mexico in which we operate. The gaming hall of an illegal bingo hall operator in Monterrey, Mexico, was the subject of organized-crime-related arson. This event negatively affected our operations in Mexico through reduced attendance at our gaming halls as well as through the temporary closure of certain other halls as a result of widespread government inspections. In response to the surge in criminal activity, the Mexican government has implemented various security measures and strengthened its military and police forces. Despite these efforts, crime rates remain high. On July 1, 2012, Mexico held federal elections in which Enrique Peña Nieto was elected President for a six-year term to commence on December 1, 2012. The results of these elections may have a significant impact on both the political environment in Mexico and the government’s approach to fighting crime. Any change in either of those areas could have a significant impact on the gaming industry and could harm our Mexican business. Similarly, any increase in criminal violence in other countries in which we operate could have a material adverse effect on our operations.
Terrorist attacks and other acts of violence or war may affect our business and results of operations.
Terrorist attacks and other acts of violence or war may negatively affect our business and results of operations. There can be no assurance that there will not be terrorist attacks or armed conflicts that may directly impact us, our customers or partners. Any of these occurrences could cause a significant disruption in our business and could adversely affect our results of operations.
Risks relating to the offered notes and this offering
Our substantial debt and debt service obligations could adversely affect our business, financial condition and results
of operations.
We have substantial debt and debt service obligations. As of September 30, 2012, after giving pro forma effect to the offering and the application of the estimated proceeds thereof, we would have had approximately €969.5 million of total debt, including the offered notes. Our level of debt has increased significantly over the last several years. Our substantial debt could have important consequences to you, including, but not limited to:
• making it more difficult for us to satisfy our debt obligations, including the offered notes;
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• increasing our vulnerability to a downturn in our business or economic and industry conditions;
• limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business opportunities and other corporate requirements;
• requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which means that this cash flow will not be available to fund our operations, product research and development efforts, capital expenditures or other corporate purposes; and
• limiting our flexibility in planning for, or reacting to, changes in our business, the competitive environment and the industry.
We may incur substantial additional debt in the future which could be senior to the offered notes or the Guarantees, could be secured or could mature prior to the offered notes. The terms of the indenture for the offered notes limit our ability to incur additional debt, but do not prohibit us from doing so. The incurrence of additional debt would increase the leverage related risks described in this listing circular.
We require a significant amount of cash to service our debt and for other general corporate purposes. Our ability to
generate sufficient cash depends on many factors beyond our control.
Our ability to make payments on our debt, and to fund working capital, product development, international operations and capital expenditures, will depend on our future operating performance and ability to generate sufficient cash. This depends, to some extent, on general economic, financial, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors discussed in these “Risk Factors” and elsewhere in this listing circular.
Our business may not generate sufficient cash flows from operations and additional debt and equity financing may not be available to us in an amount sufficient to enable us to pay our debts when due, including the notes, or to fund our other liquidity needs. For a discussion of our cash flows and liquidity, see the section in this listing circular entitled “Operating and Financial Review and Prospects.”
If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to:
• reduce or delay our business activities, research and development and capital expenditures;
• sell assets;
• obtain additional debt or equity financing; or
• restructure or refinance all or a portion of our debt, including the notes, on or before maturity.
We may not be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our debt, including the notes, limit, and any future debt that we may incur, may limit our ability to pursue any of these alternatives.
In addition, the availability and the terms of external financing have been affected by the credit crisis that started in the summer of 2007. This could adversely impact our ability to service or refinance our debt, including the notes, and to fund our other liquidity needs. In Spain, this condition has been exacerbated during 2010 and 2011 and has deteriorated further in 2012. Spain’s public debt has been downgraded by rating agencies on a number of occasions since 2010. In addition, recent negative developments with respect to Eurozone financial markets, including the Greek financial crisis, have resulted in higher costs of bank financing in Spain and Italy.
We are subject to significant restrictive debt covenants, which limit our operating flexibility.
The indenture for the notes and the agreements governing some of our other indebtedness contain covenants which impose significant restrictions on the way we and our subsidiaries can operate, including restrictions on our and our subsidiaries’ ability to:
• incur additional indebtedness;
• pay dividends or make other distributions;
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• make certain other restricted payments and investments;
• create liens;
• enter into any agreement that would limit the ability of Cirsa’s subsidiaries to pay dividends or make other payments to Cirsa;
• transfer or sell assets;
• enter into transactions with affiliates;
• enter into sale-leaseback transactions; and
• merge or consolidate with other entities.
These covenants could limit our ability to finance our future operations and capital needs and our ability to pursue acquisitions and other business activities that may be in our interest.
The indenture for the notes permits us to incur future debt that may have substantially the same or more restrictive covenants. A senior credit facility may require us to maintain specified financial ratios and satisfy specified financial tests and to observe covenants that are more restrictive than the covenants under the indenture for the notes. Our ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we may not be able to meet these ratios and tests. In the event of a default under such senior credit facility, the lenders could terminate their commitments and declare all amounts owed to them to be due and payable. Borrowings under other debt instruments that contain cross acceleration or cross default provisions, including the notes, may as a result also be accelerated and become due and payable. We may be unable to pay these debts in such circumstances.
The Issuer of the offered notes is a finance subsidiary that has no revenue generating operations of its own and
depends on cash received under its funding loans in order to be able to make payments on the offered notes.
Cirsa Funding is a finance subsidiary that was formed by Cirsa in order to offer and issue debt securities. The Issuer conducts no business operations of its own, and has not engaged in, and will not be permitted to engage in, any activities other than the issuance of the notes and certain other indebtedness, the lending of the gross proceeds from such issuances to Cirsa, which is the borrower under the funding loans, and the servicing of its obligations under the offered notes and any such other indebtedness. The Issuer has no subsidiaries, and its only material asset and only source of revenue is its right to receive payments from Cirsa. The ability of Cirsa Funding to make payments on the offered notes is therefore entirely dependent on the cash flows received under its funding loans. If the payments under such funding loans are not made by Cirsa, for whatever reason, the Issuer does not expect to have any other sources of funds available to it that would permit it to make payments on the offered notes. In such circumstances, holders of the offered notes would have to rely upon claims for payment under the Guarantees, and payment under the Guarantees is subject to the risks and limitations described in “—Fraudulent conveyance laws and other limitations on the enforceability and the amount of the Guarantees may adversely effect the validity and enforceability of the Guarantees.”
Cirsa is a holding company and is dependent on payments from its subsidiaries in order to be able to make payments
under the funding loans.
Cirsa is the sole obligor under the funding loans in respect of the offered notes from Cirsa Funding. However, Cirsa is a holding company that conducts substantially all of its operations through first-tier holding companies and their respective operating subsidiaries. Cirsa will therefore be dependent upon the cash flow from its subsidiaries and the receipt of funds from them in the form of dividends, intercompany loans or otherwise to make payments on the funding loan. Cirsa’s operating subsidiaries may not generate cash flow sufficient to enable Cirsa to meet its payment obligations under the funding loan.
In addition, Cirsa’s subsidiaries may be restricted from providing funds to Cirsa and the Issuer of the notes under some circumstances. These circumstances include:
• restrictions under Spanish corporate law which require, among other things, each of Cirsa’s Spanish subsidiaries to retain at least 10% of annual net income in a legal reserve until the reserve reaches at least 20% of such company’s share capital and that, after payment of any dividend, shareholders’ equity must exceed such company’s share capital;
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• restrictions under Argentine corporate law which require a corporation to retain at least 5% of its annual net income in a legal reserve until the reserve reaches at least 20% of the company’s share capital and similar restrictions under other applicable laws;
• restrictions under Italian corporate law which require a company to retain at least 5% of its annual unconsolidated net income to legal reserve until the reserve reaches at least 20% of the aggregate nominal value of the company’s share capital;
• restrictions under foreign exchange laws and regulations that could limit or tax the remittance of dividends or transfer payments abroad; and
• existing and future contractual restrictions, including restrictions in credit facilities and other indebtedness, that affect the ability of Cirsa’s subsidiaries to pay dividends or make other payments to Cirsa or the issuers in the future.
Moreover, a significant portion of our total assets represent interests in companies that are not 100% controlled subsidiaries. The ability of Cirsa to receive funds from these companies may be limited by, in addition to the foregoing circumstances, shareholders’ agreements with the other investors in those companies, borrowing arrangements at those companies and the need of those companies to reinvest their cash flow in their operations.
Although the indenture for the notes limits the ability of Cirsa’s restricted subsidiaries to enter into consensual restrictions on their ability to pay dividends and make payments, there are significant qualifications and exceptions to these limitations.
Cirsa Funding may not be able to recover any amounts under its funding loans because its right to receive payments
under such funding loans is subordinated to all third party liabilities of Cirsa.
Under Spanish insolvency law, each of the funding loans between the Issuer of the notes and Cirsa will be classified as subordinated claims of Cirsa, meaning that in an insolvency proceeding they would be subordinated to the preferential and ordinary claims of Cirsa.
Not all of our subsidiaries have guaranteed, or will guarantee, the notes, and any claim by us or any of our creditors, including the holders of the notes, against such non-guarantor subsidiaries will be structurally subordinated to all of the claims of creditors of those non-guarantor subsidiaries.
Not all of our existing and future subsidiaries have guaranteed, or will guarantee, the notes. In particular, none of the subsidiaries in our Latin American businesses (other than Gaming & Services de Panama, S.A.) will guarantee the notes. The indenture for the notes does not limit the transfer of assets to, or the making of investments in, any of our restricted subsidiaries, including our non-guarantor subsidiaries. Accordingly, non-guarantor subsidiaries could account for a higher portion of our assets, liabilities, net sales and net income in the future.
In the event that any of our non-guarantor subsidiaries becomes insolvent, liquidates, reorganizes, dissolves or otherwise winds up, the assets of those non-guarantor subsidiaries will be used first to satisfy the claims of its creditors, including its trade creditors, banks and other lenders. Consequently, any claim by us or our creditors, including holders of the notes, against a non-guarantor subsidiary will be structurally subordinated to all of the claims of the creditors of such non-guarantor subsidiary.
You may not be able to recover any amounts under the Guarantees due to subordination provisions and releases.
Under the terms of the intercreditor agreement, the proceeds from enforcement actions under the Revolving Credit Facility and the notes and Guarantees will be applied first to repay amounts due under the Revolving Credit Facility. See “Description of Certain Indebtedness—Intercreditor Agreement.” In the event of an enforcement action under the Revolving Credit Facility, certain of the Guarantees may be released. If you (or the trustee on your behalf) receive any proceeds of an enforcement action prior to the satisfaction of the claims of those that are superior or ratable with those of the notes or Guarantees, you (or the trustee on your behalf) will be required to turn over such proceeds until superior claims, such as the obligations under the Revolving Credit Facility, are satisfied and until ratable claims are equally satisfied. Hence, you will recover less from the proceeds of an enforcement action than you otherwise would have. As a result of these and other provisions in the intercreditor agreement, you may not be able to recover any amounts under the Guarantees in the event of a default on the offered notes.
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Fraudulent conveyance laws and other limitations on the enforceability and the amount of the Guarantees may
adversely affect the validity and enforceability of the Guarantees.
Cirsa and the other Guarantors have guaranteed the payment of the notes. The notes, the Guarantees and the funding loan may be subject to claims that they should be limited, subordinated or voided in favor of our existing and future creditors under Luxembourg, New York, Spanish, Panamanian or Italian law.
Although laws differ among various jurisdictions, in general, under fraudulent conveyance laws, a court could subordinate or void any Guarantee if it found that:
• the Guarantee was incurred with actual intent to hinder, delay or defraud creditors or shareholders of the Guarantor;
• the Guarantor did not receive fair consideration or reasonably equivalent value for the Guarantee, and the Guarantor:
• was insolvent or was rendered insolvent because of the Guarantee;
• was undercapitalized or became undercapitalized because of the Guarantee;
• intended to incur, or believed that it would incur, debts beyond its ability to pay at maturity; or
• the Guarantee was not in the best interests or for the corporate benefit of the Guarantor.
The measure of insolvency for purposes of fraudulent conveyance laws varies depending on the law applied. Generally, however, a Guarantor would be considered insolvent if it could not pay its debts as they became due. If a court decided that any Guarantee was a fraudulent conveyance and voided such Guarantee, or held it unenforceable for any other reason, you would cease to have any claim in respect of the Guarantor and would be a creditor solely of the Issuer and the remaining Guarantors.
The notes are guaranteed by Cirsa Italia S.p.A. for a maximum amount of €59.6 million, corresponding to 200% of the aggregate of its registered share capital plus legal reserve and other available reserves, as shown in Cirsa Italia S.p.A.’s financial statements, as at and for the year ended on December 31, 2009, in compliance with article 2412, first and fourth paragraphs of the Italian Civil Code. The maximum amount guaranteed under the Guarantee issued by Cirsa Italia S.p.A. might be subject to a further reduction in order to comply with the Italian law corporate benefit provisions.
Under Italian law, granting of a guarantee is subject to compliance with the rules on corporate benefit and corporate authorization. If a guarantee is being provided in the context of an acquisition, group reorganization or restructuring, financial assistance issues may also be triggered.
An Italian company granting a guarantee must receive a real and adequate benefit in exchange for the guarantee. Whilst corporate benefit for a downstream guarantee (i.e., a guarantee granted to secure financial obligations of direct or indirect subsidiaries of the relevant guarantor) is usually self-evident, the validity and effectiveness of an up-stream or cross-stream guarantor (i.e., a guarantee granted to secure financial obligations of the direct or indirect parent or sister companies of the relevant guarantor) granted by an entity organized under the laws of Italy depend on the existence of a real and adequate benefit in exchange for the granted guarantee. The concept of real and adequate benefit is not defined in the applicable legislation and is determined on a case-by-case basis. In particular, in case of upstream and cross-stream guarantee for the financial obligations of group companies, examples may include financial consideration in the form of access to cash flows through intercompany loans from other members of the group. The general rule is that the risk assumed by an Italian guarantor must not be disproportionate to the direct or indirect economic benefit to it.
Absence of a real and adequate benefit could render the guarantee provided by an Italian company ultra vires and potentially affected by conflict of interest. Thus, civil liabilities may be imposed on the directors of the Italian guarantor if it is assessed that they did not act in the best interest of the company and that the acts they carried out do not fall within the corporate purpose of the company. The lack of corporate benefit could also result in the imposition of civil liabilities on those companies or persons ultimately exercising control over the Italian guarantor or having knowingly received an advantage or profit from such improper control. Moreover, the guarantee granted by an Italian company could be declared null and void if the lack of corporate benefit was known or presumed to be known by the third party and such third party acted intentionally against the interest of the Italian company.
As to corporate authorizations, the granting of guarantees by an Italian company must be permitted by the by-laws (statuto) of the Italian company. Finally, as to the financial assistance aspects, the granting of a guarantee by an
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Italian company cannot include any liability which would result in unlawful financial assistance within the meaning of Article 2358 or 2474, as the case may be, of the Italian Civil Code pursuant to which, subject to specific exceptions, it is unlawful for a company to give financial assistance (whether by means of loans, security, guarantees or otherwise) to support the acquisition or subscription by a third party of its own shares or quotas or those of any entity that (directly or indirectly) controls the Italian company. Financial assistance for refinancing indebtedness originally incurred for the purchase or subscription of its own shares or quotas or those of its direct or indirect parent company would also be a violation.
Spanish and other applicable insolvency laws may not be as favorable to you as U.S. bankruptcy laws.
Cirsa and the other Guarantors are organized under the laws of Spain, Italy and Panama and the Issuer is incorporated in Luxembourg. All of Cirsa’s other subsidiaries are incorporated in jurisdictions other than the United States. The insolvency laws of Spain and some of these other jurisdictions may not be as favorable to holders of the notes as the laws of the United States or some other jurisdictions.
The following is a brief description of certain aspects of insolvency law in Spain, Italy, Panama and Luxembourg. In the event that any one or more of the Issuer, Cirsa, the other Guarantors or any other of Cirsa’s subsidiaries experienced financial difficulty, it is not possible to know with certainty in which jurisdiction or jurisdictions insolvency or similar proceedings would be commenced, or the outcome of such proceedings.
Spanish Insolvency Law. Under Spanish insolvency law, your ability to receive payment on the notes may be more limited than would be the case under U.S. bankruptcy laws.
The Spanish insolvency law (Law 22/2003), as further amended, regulates court insolvency proceedings, as opposed to out-of-court liquidation, which is only available when the debtor has sufficient assets to meet its liabilities.
The insolvency proceedings, which are called “concurso de acreedores,” are applicable to all persons or entities. These proceedings may lead either to the restructuring and continuation of the business or to the liquidation of the assets of the debtor.
A debtor is entitled to apply for insolvency proceedings when it is in an insolvency situation, meaning that it is not able to meet its current obligations or when it expects that it will shortly be unable to do so. In this sense, insolvency proceedings are available as a type of legal protection that the debtor may request in order to avoid the attachment of its assets by its creditors. A debtor (or, in the case of a company, its directors) is legally obliged to file for insolvency proceedings within a period of two months, when it becomes insolvent, i.e., when it fails to meet its current outstanding obligations on a regular basis.
The insolvency order contains an express request for the creditors to declare debts owed to them, within a one-month period, providing original documentation to justify such debts. Based on the documentation provided by the creditors and documentation held by the debtor, the court receivers draw up a list of acknowledged creditors and classify them according to the categories established under law:
• Claims benefiting from special privileges, representing security on certain assets (basically in rem securities). These privileges may entail separate proceedings, though subject to certain restrictions derived from a waiting period that may last up to one year. Privileged creditors are not subject to the restructuring arrangement, except if they give their express support by voting in favor of the restructuring arrangement. In the event of liquidation, they are the first to collect payment against the assets on which they are secured.
• Claims benefiting from general privileges, including among others labor and public debts. Public debts, other than those corresponding to tax withholdings and certain social security obligations, and debts held by the creditor taking the first initiative to apply for the corresponding insolvency proceedings, are recognized for half their amount. The holders of general privileges are not to be affected by the restructuring provided for the insolvency proceedings if they do not agree to the restructuring arrangement and, in the event of liquidation, they are entitled to collect payment before ordinary and subordinated creditors, in the order established under law.
• Ordinary claims (non-subordinated and non-privileged creditors) such as ordinary commercial suppliers of the company. They will be paid on a pro rata basis.
• Subordinated claims (thus classified by virtue of an agreement or pursuant to law). Subordinated claims include, among others, those credits held by parties in special relationships with the debtor: in the case of an individual, his/her relatives; in the case of a legal entity, the administrators, group companies and any shareholders holding more than 5% (for companies which have issued securities listed on an official
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secondary market) or 10% (for companies which have not issued securities listed in an official secondary market) of the share capital. Subordinated creditors are second level creditors; they may not vote on an arrangement and have very limited chances of collection, according to the ranking established by law. Under Spanish insolvency law, the funding loan between Cirsa and the Issuer will be treated as subordinated claim.
• Claims against the estate of the debtor. These include any claims of the debtor accrued after a judicial decision declaring the insolvency proceeding (e.g. those entered into order to continue the business) as well as other claims prescribed by law, such as claim of salaries (including salaries accruing during the last 30 days before the insolvency proceeding are initiated and in an amount not exceeding two times the minimum professional salary) and judicial costs and expenses caused by the insolvency proceeding. These claims are immediately payable or payable when accrued, although the insolvency law authorizes the court receivers to alter such rule postponing payment of some of such claims when it is presumed that all claims against the estate will be paid and they deemed such delay convenient to the interest of the insolvency proceeding.
As a general rule, insolvency proceedings are not compatible with other enforcement proceedings.
When compatible, in order to protect the interests of the debtor and creditors, the law extends the jurisdiction of the court dealing with insolvency proceedings, which is, then, legally authorized to handle any enforcement proceedings or interim measures affecting the debtor’s assets (whether based upon civil, labor or administrative law).
There is no claw-back date. Therefore, there are no prior transactions that automatically become void as a result of initiation of the insolvency proceedings. The court receivers may only challenge those transactions that could be deemed as detrimental or having “damaged” the insolvency estate, provided that they have taken place within two years prior to the declaration of insolvency (transactions taking place earlier than two years before insolvency has been declared may be rescinded subject to ordinary civil code based actions). Those transactions that are classified as “ordinary” transactions, according to the business of the debtor, are not subject to challenge. “Damage” does not refer to the intention of the parties, but to the consequences of the transaction on the debtor’s interests. In any case, the law refers to transactions that are somehow exceptional: damage exists (as a non-rebuttable presumption) in case of donations and early payment of obligations maturing after the insolvency declaration and damage is deemed to exist (as a rebuttable presumption) in case of transactions entered into with special related persons and when rights in rem have been created in order to protect already existing (non-secured) obligations; in the remaining cases, damage would have to be proved.
Italian Insolvency Law. In Italy, the courts play a central role in the insolvency process. Moreover, the enforcement of security interests by creditors in Italy can be time consuming.
The two primary aims of Royal Decree No. 267 of March 16, 1942 (the main Italian bankruptcy legislation), as reformed and currently in force (the “Italian Bankruptcy Law”), are to maintain employment and to liquidate the debtor’s assets for the satisfaction of creditors’ claims. These competing aims have often been balanced by selling businesses as going concerns and ensuring that employees are transferred along with the businesses being sold.
Under the Italian Bankruptcy Law, bankruptcy must be declared by a court, based on the insolvency (insolvenza) of a company. Insolvency occurs when a debtor is no longer able to regularly meet its obligations as they become due. This must be a permanent, and not a temporary, status in order for a court to hold that a company is insolvent.
The following forms of debt restructuring and bankruptcy are available under Italian law for companies in a state of crisis and for insolvent companies:
• Restructuring outside of judicial process (concordato stragiudiziale).
It is preferable to deal with the insolvency of a company in the context of an in-court insolvency proceeding because informal arrangements put in place to effect an out-of-court restructuring are susceptible to being reviewed by a court in the event of a subsequent insolvency, and possibly challenged as voidable transactions. However, in cases where a company is in distress, it may be possible for it to enter into an out-of-court arrangement with its creditors, which may safeguard the existence of the company.
• Out of court reorganization plans (piani di risanamento) pursuant to Article 67, Paragraph 3(d) of the
Italian Bankruptcy Law.
Out-of-court debt restructuring agreements are based on restructuring plans (piani di risanamento attestati) prepared by companies in order to restructure their indebtedness and to ensure the recovery of their financial condition.
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An independent expert appointed by the debtor has to verify the feasibility of the restructuring plan and the truthfulness of the business data provided by the company.
• Debt restructuring agreements with creditors (accordi di ristrutturazione dei debiti) pursuant to
Article 182-bis of the Italian Bankruptcy Law.
Out-of-court agreements for the purpose of restructuring of indebtedness of a company which are entered into by the company with those of its creditors to which at least 60% of the company’s outstanding debts are owed can be ratified by the court. An expert appointed by the debtor must assess the truthfulness of the business data provided by the company and declare that the agreement is feasible and, particularly, that it ensures that the debts of the non-participating creditors can be fully satisfied within the following time frames: (i) 120 days from the date of ratification of the agreement by the court, in the case of debts which are due and payable to the non-participating creditors as at the date of the ratification of the agreement by the court; and (ii) 120 days from the date on which the relevant debts fall due, in case of receivables which are not due and payable to the non-participating creditors as at the date of the ratification of the agreement by the court. Only a debtor who is insolvent or in a state of crisis can initiate this process and request the court’s ratification (omologazione) of the debt restructuring agreement entered into with its creditors.
The debt restructuring agreement may also contain a proposed tax settlement for the partial or deferred payment of certain taxes.
Creditors and other interested parties may oppose the agreement within 30 days from the publication of the agreement in the companies’ register. The court will, after having settled the oppositions (if any), validate the agreement by issuing a decree, which may be appealed within 15 days of its publication.
Pursuant to the new Article 182 quinquies of the Bankruptcy law, the Court may authorize the debtor to incur in new indebtedness deductible, provided that the expert appointed by the debtor declares the aim of the new financial indebtedness results in a better satisfaction of the creditors, and to pay debts deriving from the supply of services or goods, already payable and due, provided that the expert declares that such payment is essential for the keeping of company’s activities.
• Court supervised pre-bankruptcy composition with creditors (concordato preventivo).
A company which is insolvent or in a situation of crisis, but has not been declared insolvent by the court, has the option to make a composition proposal to its creditors, under court supervision, in order to compose its overall indebtedness and/or reorganize its business, thereby avoiding a declaration of insolvency and the initiation of bankruptcy proceedings. Such composition proposal can be made by a commercial enteprise which meets the requirements to be declared bankrupt (fallimento) (i.e. has had assets (attivo patrimoniale) in an aggregate amount exceeding € 0.3 million for the three preceding fiscal years, gross revenue (ricavi lordi) in an aggregate amount exceeding €0.2 million for the three preceding fiscal years, and has total indebtedness in excess of € 0.5 million). The debtor company (which has the sole power to do so) can then file a petition with the court for a concordato preventivo (attaching the composition proposal and a report prepared by an independent expert appointed by the debtor assessing the feasibility of the composition proposal and the truthfulness of the business data provided by the company), which from the date published in the companies register, stays enforcement and interim relief actions by the creditors (whose debt became due before the sanctioning of the concordato preventivo by the court) are stayed. During this time, pre-existing creditors cannot obtain security interests (unless authorised by the court) and mortgages registered within the 90 days preceding the date on which the petition for the concordato preventivo is published in the companies’ register are ineffective against such pre-existing creditors.
The composition proposal filed in connection with the petition may provide for: (i) the restructuring of debts and the satisfaction of creditors’ claims (including through extraordinary transactions, such as the granting to creditors and to their subsidiaries or affiliated companies of shares, bonds (including bonds convertible into shares), or other financial instruments and debt securities); (ii) the transfer to a receiver (assuntore) of the operations of the debtor company making the composition proposal; and (iii) the division of creditors into classes and providing for different treatment of creditors belonging to different classes. The composition proposal may also contain a proposed tax settlement for the partial or deferred payment of certain taxes.
The filing of the petition for the concordato preventivo may be preceded by the filing of a preliminary petition for a concordato preventivo. The debtor company may file such petition along with its financial statements from the latest three financial years in order to ask the court to set a deadline for the filing of the petition for the concordato preventivo (along with all relevant documentation, as outlined above). The court may then set a deadline of between 60 and 120 days from the date of the filing of the preliminary petition, subject to one possible further extension of up to 60 days, where there are reasonable grounds for such extension. In advance of such deadline, the debtor may also file a petition for the approval of a debt restructuring agreement (pursuant to Article 182-bis of the Italian Bankruptcy Law).
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The petition may propose that (i) the debtor’s company’s business continues to be run by the debtor’s company as a going concern; or (ii) the business is transferred to one or more companies and any assets which are no longer necessary to run the business are liquidated. In both cases, the petition for the concordato preventivo should fully describe the costs and revenues which are expected as a consequence of the continuation of the business as a going concern, as well as the financial resources and support which will be necessary. The report of the independent expert shall also certify that the continuation of the business is conducive to the satisfaction of creditors’ claims to a greater extent than if such composition proposal was not implemented.
If the court determines that the composition proposal is admissible, it appoints a judge (giudice delegato) to supervise the procedure, appoints one or more judicial officers (commissari giudiziali) and calls a creditor’s meeting. During the implementation of the proposal, the company generally continues to be managed by its board of directors, but is supervised by the appointed judicial officers and judge.
The implementation of the concordato preventivo is voted on at a creditors’ meeting and must be approved by the majority (by value of claims) of the creditors entitled to vote and, where there are different classes of creditors, by the majority of classes. Creditors who have not voted will be deemed to approve the concordato preventivo proposal if they fail to notify their objection via telegraph, fax, mail or e-mail to such proposal within 20 days from the relevant meeting. Secured creditors are not entitled to vote on the proposal of concordato preventivo unless and to the extent they waive their security, or the concordato preventivo provides that they will not receive full satisfaction of the fair market value of their secured assets (such value being assessed by an independent expert), in which case they can vote only in respect of the part of their debt affected by the proposal. If an objection to the implementation of the concordato preventivo is filed by 20% or less of the creditors entitled to vote, the court may nevertheless sanction the concordato preventivo if it deems that the relevant creditors’ claims are likely to be satisfied to a greater extent as a result of the concordato preventivo than would otherwise be the case.
After the approval by the creditors’ meeting, the court (having settled possible objections raised by the dissenting creditors, if any) confirms the concordato preventivo proposal by issuing a confirmation order.
If the creditors’ meeting does not approve the concordato preventivo, the court may, upon request of the public prosecutor or a creditor, and having decided that the appropriate conditions apply, declare the company bankrupt.
• Bankruptcy (fallimento).
A request to declare a debtor company bankrupt and to commence a bankruptcy proceeding (fallimento) and the judicial liquidation of the debtor company’s assets can be filed by the debtor company itself, any of its creditors and, in certain cases, by the public prosecutor. The bankruptcy is declared by the competent bankruptcy court. The Italian Bankruptcy Law is applicable only to commercial enterprises (imprenditori commerciali) if certain thresholds are met (i.e. the company has had assets (attivo patrimoniale) in an aggregate amount exceeding €0.3 million for the last three fiscal years, gross revenue (ricavi lordi) in an aggregate amount exceeding €0.2 million for the last three fiscal years and has total indebtedness in excess of €0.5 million).
On the commencement of bankruptcy proceedings:
• all actions of creditors are stayed and creditors must file any claims for their debts within a prescribed period. However, in certain circumstances and subject to certain procedures, some security interests can continue to be enforced, i.e. secured claims are paid out of the proceeds of liquidation of the secured assets, along with the applicable interest and subject to any relevant expenses. Any outstanding balance will be considered unsecured and will rank pari passu with all of the bankrupt’s other unsecured debt;
• the administration of the debtor company and the management of its assets pass from the debtor company to the bankruptcy receiver (curatore fallimentare); and
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• any act of the debtor company done after a declaration of bankruptcy (including payments made) is ineffective against the creditors. Although the general rule is that the bankruptcy receiver is allowed to either continue or terminate contracts where some or all of the obligations have not been performed by both parties, certain contracts are subject to specific rules expressly provided for by Italian Bankruptcy Law.
The bankruptcy proceedings are carried out and supervised by a court-appointed bankruptcy receiver, a deputy judge (giudice delegato) and a creditors’ committee. The bankruptcy receiver is not a representative of any one of the creditors, but is responsible for the liquidation of the assets of the debtor for the satisfaction of the creditors as a whole. The proceeds from the liquidation are distributed in accordance with statutory priority. The liquidation of a debtor can take a considerable amount of time, particularly in cases where the debtor’s assets include real property. The Italian Bankruptcy Law provides for a priority of payment to certain preferential creditors, including employees, the Italian treasury, and judicial and social authorities.
• Bankruptcy composition with creditors (concordato fallimentare).
A bankruptcy proceeding can terminate prior to liquidation through a bankruptcy composition proposal with creditors. The proposal can be filed, by one or more creditors or third parties, from the declaration of bankruptcy. By contrast, the debtor or its subsidiaries are only permitted to file such proposal after one year, but within two years following a declaration of bankruptcy. Secured creditors are not entitled to vote on the proposal of concordato fallimentare, unless and to the extent they waive their security or the concordato fallimentare provides that they will not receive full satisfaction of the fair market value of their secured assets (such value being assessed by an independent expert), in which case they can vote only in respect of the part of their debt affected by the proposal. The proposal may provide for the division of creditors into classes (thereby proposing different treatment among the classes), the restructuring of debts and the satisfaction of creditors’ claims in any manner. The concordato fallimentare proposal must be approved by the creditors’ committee and the creditors holding the majority (by value) of claims (and, if classes are formed, also by a majority (by value) of the claims in a majority of the classes). Final court ratification is also required.
Statutory priorities.
The statutory priority given to creditors under the Italian Bankruptcy Law may be different from that established in the United States, the United Kingdom and certain other E.U. jurisdictions. Neither the debtor nor the court can deviate from the rules of statutory priority by proposing their own priorities of claims or by subordinating one claim to another based on equitable subordination principles. The rules of statutory priority apply irrespective of whether the proceeds are derived from the sale of the entire bankrupt’s estate or part thereof, or from a single asset.
Article 111 of the Italian Bankruptcy Law establishes that proceeds of liquidation shall be allocated according to the following order: (i) for payments of “pre-deductible” claims (i.e. claims originated in the insolvency proceeding, such as costs related to the procedure); (ii) for payment of claims which are privileged, such as claims of secured creditors; and (iii) for the payment of unsecured creditors’ claims.
Avoidance powers in insolvency.
Under Italian law, there are so-called “clawback” or avoidance provisions that may lead to, inter alia, the revocation of payments made or security interests granted by the debtor prior to the declaration of bankruptcy. The key avoidance provisions address transactions made below market value, preferential transactions and transactions made with a view to defraud creditors. Clawback rules under Italian law are normally considered to be particularly favorable to the receiver in bankruptcy, compared to the rules applicable in other jurisdictions.
In a bankruptcy proceeding, depending on the circumstances, the Italian Bankruptcy Law provides for a clawback period of up to either one year or six months in the case of intragroup transactions (which, in the context of extraordinary administration procedures, can be extended to five and three years respectively) and a two-year ineffectiveness period for certain other transactions.
In particular, the Italian Bankruptcy Law distinguishes between acts or transactions which are ineffective by operation of law and acts or transactions which are voidable at the request of the bankruptcy receiver/court commissioner, as detailed below.
Acts ineffective by operation of law
Under Article 64 of the Italian Bankruptcy Law, all transactions entered into for no consideration are ineffective against creditors if entered into by the debtor in the two-year period prior to the insolvency declaration. Under Article 65 of the Italian Bankruptcy Law, payments of debts falling due on the day of the declaration of insolvency or thereafter are deemed ineffective against creditors if made by the debtor in the two-year period prior to the insolvency declaration.
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Acts which are voidable at the request of the bankruptcy receiver/court commissioner
The following acts and transactions, if done or made during the period specified below, may be avoided and declared ineffective unless the other party proves that it had no actual or constructive knowledge of the debtor’s insolvency:
• transactions entered into in the year preceding the insolvency declaration, where the value of the debt or of the obligations undertaken by the debtor exceeds by 25% the value of the consideration received by and/or promised to the debtor;
• payments of debts, due and payable, made by the debtor, which were not paid in cash or other customary means of payment in the year preceding the insolvency declaration;
• pledges and mortgages granted by the bankrupt entity in the year preceding the insolvency declaration in order to secure pre-existing debts which have not yet fallen due; and
• pledges and mortgages, granted by the bankrupt entity in the six months preceding the insolvency declaration, in order to secure debts which had fallen due.
The following acts and transactions, if done or made during the period specified below, may be avoided and declared ineffective if the bankruptcy receiver proves that the other party knew that the bankrupt entity was insolvent at the time of the act or transaction:
• the payments of debts that are immediately due and payable and any onerous transactions entered into or made in the six months preceding the insolvency declaration; and
• deeds granting security interests over debts (even those of third parties) which are made in the six months preceding the insolvency declaration.
Certain transactions are exempt from clawback actions, including, inter alia:
• a payment for goods or services made in the ordinary course of business and in accordance with market practice;
• a remittance on a bank account, provided that it does not reduce the bankrupt entity’s debt towards the bank in a material and lasting manner;
• a sale, including an agreement for sale registered pursuant to Article 2645-bis of the Royal Decree No. 262 of March 16, 1942 (the “Italian Civil Code”), currently in force, made for a fair value and concerning a residential property that is intended as the main residence of the purchaser or the purchaser’s family (within three degrees of kinship) or a non-residential property that is intended as the main seat of the enterprise of the purchaser, on the condition that, as at the date of the purchase, such activity is actually exercised or the investments for the start of such activity have been carried out;
• transactions entered into, payments made and security interests granted with respect to the bankrupt entity’s goods, provided that they concern the implementation of a plan which permits for the restructuring of the debt and for the improvement of its financial position (piano attestato), provided that such plan is reasonable according to an independent expert registered in the accounting auditors’ register and eligible to be appointed as bankruptcy receiver as provided by Article 28 of the Italian Bankruptcy Law and by Article 67, paragraph 3, letter d), of the Italian Bankruptcy Law;
• a transaction entered into, payment made or security interest granted to implement a concordato preventivo (see paragraph above) or an accordo di ristrutturazione dei debiti under Article 182-bis of the Italian Bankruptcy Law (see paragraph above) and transactions entered into, payments made and security interests granted after the filing of the application for a concordato preventivo (see above);
• remuneration payments to the bankrupt entity’s employees and consultants; and
• a payment of a debt that is immediately due, payable and made on the due date, with respect to services necessary for access to concordato preventivo procedures.
In addition, in certain cases, the bankruptcy receiver can request that certain transactions of the bankrupt entity be declared void within the Italian Civil Code ordinary clawback period of five years (revocatoria ordinaria). Under
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Article 2901 of the Italian Civil Code, a creditor may demand that transactions through which the bankrupt entity disposed of its assets to the detriment to a creditor’s rights be declared ineffective with respect to such creditor, provided that the bankrupt entity was aware of such detriment (or, if the transaction was entered into prior to the date on which the claim originated, that such transaction was fraudulently entered into by the debtor to its own detriment) and that, in the case of a transaction entered into for consideration with a third person, the third person was aware of such detriment (and, if the transaction was entered into prior to the date on which the claim originated, such third person participated in the fraudulent scheme).
Extraordinary administration for large companies (amministrazione straordinaria delle grandi imprese in
crisi).
An extraordinary administration procedure is available under Italian law for large industrial and commercial enterprises (commonly referred to as the “Prodi-bis” procedure). The relevant company must be insolvent, but demonstrating serious recovery prospects. To qualify for this procedure, the company must have employed at least 200 employees in the previous year. In addition, it must have debts equal to at least two-thirds of its assets and two-thirds of its income from sales and services during its last financial year.
Either of the creditors, the debtor, a court or the public prosecutor may make a petition to commence an extraordinary administration procedure. The rules which apply to such procedure are largely the same rules as those applicable to bankruptcy proceedings. There are two main phases—an administrative phase and a judicial phase.
Administrative phase
In the administrative phase, the court determines whether the company meets the admission criteria and whether it is insolvent. It then issues a decision to that effect and appoints up to three judicial receivers (commissiario giudiziale) to investigate whether the company has serious prospects for recovery via a business sale or reorganization. The judicial receiver files a report with the court within 30 days, and within 10 days from such filing, the Italian Productive Activities Minister (the “Ministry”) may make an opinion on the admission of the company to the extraordinary administration procedure. The court then decides (within 30 days from the filing of the report) whether to admit the company to the procedure or to place it into bankruptcy.
Judicial phase
Assuming that the company is admitted to the extraordinary administration procedure, the judicial phase begins and an extraordinary commissioner (or commissioners) is appointed by the Ministry. The extraordinary commissioner(s), prepares a plan which can provide for either the sale of the business as a going concern within one year (or such other term as extended by the Ministry) (the “Disposal Plan”) or a reorganization leading to the company’s economic and financial recovery within two years (or such other term as extended by the Ministry) (the “Recovery Plan”). The plan may also include an arrangement with creditors (e.g. a debt for equity swap, an issue of shares in a new company to whom the assets of the company have been transferred, etc.) (concordato). The plan must be approved by the Ministry.
The procedure ends upon successful completion of either a Disposal Plan or a Recovery Plan, failing which the company is declared bankrupt.
• Restructuring of insolvent large companies (ristrutturazione industriale di grandi imprese in stato di
insolvenza).
Introduced in 2003, the industrial restructuring of large insolvent companies is also known as the “Marzano procedure”. It is complementary to the Prodi-bis procedure and, except as otherwise provided, the same provisions apply. The Marzano procedure is intended to be faster than the Prodi-bis procedure. For example, although a company must be insolvent, the application to the Ministry is made together with the filing to the court for the declaration of the insolvency of the debtor.
The Marzano procedure only applies to large insolvent companies which, on a consolidated basis, have at least 500 employees in the year before the procedure is commenced and at least €300 million of debt. The decision whether to open a Marzano procedure is taken by the Ministry following the debtor’s request (who must also file an application for the declaration of insolvency). The Ministry assesses whether the relevant requirements are met and then appoints the extraordinary commissioner(s) who will manage the company. The court also decides on the company’s insolvency.
The extraordinary commissioner(s) has/have 180 days (or 270 days if the Ministry so agrees) to submit a Disposal Plan or Recovery Plan. The restructuring through the Disposal Plan or the Recovery Plan must be completed within two years. If no Disposal or Recovery Plan is approved by the Ministry, the court will declare the company bankrupt and open bankruptcy proceedings.
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Panama Insolvency Law. Gaming & Services de Panama S.A. will provide a Guarantee of the notes. Under Panama law, your ability to receive payment on the notes may be more limited than would be the case under U.S. bankruptcy laws.
In the case of merchants, Panama’s insolvency or bankruptcy provisions are set forth mainly in the Code of Commerce, but certain provisions of the Civil Code and the Judicial Code also apply.
Except for certain types of merchants (such as banks), for which special legislation applies, these provisions establish an orderly court supervised liquidation procedure, the objective of which is the apportionment of assets among creditors in accordance with certain legally established rules and priorities. Court ordered reorganizations are not presently available under Panama law.
Under Panama law, the state of insolvency of a company must be determined and declared by a court as insolvent. Insolvency exists when a debtor fails to pay any debt, so long as the debt is due, expressed in monetary terms and ascertainable. A petition for such a declaration may be filed before the competent courts either by one or more creditors or the debtor, but the failure of a debtor to make such petition when insolvency exists may lead to criminal prosecution.
In the declaration of bankruptcy the court must establish the date as of which the state of insolvency existed, which usually will coincide with the date the petition seeking a declaration of bankruptcy was filed but may be fixed up to four years plus 30 days prior to the date of the petition.
The date of insolvency is important for establishing the period of time during which certain acts of the debtor may be reviewed and set aside or declared void by the court for the benefit of the bankruptcy estate. Acts that may be set aside or declared void include gratuitous acts, the granting of a security interest or a preference in respect of previously contracted obligations, the pre-payment of debts not yet due, and the payment in kind of debts that are past due.
Upon the declaration of bankruptcy by the court the debtor immediately becomes separated from its assets and cannot administer them or dispose of them; administration of a debtor’s assets (the bankruptcy estate) is transferred to its creditors represented by a curator or administrator appointed by the court. Upon such declaration, the debts of the bankrupt, whether commercial or civil, are deemed to be due and payable as of the date the bankruptcy is declared; and all such debts cease accruing interest, except for those secured by pledge or mortgage and then only up to the value of the collateral. All judicial proceedings brought against the bankrupt debtor in any court within the four years prior to the date of the declaration of bankruptcy must be accumulated and dealt with in the bankruptcy proceedings. Any attachments over assets of the debtor which are issued by the bankruptcy court are given preference over attachments previously issued, except for attachments relating to property which is subject to a security interest such as a mortgage or pledge.
The Code of Commerce provides that a guarantor may demand that a creditor pursue the principal debtor and its assets before demanding payment from the guarantor or its bankruptcy. If the bankrupt is a guarantor and the obligations of the principal debtor are not due and payable, the Code of Commerce provides that the principal debtor must either prepay the debt or the bankruptcy estate would be released from the guarantee. In effect, the principal debtor is required to obtain a suitable guarantor to replace the bankrupt guarantee.
The Gaming Control Board of Panama has adopted regulations providing that the judicial administrator of an insolvent company with gaming activities authorized by the Gaming Control Board, such as Gaming & Services de Panama S.A., shall not be permitted to continue to engage in gaming activities, such as the operation of casinos, for the benefit of the creditors, unless previous approval from the Gaming Control Board has been obtained.
The Code of Commerce sets forth the following rules with respect to the application of the bankruptcy estate to the payment of the outstanding obligations: all creditors, whether or not they have a lien or privilege, have the right to be paid from the bankruptcy estate; the payment of credits must be made out of the income derived from the sale of the debtor’s assets in accordance with the ranking set out in the Civil Code; secured creditors have the right to receive payment from the sale of the collateral; secured creditors may not participate in the distribution of the bankruptcy estate unless they waive their security interest over the collateral; and secured creditors may nonetheless seek to recover any unsatisfied portion of their debt from the bankruptcy estate by participating with all of the unsecured creditors on a pro rata basis.
In bankruptcy, the credits will rank as to each other as follows:
• For movable property and assets of the bankrupt, the ranking of credits is:
– credits for the construction, repair, preservation and appreciation of the sale price of movable property and assets in possession of the bankrupt, up to the value of the same;
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– credits for the transportation of the transported assets, for the price of the same, and preservation expenses and rights; and
– credits for rents and leases of more than one year, over the movable assets located within the leased or rented property.
• For real estate property, assets and rights of the bankrupt, the ranking of credits is:
– credits in favor of the Panamanian state in which the real estate is located, over the assets of taxpayers and for the amount of the taxes owed;
– credits in favor of insurance companies, over the insured assets;
– mortgage credits registered in the Public Registry, of mortgage assets; and
– credits that have been pre-emptively registered in the Public Registry, due to a judicial order, attachment or execution of judicial sentence, over the assets that have been affected by said pre-emptive registration.
• Regarding other movable and real estate property, assets and rights of the bankrupt, the ranking of credits is:
– credits in favor of any municipality for taxes owed by the bankrupt; and
– credits owed in relation to expenses incurred by the bankrupt for purposes of judicial and administrative management of the insolvency and for the common interest of all creditors.
Bankruptcy proceedings in Panama and therefore the liquidation of a debtor may take a considerable amount of time.
In the event that the Panamanian Guarantor, Gaming & Services de Panama S.A., entered into bankruptcy proceedings, its Guarantee could be challenged. If any challenge to the validity of such Guarantee were successful, holders of the notes may not be able to recover any amounts under the Guarantee provided by Gaming & Services de Panama S.A. Likewise, upon such bankruptcy declaration, the Gaming Control Board could deny the court appointed curator the administration of Gaming & Services de Panama S.A. operation, in which case holders of the notes may not be able to recover any amounts under the Guarantee provided by Gaming & Services de Panama S.A. from operations that could otherwise continue until the bankruptcy proceedings are concluded.
Luxembourg Insolvency Law. The Issuer, which is incorporated in the Grand Duchy of Luxembourg, will issue the notes. Under Luxembourg insolvency laws, your ability to receive payment on the notes may be more limited than would be the case under U.S. bankruptcy laws. Under Luxembourg law, the following types of proceedings (together referred to as insolvency proceedings) may be opened against an entity having its registered office or centre of main interest in Luxembourg:
• Bankruptcy proceedings (faillite), the opening of which may be requested by the company or by any of its creditors. Following such a request, the courts having jurisdiction may open bankruptcy proceedings if the company (i) is in a state of cessation of payments (cessation des paiements) and (ii) has lost its commercial creditworthiness. If a court finds that these conditions are satisfied, it may also open bankruptcy proceedings ex officio (absent a request made by the company or a creditor). The main effect of such proceedings is the suspension of all measures of enforcement against the company, except, subject to certain limited exceptions, for secured creditors, and the payment of the creditors in accordance with their rank upon realization of the assets.
• Controlled management proceedings (gestion contrôlée), the opening of which may only be requested by the company and not by its creditors.
• Composition proceedings (concordat préventif de faillite), which may be requested only by the company and not by its creditors. The court’s decision to admit a company to the composition proceedings triggers a provisional stay on enforcement of claims by creditors.
• In addition to the proceedings described above, your ability to receive payment on the notes may be affected by a decision of a court to grant a stay on payments (sursis de paiements) or to put the Issuer into judicial liquidation (liquidation judiciaire). Judicial liquidation proceedings may be opened at the request of
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the public prosecutor against companies pursuing an activity violating criminal laws or that is in violation of the commercial code or of the laws governing commercial companies. The management of such liquidation proceedings will generally follow the rules of bankruptcy proceedings.
The liabilities of Cirsa Funding in respect of the notes will, in the event of the liquidation of the Issuer following, in particular, bankruptcy or judicial liquidation proceedings only rank after the cost of liquidation (including any debt incurred for the purpose of such liquidation) and those of the Issuer’s debts entitled to priority under Luxembourg law. Preferential debts under Luxembourg law include:
• money owed to the Luxembourg Revenue in respect of, for example, income tax deducted at source;
• value added tax and other taxes and duties owed to the Luxembourg Customs and Excise;
• social security contributions; and
• remuneration owed to employees.
Assets over which a security interest has been granted will in principle not be available for distribution to unsecured creditors (except after enforcement and, only to the extent a surplus is realized).
During such insolvency proceedings, all enforcement measures by unsecured creditors are suspended. The ability of secured creditors to enforce their security interest may also be limited, in particular in the event of controlled management proceedings expressly providing that the rights of secured creditors are frozen until a final decision has been taken by the court as to the petition for controlled management and may be affected thereafter by any reorganization order given by the court.
Furthermore, you should note that declarations of default and any subsequent acceleration (such as acceleration upon the occurrence of an event of default) will not be enforceable during controlled management proceedings.
Luxembourg insolvency laws may also affect transactions entered into or payments made by a Luxembourg company during the pre-bankruptcy period (période suspecte) which is a maximum of six months (and ten days, depending on the transaction in question) preceding the judgment declaring bankruptcy, except that in certain specific situations a Luxembourg court may set the start of the suspect period at an earlier date. In particular:
• pursuant to article 445 of the Luxembourg Code of Commerce (code de commerce), specified transactions (such as, in particular, the granting of a security interest for antecedent debts; the payment of debts which have not fallen due, whether payment is made in cash or by way of assignment, sale, set-off or by any other means; the payment of debts which have fallen due by any means other than in cash or by bill of exchange; the sale of assets without consideration or with substantially inadequate consideration) entered into during the suspect period (or the ten days preceding it) must be set aside or declared null and void, if so requested by the insolvency receiver;
• pursuant to article 446 of the Luxembourg Code of Commerce, payments made for matured debts as well as other transactions concluded for consideration during the suspect period are subject to cancellation by the court upon proceedings instituted by the insolvency receiver if they were concluded with the knowledge of the bankrupt party’s cessation of payments; and
• pursuant to article 448 of the Luxembourg Code of Commerce and article 1167 of the Civil Code (action paulienne) gives the insolvency receiver (acting on behalf of the creditors) the right to challenge any fraudulent payments and transactions, including the granting of security with an intent to defraud, made prior to the bankruptcy, without any time limit.
In principle, a bankruptcy order rendered by a Luxembourg court does not result in automatic termination of contracts, except for intuitu personae contracts, that is, contracts for which the identity of the company or its solvency were crucial. The contracts, therefore, subsist after the bankruptcy order. However, the insolvency receiver may choose to terminate certain contracts. As of the date of adjudication of bankruptcy, no interest on any unsecured claim will accrue vis-à-vis the bankruptcy estate.
Insolvency proceedings may hence have a material adverse effect on the relevant Luxembourg company’s business and assets and the Luxembourg company’s respective obligations under the notes (as Issuer).
Finally, any international aspects of Luxembourg bankruptcy, controlled management and composition proceedings may be subject to Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings.
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We have not prepared, and we do not intend to prepare, financial information in accordance with U.S. GAAP or
separate Guarantor financial data.
We have prepared our financial statements in accordance with IFRS (and prior to 2008, we prepared our financial statements in accordance with Spanish GAAP), which varies significantly from the U.S. GAAP and results in significant differences in reported operating results and financial condition from those under U.S. GAAP. Moreover, the indenture for the notes does not require us to reconcile future financial statements to U.S. GAAP. We also have not presented separate financial statements or summary financial data for the Guarantors in this listing circular, and are not required to do so in the future under the indenture for the offered notes.
You may be unable to enforce judgments obtained in U.S. courts against the Issuer, Cirsa or the other Guarantors.
The directors and executive officers of Cirsa Funding, Cirsa, and the other Guarantors are non-residents of the United States and the assets of these companies and their directors and officers are located outside of the United States. As a consequence, you may not be able to effect service of process on these non-U.S. resident directors and officers in the United States or to enforce judgments against them outside of the United States.
We have been advised by our Luxembourg, Spanish, Italian and Panamanian counsel, respectively, that there can be no assurance that a Luxembourg, Spanish, Italian or a Panamanian court would enforce a judgment against the Issuer, Cirsa and any of the other Guarantors obtained in the United States. See “Service of Process and Enforcement of Civil Liabilities.”
We may not be able to finance a change of control offer.
The indenture for the notes requires Cirsa Funding to make an offer to repurchase the notes at 101% of their principal amount if we experience a change of control, and Cirsa must make a payment to the Issuer under the funding loans in such amount. As described above, Cirsa depends on the cash flow of operating subsidiaries and the Issuer relies on payments by Cirsa under the funding loans to make payments on the notes, including offers to repurchase. The failure of Cirsa Funding to effect a change of control offer when required would constitute an event of default under the indenture. However, some important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a “change of control” under the indenture.
You may not be able to resell the notes easily.
Because the offered notes have a different restricted trading period than the Initial Notes and the First Additional Notes, there will be no established trading market for the offered notes and we cannot assure you that an active or liquid trading market will develop or continue for the offered notes. Future liquidity will depend, among other things, on the number of holders of the notes, our financial performance, the market for similar securities and the interest of securities dealers in making a market in the notes.
For 40 days after the issue date of this offering, the offered notes issued under Regulation S were not fungible with the Initial Notes and the First Additional Notes issued under Regulation S. For a period of one year after the issue date of this offering, the offered notes issued under Rule 144A will not be fungible with the Initial Notes and the First Additional Notes issued under Rule 144A.
In addition, because the notes have not been, and are not required to be, registered under the U.S. Securities Act or the securities laws of any other jurisdiction, they may not be offered or sold except to QIBs in accordance with Rule 144A or to non U.S. persons in accordance with Regulation S or pursuant to another exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and all other applicable laws. These restrictions may limit your ability to resell the notes.
You may face foreign exchange risks by investing in the notes.
The offered notes are denominated and payable in euros. If you measure your investment returns by reference to a currency other than euros, an investment in the notes will entail foreign exchange related risks due to, among other factors, possible significant changes in the value of the euro relative to the currency by reference to which you measure the return on your investments because of economic, political and other factors over which we have no control. Depreciation of the euro against the currency by reference to which you measure the return on your investments could cause a decrease in the effective yield of the notes below their stated coupon rates and could result in a loss to you when the return on the offered notes is translated into the currency by reference to which you measure the return on your investments. There may be tax consequences for you as a result of any foreign exchange gains or losses resulting from an investment in the offered notes.
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USE OF PROCEEDS
We will use the net proceeds of this offering to refinance approximately €70.0 million of our existing indebtedness, including €50.0 million of indebtedness under the Revolving Credit Facility, and to pay commissions, fees and expenses estimated at approximately €2.5 million associated with this offering. We will use the remaining proceeds for general corporate purposes, which may include investments in our Latin American businesses. The Issuer will lend the proceeds of the offering to Cirsa pursuant to a funding loan equal to the aggregate principal amount of the notes issued in this offering.
We intend to repay with the proceeds of this offering the full amount of indebtedness outstanding under the Revolving Credit Facility, equal to € 50.0 million, together with accrued interest and other amounts thereunder. The total committed amount under our Revolving Credit Facility (€50.0 million) will, however, remain available after such repayment. See “Description of Certain Indebtedness.” We do not currently intend to make distributions to our shareholders out of the proceeds from the offering.
The following table sets forth the estimated sources and uses of the proceeds from this offering.
Source of Funds Use of Funds
(€ million) (€ million)
Offering (net of original issue discount)(1) ................................. 99.8
Repayment under Revolving Credit Facility(2) ............................. 50.0
Repayment of other indebtedness ... 20.0 General corporate purposes ............ 27.3
Estimated commissions, fees and other expenses ................................ 2.5
Total Sources ................................ 99.8 Total Uses ...................................... 99.8
(1) Excludes payment of interest accrued from November 15, 2012 to the issue date.
(2) Represents principal amount of debt to be repaid (but excludes any accrued interest until the anticipated repayment date).
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CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term debt and consolidated capitalization, as of September 30, 2012, (i) on an actual basis and (ii) as adjusted to give effect to the offering and the application of the estimated proceeds therefrom. This table should be read in conjunction with “Summary—Summary Consolidated Historical and Unaudited Consolidated Pro Forma Financial Information,” “Operating and Financial Review and Prospects,” the consolidated financial statements and “Description of Certain Indebtedness” included elsewhere in this listing circular.
As of
September 30, 2012
Actual As Adjusted
(€ in millions) Cash and cash equivalents(1) ............................................................................................................................ 71.6 98.8
Total debt ......................................................................................................................................................... 942.3 969.5 Total equity ...................................................................................................................................................... 36.1 36.1
Total capitalization .................................................................................................................................... 978.4 1,005.6
(1) As adjusted reflects the application of the net proceeds of the offering, after repaying €70.0 million of existing indebtedness, including the
€50.0 million principal amount of indebtedness under the Revolving Credit Facility, and paying €2.5 million of estimated fees and expenses related to the offering. The remaining amount will be funded as cash on balance sheet for general corporate purposes. Excludes proceeds for payment of interest accrued from November 15, 2012 to the issue date.
(2) Represents (i) €680.0 million principal amount of the notes issued on May 5, 2010 and January 18, 2011 plus accrued interest (€22.3 million), net of amortized debt issuance costs (€14.9 million), Cirsa bonds purchased and held by us (€5.0 million) and original issue discount (€4.8 million), as adjusted for the issuance of €100.0 million principal amount of offered notes in the offering (net of original issue discount), with deduction of amortized issuance costs of the offered notes (€2.5 million).
(3) Primarily represents capital leases for slot machines.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following selected profit and loss account data, balance sheet data and other data as of and for the years ended December 31, 2011, 2010 and 2009 have been derived from our audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009. The following selected profit and loss account data, balance sheet data and other data as of and for the nine months ended September 30, 2012 and 2011 have been derived from our unaudited consolidated financial statements as of and for the nine months ended September 30, 2012.
You should read this selected financial data in conjunction with our consolidated financial statements and the related notes and “Operating and Financial Review and Prospects.”
Our consolidated financial statements have been prepared in accordance with IFRS - EU.
The comparability of our results of operations and financial position as of and for the years ended December 31, 2011, 2010 and 2009 and as of and for the nine months ended September 30, 2012 and 2011 have been affected by the factors described in “Operating and Financial Review and Prospects—Overview.”
Net profit ............................................................................................... (5.0) (19.0) (25.4) (25.6) 2.6
Selected Balance Sheet Data (at end of period): Cash and cash equivalents ...................................................................... 50.3 65.2 66.7 75.1 71.6 Total assets ............................................................................................. 1,238.7 1,349.1 1,389.6 1,320.4 1,397.3 Total debt(1) ............................................................................................. 830.7 898.2 936.7 910.9 942.3 Total net debt(2) ....................................................................................... 780.4 833.0 870.0 835.8 870.7 Total shareholders’ equity ...................................................................... 90.8 85.0 35.6 23.3 36.1
Other Financial Data: EBITDA(3) .............................................................................................. 208.6 260.0 290.0 214.4 240.0 Capital expenditures(4) ............................................................................ 167.6 140.8 160.1 103.6 111.4
(1) Total debt of €942.3 million as of September 30, 2012 was comprised of (i) bank debt of €172.8 million recorded under “Credit institutions”
as non-current liabilities and current liabilities, (ii) capital lease obligations of €29.9 million recorded under “Credit institutions” as non-current liabilities and current liabilities, (iii) gaming tax deferrals of €28.1 million recorded under “Tax authorities” as non-current liabilities and under “Other creditors” as current liabilities, (iv) promissory notes and other loans of €33.9 million recorded under “Other creditors” as non-current liabilities and current liabilities and high yield notes of €677.6 million recorded under “Bonds” as non-current liabilities and current liabilities.
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(2) We define total net debt as total debt less cash and cash equivalents.
(3) EBITDA represents profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets. We believe that it is widely accepted that EBITDA provides useful information regarding a company’s ability to service and incur indebtedness. EBITDA is not a measurement of operating performance under IFRS, and should not be considered a substitute for operating income, net income, cash flows from operating activities or other income statement data, or as a measure of profitability or liquidity, and EBITDA does not necessarily indicate whether cash flow will be sufficient or available for cash requirements. EBITDA may not be indicative of our historical operating results nor is it meant to be predictive of potential future results. Because all companies do not calculate EBITDA identically, the presentation may not be comparable to similarly entitled measures of other companies.
The following table presents our calculation of EBITDA:
Year ended December 31, Nine months ended
September 30,
2009 2010 2011 2011 2012
(€ in millions) Profit before tax ........................................................................................................ 28.2 22.5 26.8 12.2 52.4 Loss on sale of non-current assets ............................................................................. 16.3 9.4 5.2 2.4 (1.1) Foreign exchange results ........................................................................................... 0.1 0.5 6.2 4.8 4.8 Financial results ........................................................................................................ 62.5 82.7 96.8 74.9 58.1 Depreciation, amortization and impairment .............................................................. (97.5) (140.4) (149.6) (118.5) (119.3) Changes in trade provisions ...................................................................................... (3.9) (4.6) (5.5) (2.1) (4.1) EBITDA .................................................................................................................... 208.6 260.0 290.0 214.9 240.0
(4) We define capital expenditures to include the following items from our consolidated cash flow statement: “Purchase and development of property, plant and equipment” and “Purchase and development of intangibles.”
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with the consolidated financial statements included elsewhere in this listing circular.
Overview
We are one of the leading gaming companies in Spain, Italy and Latin America engaged in the operation of slot machines, casinos and bingo halls and the manufacture of slot machines for the Spanish market. In Spain, we are the leader in the €14.9 billion Spanish private gaming market, where our key activities include: the operation of slot machines, in which, as of September 30, 2012, we are the #1 operator with over 21,400 slot machines operated; the operation of four casinos; the operation of bingo halls, in which our Bingo Division is the #1 operator with 49 bingo halls; and the manufacture of slot machines, where we are the #1 manufacturer, with over 26,000 slot machines and gaming kits manufactured in the twelve months ended September 30, 2012.
In Italy, we have established a strong presence in the slot machine market with over 14,000 slot machines situated in approximately 2,850 locations across central and northern Italy. As of September 30, 2012, we have also completed the deployment of 2,170 of the 2,583 Video Lottery Terminals (“VLTs”) planned for installation in Italy.
In Argentina, we operate eight casinos, including two riverboat traditional casinos in the city of Buenos Aires with 130 gaming tables and 1,545 slot machines and a traditional casino located in Rosario with 80 gaming tables and 2,820 slot machines. Our five electronic casinos in the Province of Mendoza, Argentina operate 1,619 casino-style slot machines.
In Colombia, we operate 19 traditional casinos with 2,674 slot machines and 48 electronic casinos with a total of 3,315 slot machines.
In Panama, we operate one traditional casino in Panama City with 29 tables and 380 slot machines and 26 electronic casinos with a total of 7,300 slot machines.
In Mexico, we operate 20 bingo halls that also have a casino-style slot machine offer.
Accounting and Auditing Principles
In this listing circular, we have presented our audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009. These consolidated financial statements are prepared in accordance with IFRS. Our unaudited financial statements for the nine months ending September 30, 2012 are also presented. These consolidated financial statements are prepared in accordance with IFRS—EU.
Our auditors, Ernst & Young S.L. and Cortés, Pérez y Cía. Auditores S.L.P., independent auditors, have audited our financial statements in accordance with auditing standards generally accepted in Spain and issued unqualified audit opinions for our audited financial statements for each of the years ended December 31, 2011, 2010 and 2009.
For a description of certain changes to IFRS standards and interpretations that we have adopted in our consolidated financial statements, see notes 2.3 and 2.4 to our audited consolidated financial statements for the year ended December 31, 2011.
Segment Reporting
Our company is presently organized into five business divisions: Slots, Casinos, Bingo, B2B and On-line Gaming (which became a business division in the third quarter of 2012). Our primary basis of segment reporting is by business division, which reflects the management structure of our business, our system of internal financial reporting and what we believe to be the predominant source of the risks and returns in our business. We report operating revenues, net operating revenues, EBIT, EBITDA and net result for each of our business divisions. Our secondary basis of segment reporting is geographic, and we report operating revenues and total assets for Spain, Latin America and Italy. See note 3 to our audited consolidated financial statements.
In this operating and financial review, one of the key measures that we utilize to assess and analyze our performance and the performance of our divisions is EBITDA, which on a consolidated basis we define as profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets. We view EBITDA as providing a more useful tool to assess and analyze the performance of Cirsa and its consolidated subsidiaries (the “Group” or “Cirsa Group”) and our business divisions and our overall liquidity than operating profit or net result.
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Consolidation Method
As described in our audited consolidated financial statements for the year ended December 31, 2011, we use the full consolidation method for subsidiaries, the proportional consolidation method for jointly-controlled companies and the equity method for affiliated companies.
We own less than 100% of a number of our material subsidiaries, including the Winner Group companies in Colombia (in which we own a 50.01% interest) and Juegomatic S.A. (in which we own a 65.0% interest). We use the proportional consolidation method for our companies in which we own a 50.0% interest, which include our casinos in Buenos Aires and Rosario and our traditional casino in Panama.
Latin American Currency Effects
Our Latin American businesses account for a significant and increasing portion of the operating revenues, EBIT and EBITDA of the Cirsa Group generally and our Casinos Division in particular. Our B2B Division also generates revenues from its electronic lottery businesses in Argentina and Venezuela. The results of operations and financial position of the Cirsa Group and our Casinos Division, in particular, have from time to time been adversely affected by currency movements, including the depreciation of the Argentine peso against the euro in 2009 and 2011 and, to a lesser extent, in 2007 and 2008, as well as in earlier historical periods. Our results of operations and financial position were also adversely affected by the depreciation of the U.S. dollar and local currencies in Venezuela, the Dominican Republic and Peru against the euro in 2007, 2008, 2010, and 2011. Conversely, the appreciation of the U.S. dollar and these local currencies against the euro in 2009 and the Colombian peso against the euro in 2010 positively impacted our results of operations during those periods. Similarly, the appreciation of the U.S. dollar and the Colombian peso against the euro in 2012 positively affected our results of operations in the first nine months of 2012. We expect that our results of operations and financial condition will continue to be impacted by the effect of currency movements on our Latin American businesses in the future. We do not currently engage in and have no plans to enter into currency hedging transactions.
The depreciation of the Argentine peso against the euro has adversely affected our results of operations and financial condition in prior years. Following a sharp depreciation of the Argentine peso against the euro in 2001 and 2002 as a result of the Argentine government’s adoption of a floating exchange rate for the Argentine peso in response to the ongoing economic crisis in the country, the Argentine peso has since continued to decline, albeit more gradually. The exchange rate for the Argentine peso against the euro moved from Ps.1.50 per euro as of December 31, 2001 to Ps.3.53 per euro as of December 31, 2002 to Ps. 5.24 per euro as of December 31, 2009 to Ps.5.78 per euro as of September 30, 2012.
Due to translation effects, the depreciation of the Argentine peso has resulted in a decrease in euro terms of the revenues of our Argentine business, our Casinos Division and the Group. The impact of this decline has been partially offset due to the incurrence of most of the operating costs of our Argentine business in local currency, which has resulted in generally stable operating margins for the Argentine business. The depreciation of the Argentine peso against the euro is generally accompanied by inflationary effects, which results in an increase in Argentine peso revenues.
Key Factors Affecting Our Results of Operations
Slots
Our Slots Division is comprised of our Spanish slots business and our Italian business, where we are a network system operator for slot machines and also operate VLTs.
Revenues and profitability for our Slots Division in Spain have generally been stable and predictable, although revenues and profitability have been adversely affected by the economic downturn and smoking ban in Spain, which has been partly offset by the contribution of slots and VLTs in Italy. Following a period of rapid growth due to the consolidation of the Spanish slots market, the size of our slot machine installed base in Spain has been relatively stable in recent years, and we have generally focused on optimizing revenue per machine and profitability. Because the minimum wager, gaming taxes and payout per slot machine are regulated by law, we have concentrated on identifying and obtaining attractive sites to place our slot machines and controlling operating costs and expenses through efficient management. We monitor slot machine performance carefully to determine when to replace or relocate slot machines to improve profitability. As a part of our overall strategy to improve profitability, during the last several years we have eliminated underperforming slot machines. The total number of slot machines in the Spanish market has contracted in recent years, and we expect that this trend will continue. This contraction and the ongoing consolidation of the Spanish slots market present opportunities for acquisitions. We have continued to pursue selective acquisitions of attractive slot machine operations, including our acquisition in the twelve months ended September 30, 2012 of approximately 1,700 slot machines from several small operators.
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Profitability in our Slots Division is affected by the terms of our agreements with site owners and the agreements we enter into to acquire new route operations. When we acquire other slots operators in Spain, we frequently enter into participation agreements with the acquired operators to facilitate our acquisition or to retain the strategic benefits of the acquired slot operators’ relationships with site owners. The participation agreements with sub-operators are profit sharing agreements, the terms of which vary by sub-operator. Payments to sub-operators are recorded in the segment results of the Slots Division as an expense under Consumption. Our profitability is affected by the degree to which our locations are subject to these profit sharing arrangements. Approximately half of our slot machines were covered by such arrangements during the periods under review. As part of our strategy to maintain our performance during the economic downturn, we have focused on the renegotiation of the terms of the profit sharing agreements.
Starting in 2008, we expanded our Spanish slots business by opening arcades, where we are generally not required to enter into profit-sharing arrangements. Due to the economic downturn in Spain, we have suspended our plans to open additional arcades, and during 2011 we recorded a €12.0 million impairment charge in respect of our arcades.
The performance of our Slots Division is also affected by regulatory changes in Spain with respect to the number of slot machines permitted per site, the minimum wager, the maximum payout per slot machine, licensing fees and taxes assessed on slot machines. Costs associated with the regulatory environment have been relatively stable in recent years.
We were awarded a concession to act as a network system operator for slot machines in Italy in 2004. The Italian slots market has been characterized by significant regulatory, tax and operational uncertainty. In 2009, we received authorization to operate VLTs in Italy and were awarded a concession for the installation of 2,583 terminals. In December 2011, we were awarded a new provisional concession and in October 2012, our permanent concession was awarded.. The VLT business required significant investments in 2009, 2010, 2011 and the first nine months of 2012 in connection with the deployment of the new VLTs. The initial performance of our installed VLTs has been encouraging. However, we expect that the growth in revenues and EBITDA will be dampened as more VLTs are installed in additional locations in the Italian market by other participants. Overall, the contribution from the Italian businesses to the Slots Division has compensated for the impact of the economic downturn and smoking ban on the revenues and EBITDA of the Spanish business. The performance of our Italian business has also been adversely impacted by increases in gaming taxes in 2012, and gaming taxes were increased again with effect from January 1, 2013.
Casinos
The revenues and profitability for our Casinos Division have been impacted by a variety of factors, including currency effects, the effects of acquisitions and opening new or expanded casinos, regulatory changes and location-specific factors. Our Casinos Division derives revenues primarily from gaming tables and slot machines which, in turn depends on the number of gaming tables and slot machines at each casino, the popularity of these games and the overall mix of gaming tables and slot machines. Revenues are also affected by the number of visitors to our casinos, the average visit length and the average amount wagered by visitors.
A majority of the revenues of our Casinos Division are generated by our casinos in Latin America, principally our casinos in Argentina, Panama and Colombia. We have expanded our business in Colombia, where we did not operate prior to 2007, through the acquisitions of the Winner Group in 2007 and Unidelca in 2010. In Argentina, we opened the Rosario casino in October 2009 and substantial investments have been made in our Buenos Aires riverboat casinos to expand capacity and install new gaming machines. Likewise, we have made significant investments in our Panama casino business to expand capacity and install new gaming machines. In November 2011, we acquired a 33% share of a bingo hall in Buenos Aires, which we consider, for consolidation purposes, to be part of our Casinos Division.
In contrast to our growing Latin American casino business, the revenues and profitability of our Spanish casino business have been adversely affected by the economic downturn in Spain.
Our revenues and profitability, as well as the comparability of our results from period to period, may be impacted by the acquisition of additional casinos and the opening of new casinos. Besides the costs of acquiring a casino license or a casino, we also incur costs in connection with the acquisition of new or additional slot machines for our casinos and the refurbishment of our casinos. We also incur start-up costs in connection with the hiring and training of staff for new casinos. It also typically takes a period of time before a newly- opened casino attains profitability. Casino de Valencia, which commenced operations in August 2010 and required an initial investment of approximately €14 million, has not currently attained profitability.
The performance of our Casinos Division is also affected by regulatory changes in the number of casino licenses issued, permitted slot machines per site, the minimum wager, licensing fees and taxes assessed on casinos and slot machines, as well as by systemic shifts in the regulatory framework. For example, our results of operations in Panama and for Casino de Rosario have been impacted by increases in gaming taxes. During 2011, due to changes in the political
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and regulatory environments, our casino business ceased operations in Venezuela and Ecuador. During the first nine months of 2012, we recorded a write-off for the entire value of our Venezuelan business. In several of our casino locations, we presently operate the only casino in the area due to our exclusive license. In other locations, such as the Dominican Republic and Panama, we face competition from other casinos in the area. In addition to gaming industry regulation, our casinos may be impacted by other regulatory changes, such as the imposition of anti-smoking legislation.
Bingo
Our Bingo Division operates bingo halls in Spain and Mexico and has a minority interest in 10 bingo halls in Italy.
The majority of revenues from traditional bingo halls are derived from card sales. Card sales tend to increase with the availability of larger prize pools which, in turn, depends on the number of players during each game. Consequently, larger bingo halls generate more card sales. The development and implementation of linked bingo halls and similar technology also has the potential to generate more card sales.
The majority of the cost of running our bingo halls relates to employee expenses and gaming taxes. Increased profitability of our bingo hall operations depends on realizing operating efficiencies at bingo halls, principally through improved staffing practices and an increase in the average number of games played per day. The performance of our bingo hall operations may be affected by changes in gaming taxes. While gaming taxes on bingo halls in Spain have generally been stable, there have been some initiatives to decrease gaming tax levels in order to stimulate the levels of customer participation.
In general, the revenues and profitability of traditional bingo halls in Spain has been declining in recent years due to a variety of factors, including customer demographics, the effects of the strict smoking bans and the economic downturn. We have undertaken a number of measures to improve the performance of the Spanish business, including the introduction of machines, such as electronic bingo, slot machines and electronic roulette games, to offset the decline in traditional bingo revenues, and the closure of underperforming bingo halls. We closed five bingo halls in 2011, one bingo hall in 2012 and may close additional bingo halls in the future. The closure of bingo halls will result in decreased revenues and the payment of severance expenses. We have also recorded impairment charges in respect of our Spanish bingo halls, expect to record an impairment charge for 2012 and may record additional impairment charges in the future.
We entered the Mexican bingo hall business in 2006, and since then have been engaged in the opening of new bingo halls. As of September 30, 2012, we operated 20 bingo halls in Mexico. The results of our bingo hall business in Mexico have been impacted by the significant start-up costs associated with opening new halls. In contrast to the Spanish bingo hall business, our Mexican bingo hall operations have a broad entertainment offer, including casino-style slot machines. We have been implementing the “Casino Life” concept and the accelerated introduction of casino-style slot machines. We expect to make additional selective investments in our Mexican bingo hall business to install additional slot machines, to expand capacity in our existing halls and to acquire or to open additional bingo halls. As is the case with some of our other businesses, our Mexican bingo hall business has been impacted by changes in regulation.
B2B
We believe that among the key factors that drive the revenues and profitability of the B2B Division are the popularity of the new games for slot machines that we and our competitors introduce, the volume of slot machines that we sell in the Spanish market, the product mix between slot machines and gaming kits, the mix between sales to third parties and to our own Slots Division and our ability to realize cost savings and operational efficiencies in our manufacturing operations. One of the key elements of our strategy is to concentrate on market leadership in the Spanish amusement with prize (“AWP”) slots market and interlinked bingo halls. In general, our margins benefit if we are able to attain a robust market share in the Spanish AWP slots market as a result of the popularity of our slot machine games.
Our manufacturing costs are comprised principally of materials, components and labor costs. Innovation is critical to the success of our slot machines and investment in research and development also accounts for a portion of our costs. A significant portion of the operating costs and expenses of our B2B Division are fixed costs, although we have undertaken initiatives to move towards a more variable-cost model.
The interactive business of our B2B Division currently generates revenues from supporting our Slots Division in Italy, our on-line lottery business in Argentina, our electronic lottery business in Venezuela, and interlinked bingo games in Catalonia, Madrid and Andalusia.
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On-line Gaming
Our On-line Gaming business division commenced operations in the third quarter of 2012. We expect that it will take approximately three years of operation before the business attains profitability. We do not anticipate that the business will require any significant capital investment by us, and the business does not need any working capital investment by us.
Principal Profit and Loss Account Items
The following is a brief description of the revenues and expenses that are included in the line items of our consolidated profit and loss accounts.
Operating Revenues
Operating revenues are principally comprised of revenues from our operations and, to a lesser extent, other activities.
Operations. We record operating revenue from our principal business divisions as follows:
Slots. Operating revenues from our slot machines are recorded as the total amount collected, net of prizes. Operating revenues also include the revenues from our VLTs in Italy and our Sportium sports betting joint venture.
Bingo. Operating revenues from our Bingo Division are recorded as the total amount of bingo cards sold, according to their face value. Our Bingo Division also records operating revenue from sales of food and drinks.
Casinos. Operating revenues from our Casinos Division are recorded as the net amount (“win”), which is after deducting the prizes paid to customers. Our Casinos Division also records revenue from admission fees, on-site bars, restaurants and tips and from bingo operations located at some of our electronic casinos in Latin America.
B2B. Operating revenues from our B2B Division include sales of our slot machines and gaming kits to third parties and sales by our distribution companies of slot machines produced by third parties.
Other. We also record operating revenue from a variety of other activities, including revenues from slot machines located in bingo halls and revenues and overhead costs reimbursed from joint ventures, personal services and license fees.
Net Operating Revenues
Net operating revenues are comprised of operating revenues less bingo prizes and variable rent.
Bingo prizes refers to the prizes payable on bingo cards.
Variable rent refers to the amount collected from slot machines that are payable to the owner of the premises on a revenue-sharing basis.
Consumption
Consumption costs for our Slots Division include contractual payments to sub-operators (which are based on a profit sharing formula that varies by sub-operator). For our Bingo and Casinos Divisions, these costs principally include ordinary course costs such as bingo cards, playing cards and chips and food and beverage expenses. Our B2B Division’s costs include raw materials and costs of finished and semi-finished components furnished by third-party contractors.
External Supplies and Services
External supplies and services expenses primarily are comprised of start up costs, rent and lease costs for facilities and vehicles, professional expenses and advertising, promotion and public relation expenses.
Personnel
Our personnel costs include wages and salaries, employee benefit costs and employee indemnity payments.
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Taxes on Gaming
Gaming tax expenses include all taxes relating to our gaming activities assessed by national, regional and local authorities.
Depreciation, Amortization and Impairment
Depreciation expense relates to the depreciation of property, plant and equipment.
Amortization expense principally relates to the amortization of the cost of our licenses for gaming services in Panama, and capitalized development costs of our B2B Division. We do not have any license costs for licenses that are awarded in public tenders, such as our Buenos Aires casino license.
Impairment relates to the impairment loss in respect of intangible assets, including goodwill, property, plant and equipment and equity investments.
We capitalize those development costs which qualify for recognition as an asset pursuant to IAS 38 which, in any case, represent a minority portion of the total expenditures in research and development linked to our B2B Division. In our consolidated cash flow statement, this is shown as a movement in “Purchase and development of intangibles.”
Variation in Operating Provisions
Variation in operating provisions principally relates to movements in allowances for receivables and inventories.
Financial Results
Financial results comprises financial income less financial costs and expenses.
Financial income is comprised of income from financial investments, interest from loans made to a variety of parties, including Nortia, site owners and sub-operators in our Slots Division, and site owners of certain international casinos.
Financial costs and expenses is comprised of interest expenses and variation in financial provisions.
Foreign Exchange Results
Foreign exchange results refers to realized and unrealized exchange gains and losses and other financial results. The intragroup exchange gains/losses in foreign subsidiaries arising from loans granted by Cirsa are recorded in the consolidated balance sheet under “Cumulative Translation Reserve” and therefore do not affect the consolidated income statement so long as the loans constitute a component of Cirsa’s total net investment in the foreign subsidiary.
Income Tax
Due to Spanish tax legislation, our history of acquisitions and dispositions and internal corporate reorganizations as the Cirsa Group has grown, and the significant international operations of the Cirsa Group, our tax position is complex.
For Spanish tax purposes, as of September 30, 2012, we have three groups that file their tax returns on a fiscal consolidated basis: one group has three Spanish companies, the second group has eight Spanish companies and the third group has 73 Spanish companies. As of September 30, 2012, under Spanish tax legislation, Cirsa must have owned more than 75% of the capital stock of a company at the start of the tax year in order to include the company in its tax consolidated group. Spanish companies that are not part of the fiscal consolidated group pay tax on an unconsolidated basis (unless it belongs to another fiscal group). Our non-Spanish subsidiaries are not included in the tax consolidated group and pay taxes in their local jurisdiction.
The statutory corporate tax rate in Spain during 2012 was 30.0%. We define our effective tax rate as our income tax expense over our profit (loss) before tax. The level of our effective tax rate is influenced by a number of factors, including (i) the profitability of Group companies, (ii) the fact that certain expenses in the profit and loss account are not deductible for Spanish tax purposes and (iii) the availability of tax credits to offset against profits so as to reduce tax expense.
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Minority Interest
Minority interest is comprised of the results included in consolidated results for which we do not own 100%. During the period under review, minority interest is principally attributable to minority ownership interests in the Winner Group, Juegomatic S.A., Pringsa in Mexico (in which our interest has subsequently increased to 100% as of December 2010), a Panamanian casino business and a Venezuelan casino business (which operations were halted in July 2011).
EBITDA
We define EBITDA as profit before tax, depreciation, amortization and impairment, financial results, foreign exchange results and loss on sale of non-current assets.
Segment Results—Other Structure/Consolidation
In determining the operating revenues, total EBIT and total EBITDA for the Group, we have to take account of certain unallocated corporate overhead costs and consolidation adjustments. Corporate overhead costs include such items as payroll expenses, rent expenses and the costs of professional services. We allocate a portion of corporate overhead costs to each division based on their use of such services. Corporate overhead costs allocated to a division are included in the division’s “External supplies and services.”
Consolidation adjustments primarily relate to (i) the adjustment of unrealized margins on assets and depreciation in order to show the assets at their original cost and (ii) the elimination of intercompany balances arising from financial operations, rental agreements, payment of dividends, purchase and sale of inventories, tangible fixed assets and investments, and services.
Results of Operations
Nine months ended September 30, 2012 and 2011
Group Results of Operations
The following table sets forth, by business division, operating revenues, net operating revenues, EBIT and EBITDA for the nine months ended September 30, 2012 and 2011:
Total ............................................................................................................................................ 1,286.7 1,343.5 56.7
Total .................................................................................................................................................. 925.4 999.4 73.9
Total ............................................................................................................................................... 94.3 116.5 22.2
Total ..................................................................................................................................................... 214.9 240.0 25.0
(1) Other includes central corporate services and certain inter-segment consolidation adjustments.
Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Group Results of Operations
Net Operating Revenues
Net operating revenues increased by €73.9 million, or 8.0%, to € 999.4 million in the first nine months of 2012 from €925.4 million in the first nine months of 2011. The increase in net operating revenues was primarily due to the growth in revenues from the Latin American casinos and the Italian slots businesses, which offset the decline in revenues from the Bingo Division and B2B Division and our slots and casinos businesses in Spain.
EBIT
EBIT increased from €94.3 million in the first nine months of 2011 to €116.5 million in the first nine months of 2012. EBIT margin (EBIT as a percentage of net operating revenues) was 11.7% in the first nine months of 2012 as compared to 10.2% in the first nine months of 2011.
EBITDA
EBITDA increased 11.7% from €214.9 million in the first nine months of 2011 to €240.0 million in the first nine months of 2012. EBITDA margin (EBITDA as a percentage of net operating revenues) was 24.0% in the first nine months of 2012 as compared to 23.2% in the first nine months of 2011. EBITDA growth was primarily attributable to the performance of our Latin American casinos in Argentina, Colombia and Panama, which offset the decreased EBITDA from our Slots Division. The Bingo Division and the B2B Division also contributed, to a lesser extent, to the growth in EBITDA.
Financial Results
Financial result was negative €58.1 million in the first nine months of 2012 as compared to negative €74.9 million in the first nine months of 2011. Financial result in the first nine months of 2011 was impacted by the one-time costs of the redemption of Cirsa Capital’s 7.875% Notes due 2012.
Foreign Exchange Results
Foreign exchange results was negative €4.8 million in each of the first nine months of 2012 and in the first nine months of 2011.
Income Tax Expense
Income tax expense increased to €40.6 million in the first nine months of 2012 from €30.5 million in the first nine months of 2011, reflecting the increased profitability of our international operations and our losses in Spain.
Net Profit
As a result of the foregoing, net profit, after minority interests, was € 2.6 million in the first nine months of 2012 as compared to €(25.6) million in the first nine months of 2011.
Revenues. Operating revenues from our Slots Division principally represent revenues collected from our slot machines after prize payouts. Operating revenues also include the revenues from the Sportium sports betting joint venture. Operating revenues increased 2.9% from € 514.2 million in the first nine months of 2011 to €529.0 million in the first nine months of 2012. Net operating revenues from our Slots Division represent operating revenues after variable rent payments made to site owners. Net operating revenues increased 6.2% from €348.2 million in the nine months ended September 30, 2011 to €369.6 million in the nine months ended September 30, 2012.
In Spain, net operating revenues decreased by 0.4% in the first nine months of 2012 as compared to the first nine months of 2011, principally due to the negative effects of the smoking ban in Spain and of the economic downturn. The number of slot machines decreased marginally as a result of our strategy to increase the quality of our slots portfolio through the disposal of underperforming slot machines and sites and the pursuit of highly-selective acquisitions. Average revenues per unit increased in the first nine months of 2012 as compared to the first nine months of 2011. We had 21,439 slot machines in operation in Spain as of September 30, 2012 compared to 21,634 units as of September 30, 2011.
In Italy, net operating revenues increased 11.9% in the first nine months of 2012 as compared to the first nine months of 2011, primarily due to the steady growth and diversification of our operations in Italy through the addition of 751 VLTs and 877 AWP slot machines. As of September 30, 2012, in Italy we operated 10,271 slot machines and provided third-party interconnection services for an additional 4,379 slot machines, as compared to the operation of 9,394 slot machines and provision of interconnection services for 4,439 slot machines as of September 30, 2011. We have installed over 2,200 VLTs in Italy as of September 30, 2012, and expect to complete during 2013 the deployment of the entire 2,583 VLTs for which we have secured a license.
Costs and Expenses. Costs and expenses for our Slots Division principally include taxes on gaming activities, payments to sub-operators under participation agreements, personnel expenditures, depreciation, amortization and impairment expenses and external supplies and services expenses.
Overall costs and expenses for our Slots Division increased by 6.2% to €349.5 million in the first nine months of 2012 as compared to € 329.1 million in the first nine months of 2011. As a percentage of segment net operating revenues, costs and expenses were 94.6% in the first nine months of 2012 and 94.5% in the first nine months of 2011. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes, which in Spain are incurred annually based on a fixed amount for each machine but in Italy are incurred at a variable rate based on machine revenues, increased by 13.5% from € 166.3 million in the first nine months of 2011 to €188.7 million in the first nine months of 2012. This increase is largely attributable to the increase in revenues in Italy, the 2.0% increase in the gaming tax rate in Italy with effect from January 1, 2012, and the operation of additional VLTs in Italy, which are subject to a higher tax rate than slot machines. As a percentage of segment net operating revenues, gaming taxes increased to 51.1% in the first nine months of 2012 from 47.8% in the first nine months of 2011.
• Personnel Expenses. Personnel expenses include wages and salaries for commercial, collection and technical support employees. This expense category increased slightly to €35.1 million in the first nine months of 2012 from €34.4 million in the first nine months of 2011.
• Consumption. Consumption expense is primarily comprised of payments to sub-operators. This expense decreased by 7.6% from €31.1 million in the first nine months of 2011 to €28.7 million in the first nine
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months of 2012. This decrease was primarily attributable to lower payments made to sub-operators due to the decline in slot machine revenues.
• External Supplies and Services. This expense category increased by 5.2% from €48.2 million in the first nine months of 2011 to € 50.7 million in the first nine months of 2012, primarily due to start-up costs associated with the deployment of VLTs in Italy, including opening new sites and promotional activities.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses decreased by 5.7% from €49.1 million in the first nine months of 2011 to €46.3 million in the first nine months of 2012. The decrease was primarily attributable to a non recurring impairment test in 2011 that offsets the increase of the depreciation costs associated with our investment in AWP slot machines in Italy and Spain in 2011 and 2012.
EBIT. EBIT for our Slots Division increased from €19.1 million in the first nine months of 2011 to €20.1 million in the first nine months of 2012. EBIT margin (EBIT as a percentage of segment net operating revenues) decreased from 5.5% in the first nine months of 2011 to 5.4% in the first nine months of 2012.
EBITDA. EBITDA for our Slots Division decreased from €68.2 million in the first nine months of 2011 to €66.3 million in the first nine months of 2012. EBITDA margin (EBITDA as a percentage of segment net operating revenues) decreased from 19.6% in the first nine months of 2011 to 17.9% in the first nine months of 2012.
In Spain, EBITDA decreased by 1.3% to €39.1 million in the first nine months of 2012 from €39.6 million in the first nine months of 2011. EBITDA was impacted in the first nine months of 2012 by lower revenues due to the ongoing effects of the economic downturn in Spain and the smoking ban.
Our Italian business recorded EBITDA of €27.2 million in the first nine months of 2012 compared to €28.6 million in the first nine months of 2011. The EBITDA decrease in Italy is primarily due to the 2.0% increase in the gaming tax rate.
Revenues. Operating revenues from our casinos primarily comprise revenues from gaming tables and slot machines located at our casinos. We also generate revenues from restaurant services, admission ticket sales and tips and from bingo operations located at some of our electronic casinos in Latin America. Operating revenues from our casinos increased by 16.2% from € 362.0 million in the first nine months of 2011 to €420.8 million in the first nine months of 2012.
Net operating revenues from our Casinos Division represent operating revenues after payment of bingo prizes and variable rent payments. Net operating revenues increased by 16.1% from €358.2 million in the first nine months of 2011 to €415.9 million in the first nine months of 2012. The increase in revenues is primarily due to our Latin American casinos, and the positive effect of the appreciation of the U.S. dollar and the Colombian peso against the euro. Revenues benefited from the expansion of our existing casino halls in Panama and Colombia and the installation of additional machines in our better performing halls, including Casino de Rosario. Net operating revenues from our Spanish casinos decreased 18.4% in the first nine months of 2012 as compared to the first nine months of 2011, largely due to the impact of the economic downturn and the smoking ban.
Costs and Expenses. Costs and expenses from our casinos principally include personnel expenditures, depreciation, amortization and impairment expenses, taxes on gaming and other operating expenses.
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Costs and expenses from our casinos increased to €316.2 million in the first nine months of 2012 compared to €280.4 million in the first nine months of 2011. The key changes in the components of segment operating expenses are as follows:
• External Supplies and Services. External supplies and services expenses for our Casinos Division include costs such as security, travel, professional services, sales and marketing, and lease costs for our casinos. This expense category increased 7.7% to €90.5 million the first nine months of 2012 from €84.1 million in the first nine months of 2011. As a percentage of net operating revenues, this expense category decreased to 21.8% in the first nine months of 2012 compared to 23.5% in the first nine months of 2011.
• Gaming Taxes. Gaming taxes increased by 23.9% to €79.1 million in the first nine months of 2012 as compared to €63.8 million in the first nine months of 2011. The increase is primarily due to higher gaming tax rates in Panama and for Casino de Rosario.
• Personnel Expenses. Personnel expenses increased 14.3% to € 83.4 million in the first nine months of 2012 compared to €73.0 million in the first nine months of 2011. As a percentage of net operating revenues, this expense category decreased to 20.1% in the first nine months of 2012 from 20.4% in the first nine months of 2011.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses increased to €53.6 million in the first nine months of 2012 from €51.6 million in the first nine months of 2011. The increase is primarily attributable to the investments made in 2011 and 2012 in our casinos in Panama, Colombia and Argentina.
• Consumption. Consumption expenses increased to €9.6 million in the first nine months of 2012 from €8.0 million in the first nine months of 2011.
EBIT. EBIT from our Casinos Division increased to €99.7 million in the first nine months of 2012 from €77.8 million in the first nine months of 2011. EBIT margin (EBIT as a percentage of segment net operating revenues) for the Casinos Division decreased to 24.0% in the first nine months of 2012 from 21.7% in the first nine months of 2011.
EBITDA. EBITDA for our Casinos Division increased 18.6% to € 153.3 million in the first nine months of 2012 from €129.3 million in the first nine months of 2011. EBITDA margin (EBITDA as a percentage of segment net operating revenues) increased to 36.9% in the first nine months of 2012 as compared to 36.1% in the first nine months of 2011. The EBITDA growth in the first nine of months of 2012 was driven by our casinos in Latin America, particularly Panama and Colombia. The improvement in EBITDA margin is attributable to operating efficiencies, the expansion of our existing casino halls in Panama and Colombia and the installation of additional machines in our better performing halls. EBITDA for our Spanish casinos was flat.
Revenues. Operating revenues from our Bingo Division include revenues from sales of traditional bingo cards before prize payouts and revenues from electronic bingo and roulette games and slot machines located in our bingo halls. Operating revenues also include revenues from the Bingo Division’s 20 halls in Mexico, which have a broad entertainment offer, including casino-style slot machines.
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The following table set forth the number of bingo halls operated by our Bingo Division as of September 30, 2012:
Cirsa’s ownership Spain Italy Mexico Total halls
76%-100% ..................................................................................................................... 29 — 20 49 51%-75% ....................................................................................................................... 6 — — 6 50% or less .................................................................................................................... 14 10 — 24
Total bingo halls........................................................................................................... 49 10 20 79
Operating revenues from our Bingo Division decreased 5.8% from € 374.0 million in the first nine months of 2011 to €352.4 million in the first nine months of 2012. Net operating revenues from our Bingo Division represent operating revenues after prize payouts and variable rent. Net operating revenues decreased by 5.3% from €182.6 million in the first nine months of 2011 to €173.0 million in the first nine months of 2012. The decrease in revenues is primarily due to the ongoing effects of the economic downturn and smoking ban in Spain and the closure of underperforming halls in Spain in the third and fourth quarters of 2011.
Operating revenues from our bingo halls in Mexico increased by 1.8% to €55.1 million in the first nine months of 2012 compared to € 54.1 million in the first nine months of 2011. The decrease in revenues was primarily due to the temporary removal of certain types of slot machines from our bingo halls and the residual impact on attendance of the events associated with the criminal arson attack on a competitor’s hall in 2011.
Costs and Expenses. Costs and expenses from our bingo operations principally include personnel expenditures, depreciation, amortization and impairment expenses, taxes on gaming and other operating expenses.
Costs and expenses for the Bingo Division decreased by 4.6% from € 185.5 million in the first nine months of 2011 to €176.9 million in the first nine months of 2012, consistent with the decrease in net operating revenues. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes decreased by 11.8% to €59.9 million in the first nine months of 2012 from €67.9 million in the first nine months of 2011 primarily due to lower revenues in Spain.
• Personnel Expenses. Personnel expenses are primarily comprised of the wages and salaries and employee benefits of our bingo hall staffs. Personnel expenses decreased by 11.5% from €37.0 million in the first nine months of 2011 to €32.8 million in the first nine months of 2012. As a percentage of segment net operating revenues, personnel expenses decreased from 20.3% in the first nine months of 2011 to 19.0% in the first nine months of 2012, due mainly to the reduction of the number of halls in operation.
• Consumption. Consumption expense for our Bingo Division primarily relate to the ordinary course materials required to operate bingo halls, such as food and beverages and bingo supplies. Consumption expense decreased 23.8% from €9.6 million in the first nine months of 2011 to €7.3 million in the first nine months of 2012. The decrease was primarily attributable to the reduction in the number of halls in operation.
• Depreciation, Amortization and Impairment Expenses. Depreciation, amortization and impairment expenses increased from € 19.8 million in the first nine months of 2011 to €23.7 million in the first nine months of 2012. The increase was primarily attributable to the investments made in our Mexican business.
• External Supplies and Services. This expense category primarily relates to the costs of the expansion of, and installation of new gaming machines in our Mexican bingo halls. External expenses increased by 4.0% to €53.3 million in the first nine months of 2012 from €51.2 million in the first nine months of 2011.
EBIT. EBIT from our Bingo Division decreased from €(2.9) million in the first nine months of 2011 to €(4.0) million in the first nine months of 2012.
EBITDA. EBITDA for our Bingo Division improved to €19.7 million in the first nine months of 2012 from €16.9 million in the first nine months of 2011. EBITDA margin (EBITDA as a percentage of net operating revenues) increased to 11.4% in the first nine months of 2012 from 9.2% in the first nine months of 2011. The Mexican business contributed EBITDA of €12.6 million in the first nine months of 2012, as compared to €12.8 million in the first nine months of 2011.
The improvement in EBITDA and EBITDA margin is largely due to the closure of underperforming bingo halls in Spain during 2011 and the performance of our Mexican operations. In Mexico, despite a difficult operating
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environment, EBITDA remained stable due to operating efficiencies and the expansion of, and installation of additional slot machines in, our better performing bingo halls.
Revenues. The revenues of our B2B Division include revenues from sales of our slot machines and gaming kits and sales of slot machines produced by third parties by our distribution companies. Also included are revenues generated from supporting the Slots Division in Italy, lottery business in Argentina, and interlinked bingo games in Madrid, Andalusia and Catalonia. Net operating revenues from our B2B Division decreased by 8.1% to € 78.0 million in the first nine months of 2012 from €84.8 million in the first nine months of 2011. The decline in revenues is due to the negative impact of the economic downturn in Spain. A number of slot machine customers have elected to purchase lower-price slot machine kits to change games or upgrade existing slot machines rather than invest in new slot machines.
Costs and Expenses. Costs and expenses from our B2B Division are comprised principally of cost of components, direct labor costs, sub-contracting costs, personnel expenditures, depreciation, amortization and impairment expenses and other expenditures such as research and development costs (to the extent not capitalized) and marketing costs.
Costs and expenses for our B2B Division decreased by 12.3%, from € 71.5 million in the first nine months of 2011 to €62.7 million in the first nine months of 2012, which cost decrease represents a higher decrease than our 8.1% decrease in revenues.
The key changes in the components of segment operating expenses are as follows:
• Consumption. Consumption expenses primarily are comprised of purchases of semi-finished and finished components. Consumption expenses decreased 22.1% from €37.5 million in the first nine months of 2011 to €29.2 million in the first nine months of 2012 primarily as a result of lower sales.
• External Supplies and Services. External supplies and services expenses increased 5.6% from €14.4 million in the first nine months of 2011 to €15.3 million in the first nine months of 2012.
• Personnel Expenses. Personnel expenses decreased by 3.5% from €14.3 million in the first nine months of 2011 to €13.8 million in the first nine months of 2012.
• Depreciation, Amortization and Impairment Expenses. For our B2B Division, this expense category includes depreciation, amortization and impairment expenses and variation in operating provisions. Depreciation, amortization and impairment expenses decreased from €4.4 million in the first nine months of 2011 to €3.5 million in the first nine months of 2012.
EBIT. EBIT from our B2B Division increased from €13.3 million in the first nine months of 2011 to €15.3 million in the first nine months of 2012.
EBITDA. EBITDA for our B2B Division increased by 5.7% from € 17.8 million in the first nine months of 2011 to €18.8 million in the first nine months of 2012. EBITDA margin (EBITDA as a percentage of segment net operating revenues) improved to 24.1% in the first nine months of 2012 from 21.0% in the first nine months of 2011. The increase in EBITDA and EBITDA margin are primarily due to the impact of cost and productivity improvement initiatives in relation to our manufacturing activities.
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On-line Gaming
Our On-line Gaming Division commenced operations in Spain and Italy during the third quarter of 2012 after obtaining the necessary permissions and licenses. We expect that the Division will require approximately three years to reach EBITDA break even. Our on-line gaming plans do not contemplate any material investments since our operating platform is based on technology partnerships with global suppliers.
During the first nine months of 2012, EBITDA for the On-line Gaming Division was negative €2.9 million.
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Years ended December 31, 2011 and 2010
Group Results of Operations
The following table sets forth, by business division, operating revenues, net operating revenues, EBIT and EBITDA for the years ended December 31, 2010 and 2011:
Total ......................................................................................................................................... 1,774.2 1,746.8 (27.4)
Total ......................................................................................................................................... 1,244.5 1,257.2 12.7
Total .................................................................................................................................................. 115.0 134.9 19.9
Total .................................................................................................................................................. 260.0 290.0 30.0
(1) Other includes central corporate services and certain inter-segment consolidation adjustments.
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Year ended December 31, 2011 compared to year ended December 31, 2010
Group Results of Operations
Net Operating Revenues
Net operating revenues increased slightly by €12.7 million, or 1.0%, to €1,257.2 million in 2011 from €1,244.5 million in 2010. The increase in net operating revenues was primarily due to the growth in revenues from the Latin American casinos and the Italian slots businesses, which offset the decline in revenues from the Bingo Division and slots and casinos businesses in Spain. The revenues from the B2B Division also improved in 2011 due to the success of the Division’s games as more operators updated or replaced their existing slot machine offering.
EBIT
EBIT increased from €115.0 million in 2010 to €134.9 million in 2011. EBIT margin (EBIT as a percentage of net operating revenues) was 10.7% in 2011 as compared to 9.2% in 2010.
EBITDA
EBITDA increased 11.5% from €260 million in 2010 to €290 million in 2011. EBITDA margin (EBITDA as a percentage of net operating revenues) was 23.1% in 2011 as compared to 20.9% in 2010. EBITDA growth was primarily attributable to the performance of our Latin American casinos in Argentina, Colombia and Panama, which offset the decreased EBITDA from our Bingo Division. The Italian slot operations (VLTs) and the B2B Division also contributed to the growth in EBITDA.
Financial Results
Financial result was negative €96.8 million in 2011 as compared to negative €82.7 million in 2010. The increase is primarily due to higher levels of indebtedness and higher interest rates during 2011, and €23.2 million of non-recurring interest, fees and expenses associated with the issuance of €280 million of the 2018 Notes and the redemption of €200 million of the 2012 Notes.
Foreign Exchange Results
Foreign exchange results increased to negative €6.2 million in 2011 as compared to negative €0.5 million in 2010. This increase was primarily attributable to the depreciation of the U.S. dollar against the euro during 2011.
Income Tax Expense
Income tax expense increased to €43.7 million in 2011 from €33.0 million in 2010, reflecting a negative impact in changes in our revenue mix due to the inability to utilize Spanish tax credits on international taxable earnings.
Net Profit
As a result of the foregoing, net profit, after minority interests, was negative €25.4 million in 2011 as compared to negative €19.0 million in 2010.
Revenues. Operating revenues from our Slots Division principally represent revenues collected from our slot machines after prize payouts. Operating revenues also include the revenues from the Sportium sports betting joint venture. Operating revenues increased 10.1% from €642.1 million in 2010 to €706.7 million in 2011. Net operating revenues from our Slots Division represent operating revenues after variable rent payments made to site owners. Net operating revenues increased 9.6% from €434.5 million in the year ended December 31, 2010 to €476.2 million in the year ended December 31, 2011.
In Spain, net operating revenues decreased by 11.2% in 2011 as compared to 2010, principally due to the negative effects of the smoking ban in Spain and of the economic downturn. The number of slot machines decreased marginally as a result of our strategy to increase the quality of our slots portfolio through the disposal of underperforming slot machines and sites and the pursuit of highly-selective acquisitions. Average revenues per unit decreased in 2011 as compared to 2010. We had 22,310 slot machines in operation in Spain as of December 31, 2011 compared to 22,388 units as of December 31, 2010.
In Italy, net operating revenues increased 37.0% in 2011 as compared to the prior period, primarily due to the steady growth and diversification of our operations in Italy through the addition of 1,027 VLTs in 2011. As of December 31, 2011, in Italy we operated 9,994 slot machines and provided third-party interconnection services for an additional 4,666 slot machines, as compared to the operation of 9,937 slot machines and provision of interconnection services for 4,222 slot machines as of December 31, 2010. We had installed 1,686 VLTs in Italy as of December 31, 2011.
Costs and Expenses. Costs and expenses for our Slots Division principally include taxes on gaming activities, payments to sub-operators under participation agreements, personnel expenditures, depreciation, amortization and impairment expenses and external supplies and services expenses.
Overall costs and expenses for our Slots Division increased by 11.6% to €441.7 million in 2011 as compared to €395.8 million in 2010. As a percentage of segment net operating revenues, costs and expenses were 92.8% in 2011 and 91.1% in 2010. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes, which in Spain are incurred annually based on a fixed amount for each machine but in Italy are incurred at a variable rate based on machine revenues, increased by 5.1% from €211.5 million in 2010 to €222.3 million in 2011. This increase is largely attributable to the increase in revenues in Italy and the operation of additional VLTs in Italy, which are subject to a higher tax rate than slot machines. As a percentage of segment net operating revenues, gaming taxes decreased to 46.7% in 2011 from 48.7% in 2010.
• Personnel Expenses. Personnel expenses include wages and salaries for commercial, collection and technical support employees. This expense category remained largely unchanged, increasing slightly to €46.2 million in 2011 from 45.6 million in 2010.
• Consumption. Consumption expense is primarily comprised of payments to sub-operators. This expense increased by 28.4% from €32.6 million in 2010 to €41.9 million in 2011. This increase was primarily attributable to the operation of additional VLTs in Italy and the corresponding payments under profit-sharing arrangements for certain of our VLTs in Italy.
• External Supplies and Services. This expense category increased by 17.9% from €56.4 million in 2010 to €66.5 million in 2011 due to start-up costs associated with the deployment on VLTs in Italy, including opening new sites and promotional activities.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses increased by 30.6% from €49.7 million in 2010 to €64.8 million in 2011. The increase was primarily attributable to impairment loss of €12.0 million related to our gaming arcades in Spain recorded in 2011.
EBIT. EBIT for our Slots Division decreased from €38.7 million in 2010 to €34.5 million in 2011 . EBIT margin (EBIT as a percentage of segment net operating revenues) decreased from 8.9% in 2010 to 7.2% in 2011.
EBITDA. EBITDA for our Slots Division increased from €88.4 million in 2010 to €99.3 million in 2011. EBITDA margin (EBITDA as a percentage of segment net operating revenues) increased from 20.3% in 2010 to 20.9% in 2011. The increase in EBITDA margin is primarily attributable to the higher margins of our expanded and more diversified Italian operations, which growth more than offset the decreased EBITDA from our Spanish operations.
In Spain, EBITDA decreased to €54.2 million in 2011 compared to €69.3 million in 2010. EBITDA was impacted in 2011 by lower revenues due to the negative effects of the smoking ban and the economic downturn.
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Our Italian business recorded EBITDA of €45.2 million in 2011 compared to €19.1 million in 2010. The EBITDA improvement in Italy is primarily due to the deployment of an additional 1,027 VLTs in Italy. We believe that our Italian VLT business in 2011 benefited from our rapid deployment of VLTs in attractive locations in the Italian market, and expect that this deployment may slow down during 2012 and that revenues per machine may decrease due to the expected increase in total installed VLTs. The EBITDA of our Italian AWP slots business also improved due to a focus on optimizing profitability.
Revenues. Operating revenues from our casinos primarily comprise revenues from gaming tables and slot machines located at our casinos. We also generate revenues from restaurant services, admission ticket sales and tips and from bingo operations located at some of our electronic casinos in Latin America. Operating revenues from our casinos increased by 6.1% from €466.9 million in 2010 to €495.5 million in 2011.
Net operating revenues from our Casinos Division represent operating revenues after payment of bingo prizes and variable rent payments. Net operating revenues increased by 6.2% from €461.3 million in 2010 to €490.1 million in 2011. The increase in revenue is primarily due to the growth in revenues from our casinos in Argentina, Colombia and Panama, partially offset by a decline in revenues from our Spanish casinos, the impact of the suspension of operations of our two casinos in Venezuela, the closure of our casino in Ecuador and the depreciation of the U.S. dollar and Latin American currencies against the euro. In Argentina, the revenue growth was primarily attributable to the Rosario casino. In Colombia, the increase in revenues is partly due to the impact of the acquisition of the Unidelca casinos in May 2010. Net operating revenues from our Spanish casinos decreased 1.3% in 2011 as compared to 2010, largely due to the impact of the economic downturn in Spain and partially offset by the full-year effect of our Casino de Valencia, which opened in August 2010.
Costs and Expenses. Costs and expenses from our casinos principally include personnel expenditures, depreciation, amortization and impairment expenses, taxes on gaming and other operating expenses.
Costs and expenses from our casinos increased to €384.6 million in 2011 compared to €380.2 million in 2010. The key changes in the components of segment operating expenses are as follows:
• External Supplies and Services. External supplies and services expenses for our Casinos Division include costs such as security, travel, professional services, sales and marketing, and lease costs for our casinos. This expense category decreased 11.0% to €113.3 million from €127.3 million in 2010. As a percentage of net operating revenues, this expense category decreased to 23.1% in 2011 compared to 27.6% in 2010.
• Gaming Taxes. Gaming taxes increased by 14.0% to €94.0 million in 2011 as compared to €82.5 million in 2010. The increase is primarily due to the growth in revenues generally and increased revenues from Panama and our Rosario casino in Argentina, both of which are subject to a relatively higher gaming tax rate.
• Personnel Expenses. Personnel expenses remained largely unchanged at €98.3 million in 2011 compared to €98.5 million in 2010. As a percentage of net operating revenues, this expense category decreased to 20.0% in 2011 from 21.4% in the 2010.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses increased to €67.0 million in 2011 from €61.1 million in 2010. The increase is primarily attributable to a €6.7 million provision that we recorded in connection with the temporary suspension by the Venezuelan gaming authorities of all casino operations in the country, including our two casino businesses.
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• Consumption. Consumption expenses increased to €12.0 million in 2011 from €10.8 million in 2010. The increase was primarily attributable to growth in revenues from Panama and our Rosario casino in Argentina.
EBIT. EBIT from our Casinos Division increased to €105.5 million in 2011 from €81.1 million in 2010. EBIT margin (EBIT as a percentage of segment net operating revenues) for the Casinos Division increased to 21.5% in 2011 from 17.6% in 2010.
EBITDA. EBITDA for our Casinos Division increased 21.3% to €172.5 million in 2011 from €142.2 million in 2010. EBITDA margin (EBITDA as a percentage of segment net operating revenues) increased to 35.2% in 2011 as compared to 30.8% in 2010. The EBITDA growth in 2011 was driven by our casinos in Colombia, Argentina and Panama. The improvement is primarily due to the selective expansion of existing gaming areas to accommodate additional slot machines, the achievement of synergies in connection with the integration of Unidelca in Colombia, the improvement of our table games mix and the growth in our customer base and operational improvements at the Rosario casino, Albrook Panamá and Casino de Valencia. The increase in EBITDA was partly offset by the decline in EBITDA for our Spanish casinos and the temporary suspension of casino operations in Venezuela.
Revenues. Operating revenues from our Bingo Division include revenues from sales of traditional bingo cards before prize payouts and revenues from electronic bingo and roulette games and slot machines located in our bingo halls. Operating revenues also include revenues from the Bingo Division’s 20 halls in Mexico, which have a broad entertainment offer, including casino-style slot machines.
The following table set forth the number of bingo halls operated by our Bingo Division as of December 31, 2011:
Cirsa’s ownership Spain Italy Mexico Total halls
76%-100% ..................................................................................................................... 32 — 20 52 51%-75% ....................................................................................................................... 5 — — 5 50% or less .................................................................................................................... 14 10 — 24
Total bingo halls........................................................................................................... 51 10 20 81
Operating revenues from our Bingo Division decreased 18.4% from €606.1 million in 2010 to €494.9 million in 2011. Net operating revenues from our Bingo Division represent operating revenues after prize payouts and variable rent. Net operating revenues decreased by 16.7% from €289.6 million in 2010 to €241.2 million in 2011. The decrease in revenues is primarily due to the closure of five bingo halls in Spain and the ongoing effects of the smoking ban and of the economic downturn. The five underperforming bingo halls were permanently closed during the third and fourth quarters of 2011. Overall, net operating revenues in Spain decreased by 26.2% in 2011 as compared to 2010.
Operating revenues from our bingo halls in Mexico increased by 4.2% to €70.3 million in 2011 compared to €67.4 million in 2010. Revenues were adversely impacted by the temporary closure of two of our bingo halls following a nationwide closure of bingo halls ordered to conduct government inspections following arson at a competitor’s hall in August 2011. The effect of the closures, however, were more than offset by the increase in revenues, including from the implementation of the “Casino Life” concept and the installation of casino-style slot machines.
Costs and Expenses. Costs and expenses from our bingo operations principally include personnel expenditures, depreciation, amortization and impairment expenses, taxes on gaming and other operating expenses.
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Costs and expenses for the Bingo Division decreased by 16.2% from €295.5 million in 2010 to €247.6 million in 2011, consistent with the decrease in net operating revenues. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes decreased by 22.7% to €92.8 million in 2011 from €120.1 million in 2010 primarily due to lower revenues in Spain.
• Personnel Expenses. Personnel expenses are primarily comprised of the wages and salaries and employee benefits of our bingo hall staffs. Personnel expenses decreased by 2.0% from €49.9 million in 2010 to €48.9 million in 2011. The slight decrease was primarily attributable to the reduction in the number of halls in operation. As a percentage of segment net operating revenues, personnel expenses increased from 17.2% in 2010 to 20.3% in 2011, due mainly to the cost of severance.
• Consumption. Consumption expense for our Bingo Division primarily relate to the ordinary course materials required to operate bingo halls, such as food and beverages and bingo supplies. Consumption expense decreased 32.7% from €18.7 million in 2010 to €12.6 million in 2011. The decrease was primarily attributable to the reduction in the number of halls in operation.
• Depreciation, Amortization and Impairment Expenses. Depreciation, amortization and impairment expenses decreased from €36.8 million in 2010 to €24.5 million in 2011. We recorded a €3.3 million impairment loss in 2011 with respect to Spanish bingo halls that we acquired during the period from 2000 to 2004. In 2010, we recorded an impairment loss of €20.0 million with respect to our Spanish bingo halls.
• External Supplies and Services. This expense category primarily relates to the costs of the expansion of, and installation of new gaming machines in our Mexican bingo halls. External expenses decreased by 1.7% to €68.9 million in 2011 from €70.1 million in 2010.
EBIT. EBIT from our Bingo Division declined from negative €5.9 million in 2010 to negative €6.4 million in 2011.
EBITDA. EBITDA for our Bingo Division declined to €18.0 million in 2011 from €30.9 million in 2010. EBITDA margin (EBITDA as a percentage of net operating revenues) decreased to 7.5% in 2011 from 10.7% in 2010. The Mexican business contributed EBITDA of €12.4 million in 2011, as compared to €12.7 million in 2010.
The decline in EBITDA and EBITDA margin is largely due to expenses relating to the closure of five underperforming halls and the negative effects of the smoking ban in Spain, which reduced the overall number of visits to our bingo halls . The EBITDA of our Mexican business remained largely unchanged in spite of the temporary closure of two of our bingo halls by the Mexican authorities. In Spain, we will continue to review the performance of our bingo hall portfolio.
Revenues. The revenues of our B2B Division include revenues from sales of our slot machines and gaming kits and sales of slot machines produced by third parties by our distribution companies. Also included are revenues generated from supporting the Slots Division in Italy, lottery businesses in Argentina and Venezuela, and interlinked bingo games in Madrid, Andalusia and Catalonia. Net operating revenues from our B2B Division increased by 16.0% to €106.2 million in 2011 from €91.6 million in 2010. The growth in revenues is due to increased sales of slot machines in Spain, where we benefited from the popularity of our games offer.
Costs and Expenses. Costs and expenses from our B2B Division are comprised principally of cost of components, direct labor costs, sub-contracting costs, personnel expenditures, depreciation, amortization and impairment
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expenses and other expenditures such as research and development costs (to the extent not capitalized) and marketing costs.
Costs and expenses for our B2B Division increased by 14.5%, from €78.5 million in 2010 to €89.9 million in 2011, which represents a slightly smaller increase than our increase in revenues.
The key changes in the components of segment operating expenses are as follows:
• Consumption. Consumption expenses primarily are comprised of purchases of semi-finished and finished components. Consumption expenses increased 17.8% from €38.2 million in 2010 to €45.0 million in 2011.
• External Supplies and Services. External supplies and services expenses increased 17.0% from €17.2 million in 2010 to €20.1 million in 2011 primarily as a result of decreased volumes.
• Personnel Expenses. Personnel expenses increased by 2.5% from €19.0 million in 2010 to €19.4 million in 2011.
• Depreciation, Amortization and Impairment Expenses. For our B2B Division, this expense category includes depreciation, amortization and impairment expenses and variation in operating provisions. Depreciation, amortization and impairment expenses increased from €3.4 million in 2010 to €4.3 million in 2011.
EBIT. EBIT from our B2B Division increased by 24.6% from €13.0 million in 2010 to €16.2 million in 2011.
EBITDA. EBITDA for our B2B Division increased by 25.4% from €16.4 million in 2010 to €20.6 million in 2011. EBITDA margin (EBITDA as a percentage of segment net operating revenues) improved to 19.4% in 2011 from 17.9% in 2010. The increase in EBITDA and EBITDA margin are primarily due to the impact of cost and productivity improvement initiatives in relation to our manufacturing activities and steady sales growth.
Years ended December 31, 2010 and 2009
Group Results of Operations
The following table sets forth, by business division, operating revenues, net operating revenues, EBIT and EBITDA for the years ended December 31, 2009 and 2010:
Total ............................................................................................................................................ 1,648.3 1,774.2 125.8
Total ......................................................................................................................................... 1,099.8 1,244.5 144.7
Total ..................................................................................................................................................... 107.1 115.0 7.9
Total .................................................................................................................................................. 208.6 260.0 51.4
(1) Other includes central corporate services and certain inter-segment consolidation adjustments.
Year ended December 31, 2010 compared to year ended December 31, 2009
Group Results of Operations
Net Operating Revenues
Net operating revenues increased by €144.7 million, or 13.2%, to €1,244.5 million in 2010 from €1,099.8 million in 2009. The increase in net operating revenues was driven by the €111.0 million increase in net operating revenues from our Casinos Division, where the strong performance of the Latin American casinos and the contributions from the Rosario casino (opened in October 2009) and Unidelca (acquired in May 2010) overcame the weaker performance of the Spanish casinos. Together, the net operating revenues of Unidelca and the Rosario casino accounted for € 76.2 million of the €111.0 million growth in net operating revenues of the Casinos Division. The Slots and Bingo Divisions also contributed to the increase, despite the effects of the continuing economic downturn in Spain. The growth from these Divisions was partly offset by the €18.4 million decrease in net operating revenues from the B2B Division.
EBIT
EBIT increased from €107.1 million in 2009 to €115.0 million in 2010. EBIT margin (EBIT as a percentage of net operating revenues) was 9.2% in 2010 as compared to 9.7% in 2009.
EBITDA
EBITDA increased 24.7% from €208.6 million in 2009 to €260.0 million in 2010. EBITDA margin (EBITDA as a percentage of net operating revenues) was 20.9% in 2010 as compared to 19.0% in 2009. EBITDA growth was attributable to the improvement of EBITDA in our Casino and Bingo Divisions, which benefited from the strong results in Argentina, Colombia, Panama and Mexico. Together, Unidelca and the Rosario casino contributed €29.3 million of the €51.4 million overall growth in EBITDA of the Group. The EBITDA of the Slots and B2B Divisions were flat in 2010 as compared to the prior period.
Financial Results
Financial result was negative €82.7 million in 2010 as compared to negative €62.5 million in 2009. The increase is primarily due to higher levels of indebtedness and higher interest rates during 2010, and the €14.5 million of non-recurring interest, fees and expenses associated with the issuance of the 2018 Notes and the redemption of the 2012 Notes and 2014 Notes.
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Foreign Exchange Results
Foreign exchange results were negative €0.5 million in 2010 as compared to negative €0.1 million in 2009.
Income Tax Expense
Income tax expense increased to €33.0 million in 2010 from € 31.3 million in 2009.
Net Profit
As a result of the foregoing, net profit, after minority interests, was negative €19.0 million in 2010 as compared to negative €5.0 million in 2009.
Revenues. Operating revenues increased 3.4% from €621.1 million in 2009 to €642.1 million in 2010. Net operating revenues from our Slots Division represent operating revenues after variable rent payments made to site owners. Net operating revenues increased 4.4% from €416.1 million in the year ended December 31, 2009 to € 434.5 million in the year ended December 31, 2010.
In Spain, net operating revenues decreased 5.6% in 2010 as compared to the prior period, principally due the economic downturn in Spain. The number of slot machines decreased as a result of our strategy to discontinue underperforming slot machines and sites, while the average revenues per unit increased. We had 22,388 slot machines in operation in Spain as of December 31, 2010 compared to 23,276 units as of December 31, 2009.
In Italy, net operating revenues increased 21.4% in 2010 as compared to the prior period, primarily due to higher average revenues per unit. As of December 31, 2010, in Italy we operated 9,937 slot machines and provided third-party interconnection services for an additional 4,222 slot machines, as compared to operating 6,904 slot machines and providing interconnection services for 6,908 slot machines as of December 31, 2009. We had installed 659 VLTs in Italy as of December 31, 2010.
Costs and Expenses.
Overall costs and expenses for our Slots Division increased 4.2% from € 379.7 million in 2009 to €395.8 million in 2010. As a percentage of segment net operating revenues, costs and expenses were 91.1% in 2010 and 91.3% in 2009. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes increased by 8.4% from €195.1 million in 2009 to €211.5 million in 2010. As a percentage of segment net operating revenues, gaming taxes increased to 48.7% in 2010 from 46.9% in 2009. The growth is largely attributable to the increase in machine revenues from Italy.
• Personnel Expenses. Personnel expenses were flat, increasing slightly to €45.6 million in 2010 from €44.7 million in 2009. In Spain, we had reduced headcount at our slot arcades during 2009 in response to the lower volume of visits.
• Consumption. Consumption expense was flat, decreasing slightly to €32.6 million in 2010 from €32.7 million in 2009.
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• External Supplies and Services. This expense category increased 4.2% from €54.1 million in 2009 to €56.4 million in 2010.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses decreased from €53.1 million in 2009 to €49.7 million in 2010. The decline is primarily due to the decrease in the number of slot machines installed in our business.
EBIT. EBIT for our Slots Division improved to €38.7 million in 2010 from €36.4 million in 2009. EBIT margin (EBIT as a percentage of segment net operating revenues) increased to 8.9% in 2010 from 8.7% in 2009.
EBITDA. EBITDA for our Slots Division decreased from €89.4 million in 2009 to €88.4 million in 2010. EBITDA margin (EBITDA as a percentage of segment net operating revenues) decreased from 21.5% in 2009 to 20.3% in 2010. The decrease in EBITDA margin is attributable to the higher contribution of operating revenues from Italy, where gaming taxes are incurred at a variable rate based on revenues.
In Spain, EBITDA decreased to €69.3 million in 2010 from € 71.4 million in 2009. EBITDA was impacted in 2010 by lower revenues due to a decrease in the number of slot machines in operation. In Spain, we have continued our strategy to discontinue underperforming slot machine sites and machines.
Our Italian slots business recorded EBITDA of €19.1 million in 2010 as compared to €18.1 million in 2009. The EBITDA improvement in Italy is primarily due to the higher average revenues per unit. We are focused on increasing the mix of our Italian slot machine business towards slot machines owned by us, which are more profitable than providing interconnection services to third parties.
Revenues. Operating revenues from our casinos increased by 31.7% from €354.5 million in 2009 to €466.9 million in 2010.
Net operating revenues increased 31.7% from €350.3 million in 2009 to €461.3 million in 2010. The increase in revenues is primarily due to the contribution of revenues from the Rosario casino (our 50% joint venture which opened in October 2009) and the Unidelca casinos in Colombia (which were acquired in May 2010) and the strong performance of most of our other Latin American casinos, particularly in Panama and Argentina, which overcame the weaker performance of our Spanish casinos. Net operating revenues from our Spanish casinos decreased 0.8% in 2010 as compared to the prior period, largely due to the impact of the economic downturn in Spain, which has resulted in lower visits to our casinos. Together, the net operating revenues of Unidelca and the Rosario casino accounted for €76.2 million of the €111.0 million growth in net operating revenues. During August 2010, our new Spanish casino, Casino de Valencia, commenced operations.
Revenues were also affected by the appreciation of the U.S. dollar against the euro, which impacted the results of our casino businesses in Panama, and the appreciation of the Colombian peso. Net operating revenues of our Venezuelan business increased in local currency terms, but decreased in euro terms due to the devaluation of the Venezuelan currency.
Costs and Expenses.
Costs and expenses from our casinos increased by €107.5 million, or 39.4%, to €380.2 million in 2010 from €272.7 million in 2009, which outpaced the 31.7% increase in net operating revenues. The increase in costs in 2010 is
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primarily due to the incorporation of the costs from the Rosario casino and the newly-acquired Unidelca business. The key changes in the components of segment operating expenses are as follows:
• External Supplies and Services. External supplies and services expenses for our Casinos Division increased 38.8% from €91.8 million in 2009 to €127.3 million in 2010. As a percentage of net operating revenues, this expense category increased to 27.6% in 2010 from 26.2% in 2009. The growth is primarily attributable to the costs associated with opening the Valencia casino and the costs of the Rosario casino and the Unidelca business.
• Gaming Taxes. Gaming taxes increased 55.5% to €82.5 million in 2010 as compared to €53.1 million in 2009. The increase in the gaming tax rate in Panama (from 10% to 16%) accounted for a portion of the increase.
• Personnel Expenses. Personnel expenses increased 24.2% to €98.5 million in 2010 from €79.3 million in 2009. As a percentage of net operating revenues, this expense category decreased to 21.4% in 2010 from 22.6% in 2009.
• Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expenses increased to €61.1 million in 2010 from €37.6 million in 2009. The increase is primarily attributable to the Rosario casino and the Unidelca business.
• Consumption. Consumption expenses decreased slightly from €11.0 million in 2009 to €10.8 million in 2010.
EBIT. EBIT from our Casinos Division increased to €81.1 million in 2010 from €77.6 million in 2009. EBIT margin (EBIT as a percentage of segment net operating revenues) for the Casinos Division decreased from 22.2% in 2009 to 17.6% in 2010.
EBITDA. EBITDA for our Casinos Division increased 23.4% from €115.2 million in 2009 to €142.2 million in 2010. EBITDA margin (EBITDA as a percentage of segment net operating revenues) decreased to 30.8% in 2010 as compared to 32.9% in 2009. The improvement is primarily due to the EBITDA growth in Argentina, Colombia and Panama, which was partly offset by decreased EBITDA from Venezuela, Spain, the Dominican Republic, Peru and Ecuador. Excluding the €29.3 million EBITDA contribution from Unidelca and the Rosario casino, the EBITDA of our Casinos Division during 2010 would have been €2.3 million lower than the EBITDA of our Casinos Division for the prior period. The decrease in EBITDA margin is due to the start-up costs associated with the opening of the Valencia casino and the lower EBITDA margins from the Rosario casino.
Operating revenues from our Bingo Division decreased 0.7% from €610.5 million in 2009 to €606.1 million in 2010. Net operating revenues from our Bingo Division represent operating revenues after prize payouts and variable rent. Net operating revenues increased 6.8% from €271.2 million in 2009 to €289.6 million in 2010, due to the performance of the Mexican business, which were partly offset by a 3.3% decline in net operating revenues in Spain. As of December 31, 2010, our Bingo Division operated a total of 86 bingo halls, including 37 wholly owned halls, 4 majority owned halls, and 15 less than majority owned halls in Spain, 10 less than majority owned halls in Italy and 20 wholly-owned halls in Mexico.
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Revenues from our bingo halls in Mexico and Italy increased in 2010 as compared to 2009. In Mexico, the revenue growth was driven by the success of the “Casino Life” concept and the installation of casino-style slot machines. Revenues from the Mexican business were adversely impacted in the second quarter of 2009 due to the suspension of operations during the swine flu crisis.
Costs and Expenses.
Costs and expenses for the Bingo Division increased 8.1% to €295.5 million in 2010 from €273.3 million in 2009, as compared to the 6.8% increase in net operating revenues. The key changes in the components of segment operating expenses are as follows:
• Gaming Taxes. Gaming taxes decreased 10.7% to €120.1 million in 2010 from €134.4 million in 2009.
• Personnel Expenses. Personnel expenses increased from €47.3 million in 2009 to €49.9 million in 2010. As a percentage of segment net operating revenues, personnel expenses were 17.2% in 2010 and 17.4% in 2009.
• Consumption. Consumption expense increased 30.4% from €14.3 million in 2009 to €18.7 million in 2010. The increase is primarily attributable to the Bingo Division’s decision to have our own personnel provide food and beverage services in our bingo halls, which services had been previously outsourced to third party vendors.
• Depreciation, Amortization and Impairment Expenses. Depreciation, amortization and impairment expenses increased to €36.8 million in 2010 from €11.6 million in 2009. The increase is primarily due to our operations in Mexico and an impairment loss of €20.0 million related to our bingo halls located in Spain.
• External Supplies and Services. External expenses increased 6.8% to €70.1 million in 2010 from €65.6 million in 2009.
EBIT. EBIT from our Bingo Division declined from negative €2.1 million in 2009 to negative €5.9 million in 2010.
EBITDA. EBITDA for our Bingo Division improved to €30.9 million in 2010 from €9.5 million in 2009. EBITDA margin (EBITDA as a percentage of net operating revenues) increased from 3.5% in 2009 to 10.7% in 2010. The Mexican business contributed EBITDA of €12.7 million in 2010, as compared to negative €3.0 million in 2009.
The improvement in EBITDA and EBITDA margin is largely due to the improved results from the Mexican business and a €3.5 million improvement in the results of the Spanish business. The improvement in the Mexican business is due to the success of the “Casino Life” concept and the accelerated deployment of casino-style slot machines, which were recently authorized in Mexico. The results of the Spanish business were positively impacted by the introduction of electronic bingo, slot machines and electronic roulette games to counteract the decline in revenues from traditional bingo games.
Revenues. Net operating revenues from our B2B Division decreased by €18.4 million, or 16.7%, to €91.6 million in 2010 from €109.9 million in 2009. The decrease in revenues is attributable to the impact of the economic downturn in Spain and the effect of our more stringent credit-scoring standards for customers.
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Costs and Expenses.
Costs and expenses for our B2B Division decreased by €19.4 million, or 19.9%, from €98.0 million in 2009 to €78.5 million in 2010.
The key changes in the components of segment operating expenses are as follows:
• Consumption. Consumption expenses decreased 29.6% from €54.3 million in 2009 to €38.2 million in 2010.
• External Supplies and Services. External supplies and services expenses decreased 10.9% to €17.2 million in 2010 from €19.3 million in 2009.
• Personnel Expenses. Personnel expenses increased to €19.0 million in 2010 as compared to €18.8 million in 2009.
• Depreciation, Amortization and Impairment Expenses. Depreciation, amortization and impairment expenses decreased from €4.8 million in 2009 to €3.4 million in 2010.
EBIT. EBIT from our B2B Division increased from €12.0 million in 2009 to €13.0 million in 2010.
EBITDA. EBITDA for our B2B Division decreased to €16.4 million in 2010 from €16.7 million in 2009. EBITDA margin (EBITDA as a percentage of segment net operating revenues) improved to 17.9% in 2010 from 15.2% in 2009. The decrease in EBITDA is due to a soft demand environment and the improvement in EBITDA margin is primarily due to the impact of productivity initiatives on manufacturing costs.
Liquidity and Capital Resources
Historical Cash Flows
The following is a brief description of certain of the line items that are included in our consolidated cash flow statement:
Current account with Nortia Corporation. We have engaged in a variety of transactions with our principal shareholder, Nortia Corporation, that affect our cash flows. During the period under review, the principal transactions have been purchases of companies from Nortia, transactions pursuant to a cash management agreement and payments of interest on outstanding balances. See “Certain Relationships and Related Party Transactions—Transactions with Nortia.” The cash flows related to these transactions are recorded in our cash flow statement as “Current account with Nortia—Outflows” and “Current account with Nortia—Inflows.”
Purchase and development of intangibles. We capitalize those development costs which qualify for recognition as an asset pursuant to IAS 38 which, in any case, represent a minority portion of the total expenditures in research and development linked to our B2B Division. The total cash outflows associated with these expenditures are included in our cash flow statement as “Purchase and development of intangibles.” Under IFRS, this line item also includes the amounts we pay to owners of the premises where we have our slot machines for exclusivity rights.
Loans granted. We have granted loans to the owners of hotels in the Dominican Republic and Venezuela where we have casinos. Payments with respect to these loans are recorded in “Loans granted” in our consolidated cash flow statement.
Purchase of other financial assets. Variations in the amount of securities we own and variations in deposits and warranties primarily relating to deposits with casino site owners are recorded as “Purchase of other financial assets.” This line item also includes deposits with the Italian slots regulator, the AAMS. See “Regulation—Italy”.
Capital lease payments. Our B2B Division sells slot machines to our Slots Division from time to time pursuant to capital leasing financing provided by financial institutions. Payments of attributable principal under such capital leases by our Slots Division are recorded in “Capital lease payments” in our consolidated cash flow statement, and payments of attributable interest are recorded in “Interest paid on financial debt.” Sales of slot machines by our B2B Division to our Slots Division are treated as intra group sales which are eliminated upon consolidation and are not recorded as net operating revenues in our profit and loss accounts. The net cash effect of the transfer of slot machines from the B2B Division to the Slots Division is, therefore, (i) the receipt of cash by the B2B Division from a finance leasing company and (ii) the payment of cash from the Slots Division to the leasing company over time in an aggregate amount which
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approximates the initial amount received by the B2B Division upon transfer of the assets to the finance leasing company, plus an additional amount attributable to interest.
Net foreign exchange differences. This line item shows the effects of differences between initial and period-end exchange rates on balances of cash and cash equivalents in currencies other than the euro.
Consolidated Cash Flow Statement
Nine months ended September 30,
2011 2012
(€ in millions)
Cash flows from operating activities Profit before tax, as per the consolidated profit and loss accounts ................................................. 12.2 52.4 Adjustments for non-cash revenues and expenses:
Depreciation, amortization and impairment .............................................................................. 118.6 119.3 Allowances for doubtful accounts and inventories .................................................................... 2.1 4.1 Other ......................................................................................................................................... 1.5 1.5
Financial items included in profit before tax: Financial results ........................................................................................................................ 74.9 58.1 Foreign exchange results ........................................................................................................... 4.8 4.8
Results on sale of non-current assets ............................................................................................. 2.4 1.1
Adjusted profit before tax from operations before changes in net operating assets ....................... 216.4 241.5 Variations in:
Cash generated from operations..................................................................................................... 190.0 206.6 Income taxes paid .......................................................................................................................... (25.5) (32.0)
Net cash flows from operating activities ........................................................................... 164.5 174.6
Cash flows from (used in) investing activities Purchase and development of property, plant and equipment ........................................................ (86.3) (95.6) Purchase and development of intangibles ...................................................................................... (17.3) (15.8) Acquisition of participating companies, net of cash acquired ........................................................ (2.5) (10.3) Current account with Nortia Corporation—Outflows .................................................................... (36.6) (42.3) Current account with Nortia Corporation—Inflows ...................................................................... 37.7 42.3 Proceeds from sale of assets .......................................................................................................... 12.2 17.8 Purchase of other financial assets .................................................................................................. (4.8) (8.2) Interest received on loans granted and cash revenues from other financial assets ......................... 5.0 5.3
Net cash flows used in investing activities ......................................................................... (92.5) (106.7)
Cash flows from (used in) financing activities Proceeds from bank borrowings .................................................................................................... 883.9 678.9 Repayment of bank borrowings ..................................................................................................... (912.8) (665.8) Issuance of bonds (8.75% Senior Notes due 2018) ........................................................................ 285.7 — Repayment of bonds ...................................................................................................................... (239.5) — Purchase of bonds (8.75% Senior Notes due 2018) ....................................................................... (4.2) — Capital lease payments .................................................................................................................. (8.5) (8.9) Interest paid on financial debt ........................................................................................................ (59.5) (50.8) Proceeds from repayment of other borrowings .............................................................................. — (8.9) Other .............................................................................................................................................. (7.5) (4.6)
Net cash flows from (used in) financing activities ............................................................ (62.4) (60.2)
Net variation in cash and cash equivalents .................................................................................... 9.6 7.8 Net foreign exchange differences .................................................................................................. 0.3 (2.9) Cash and cash equivalents at January 1 ......................................................................................... 65.5 66.7
Cash and cash equivalents at September 30 .............................................................................. 75.1 71.6
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Consolidated Cash Flow Statement
Year ended December 31,
2009 2010 2011
(€ in millions)
Cash flows from operating activities Profit before tax, as per the consolidated profit and loss accounts ......................................... 28.2 22.5 26.8 Adjustments for non-cash revenues and expenses:
Depreciation, amortization and impairment ...................................................................... 97.5 140.4 149.6 Allowances for doubtful accounts and inventories ............................................................ 3.9 4.6 5.5 Other ................................................................................................................................. 2.4 1.0 1.8
Financial items included in profit before tax: Financial results ................................................................................................................ 62.8 82.7 96.8 Foreign exchange results ................................................................................................... 0.1 0.5 6.2
Results on sale of non-current assets ..................................................................................... 16.3 9.4 5.2
Adjusted profit before tax from operations before changes in net operating assets ............... 211.3 261.0 291.9 Variations in:
Cash generated from operations............................................................................................. 233.2 253.1 286.3 Income taxes paid .................................................................................................................. (22.3) (26.7) (42.8)
Net cash flows from operating activities ................................................................... 210.9 226.4 243.5
Cash flows from (used in) investing activities Purchase and development of property, plant and equipment ................................................ (120.2) (105.4) (127.5) Purchase and development of intangibles .............................................................................. (47.4) (35.4) (32.6) Acquisition of participating companies, net of cash acquired ................................................ (10.8) (30.8) (14.9) Current account with Nortia Corporation—Outflows ............................................................ (25.9) (74.7) (56.8) Current account with Nortia Corporation—Inflows .............................................................. 25.9 74.7 56.8 Proceeds from sale of assets .................................................................................................. 3.4 1.1 4.9 Purchase of other financial assets .......................................................................................... (10.9) (14.6) (10.4) Interest received on loans granted and cash revenues from other financial assets ................. 6.6 6.8 6.4
Net cash flows used in investing activities ................................................................. (179.3) (178.3) (174.2)
Cash flows from (used in) financing activities Proceeds from bank borrowings ............................................................................................ 1,609.8 2,071.9 1,093.7 Repayment of bank borrowings ............................................................................................. (1,580.4) (2,098.0) (1,111.0) Issuance of bonds (8.75% Senior Notes due 2018) ................................................................ — 391.6 285.7 Repayment of bonds .............................................................................................................. (0.4) (278.0) (239.5) Purchase of bonds (8.75% Senior Notes due 2018) ............................................................... — (10.0) (4.2) Capital lease payments .......................................................................................................... (6.0) (12.1) (12.3) Interest paid on financial debt ................................................................................................ (67.8) (88.8) (96.3) Proceeds from repayment of other borrowings ...................................................................... — — 22.2 Other ...................................................................................................................................... (3.1) (9.6) (5.6)
Net cash flows from (used in) financing activities .................................................... (48.0) (33.0) (67.3)
Net variation in cash and cash equivalents ............................................................................ (16.4) 15.1 2.0 Net foreign exchange differences .......................................................................................... 2.7 (0.2) (0.5) Cash and cash equivalents at January 1 ................................................................................. 64.0 50.3 65.2
Cash and cash equivalents at December 31 ....................................................................... 50.3 65.2 66.7
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Cash Flows from Operating Activities. Our net cash flow from operating activities was €174.6 million in the first nine months of 2012 as compared to €164.5 million in the first nine months of 2011. The difference is principally due to the higher EBITDA for the first nine months of 2012, which was partly offset by the higher levels of cash used to pay income taxes in the first nine months of 2012.
Our net cash flow from operating activities was €243.5 million in 2011 as compared to €226.4 million in 2010. The difference is principally due to the higher EBITDA in 2011, which was partly offset by higher levels of cash used to pay income taxes in 2011.
Cash Flows used in Investing Activities. Our net cash flow used in investing activities was €106.7 million in the first nine months of 2012 as compared to €92.5 million in the first nine months of 2011, reflecting higher capital expenditure levels in the first nine months of 2012.
Our net cash flow used in investing activities was €174.2 million in 2011 as compared to €178.3 million in 2010.
Cash Flows used in Financing Activities. Our net cash flow used in financing activities was €60.2 million in the first nine months of 2012 as compared to €62.4 million in the first nine months of 2011.
Our net cash flow used in financing activities was €89.5 million in 2011 as compared to €33.0 million in 2010. In 2011, we issued €280.0 million of the 2018 Notes and redeemed the entire € 220.0 million principal amount of the outstanding 2012 Notes.
Working Capital Requirements
The following table, which is derived from our consolidated cash flow statement, sets forth movements in our working capital for the periods indicated:
Total .............................................................................................................. 22.0 (7.8) (5.5) (26.6) (34.9)
The operation of our various businesses, in the aggregate, is not working capital intensive. Our working capital requirements largely arise in our B2B Division. We manage our working capital requirements on a centralized basis at the Group level rather than by business division or by geographic area. We have historically funded our operating cash flow requirements through funds generated from our operations, from borrowings under bank facilities and through funds from other finance sources. Although our Casinos Division and Slots Division do have certain limited working capital requirements, particularly for cash, we believe that these divisions are cash-generative and fund a substantial portion of the working capital needs of the B2B Division.
Our results of operations can be impacted by the level of allowances for doubtful accounts. Movements in these allowances are recorded in “Change in trade provisions” in our profit and loss account. Change in trade provisions changed from €3.9 million in 2009 to €4.6 million in 2010 to €5.5 million in 2011. During the first nine months of 2012, change in trade provisions was €4.1 million.
During the period under review, our working capital has been principally driven by the level of demand for the slot machines of our B2B Division. The total variation in working capital changed from €26.6 million in the first nine months of 2011 to €34.9 million in the first nine months of 2012. As compared to 2009, in 2010 we used lower levels of cash on receivables and inventory due to reduced sales by our B2B Division, and the cash used on payables reflected our practice of making payments to vendors more rapidly in order to obtain discounted payment terms. In 2009, working capital related cash flows benefited from our focus on working capital management. In 2009, net accruals were positively affected by the collection of loans from slot site owners, and a decrease in making new such loans.
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We anticipate that our working capital requirements in the foreseeable future will generally be stable. However, these requirements can fluctuate for a variety of factors, including any significant increase in demand for slot machines produced by us.
Capital Expenditures
We define capital expenditures to include the following items of consolidated cash flow statement: “Purchase and development of property, plant and equipment” and “Purchase and development of intangibles.” The following table, which is derived from our consolidated cash flow statement, sets forth our capital expenditures for the periods indicated:
Year ended
December 31,
Nine months
ended
September 30,
2009 2010 2011 2011 2012
(€ in millions)
Purchase and development of property, plant and equipment ........................................ 120.2 105.4 127.5 86.3 95.6 Purchase and development of intangibles ...................................................................... 47.4 35.4 32.6 17.3 15.8
Total Capital Expenditures .................................................................................... 167.6 140.8 160.1 103.6 111.4
Our capital expenditures primarily consist of investments to maintain the quality of our facilities, to expand our capacity in our Slots, Bingos and Casinos Divisions and to fund research and development expenditures made by our B2B Division. We do not expect to make material capital expenditures in our On-line Gaming Division. The following table sets forth our capital expenditures by business division:
Total Capital Expenditures .............................................................................................. 167.6 140.8 160.1 103.6 111.4
Our total capital expenditures for 2009 was €167.6 million. This total amount for 2009 includes the cost of the initial €19.5 million payment for the authorization for our Italian VLT business. Capital expenditures in 2009 also included the net capital expenditure of €20 million for the Rosario casino, the investment in replacement slot machines for the Slots Division and the “key money” payment made to the Panamanian government in respect of our electronic casinos licenses.
Our total capital expenditures for 2010 was €140.8 million. Capital expenditures during 2010 include approximately €21.5 million related to the VLT business (including the second concession payment of € 19.5 million made in November 2010), approximately €14 million for the costs of moving our Monte Picayo casino to the city center of Valencia, approximately €21 million related to our Mexican bingo business, including the acquisition of casino-style slot machines, approximately € 15 million related to the expansion of casino capacity and the installation of new gaming machines in Panama, €18 million for the access facilities and new gaming machines for our riverboat casinos in Argentina, and €12 million in respect of key money payments for our Slots Division in Spain.
Our total capital expenditures for 2011 was €160.1 million. Our major capital expenditures in 2011 included €9.7 million for the deployment of VLTs in Italy, €16.9 million to acquire 1,700 slot machines in Spain, €5.9 million to acquire a 33.3% ownership interest in a gaming hall in Buenos Aires, and €55.4 million in connection with the expansion and installation of gaming machines in 12 casinos in Argentina, Panama and Colombia.
Our total capital expenditures for the first nine months of 2012 was € 111.4 million, and we estimate that our total capital expenditures for 2012 will be €150.0 million. Our major capital expenditures in the first nine months of 2012 included:
• €59.0 million for the expansion of our existing halls in Panama, Colombia and Argentina;
• €9.2 million in connection with the enlargement of key halls in Mexico; and
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• €20.7 million to replace 5,425 slot machines in Spain.
We estimate that our total capital expenditures for 2013 will be approximately €120.0 million. In addition to maintenance capital expenditures, the principal areas of capital expenditures for 2013 are expected to be in our Latin American businesses.
Contractual Obligations
We have numerous contractual commitments providing for payments pursuant to, among other things, leases for casinos, production plants, warehouses and office facilities, equipment leases, automobile leases and payments to site owners and sub-operators in our slots businesses. We also have, and will have, payment obligations pursuant to our outstanding borrowings, including the financial obligations arising from the notes.
Our consolidated contractual obligations as of September 30, 2012, after giving pro forma effect to the offering and the application of the estimated proceeds therefrom, were as follows:
Payments due by period
Contractual Obligations Total Less than
1 year 1-3 years After
4 years
(€ in millions)
Long term debt........................................................................................ 867.6 — 88.4 779.2 Promissory notes..................................................................................... 4.5 3.7 0.8 — Capital lease agreements (short term) ..................................................... 12.3 12.3 — — Other obligations (short term) ................................................................. 85.0 85.0 — — Multigroup and affiliated companies ...................................................... 15.1 4.7 10.4 —
Total contractual obligations ........................................................... 984.5 105.7 99.6 779.2
Off-Balance Sheet Arrangements
We generally do not utilize off balance sheet arrangements, other than performance bonds for obligations for gaming taxes and prizes and other obligations. See note 15 to our 2011 consolidated financial statements and “—Market Risks.”
Liquidity
Intra Group Funding
The liquidity needs of Cirsa and its subsidiaries are met through a combination of internally generated cash flow, dividends, intercompany loans, capital contributions, intra-Group payment obligations and payments under management services agreements and other arrangements.
Cirsa’s subsidiaries may be restricted from providing funds to Cirsa and its other subsidiaries (including Cirsa Funding) under some circumstances. Certain subsidiaries are subject to corporate law and contractual restrictions, including restrictions under debt instruments, that limit their ability to pay dividends or make other payments. See “Risk Factors—Risks relating to the offered notes and this offering—Cirsa is a holding company and is dependent on payments from its subsidiaries in order to be able to make payments under the funding loans” and “Description of Certain Indebtedness.”
A significant portion of the Group’s revenues and EBITDA is generated by its Latin American businesses. The Argentine authorities, including the Argentine Central Bank, have, in the past, imposed restrictions of the transfer of funds outside of Argentina and may do so again in the future. The Venezuelan government has also imposed such restrictions. If we were unable to repatriate some or all of its profits from our Latin American businesses, we would not be able to use the cash flow from these businesses to fund the liquidity needs of the other members of the Group.
External Sources of Liquidity
Our principal external sources of liquidity during 2009, 2010, 2011 and the first nine months of 2012 have been the issuance of debt securities, borrowings under long-term and short-term credit facilities (including the Revolving Credit Facility with Deutsche Bank AG, London Branch), gaming tax deferrals, local lines of credit and overdraft facilities, as well as capital leases. In addition, we expect that as in the past, certain of our partners in joint ventures and companies in which we hold a minority interest will provide funding for these joint ventures and companies.
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We continue to monitor and limit our exposure to short-term borrowings in Spain and Italy given the restrictions on liquidity that the Spanish banking and Italian systems have been experiencing. We also seek to limit our exposure to cross-border risk in our financings. In furtherance of these objectives, we are seeking to improve our debt maturity profile and to strengthen our balance sheet. We also have been exploring opportunities to obtain local financings in certain jurisdictions in which we operate, and have obtained bank facilities in Colombia, Argentina and Italy.
We have substantial debt and debt service obligations. As of September 30, 2012, after giving pro forma effect to the offering and the application of the proceeds therefrom, we would have had approximately € 969.5 million of debt. Our level of debt has increased significantly during the last five years. In addition, we may incur substantial additional debt in the future. See “Risk Factors—Risks relating to the offered notes and this offering—Our substantial debt and debt service obligations could adversely affect our business, financial condition and results of operations.”
We will continue to need significant cash resources to, among other things:
• meet our debt service requirements under the notes and our other indebtedness;
• fund our working capital requirements, particularly for our B2B Division;
• make capital investments to comply with our existing contractual obligations and the terms of our licenses, to acquire new slot machines and to maintain and to expand our slots business in Spain, our slots business in Italy, our casino operations in Latin America and our bingo hall business in Mexico;
• make other investments in the gaming business, including joint ventures and minority investments, and acquiring majority control of existing joint ventures and investments; and
• fund our research and development activities.
We believe that our cash flow from operations and available cash and our other available external financing sources will be adequate to meet our future liquidity needs for the foreseeable future, although we cannot assure you that this will be the case. See “Risk Factors—Risks relating to the offered notes and this offering—We require a significant amount of cash to service our debt and for other general corporate purposes. Our ability to generate sufficient cash depends on many factors beyond our control.”
If we are required to borrow additional amounts, our ability to do so could be restricted by the terms of the indenture governing the notes and the terms of our bank indebtedness. See “Risk Factors—Risks relating to the offered notes and this offering—We are subject to significant restrictive debt covenants, which limit our operating flexibility.”
In addition, the availability and the terms of external financing have been adversely affected by the onset of the credit crisis since the summer of 2007. In Spain, this condition has been exacerbated during 2010, 2011 and 2012 and in Italy, conditions have been increasingly difficult since 2011. The public debt of both Spain and Italy have been downgraded by rating agencies on a number of occasions in recent years. In addition, the recent negative developments with respect to Eurozone financial markets have resulted in higher costs of bank financing in these countries.
Our future operating performance and our ability to service or refinance the notes are subject to future economic conditions, financial, business and other factors, many of which are beyond our control.
Effects of Inflation
Our performance is affected by inflation to a limited extent. In recent years, the impact of inflation on our operations in Spain has not been material. However, our international operations, particularly those in Latin America, are subject to relatively high inflation rates. Both Argentina and Venezuela experienced inflationary effects in 2002. During 2002, the Argentine consumer price index increased 41% and the wholesale price index increased 118%. During 2009, we recorded a €4.9 million non cash adjustment to our financial statements due to the impact of Venezuela’s hyper-inflationary economy as required by IAS 29.
Effects of Related Party Transactions
We have engaged in a significant number and variety of transactions with our principal shareholder, Mr. Manuel Lao Hernández, his holding company, Nortia, and certain other companies associated with Mr. Manuel Lao Hernández and Nortia. See “Certain Relationships and Related Party Transactions.”
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Cirsa has not paid any dividends to its shareholders during the period under review. We have from time to time extended credit to Nortia and provided credit support for the obligations of Nortia and Mr. Lao Hernández. See “Certain Relationships and Related Party Transactions.”
Employee Benefit Plans
We maintain employee benefit plans for certain employees in our Bingo Division. We do not have any material pension commitments or other similar obligations.
Critical Accounting Policies
Our financial statements and the accompanying notes contain information that is pertinent to this discussion and analysis of our financial position and results of operations. The preparation of financial statements in conformity with IFRS requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Estimates are evaluated based on available information and experience. Actual results could differ from these estimates under different assumptions or conditions. We believe that, in particular, the critical accounting policies and estimates discussed below involve significant management judgment due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts. For a detailed description of our significant accounting policies, see note 2 to our 2011 consolidated financial statements.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts related to our accounts, contracts and notes receivable that we have deemed to have a high risk of collectability. We analyze historical collection trends, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts. While we believe that our estimated for these matters are reliable and calculated with due care, if we changed our assumptions and estimates, our bad debt expense could change, which could impact our operating income.
Inventory
We regularly review inventory quantities on hand and record charges for excess and obsolete inventory, based primarily on our estimated forecast of product demand and production requirements. The determination of obsolete or excess inventory requires us to estimate the future demand for our slot machines and gaming kits within specific time horizons. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we may need to record additional charges for inventory obsolescence, which would have a negative impact on our operating income.
Intangible assets
Our intangible assets include capitalized development costs, authorizations or licenses and installation rights.
We assign useful lives to our intangible assets based on the period of time that the assets is expected to contribute directly or indirectly to our future cash flows. We consider certain factors when assigning useful lives such as legal, regulatory and contractual provisions, as well as the effects of obsolescence, demand, competition and other economic factors. We are required to use judgment and make estimates to determine the useful lives of intangible assets. We amortize our intangible assets to reflect the pattern in which the economic benefits for the assets will be consumed based on projected revenues.
Impairment
Impairment—Non-Financial Assets
We assess for impairment at year end for all non-financial assets which carrying amount could be unrecoverable. Goodwill and intangible assets with an indefinite useful life are tested for impairment annually, or when there is evidence of impairment.
We assess at each year end whether there is an indication that a non-current asset may be impaired. If any indication exists, and when an annual impairment test is required, we estimate the asset’s recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and value in use, and it is established for each separate asset, unless for assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered
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impaired and its carrying amount is reduced to the recoverable amount. To assess value in use, expected cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. Impairment losses from continuing activities are recognized in the consolidated statement of comprehensive income based on the nature of the impaired asset.
We assess at year end indicators of impairment losses previously recorded in order to verify whether they have disappeared or decreased. If there are indicators, we estimate a new recoverable amount. A previously recognized impairment loss is reversed only if the circumstances giving rise to it have disappeared, since the last loss for depreciation was recognized, except that goodwill impairment losses cannot be reversed in future periods. In this regard, the asset’s carrying amount increases to their recoverable amount. The reversal is limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset.
The reversal is recognized in the consolidated statement of comprehensive income. Upon such reversal, the depreciation expense is adjusted in the following periods to amortize the asset’s revised book value, net of its residual value, systematically over the asset’s useful life.
Impairment—Financial assets
We assess at year end if financial assets or group of financial assets are impaired. To assess the impairment of certain assets, the following criteria are applied:
• Assets measured at amortized cost
If there is objective evidence that there is an impairment loss of loans and other receivables recorded at amortized cost, the loss is measured as the difference between the net carrying amount and the present value of estimated cash flows, discounted at the current market rate upon initial recognition. The net carrying amount is reduced by an allowance, and the loss is recorded in the consolidated statement of comprehensive income.
Impairment loss is reversed only if the circumstances giving rise to it have ceased to exist. Such reversal is limited to the carrying amount of the financial asset that would have been recognized on the reversal date had no impairment loss been recognized.
In regard with trade and other receivables, when there is objective evidence of not collecting them, an allowance is made based on identified bad debts risk.
• Available-for-sale financial assets
If a financial asset available-for-sale is impaired, the difference between its cost (net of any repayment) and present fair value, less any previous impairment loss recognized in equity are taken to the consolidated statement of comprehensive income. Reversals related to equity instruments classified as available-for-sale are not recognized in the consolidated statement of comprehensive income, but the associated increase in value is directly recorded in equity.
Business combinations and goodwill
For each business combination, we assess the fair value of assets, liabilities and acquired contingent liabilities, allocating the cost of the business combination to the identified elements. Likewise, goodwill arising from acquisitions is assigned to its corresponding cash-generating unit, based on expected synergies, for subsequent impairment tests.
Income taxes
For financial reporting, we use estimates and judgments to determine our current tax liability as well as taxes deferred until future periods. Deferred taxes account for temporary differences between taxable income and accounting income. Deferred tax assets and tax credits from tax loss carry forwards are recognized when it is probable that sufficient taxable profits exist to realize such tax asset. When we or a participating company recognize deferred tax assets, the estimated taxable profits that will be generated in future years are reviewed at year end in order to assess their recoverability, and any impairment loss is recognized accordingly.
Market Risks
We are primarily exposed to market risk from changes in interest rates and foreign currency exchange rates. We manage our exposure to these market risks through our regular operating and financing activities. Financial instruments
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that potentially subject us to credit risk consist of cash investments and trade receivables. We maintain cash and cash equivalents with financial institutions in Spain with high credit standards. Concentration of credit risks with respect to accounts receivable is limited, due to our large number of customers.
Interest Rate Risks
A substantial portion of our indebtedness is comprised of fixed rate debt securities. However, we are subject to interest rate risks related to our borrowings. Almost all of our bank borrowings are in euros with floating interest rates based on EURIBOR. We do not currently hedge our interest rate exposure and do not expect to do so in the future. See “Description of Certain Indebtedness.”
Foreign Currency Risks
Our principal exchange rate exposure relates to euro/Argentine peso for translation related exposure. We also have exchange rate exposure to the euro/U.S. dollar. We currently have no swaps to hedge our exchange rate exposure outstanding.
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THE SPANISH GAMING MARKET
Introduction
We believe that Spain is one of the largest gaming markets in Europe based on total amounts wagered.
According to the Spanish National Gaming Commission, the total amount wagered in the Spanish gaming market during 2011 amounted to approximately €26.6 billion. The Spanish gaming market is broadly divided into two markets: (i) the public market, which consists of national, regional and charitable lotteries and (ii) the private market, which consists primarily of slot machines, casinos and bingo halls.
The following table sets forth the approximate total amount wagered in each sector of the Spanish gaming market from 2009 to 2011:
Source: Spanish National Gaming Commission Annual Report.
(1) On-line data from June 2011.
(2) Totals may not sum due to rounding.
As shown in the table above, slots, casinos and bingo halls and on-line gaming, collectively, generated a total wagered amount of €14.9 billion in 2011. The largest component came from slot machines (63%), followed by bingo halls (14%) and casinos (11%). The discussion below highlights recent trends for each of these three components of the gaming market.
Slots
Slot machines provide games of controlled chance and pay cash to winners. Slot machines employ a reel or video display. Slot machines with reels containing pictures of various fruits are the most popular reel slot machines. Regional regulations generally provide that slot machines must control the probability of payout so that a specific number of prizes of different amounts or the aggregate value of such prizes are paid out over a given number of games. Subject to these regulations, operators may adjust each slot machine’s payout as a percentage of the amount paid in, payout odds, wager amounts and maximum prizes. In general, slot machines have a payout of at least 70% of the amount wagered on a slot machine over a cycle of 20,000 games. Slot machines are primarily placed in bars, cafés, arcades and bingo halls. The Spanish autonomous regions limit the number of slot machines per establishment. In addition, the Spanish autonomous regions are responsible for taxation of slot machines and taxes have generally increased over the years. See “Regulation—Spain—Slot Machines.”
Slot machines have been one of Spain’s most popular forms of gaming since they were legalized in 1977. The market for slot machines in Spain has experienced moderate declines over the past few years consistent with the economic climate.
The following table sets forth information on the approximate amounts wagered and the number of slot machines in operation from 2009 to 2011:
Year ended December 31,
2009 2010 2011
Amounts wagered (€ in billions)................................................................................................................... 13.4 11.3 9.4 Machines in operation (in thousands)(1) ........................................................................................................ 246.7 240.0 228.4 Revenue/slot machine/year (€ in thousands)(2).............................................................................................. 13.3 13.7 13.2
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Source: Spanish National Gaming Commission Annual Report.
(1) Number of slot machines in operation at December 31.
(2) Net of cash prize payouts, which in general represent on average 75% of amounts wagered in 2011.
Casinos
As of December 31, 2011, there were 43 casinos in operation in Spain. Casinos derive revenues from gaming tables, casino style slot machines (which in Spain are only permitted to be operated in casinos), tips (employees commonly share tips with the casino under the terms of their collective bargaining agreements), admission tickets and, if available, from restaurant services.
The following table sets forth information on the approximate total amounts wagered and the number of casinos in operation in Spain:
Year ended
December 31,
2009 2010 2011
Total amounts wagered (€ in billions) ................................................................................................................. 2.0 1.9 1.6 Casinos in operation ............................................................................................................................................ 43 43 43
Source: Spanish National Gaming Commission Annual Report.
Bingo
Bingo is one of the most popular gaming activities in Spain. The objective of the Spanish version of bingo is to be the first to complete a five-by-three game card with numbers between one and 90. Cards are sold by bingo hall employees to players immediately before each draw and there are no intermissions. A caller randomly selects numbers and players fill a corresponding space on their cards. Players may win a smaller prize by completing a line of five across, a larger prize by completing all 15 numbers, which is known as “bingo,” or a bonus prize by completing all 15 numbers before a predetermined quantity of numbers is called out. There are also several versions of bonus prizes which may include accumulated un-won prizes, on-line bingo prizes or linked bingo hall prizes, depending on the Spanish autonomous region. The cost per game is established by the relevant applicable regional or national regulation, as the case may be, and is typically €2, €3 or €6. Each region currently requires a bingo hall operator to pay out between 59% and 67% of card sales. Many bingo halls generate additional revenue from a limited number of slot machines installed in the lobby outside the bingo hall (the maximum number per bingo hall and the type of slot machines that can be installed in a bingo hall are regulated) and restaurant services. See “Regulation—Spain—Bingo Halls.”
The following table sets forth information on approximate total amount wagered and the number of bingo halls in operation in Spain:
Year ended
December 31,
2009 2010 2011
Amounts wagered (€ in billions).......................................................................................................................... 2.9 2.7 2.0 Bingo halls in operation(1) .................................................................................................................................... 401 399 388 Amounts wagered/bingo hall (€ in millions) ....................................................................................................... 7.2 6.7 5.2
Source: Spanish National Gaming Commission Annual Report.
(1) Number of bingo halls in operation at December 31.
The bingo business in Spain is mature. There has been a decline in amounts wagered since 2006. We believe that the bingo business in Spain has also been adversely impacted by the introduction of national anti-smoking laws in 2006 and 2011.
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BUSINESS
Our Company
We are one of the leading gaming companies in Spain, Italy and Latin America engaged in the operation of slot machines, casinos and bingo halls and the manufacture of slot machines for the Spanish market. In Spain, we are the leader in the €14.9 billion Spanish private gaming market, where our key activities include: the operation of slot machines, in which, as of September 30, 2012, we are the #1 operator with over 21,400 slot machines operated; the operation of four casinos; the operation of bingo halls, in which our Bingo Division is the #1 operator with 49 bingo halls; and the manufacture of slot machines, where we are the #1 manufacturer, with over 26,000 slot machines and gaming kits manufactured in the twelve months ended September 30, 2012.
In Italy, we have established a strong presence in the slot machine market with over 14,000 slot machines situated in approximately 2,850 locations across central and northern Italy. As of September 30, 2012, we have also completed the deployment of 2,170 of the 2,583 Video Lottery Terminals (“VLTs”) planned for installation in Italy.
In Argentina, we operate eight casinos, including two riverboat traditional casinos in the city of Buenos Aires with 130 gaming tables and 1,545 slot machines and a traditional casino located in Rosario with 80 gaming tables and 2,820 slot machines. Our five electronic casinos in the Province of Mendoza, Argentina operate 1,619 casino-style slot machines.
In Colombia, we operate 19 traditional casinos with 2,674 slot machines and 48 electronic casinos with a total of 3,315 slot machines.
In Panama, we operate one traditional casino in Panama City with 29 tables and 380 slot machines and 26 electronic casinos with a total of 7,300 slot machines.
In Mexico, we operate 20 bingo halls that also have a casino-style slot machine offer.
For the twelve months ended September 30, 2012, we had net operating revenues and EBITDA of €1,331.1 million and €315.0 million, respectively. During the twelve months ended September 30, 2012, 58.2% of our net operating revenues and 39.9% of our EBITDA were generated in Spain and Italy, and 41.8% of our net operating revenues and 60.1% of our EBITDA were generated from our other international activities. We have also made significant efforts to reduce our net leverage ratio (net debt/EBITDA) which decreased from 5.0x in 2005 to 2.8x as of September 30, 2012.
Our Strengths
We believe a number of key factors give us a strong competitive advantage, including:
• Business and Geographic Market Diversification. We are a well diversified gaming company with five distinct and complementary business divisions within the industry and operations in seven countries outside of Spain. We believe that the diversity of our revenue stream helps improve the stability of our cash flow profile by reducing our dependence on any single geographic market, economy or business segments in the gaming industry. In addition, our diversified operations allow us to identify opportunities for growth in known markets by using our operating experience across the gaming industry in Spain, Italy and Latin America.
• Corporate Synergies. We are a leading integrated manufacturer, distributor and operator of slot machines in Spain. Our Slots Division provides us with information regarding evolving customer preferences and tendencies, which helps us to design and manufacture popular games in a timely manner. In the twelve months ended September 30, 2012, we manufactured four of the top ten revenue-generating slot machine models in Spain. Our strong manufacturing capabilities, in turn, support demand for our slot machines and facilitates access to new successful games for our Slots Division. We believe that our integrated manufacturing, distribution and operating capabilities give us cost and service advantages not enjoyed by many of our competitors.
• Barriers to Entry. We believe that there are significant barriers to entry in our principal business divisions, including regulatory, financial and technological barriers, the need for operational expertise and the need for a proven track record in order to obtain the trust and confidence of regulators, customers, partners and suppliers. In certain jurisdictions in which our Casinos Division operates, casino licenses are generally awarded after a competitive public tender process. In our Slots Division, we typically enter into five-year exclusivity agreements to place our slot machines in a given location, and many of these agreements have
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been consistently renewed for the past twenty years. Additionally, in our Slots Division and B2B Division, we believe a new competitor would need significant financial resources, operating expertise and a qualified workforce to build profitable operations. We believe that barriers to entry in our principal business divisions help protect our leading market position and profitability by limiting the number of new competitors in our core business segments.
• Leading Market Position and Economies of Scale in Spain. We are a leader in Spanish slot machine operations and manufacturing, as well as bingo hall operations. We believe that this leadership position enables us to identify and manage trends in the private gaming industry in Spain. The Spanish slot machine operator and bingo segments are highly fragmented, and we are substantially larger than our competitors. We believe that our size allows us to benefit from economies of scale in many of our businesses. For example, in our slot machine operations, we can spread the cost of providing coin collection services and rapid response to repair calls (minimizing machine downtime) over our more than 21,400 slot machines, which helps us to realize a lower operational cost per machine and to have a more developed internal control system as compared to our competitors.
• Demonstrated Financial Performance. We have a strong financial profile, combining increasing EBITDA and a decrease of our overall level of leverage in recent years. Our EBITDA grew by more than 2.7 times in recent years, from €114.1 million in 2005 to €315.0 million in the twelve months ended September 30, 2012. Over the same period, we have made significant efforts to reduce our leverage ratio, which decreased from 5.0x in 2005 to 2.8x as of September 30, 2012.
• Seasoned Management Team. We are led by an experienced and professional management team with a track record of managing complex operations, developing new products inside and outside the gaming industry and delivering upon its commitments. A portion of the compensation of our senior management team is based on achieving financial targets.
Our Strategy
Our strategic objective is to continue to consolidate our businesses and to achieve sustainable profitable growth through the following three strategic pillars:
• Continue to improve EBITDA through revenue mix management and cost optimization. We will focus on strengthening EBITDA through various revenue mix management and cost optimization initiatives in our core business segments and geographic markets. We will seek to ensure that our EBITDA maintains geographical and business segment diversification. We will seek to enhance our casino, slot and bingo operations through the selective expansion of existing halls and operations and increased slot machine density. We will seek to improve our products mix and realize investments that are accretive to EBITDA and meet other key criteria. In our B2B business, we will focus on increasing the sales of higher-margin products. In Italy, our priority will be the continued development of the VLT business and, in Spain, we will actively work to reduce our base cost expenses through the closure of underperforming sites and operations. Our focus on EBITDA improvement should enable us to continue to reduce our leverage ratio; we strive to maintain a target leverage ratio of between 2.5x to 3.0x.
• Enhance productivity programs across businesses and geographies. We will also build upon the productivity initiatives and synergies achieved in prior periods. We will continue to implement best practices across our markets to improve productivity. In our slots business, this will entail further enhancing the profitability of our slot machine portfolio, including through opportunistic slot machine rotations and replacements. In our casinos division, we intend to implement player tracking and coinless systems throughout our casinos. In our bingo business, we will seek to close underperforming halls and increase market share through strategic acquisitions. We will also continue to divest or exit other non-performing businesses and assets.
• Make selective investments with focus and rigor. Our investment program in the short- to medium- term is subject to rigorous investment criteria, strategic planning and control of capital expenditures. We will continue to review and analyze investment opportunities in our core business segments with a view to executing investments on an opportunistic basis that enhance our cash flow and positively contribute to EBITDA. In our B2B business, we will continue to focus our research and development efforts on maintaining our leadership in the Spanish slots market.
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History of the Cirsa Group
Following the liberalization of the Spanish gaming industry in 1977, we were founded in 1978 by Manuel Lao Hernández, our controlling shareholder, his brother Juan Lao Hernández and other family members, who began importing, exporting and operating third party manufactured slot machines in bars, cafés, restaurants and arcades in the Catalonia region of Spain. Shortly thereafter, in 1979, we began to design and manufacture slot machines for the Spanish market and by the mid 1980s, we were established as a leading slot machine manufacturer in the Spanish market. In 1982, we changed our corporate name to Cirsa Compañía de Inversiones, S.A. and expanded our activities to all autonomous regions of Spain by acquiring independent operators which own, service and manage slot machines placed principally in bars and restaurants. In 1984, we manufactured our first casino-style slot machines. Following the success of our Nevada and Mini Money slot machine models, we increased the number of slot machines under operation significantly in the early 1990s through the acquisition of operating companies and by acquiring controlling interests in a number of slot machine distributors located throughout Spain. We also expanded into a number of related businesses, both domestically and internationally, including slot machines, casinos and bingo halls, as well as into a number of unrelated businesses (which we subsequently disposed of including real estate development and ownership and management of hotels). At the same time we continued to develop our core slot machine businesses.
In 1996, Manuel Lao Hernández together with his wife and children founded L&G (which was renamed as Nortia Business Corporation during 2007), which focuses mainly on its investments in other leisure and gaming companies and the real estate it owns, manages and leases. In July 1998, Nortia, which was and is currently controlled by Manuel Lao Hernández, bought substantially all of Juan Lao Hernández’s interest in Cirsa. Subsequently, Nortia and Manuel Lao Hernández acquired the remaining shares of Juan Lao Hernández. During 1998 and 1999, Nortia and Manuel Lao Hernández transferred any operations in the gaming industry which were not already part of Cirsa, but in which Manuel Lao Hernández had a controlling interest, to Cirsa. Other gaming operations in which Manuel Lao Hernández did not have a controlling interest, and companies outside the gaming industry in which Manuel Lao Hernández had an interest, as well as certain real estate interests, were transferred to Nortia. Cirsa is presently wholly owned by Mr. Lao Hernández and Nortia.
Our Divisions
We have five business divisions: Slots, Casinos, Bingo, B2B and On-line Gaming.
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Slots Division
Our Slots Division owns and manages slot machines in bars, cafés, restaurants and arcades in Spain. We are also a network system operator for slot machines in Italy and have commenced operation in the VLTs market in Italy. We are also party to a joint venture with Ladbrokes PLC for the operation and further development of a sports region-based betting business in Spain.
Spain
As of September 30, 2012, we directly, or indirectly through slot machine sub operators, controlled 21,439 slot machines located in approximately 14,000 sites, primarily in bars. We plan to continue to optimize our slot machine portfolio in Spain. More recently, we have opened a number of arcades. As of September 30, 2012, we owned and operated 114 arcades, with an average of approximately 14 slot machines per arcade. We do not plan to open additional new arcades until we see signs of an economic recovery in Spain.
The following table sets forth certain historical data concerning slot machine operations in Spain and the average revenues per slot machine:
Year ended December 31,
2009 2010 2011
Slot machines Total number of slot machines in Spain(1) .................................................................................. 246,651 239,992 228,434 Number of slot machines operated ............................................................................................. 23,276 22,388 22,310
Average revenues/slot machine/year (in € thousands)(2) Spanish market average(1) ........................................................................................................... 13.3 13.7 13.2 Our average ................................................................................................................................ 17.8 17.3 15.6
(1) Based on information provided by the Spanish National Gaming Commission.
(2) Average revenues/slot machine/year are calculated net of prizes.
We believe our average revenues per slot machine per day are higher than the Spanish market average because of the quality of the sites and the frequency with which we change our games.
Relationship with Site Owners. We enter into contracts with site owners under which a site owner typically gives us the exclusive right to place one or more of our slot machines at the owner’s establishment for a period of up to five years. We believe that our long-standing relationships, history of excellent service with site owners and higher than average revenues per slot machine are the basis for our high contract renewal rates. We install, maintain and service the slot machines, collect money and pay the required taxes. We also ensure that each slot machine complies with regional and national laws and regulations and, where required, post bank guarantees. We understand that slot machines are generally the most significant profit center of a site owner’s business.
In addition to revenue sharing, we often make interest-free loans and cash payments to induce site owners to enter into or extend contracts. We collect payment on these loans over an 11-month period, on average, through an offset against the site owner’s share of slot machine revenues. We record these loans as receivables on our balance sheet. For the twelve months ended September 30, 2012, these loans and other incentives (such as contributions to bar decorations and equipment) amounted to approximately €7.7 million.
Participation Agreements with Former Slot Machine Operators. Our preferred method of expansion has been by purchasing existing slot machine operators. However, when there is a strong relationship between the slot machine operator and site owners, it is often preferable or necessary for us to acquire the slot machine operators and enter into a participation contract with the seller under which the seller continues to maintain a commercial relationship with site owners in exchange for a percentage of revenues. As of September 30, 2012, we had agreements (or sub-operator agreements) covering approximately 47% of the slot machines we operate in Spain. Revenue sharing to sub-operators under these participation agreements totaled approximately €16.0 million for the twelve months ended September 30, 2012.
Coin Collection and Information Systems. We carry out coin collection through approximately 268 company- employed collectors who utilize our fleet of vehicles. Each cash collector follows a pre-arranged route and is responsible for approximately 80 machines. To monitor and control our slot machines, we use a proprietary computerized information and collection control system. Our collectors connect a portable electronic device to the slot machine which downloads information about the model of the machine, amount wagered, prize payout, time the slot machine was in use and other information relating to the slot machine’s usage. We make collections and retrieve data from each slot machine weekly. The collectors promptly forward all data to our head office for compilation and analysis.
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We believe that our information and collection control system helps us maximize revenues through accurate and efficient collections. The system optimizes accuracy by matching the amount due to the operator to the amount received from the collector. Any discrepancy between the amount due and the amount collected is analyzed (usually on the same business day that it is collected) and, if necessary, investigated.
The information and collection control system also generates more efficient slot machine performance and revenue data than the manual method used by many of our competitors. Our revenue and game-use data assists us in monitoring individual slot machines and in determining when to rotate a slot machine to a different site or to retire it, as well as in obtaining information on player tendencies. We aggregate individual data on player tendencies to assist us in developing new games and slot machines.
Purchasing Slot Machines. We select slot machines based on the games we believe to be superior and likely to become popular with customers. Our Slots Division purchases slot machines from our B2B Division and from other manufacturers. If we believe that another slot machine manufacturer is offering a better game, we will purchase from that manufacturer instead of from our B2B Division. In 2011, approximately 99% of our new slot machines for our Slots Division in Spain were manufactured by our B2B Division.
Joint Venture with Ladbrokes PLC. In January 2007, we entered into a joint venture agreement with Ladbrokes PLC, a British betting operator, to develop a sports region-based betting business in Spain. The joint venture, in which each party has a 50% interest, was awarded a sports betting license for the Madrid autonomous region in April 2008. The joint venture, which operates under the Sportium name, commenced initial operations in May 2008. As of September 30, 2012, Sportium offered sport betting products through outlets installed in 119 slot arcades and bingo halls in Madrid and 64 slot arcades and bingo halls in Aragon and 47 slot arcades and bingo halls in Valencia. We also have 13 Sportium dedicated sports betting locations in Madrid. We expect that the Sportium joint venture will expand its operations to other autonomous regions in Spain as the relevant gaming regulators authorize sports betting activities.
Slots Concession in Italy
During 2004, we were awarded a concession to act as a network system operator for slot machines in Italy by the Italian authority for betting and gaming (Amministrazione autonoma dei monopoli di Stato) (the “AAMS”). Under the Italian regulatory regime, only interlinked slot machines have been permitted to operate in Italy since October 31, 2004. This requirement of interlinking allows regulatory authorities to monitor slot operators for regulatory and tax purposes.
In December 2011, we were awarded a new provisional concession to act as a network system operator for both slot machines and VLTs in Italy. On October 18, 2012, the provisional concession became permanent following our submission of documentation demonstrating our continuing compliance with the technical and economic requirements to act as network system operator. Following the grant of such concession, we still must complete certain other requirements (such as the execution of the concession agreement and the posting of a performance bond) that remain pending.
As of September 30, 2012, we operated 10,271 slot machines owned by us and had another 4,379 slot machines interlinked to our network, which together represented approximately 4% of the total number of slot machines in Italy. The slot machines that we own are manufactured in Italy and are located in approximately 2,900 locations across central and northern Italy. These locations include bars, bingo halls, restaurants and service stations. We have revenue sharing agreements in place with the owners or operators of these locations. These revenue sharing agreements generally have an initial term of up to five years and are renewable annually thereafter. Pursuant to these revenue sharing agreements, we generally split revenues (net of prize payouts and taxes due to the AAMS) on a 50:50 basis with the owners or operators of the locations. Pursuant to interconnection agreements, we charge a fixed fee per third-party owned slot machine interlinked to our network. Third-party slot machine owners may renew these interconnection agreements on an annual basis.
For a description of the Italian regulatory environment, including the terms of our slots concession and certain regulatory proceedings, see “Regulation—Italy—Slot Machines.”
Video Lottery Terminals Concession in Italy
In November 2009, our Italian subsidiary, Cirsa Italia S.p.A. (“Cirsa Italia”), was authorized to act as a network system operator for VLTs in Italy for a testing period. The AAMS approved this testing, and in October 2010 we commenced operations of VLTs in Italy. In December 2011, we were awarded a new provisional concession to act as a network system operator for both slot machines and VLTs in Italy. On October 18, 2012, the provisional concession became permanent following our submission of documentation demonstrating our continuing compliance with the technical and economic requirements to act as network system operator. We are authorized to operate 2,583 VLTs.
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Venue requirements for the placement of VLTs and slot machines in Italy are regulated and may be installed in (i) bingo halls; (ii) sports betting agencies; (iii) horse race betting shops that employ totalizer and fixed-odds betting systems; (iv) gaming shops whose primary activity is marketing public gaming products and otherwise meeting certain specified requirements under Italian law; (v) public gaming rooms specifically designated for the conduct of lawful gaming, provided that a separate area for games is reserved for underage players; and (vi) premises dedicated exclusively to gaming with slot machines and /or VLTs, provided, however, that the relevant shop, hall or agency maintains the requisite gaming license in accordance with the Italian regulatory framework.
An initial VLT concession payment of €19.5 million and an additional VLT concession payment of €19.5 million were paid in 2009 and 2010, respectively. We expect that the total costs for the VLT project will be approximately €52 million, of which our share, pursuant to the joint venture arrangement with Grupo Berruezo described below, will be approximately €33 million. Total costs for the VLT project through September 30, 2012 were approximately €49 million, of which our share was approximately €31 million. Our remaining share of the expected costs is €2 million.
We are utilizing our existing 50:50 joint venture arrangement, Orlando Play S.A., that we have with a Spanish partner, Grupo Berruezo, to share the costs of the two VLT concession payments, VLT equipment purchases and replacement costs, as well as certain other costs relating to the VLT project. Orlando Play has established a subsidiary in Italy, Orlando Italia, S.r.l., to implement the VLT project.
We have commenced installation and operation of our VLTs, which are being placed in bingo halls and arcades located mainly in central and northern Italy and connected to our existing Italian slot machine network. We expect to operate approximately 25% of the VLTs directly through Cirsa Italia and 75% through Orlando Italia. Cirsa Italia will own the concession for all 2,583 VLTs and will enter into the agreements with site owners. Cirsa Italia will make certain payments to Orlando Italia under a profit-sharing arrangement. This agreement will expire on the later of October 31, 2019 and the expiration of the concession, as renewed or extended. We have entered into (and expect to enter into) agreements pursuant to which Cirsa Italia and Orlando Italia purchase or lease VLTs manufactured by Barcrest and Novomatic. As of September 30, 2012, we had installed 2,173 VLTs and expect to complete the deployment of the remaining VLTs in 2013.
For a description of the Italian regulatory environment relating to VLTs, see “Regulation—Italy—Video Lottery Terminals.”
Casinos Division
We currently manage and operate two types of casinos: traditional casinos which operate table games and casino-style slot machines and electronic casinos which only operate slot and other gaming machines.
Traditional Casinos
As of September 30, 2012, we operated a total of 32 traditional casinos, four casinos in Spain and 28 casinos internationally. Our casinos offer table games and casino-style slot machines. Our casinos also generate revenues from restaurant and bar services, admission ticket sales and tips (which employees share with us pursuant to collective bargaining agreements). We believe that our casinos appeal to the mass market customer base, while also offering features that appeal to the high end segment of the market. We have undertaken a number of initiatives to improve the performance of our casinos, including providing a full entertainment offer, increasing productivity with ticket-in/ticket-out (TITO) and player tracking systems and expanding and refurbishing existing casinos in key markets. We have also designed various marketing campaigns, such as our Cirsa Poker Tour and Poker House concept, which are intended to exploit the growing poker market. The following is a description of our casinos, except as otherwise indicated, as of September 30, 2012:
Spanish Casinos
• Casino Nueva Andalucía, which was acquired in 1995, is located in Marbella, Spain, a prime tourist location. The casino hosts 22 gaming tables and 88 slot machines. We believe this casino is the fourth largest of 43 casinos in Spain, based on total revenues during 2011. The operating license for this casino has a term of 15 years and will be eligible for renewal in 2019.
• Casino de Valencia, which we opened in August 2010, is located in the city center of Valencia. We believe this casino is the third largest of 43 casinos in Spain, based on total revenues during 2011. The casino required a total investment of approximately €14 million and hosts 15 gaming tables, 114 slot machines and a 200 position poker room. The operating license for this casino and its branch (Casino Puçol) will be eligible for renewal in November 2019.
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• Casino Puçol, which has been designated as a branch of Casino de Valencia in August 2010 (and was formerly known as Casino Monte Picayo), is located twenty kilometers north of Valencia, Spain. The casino hosts 7 gaming tables and 29 slot machines.
• Casino La Toja, which we have operated since 1995, is located in La Toja, Spain, a historic spa resort area. Casino La Toja is a seasonal casino, attended mostly by tourists from Portugal and hosts 11 gaming tables and 29 slot machines. The operating license for this casino is perpetual. In December 2009, we sold a 50% interest in Casino La Toja.
International Casinos
• Our riverboat casino in Buenos Aires, Casino Estrella de la Fortuna, has been in operation since 1999. The riverboat is permanently harbored in the Puerto Madero area of Buenos Aires, a prime leisure area. The State Lottery of Argentina granted our license to operate the casino and is entitled to 20% of the gross revenues of the casino which it shares with the city of Buenos Aires pursuant to the settlement agreement among them. The license had an initial 15-year term and a five-year extension has been granted to operate through 2019. After the initial license was granted, we received authorization to expand the license, allowing us to operate an additional riverboat casino next to the existing riverboat. During January 2006, our second riverboat casino, the Princess Casino commenced operations. In September 2008, we were granted an authorization to operate the Princess Casino as our second riverboat casino, through 2019. Our riverboat casinos have a combined total of 130 gaming tables and 1,545 slot machines. During 2009, we completed an extensive refurbishment of the riverboat casinos. In 2010, we completed the construction of new access facilities for the casinos. As a result of adding the access facilities, we have maximized the space in the riverboats dedicated to gaming machines and tables, and the entertainment and restaurant facilities are located in the access facilities. During 2007, we entered into a UTE contractual agreement with Casino Club and Hapsa with respect to our riverboat casinos. See “—Strategic Arrangements in Argentina.” Our Buenos Aires casino business has been the subject of litigation from time to time. See “Risk Factors—Risks Related to the Gaming Industry and Our Business—Our business in Argentina generates a significant amount of our revenues and EBITDA, and any adverse developments with respect to it could negatively impact our financial condition and results of operations.”
• We have a 50% interest in Casino de Rosario S.A., a company that holds the concession for and operates a casino in Rosario, an industrial port located approximately 300 kilometers from Buenos Aires with a population of over 1.5 million. The casino commenced operations in October 2009 and has 80 gaming tables and 2,820 slot machines.
• In July 2007, we acquired a 75% interest in the Winner Group. In May 2010, we merged Winner Group with Unidelca, a large gaming company in Colombia, and we now hold 50.1% of the resulting combined business. The Unidelca acquisition significantly expanded our Colombian business, and we now own and operate 19 traditional casinos in Colombia with a total of 2,674 slot machines. Our largest traditional casinos in that market are the Casino Rio Bogota (138 slot machines), the Casino Hollywood Bogota (166 slot machines), the Casino Rock ‘N Jazz Bogota (123 slot machines), the Casino Caribe Centro Bogota (217 slot machines), the Casino Rio Medellin (217 slot machines), the Casino Caribe La Playa Medellin (343 slot machines) and the Casino Caribe Unicentro Bogota (125 slot machines).
• We currently have a 50% interest in the Majestic Casino, located in a prime commercial area in Panama City, Panama. The casino opened in December 2003. Our operating license expires in 2023.
• We manage Casino La Hispaniola in Santo Domingo, the capital of the Dominican Republic. It is located in the Hispaniola Hotel & Casino, which owns the premises and holds the operating license, and attracts customers with its various nightlife activities. Under our operating agreement with the hotel, we retain all revenues from the casino operations and pay the hotel monthly rent. In addition, the operating contract, which expires in February 2026, requires us to make certain improvements to the casino at our expense, and to pay the hotel for certain administrative services it provides.
• We manage Casino Lina in Santo Domingo, Dominican Republic. The casino is located in the Barceló Gran Hotel Lina Spa & Casino, which owns the premises and holds the operating license, and attracts customers with its modern decor and layout. Under our operating agreement with the hotel, we retain all revenues from casino operations and pay the hotel monthly rent. In addition, the operating contract, which expires in 2015, requires us to make certain improvements to the casino, at our expense, and to pay the hotel for certain administrative services it provides. The operating contact will automatically renew for an additional term unless either party provides notice of termination.
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• We manage Gran Casino Almirante in Santiago de los Caballeros, the second largest city in the Dominican Republic. The casino is located in the Gran Almirante Hotel & Casino, which owns the premises and owns the operating license. Under our operating agreement with the hotel, we retain all revenues from casino operations and pay the hotel monthly rent. In addition, the operating contract, which expires in 2020, also requires us to make certain improvements to the casino at our expense, and to pay the hotel for certain administrative services it provides.
• We operate the Majestic Lima casino located at the JW Marriot Hotel in Lima, Peru. We acquired the casino for $11.5 million in April 2005. The casino, which recommenced operations on November 22, 2005 following an extensive expansion and refurbishment, has 26 gaming tables and 230 slot machines. The license for the casino expires in January 2014. We also operate Casino Miami in Peru with a total of 200 casino-style slot machines and 15 tables.
Electronic Casinos
We operate 82 electronic casinos internationally as of September 30, 2012. Electronic casinos, which are casinos that offer enhanced types of casino-style slot machines and other electronic games such as blackjack or roulette through multi position electronic gaming machines, are very popular in Latin America. The following is a description of our electronic casinos, except as otherwise indicated, as of September 30, 2012:
Argentina. In the Province of Mendoza, we have licenses to operate 519 casino-style slot machines in the Casino Central Mendoza, and a maximum of 1,050 casino-style slot machines in 4 electronic casinos. Casino Central and four electronic casinos currently operate in Mendoza with an aggregate of 1,619 casino-style slot machines. In December 2008, Casino Buenos Aires assigned the concession agreement for renting slot machines at Casino Central Mendoza to Mendoza Central Entretenimientos, effective January 2009. The operating licenses for the other four electronic casinos in the province of Mendoza expire in 2020. In August 2010, the shareholders of Casino Buenos Aires approved the assignment of the concession agreement related to these four electronic casinos to Traylon S.A., a 50:50 joint venture owned by Casino Buenos Aires and Ciesa. This assignment was approved in February 2011 by the Instituto Provincial de Juegos y Casinos (Provincial Gaming Authority).
In addition, in November 2011, we completed the acquisition of a 33.3% ownership interest in Bingo Los Polvorines, a bingo hall located in the metropolitan area of Buenos Aires, for a total consideration of €5.9 million. The business hosts bingo games and 426 slot machines. During 2012, we also entered into arrangements for the right to acquire interests in two other bingo halls in Buenos Aires. See “—Strategic Arrangements in Argentina.”
Colombia. We own and operate 48 electronic casinos in Colombia with a total of 3,315 slot machines. The electronic casinos are located in Bogota, Medellin, Cali, Costa Norte, Barranquilla, Eje Cafetero and Cartagena. We have completed the process of integrating the Unidelca operations into our existing operations in Colombia. This process included the integration of Unidelca’s and Winner Group’s offices, the migration of Unidelca onto Winner Group’s IT systems, the alignment of business processes in order to increase productivity and a reduction of overall headcount.
Panama. We operate 26 electronic casinos and 7,300 slot machines in Panama. Pursuant to an arrangement with the government of Panama, during December 2009 we acquired the interests held by minority partners in Gaming & Services de Panama S.A., a company that operates our electronic casinos in Panama. See “Regulation—Republic of Panama.”
Peru. We operate two electronic casinos in Peru. The Joker Miraflores, which has an aggregate of 153 casino-style slot machines and which is located at the Double Tree (Hilton) Hotel in Lima, was opened in October 2005. The Premie Casino, which has 123 casino-style slot machines was reopened on December 2006. Operating licenses for these two electronic casinos must be renewed on an annual basis.
Other. In December 2010, our contract to operate the Casino Puerto La Cruz in Venezuela was terminated and we closed the Majestic Santo Domingo casino in the Dominican Republic. In May 2011, a referendum was held in Ecuador which resulted in a ban on all gaming activities in the country, and our Dann Carlton Hotel casino located in Quito, Ecuador was forced to permanently cease operations. In the summer of 2011, the Venezuelan gaming authorities temporarily halted all casino operations in order to evaluate and determine the future of the gaming industry in the country. Our two casinos in Venezuela, Gran Casino Margarita and Gran Bingo Maracaibo, were affected by this decision and forced to cease operations. We cannot anticipate when or if our casinos in Venezuela will be allowed to resume operations.
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Bingo Division
Spain. We are the leader of the bingo market in Spain, with, as of September 30, 2012, a total of 49 bingo halls, of which 35 are operated and majority owned by us. The remaining 14 bingo halls, in which we hold less than a majority interest, are operated by local partners.
Our bingo halls generate revenues from the sale of bingo cards, operations of slot machines installed in its halls and from food and beverage sales.
Revenues from traditional bingo games in Spain have been declining in recent years. We believe that this is due to a variety of factors. In Spain, we have been introducing machines, such as electronic bingo games, slot machines, and electronic roulette games, into some of our bingo halls. We believe that the introduction of these machines in our bingo halls will partly compensate for the decline of traditional bingo revenues.
During the twelve months ended September 30, 2012, our bingo halls in Spain received approximately 5.9 million visitors with an average wagered amount of approximately €64 per visit. In connection with efforts to reduce our cost base and enhance our portfolio, we closed one underperforming bingo hall in 2010, five additional underperforming halls in 2011 and one underperforming hall in the fourth quarter of 2012. We may close additional underperforming bingo halls in Spain in the future.
Our bingo halls are strategically located in most of Spain’s main cities in nine of the 17 autonomous regions:
• 14 in Andalusia;
• 12 in Catalonia;
• 8 in Madrid;
• five in the Canary Islands;
• three in Castilla la Mancha;
• two in Aragon;
• two in the Basque Country;
• two in Valencia; and
• one in Cantabria.
Mexico. During October 2005, we entered into an agreement with a Mexican company, Promociones e Inversiones de Guerrero S.A. (Pringsa), which holds a license to operate a total of 58 bingo halls in Mexico. In April 2010, we consummated an agreement with our Mexican partners under which we increased our ownership interest in Pringsa from 51% to 100% and the rights to utilize the license for 29 of the 58 bingo halls were transferred to our partners in a cash free spin off. As a result, Cirsa now owns 100% of Pringsa. Pringsa holds the license and the right to operate 29 bingo halls, including the 20 bingo halls operating in Mexico as of September 30, 2012.
In 2009, 2010, 2011 and the first nine months of 2012 we made significant investments in our bingo halls in Mexico in order to remodel and expand our facilities and implement the new “Casino Life” concept. The “Casino Life” concept offers our bingo hall customers a wide range of entertainment including cafes, bars, live music, sports betting and electronic bingo machines. During this period, we have enhanced our offering in bingo halls by installing top of the line casino-style slot machines made by Bally, International Game Technology, WMS Gaming Inc. and Aristocrat.
Italy. Our Bingo Division holds minority interests in companies that own and operate ten bingo hall businesses in Italy.
B2B
Our B2B Division designs, manufactures and distributes slot machines and gaming kits for the Spanish and international markets, and also engages in the development of interactive gaming systems, concentrating on ready-to-market products such as interconnected slot machines, linked bingo products and electronic and on-line lotteries.
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We sell slot machines directly from our manufacturing plant or through distributors, some of which we control or have investments in, to independent customers (mainly slot machine operators and other gaming establishments), as well as directly to our other divisions, principally the Slots Division.
Slot Machines. We manufacture a wide variety of slot machines. Our slot machines commonly feature reel and video format options, standard and “mini” sizes, full operator flexibility to adjust the limits regarding bets, maximum prize payout, aggregate prize payout as a percentage of amount wagered and other features in accordance with local regulations and operator preferences. In addition, our slot machines feature information and collection control systems and an optional bill validation device. In order to attract customers and compete with slot machines introduced by competitors, we introduce new games and themes that require our slot machines to be changed sooner than their mechanical life would require. The cost of a new slot machine is relatively small as compared to the increase in revenues attributable to a new successful game and is, on average, recovered by slot machine operators within a few months. The average selling price of one of our slot machines is approximately €1,826. From time to time, we provide volume discounts to purchasers.
We offer gaming kits to convert slot machine cabinets from an old game to a new game. The cost of a kit is lower than the cost of a new slot machine, therefore, purchasing gaming kits allows our customers to increase their revenues without having to invest in a new slot machine. The mix and relative profitability of slot machine cabinets and gaming kits can vary over time due to a variety of reasons, including general market conditions, the availability and popularity of new slot machine games, differences in demand for a game among regional markets and the pricing strategy of particular slot machine producers and distributors.
Product Sales. The following table sets forth total sales of our slot machines for the periods indicated:
Number of units sold
Year ended December 31,
2009 2010 2011 Nine months ended
September 30, 2012
Total ........................................................................................................... 37,400 32,050 30,536 21,317
In the twelve months ending September 30, 2012, we sold a total of 26,092 slot machines cabinets, gaming kits and other gaming machines, predominantly in Spain.
Production. We assemble all our slot machines in Spain.
We design most of our main core components, and outsource their manufacturing. Our assembly processes consist of component sub-assembly, final product assembly, customization and final testing. We also apply just-in-time management principles to match inventory levels to production needs.
We depend on many suppliers for the components used to assemble our slot machines. We have not encountered any significant production problems with any of these suppliers. We believe that the relevant components could be obtained from alternative suppliers, although at a higher potential cost and with a lower probability of timely delivery.
We ensure product quality through periodic internal inspections and use prototypes and pre-series batches to certify both individual components and manufacturing processes before mass production. In addition, we provide a limited three-month warranty on slot machines sold in Spain and will replace defective products during that time period.
Distribution of Products in Spain. We distribute slot machines and gaming kits in Spain through four channels of distribution: the Slots Division, independent slot machine operators, controlled distributors, and independent distributors. Large slot machine operators purchase slot machines and gaming kits directly from our sales offices. Most other slot machine operators buy from distributors who offer a wide selection of products (both manufactured by us and by third parties) at their sales showrooms and provide technical assistance. In order to obtain a direct relationship with these slot machine operators and increase our knowledge of their needs, we have acquired a 50% interest in several distribution companies which cover the most significant regions of Spain.
The following table shows our percentage sales of slot machines and gaming kits in Spain for each of our channels of distribution for the periods indicated:
Total ....................................................................... 100.0% 100.0% 100.0% 100.0%
Research and Development. We design all aspects of slot machines, from the rules and graphics of the game to computer software and hardware. We believe that the design of slot machines is critical in attracting players. In order to maintain player interest, games must be attractive, visually stimulating, interesting and varied. Consequently, we regularly test consumer views of the games’ aesthetics, features and quality, as we seek to provide a regular supply of new and popular games to the market.
As of September 30, 2012, we have a team of over 85 employees in our research and development group, including software programmers and designers who are responsible for designing software that is used in our new slot machine models. Our most popular slot machine models incorporate software designed by our research and development group.
Our interactive business is focused on network systems, linked bingo products, on-line lotteries and electronic instant lotteries. We are also working to develop video lottery management systems.
Networks. We support the Italian slots business by providing a platform that enables the interconnection of thousands of slot machines. This network systems technology will also be used in the network for our Italian VLT business.
Bingo Link. We have developed a system that allows the networking of multiple bingo halls. The system allows real-time linking of multiple bingo halls, thereby offering our customers the potential for larger prizes and jackpots. Additionally, the system is capable of delivering new bingo games and printing bingo cards in-house. Our bingo link system is operational in Andalusia, Madrid, the Canaries and Catalonia. As of September 30, 2012, more than 130 bingo halls are permanently linked under central systems for each region, 32 of which are operated and majority owned by us and 11 of which, in which we hold a minority interest, are operated by local partners.
On-Line Gaming
Our On-Line Gaming Division commenced operations in Spain and Italy during the third quarter of 2012 after obtaining the necessary permissions and licenses. Our offer includes sports betting, roulette, blackjack, “punto y banca”, poker and bingo. We expect that it will take approximately three years to reach EBITDA break even. Our on-line gaming plans do not contemplate any material investments because our operating platform is based on technology partnerships with global suppliers.
Competition
Slots Division
Due to the fragmentation of the slot machine segment in Spain, we compete with a large number of regional and, generally, much smaller slot machine operators. There are, however, several significant competitors, including Codere and Orenes, which we believe are substantially smaller than us. In Italy, we compete with a number of other authorized slot and VLT operators, some of which are substantially larger than us and have access to significant financial resources. The principal factors of competition in this segment are the ability to maintain good on-going relationships with site owners, provide excellent service to the site owner and place popular slot machines and VLTs at the most attractive sites. In order to obtain the most profitable sites, we may selectively acquire slot machine operators when available. To retain the profitable sites, we must offer attractive renewal agreements to our current site owners. As the market for slot machines is consolidating, we may compete with these larger competitors to acquire new or existing slot machine sites.
Casinos Division
Although casino owners have had limited direct competition from other casinos, we may face competition from other forms of gaming, for instance bingo hall operators. In Spain and Latin America, the number of casino licenses issued may increase in certain jurisdictions in which we operate and, as a result, there may be an increase in direct competition between casinos. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities offered and the implementation of successful marketing programs.
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Bingo Division
Although the bingo hall market in Spain is dominated by a few large companies, we compete with a large number of regional bingo hall operators. Our principal competitors, each of which is substantially smaller than us, are Grupo Alfredo García, Grupo Ballesteros, Grupo Rank and Grupo Orenes Franco. In addition, we estimate that independent owners operate several hundred bingo halls throughout the country. In Mexico, we operated approximately 6% of the total licensed bingo halls in 2011 and we compete with other licensed bingo hall operators and unlicensed operators. Operators of bingo halls also face competition from other forms of gaming. We believe that our size allows us to compete effectively in the bingo hall market and that the economic downturn and the increase in availability of advanced technologies will bring further consolidation in bingo hall operations.
B2B Division
In the manufacturing of slot machines for Spain, there is a high level of competition between a small number of manufacturers who dominate the Spanish market. The Spanish slot machine market is a separate market from the international slot machine market due to consumer preferences and Spanish regulations which impose, amongst others, specific design requirements on slot machines that are not placed in casinos. In slot machine manufacturing, our main competitors in Spain are Recreativos Franco and SENTE. The quality, appeal and originality of games are the key factors in determining the success of our B2B Division.
Manufacturers of slot machines can be expected to continue to improve the design and performance of their slot machines and to introduce new popular games with greater revenue producing potential and more competitive prices. From time to time, one or more of our new games may prove unsuccessful, which may cause our market share to erode and our profitability to decrease. We have been successful in introducing popular new games in the past and, because of our continuing commitment to research and development, are confident that we can produce popular new games in the future.
Technological Change
Constant innovation is particularly important in the manufacture of slot machines, because they have a short commercial life. For instance, we believe that the average commercial life of an installed slot machine is approximately four to five years in Spain. In addition, existing technology (such as internet gaming), as well as proposed or as yet undeveloped technologies may become more popular in the future and render our games less profitable or even obsolete. We believe that we have developed technological and other advantages such as the proprietary technology contained in some of our most popular games, as well as the new generation of slot machines in video formats which allow a wide variety in choice of games, including poker, blackjack, keno and bingo. However, we cannot assure you that these technological and other changes would allow us to continue to innovate and compete effectively.
Strategic Arrangements in Argentina
During May 2007, we and Casino Club S.A. obtained regulatory approval for our strategic arrangements with respect to the operation and future development of our casino operations in the key areas of Buenos Aires, Argentina’s capital and largest city. We and Casino Club also continue to work together with respect to the development and operation of any future gaming operations that we might undertake in Argentina.
Cirsa, through our subsidiary Casino Buenos Aires, and Casino Club and Hapsa (owner of the Palermo racetrack), through their subsidiary Ciesa, entered into a joint venture agreement known in Argentina as a Unión Transitoria de Empresas (UTE) with respect to the operation and future development of the casino business in the city of Buenos Aires. With effect from June 1, 2007, our two existing riverboat casinos in Puerto Madero have been operated under the UTE contractual arrangement. The UTE arrangement is overseen by a five-person management board, of which we appoint three members, with key decisions regarding the UTE arrangement requiring a supermajority approval. We and Ciesa each have a 50% economic interest under the UTE arrangement, although we entered into an amendment with effect from January 1, 2012 for a four-year term pursuant to which we receive 45% of the dividends paid under the UTE in consideration of Ciesa’s agreement to supply assumed costs relating to the management of assets being operated under the UTE. The amendment is effective between Ciesa and us, however, is not effective vis-a-vis third parties as it has not been registered with the Public Registry of Commerce. We have retained the ownership of all of our existing properties, including the licenses, and all other assets being operated under the UTE arrangement. As part of the arrangements, we committed to invest up to $120 million. Approximately $20 million was invested to refurbish the main riverboat casino, including the installation of new slot machines, new gaming machine equipment, latest generation operating systems (accounting, player tracking and ticket-in/ticket-out (TITO)), site decoration and the enhancement of food and beverage facilities. This project was completed in June 2008. The refurbishment of our second casino was completed in 2009. The refurbishment of the second casino and the construction of new access facilities that connect the
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two vessels and a new reception facility were completed in 2010. As a result of the completion of this project, the investment commitment of Ciesa was satisfied.
We acquired a 50% interest in Casino de Rosario S.A., which owns a concession in Rosario, from Casino Club during 2007. At the time of acquisition, Casino Club was developing the Rosario casino after winning an exclusive 30-year concession to operate a casino in Rosario. We acquired our stake for consideration of $20 million, half of the $40 million of funds invested by Casino Club in developing Rosario to that time. The casino commenced operations in October 2009 and the total cost of the casino through the date of opening was approximately $260 million.
In November 2011, we completed the acquisition of a 33.3% share in, Bingo Los Polvorines, a bingo hall located in the metropolitan area of Buenos Aires for a total consideration of € 5.9 million. Casino Club acquired an equal stake of the bingo hall, which is operated by our combined casino management team. We consolidate 33.3% of the financial results of this hall into our Casino Division results. During 2012, we also obtained the right to acquire interests in two additional bingo halls in Buenos Aires.
Property, Plant and Equipment
Our principal executive offices are located at Carretera de Castellar, 298, Terrassa (Barcelona), Spain, and are owned by Nortia. See “Certain Relationships and Related Party Transactions.” The table below sets forth our principal properties as of September 30, 2012.
Location Approximate
Size (m2) Purpose
Terrassa, Spain(1) ................................................................................ 5,341 Corporate Headquarters Terrassa, Spain(1) ................................................................................ 3,009 Unidesa R&D Center Terrassa, Spain(1) ................................................................................ 600 Bingo Equipment Manufacturing Terrassa, Spain(1) ................................................................................ 7,331 Unidesa Factory Valencia, Spain ................................................................................... 5,672 Casino (Valencia) Marbella, Spain ................................................................................... 5,427 Casino (Marbella) Buenos Aires, Argentina ..................................................................... 6,623 Riverboat Casinos Buenos Aires, Argentina(2) .................................................................. 54,000 Administrative Support Buildings Rosario, Argentina .............................................................................. 130,000 Hotel & Casino
(1) Indicates a property that is leased. See “Certain Relationships and Related Party Transactions.”
(2) Includes a 1,770 m2 administrative building and a 44,547m2 visitor parking area.
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Employees
The number of employees employed by us at the end of 2009, 2010, 2011, and the nine months ended September 30, 2012 were 14,390, 16,047, 15,545, and 15,344 respectively. Most of our employees have a permanent employment contract. The following tables set forth, as of September 30, 2012, a breakdown of our employees by the main category of activity and geographic area:
Total ................................................................................................................................................................................................. 15,344
(1) Includes employees of bingo halls in which we own less than a majority interest.
Geographic area Number
Spain ................................................................................................................................................................................................... 3,851 Italy(1) .................................................................................................................................................................................................. 592 Argentina............................................................................................................................................................................................. 4,892 Colombia ............................................................................................................................................................................................. 2,494 Panama ................................................................................................................................................................................................ 1,605 Dominican Republic............................................................................................................................................................................ 619 Other ................................................................................................................................................................................................... 1,291
Total ............................................................................................................................................................................................... 15,344
(1) Includes employees of bingo halls in Italy in which we own less than a majority interest.
We are subject to different national and regional industry-wide collective bargaining agreements in each of the respective sectors in which we operate, except for our casinos in Marbella, Valencia, Puçol, La Toja and Buenos Aires, whose employees are party to collective bargaining agreements directly with us. In addition, we are a party to a collective bargaining agreement with the employees of Universal de Desarollos Electronicos, S.A., a slot machine manufacturing subsidiary, concerning hours of employment. Under the relevant national and regional collective bargaining agreements, salary scales are established for each position in each industry. These salary scales are usually revised annually and typically provide for increases in the salary scales in accordance with increases in the consumer price index in Spain or a slightly larger increase (usually 1% to 2%). We have a policy of meeting or exceeding the established salary scales for our employees. We believe our relationships with employees and unions to be satisfactory.
Licenses and Trademarks
We have registered our corporate logo and have registered, or are in the process of registering, each of our relevant brand names, marks and logos which distinguish our products for trademark protection in Spain and other jurisdictions, including the European Union and the United States.
Environmental and Other Government Regulations
Our manufacturing facilities are subject to environmental, health and safety and other laws and regulations, including laws and regulations governing disposal of solid and a variety of hazardous waste and water discharges from our silk screen printing operations. We are required to obtain environmental licenses for our production facilities and are also subject to periodic inspections by regulatory authorities. We have not incurred any significant environmental liabilities during our history.
Our products, activities and premises are subject to regulatory approvals in the countries in which we act as an operator of slot machines, casinos or bingo halls or the countries in which we sell our slot machines. See “Regulation.”
Regulatory Action Concerning Electronic Casinos in Panama
For a description of certain regulatory and legislative developments affecting our Panamanian electronic casinos business, see “Regulation—Republic of Panama.”
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Litigation
Legal Proceedings and Claims relating to Buenos Aires Casinos
Our casino operations in Buenos Aires, Argentina have been directly and indirectly subject to a variety of legal proceedings and other claims over the past fourteen years. These proceedings and claims have included several proceedings regarding the validity of the license, criminal proceedings against a number of our directors and employees in Argentina relating to the importation of the riverboat casino into Argentina and potential tax claims by municipal tax authorities.
Litigation in connection with the casino license
The operation of our casino in Buenos Aires has been subject to local government challenge and related litigation. There have been six principal proceedings. The proceedings have taken place in the Federal courts of Argentina and the City courts of the City of Buenos Aires.
Proceedings relating to the power to license and regulate riverboat and adjacent land
The first proceeding principally involves the City of Buenos Aires and the State Lottery of Argentina. In 1999, shortly after the State Lottery of Argentina granted the license to operate our casino in Buenos Aires, the City of Buenos Aires challenged the State Lottery of Argentina’s authority to grant us our license and ordered us to stop any gaming activities in our casino. Immediately thereafter, the State Lottery of Argentina commenced legal proceedings before an Argentine Federal court against the City of Buenos Aires seeking an injunction to prevent any interference with its jurisdictional authority by the City of Buenos Aires.
Simultaneously, the captain of the riverboat casino (an employee of Casino Buenos Aires) commenced a second legal proceeding before an Argentine Federal court against the City of Buenos Aires, the Federal government and the Federal Port Authority seeking a court ruling to determine the jurisdiction and regulatory authority over the gaming activity on the riverboat. Casino Buenos Aires joined this proceeding at a later stage and requested a temporary restraining order to suspend any legal action aimed at interfering with the riverboat casino’s gaming activities. The temporary restraining order was granted by the lower Federal court and confirmed by the Federal Court of Appeals in 1999.
Casino Buenos Aires initiated a third proceeding by filing a claim against the City of Buenos Aires requesting an injunction to prevent the City of Buenos Aires from exercising jurisdiction over the land next to our riverboat. The Federal court granted a temporary restraining order against the City of Buenos Aires. The temporary restraining order was appealed by the City of Buenos Aires before the Federal Court of Appeals.
Proceedings relating to the settlement agreement
On October 30, 2003, the City of Buenos Aires and the State Lottery of Argentina entered into a settlement agreement relating to the first legal proceeding, in which the parties agreed (i) that the State Lottery of Argentina has the regulatory authority over our casino in Buenos Aires, (ii) a method for the distribution of gaming royalties and related fees between them, and (iii) the termination of all pending litigation between them, in each case without acknowledgement by either party of any underlying rights. The settlement agreement has a four year renewable term, and either the State Lottery of Argentina or the City of Buenos Aires may terminate the settlement agreement by giving notice within 120 days prior to the expiration of any four year period.
The settlement agreement relating to the first legal proceeding came under challenge through a fourth proceeding that had been initiated by the City of Buenos Aires Ombudsman. This proceeding was discontinued by the Ombudsman, but was subsequently renewed by a private individual. In March 2005, in response to the complaint brought by such individual against the City of Buenos Aires, a City court of the City of Buenos Aires (which is a municipal court, and not a Federal court) ruled that the settlement agreement was void and the law ratifying the settlement was contrary to the constitution of the City of Buenos Aires, and ordered that our casino in Buenos Aires be closed. The City of Buenos Aires appealed the decision of the City court of the City of Buenos Aires. Upon becoming aware of this decision (we are not party to the proceeding in the City court and did not have access to the court file), we requested that the Argentine Federal court extend the existing injunctions against the City court of the City of Buenos Aires order. On March 23, 2005, the Federal court issued orders to the Argentine Coast Guard, National Gendarmerie, the Federal Police and the City of Buenos Aires ordering them to observe the rulings issued in the Federal court case and to abstain from taking any action that may hinder of affect activities carried out on the casino under the license granted by the State Lottery of Argentina. The Federal court also ordered measures to preserve its jurisdiction and the injunctions that it has ordered.
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As a result of the aforementioned ruling by the City court of the City of Buenos Aires declaring the settlement agreement void, Casino Buenos Aires initiated fifth proceeding, which is a declarative lawsuit before an Argentine Federal court against the City of Buenos Aires to obtain a ruling on the constitutionality and validity of the agreement. Casino Buenos Aires also requested an injunction to prevent the City of Buenos Aires from exercising jurisdiction over the second riverboat. The injunction was granted by the Federal court in favor of Casino Buenos Aires, but the City of Buenos Aires appealed. On February 10, 2006 the Federal Court of Appeals confirmed the injunction in favor of Casino Buenos Aires. The City of Buenos Aires appealed the injunction, but the Federal Supreme Court rejected the appeal on August 30, 2006. The court file was sent back to the Argentine Federal court where Casino Buenos Aires initiated the declarative lawsuit, in order for such proceedings to be continued. On April 19, 2011, the Argentine Federal court affirmed the validity and legal effect of the settlement agreement. The court also affirmed the right of Casino Buenos Aires to operate gaming activities on a boat as authorized by the State Lottery of Argentina. The Federal court decision is a final decision as it was not appealed.
With respect to the fourth proceeding, on October 6, 2006, the Supreme Court of the City of Buenos Aires (the highest court of the City of Buenos Aires) held that the decision by the City court that the settlement agreement between City of Buenos Aires and the State Lottery of Argentina was void, as described above, was itself null and void. According to the Supreme Court of the City of Buenos Aires, the State Lottery of Argentina should have been a party (as a defendant or as a third party defendant) since the beginning of the proceedings, and the State Lottery of Argentina did not have knowledge of such proceedings until it was served with notice of the City court decision. Moreover, the Supreme Court of the City of Buenos Aires stated that had the State Lottery of Argentina been a defendant, the case would have fallen under the scope of federal jurisdiction (and not under the jurisdiction of the City court). In the event that a new case is to be filed against the State Lottery of Argentina, the case should be filed in a Federal court. There can be no assurance that the settlement agreement between the City of Buenos Aires and the State Lottery of Argentina will not be challenged in a Federal court.
However, the Supreme Court of the City of Buenos Aires also stated that subject matter jurisdiction over gaming activities (especially casinos) is local and that all casinos are subject to the control of the Provinces, except the casino in the city of Buenos Aires (due to its settlement agreement with the State Lottery of Argentina). The Supreme Court also stated that it is generally not possible to limit the police powers of the government of the City of Buenos Aires with respect to gaming activities and income levying, despite the fact that the casino is harbored in the port of the city. Furthermore, the Supreme Court of the City of Buenos Aires pointed out that lower Federal courts cannot interfere with the jurisdiction of local courts and that, although there can be disputes between federal and local courts as to which court has jurisdiction over the case, under Argentine law, a lower Federal court cannot mandate a local court.
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Developments in the proceedings relating to the riverboat and adjacent land
In connection with the second legal proceeding the City of Buenos Aires requested a clarification as to whether the Federal court ruling also prohibited the City of Buenos Aires from imposing taxes on the riverboat casino. The Federal court rejected this request, and the City of Buenos Aires appealed the decision. While this issue was on appeal, the State Lottery of Argentina entered into the settlement agreement, and argued that the appeal had become moot on account of the settlement agreement. The Federal Court of Appeals requested that the City of Buenos Aires advise the Court if they were ending their appeal in light of the settlement agreement. The City of Buenos Aires answered that it was continuing the appeal, and asked that the Federal Court of Appeals rule on the appeal. The Federal Court of Appeals rejected the appeal and confirmed the injunction preventing the City of Buenos Aires from assessing or collecting municipal turnover tax. The City of Buenos Aires filed an extraordinary appeal that was also rejected. The City of Buenos Aires then filed a remedy of complaint (recurso de queja) before the Federal Supreme Court. In February 2009, Casino Buenos Aires amended its complaint on account of legislation passed by the City of Buenos Aires establishing specific rates applicable to betting and games of chance for municipal turnover tax.
On October 18, 2011, the Federal Supreme Court determined that the remedy of complaint (recurso de queja) should be decided by the court, declared the decision of the Federal Court of Appeals without effect, and concluded that the lawsuit filed in the case was moot due to the existence of a settlement agreement. Additionally, because the original purpose of the lawsuit filed in the case was seeking a ruling to determine jurisdiction and regulatory authority over gaming activity on the riverboat, the Supreme Court determined that any decision related to the exercise of local tax powers by the City of Buenos Aires was beyond the scope of its decision.
On October 24, 2011, Casino Buenos Aires commenced a sixth proceeding in a Federal court against the Federal government, the State Lottery of Argentina and the City of Buenos Aires to determine the applicability of municipal turnover tax in light of the concession documents and the settlement agreement. In connection with this proceeding, on November 9, 2011, the Federal court granted an injunction pursuant to which the City of Buenos Aires was ordered to abstain from issuing any administrative decision or taking any action to collect municipal turnover tax in relation to the activities of Casino Buenos Aires in the Estrella de la Fortuna and Princess boats, until a final decision was made in relation to the lawsuit. The injunction was appealed by the City of Buenos Aires but rejected. An extraordinary appeal was similarly rejected by the Court of Appeals in December 2012. The City of Buenos Aires retains the option of filing a remedy of complaint (recurso de queja) with the Federal Supreme Court.
In connection with the third proceeding, in which Casino Buenos Aires had sought an injunction against the City of Buenos Aires, the Federal Court of Appeals upheld the injunction granted by the Federal court preventing the City of Buenos Aires from exercising jurisdiction over the land adjacent to our riverboat casino. The City of Buenos Aires unsuccessfully filed an extraordinary appeal against this decision. In July 2008, the Federal court suspended the third proceeding pending resolution of the second proceeding. Following a final determination that the second proceeding was moot due to the existence of the settlement agreement, the Federal court similarly concluded that the third proceeding was also moot. Casino Buenos Aires reserved the right to file a new lawsuit in connection with the land adjacent to the riverboat casinos. In April 2010, City of Buenos Aires officials attempted to inspect and to stop a construction project being undertaken on the land adjacent to our riverboat casinos. Casino Buenos Aires representatives informed such officials that the construction project had been authorized by the Federal Port Authority and that the injunctions ordered in the proceedings prevented the City of Buenos Aires from exercising jurisdiction over the land adjacent to our riverboat casinos. Casino Buenos Aires filed a petition to inform the court about such attempt by the City of Buenos Aires and the court ordered that a notice be sent to the City of Buenos Aires informing it that the injunctions ordered in the proceedings were in full force and effect.
The current term of the settlement agreement expires in December 2015. If upon termination of the settlement agreement, the City of Buenos Aires decides to initiate new legal proceedings challenging the validity or our license or the State Lottery of Argentina’s regulatory authority over our casinos in Buenos Aires, or otherwise interferes with its operation, we believe we may be able to prevent such interference under temporary restraining orders issued at our request and currently in force against the City of Buenos Aires, or by requesting new restraining orders in the future. However, we cannot assure you that any such temporary restraining orders will be granted or enforced.
Claims for Municipal Turnover Tax
The City of Buenos Aires also has claimed that the riverboat casino is subject to a so-called municipal turnover tax. This is a local tax levied by the City of Buenos Aires on any commercial activity usually performed, regardless of the type of activity or the nature of the person performing the activity. The amount of the tax is determined on the basis of the gross income during the fiscal year of the taxed activity. The City of Buenos Aires has neither assessed nor claimed any specific amount for this tax yet. The City of Buenos Aires, however, has made several attempts to inspect our premises in Buenos Aires in order to obtain the necessary evidence and information to be able to assess and collect such tax. We do not believe that we are subject to the turnover tax on a variety of grounds. Among other things, our riverboat
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casino is not located within the jurisdiction of the City of Buenos Aires. In addition, we believe that under the settlement agreement, the City of Buenos Aires is prevented from making any tax claims against Casino Buenos Aires, and the city is also enjoined from making any such claims under the temporary restraining orders issued by the Argentine Federal Court. Nevertheless, if we were found to be subject to such tax and required to pay such tax, it could have a material adverse effect on our results of operations.
Criminal proceedings against former officer
On October 15, 1999, four members of Congress made a criminal claim in an Argentine Federal Criminal Court based on the alleged smuggling of the riverboat on which our casino in Buenos Aires is operating. The alleged smuggling relates to the payment of certain customs taxes in connection with the importation of the riverboat, which were already satisfied by Casino Buenos Aires. A criminal case was initiated against Mr. Sánchez Uroz, former Chairman of Casino Buenos Aires, other directors and employees of the casino and public officers of the Argentine Federal Custom Authority. Casino Buenos Aires, however, was never accused of any wrongdoing. All charges were dismissed against all parties at such time. On April 21, 2004, an Argentine court issued an order dismissing the charges against Mr. Sánchez Uroz, which decision was appealed by the prosecutor. On July 5, 2004, the Court of Appeals affirmed the ruling of the Argentine court. Both the prosecutor and the Argentine Federal Custom Authority appealed this decision of the Court of Appeals. Upon appeal, on April 12, 2005, the Argentine Court of Cassation revoked the decision of the Court of Appeals to dismiss the case on the grounds that the Court of Appeals lacked sufficient grounds because certain evidence had not been duly considered. The Court of Appeals reviewed its previous dismissal of the case and on June 21, 2005, confirmed the dismissal based on additional arguments that convinced the Court that there is insufficient evidence to prosecute Mr. Sánchez Uroz. The decision of the Court of Appeals has not been appealed to the Court of Cassation, which made the court’s decision a final declaration.
Claims by Italian judicial body and regulator
In June 2007, the Italian Corte dei Conti (the Italian judicial institution whose responsibility is the safeguard of public finance) (“CdC”), acting through its own prosecutor as permitted under Italian law, started proceedings against Cirsa Italia in relation to an alleged failure by Cirsa Italia to comply with certain of its obligations arising from its role as an authorized network operator of slot machines in Italy and for failing to provide a minimum level of service. The CdC also sought to impose fines for such failures. The CdC claimed four types of penalties for the alleged violations. At or about the same time, the CdC, acting through its prosecutor, began similar proceedings against the other nine Italian network operators, as well as proceedings against AAMS, alleging that AAMS had been negligent in not ordering the fines itself.
After the CdC prosecutor started proceedings against the AAMS, the AAMS in turn started proceedings against Cirsa Italia and the other nine network operators before the Administrative Court for the Region of Lazio (the “TAR”). The AAMS claimed the same four types of penalties for the alleged violations as the CdC claim.
The CdC proceedings and the AAMS proceedings have been ongoing concurrently as described in the following discussion.
CdC Proceedings
In the CdC proceedings against Cirsa Italia, the CdC prosecutor alleged that Cirsa Italia’s non-compliance had resulted in damages to the Italian state, and calculated the compensation payable by Cirsa Italia for all of the alleged violations as €3.3 billion in the aggregate. Cirsa Italia filed a motion with Italy’s highest court, the Corte di Cassazione, on the grounds that the CdC did not have jurisdiction over Cirsa Italia, nor over the subject matter at issue in the proceedings. In accordance with Italian civil procedure, we notified the CdC of our motion to the Corte di Cassazione. Pending a ruling on the issue by the Corte di Cassazione, the CdC suspended the proceedings and suspended the effectiveness of its request for € 3.3 billion in compensation.
The hearing at the Corte di Cassazione on the issue of jurisdiction was held on October 27, 2009. Following the hearing, the Corte di Cassazione issued a ruling on December 4, 2009 holding that the CdC had jurisdiction over the proceedings.
The Corte di Cassazione reasoned that the claims brought forth by the CdC were of a different nature than those brought by AAMS, finding that while the AAMS’s claims were for our failure to comply with the service standards of the concession, as amended, the CdC’s claims were brought by the CdC prosecutor for the alleged economic damage the Italian state has incurred as a result of our (and of the other network operators’) alleged conduct. Therefore, the Corte di Cassazione found that the CdC is the proper forum in which to determine the existence and the extent of any damage to the Italian state.
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On March 24, 2010, the CdC revoked the suspension of the effectiveness of its request for €3.3 billion in compensation and the suspension of the CdC proceedings on the merits to determine the amount of economic damage, if any, Cirsa Italia should pay to the Italian state.
The proceedings resumed, and a hearing was held on October 11, 2010. During November 2010, the CdC issued two partial rulings, which rulings rejected the procedural objections raised by Cirsa Italia. One of the objections had asserted that the CdC prosecutor’s acts should be nullified because such acts were not based on specific and detailed evidence of the damages allegedly suffered by the Italian state. A second objection had asserted that the CdC prosecutor had proposed an illegitimate duplication of the damages allegedly suffered by the Italian state and the liquidated damages claimed by the AAMS. However, the CdC ruled that the standards used by the CdC prosecutor to determine the amount of the €3.3 billion in compensation were incorrect, and that the prosecutor should determine what was the amount of lost income to the Italian state from the alleged conduct of Cirsa Italia and the other network operators. The CdC directed the prosecutor to undertake further investigations on this question.
In the ruling, the CdC also ordered that the governmental entity that has responsibility for the design and implementation of the slot machine network, the SOGEI (Information and Communication Technology Company of the Ministry of the Economy and Finance), should be added as a party to the CdC proceedings. The CdC also designated a company to act as a technical consultant and to prepare a report to ascertain whether Cirsa Italia and the other network operators are entirely responsible for the alleged economic damage to the Italian state or whether other third parties, including the SOGEI, are also responsible. The CdC directed that the technical consultant deliver the report to the CdC within six months.
Pending the delivery of the technical report, Cirsa Italia filed an appeal against the CdC partial ruling issued in November 2010 on the grounds that the CdC prosecutor violated its legal obligation to only bring legal action for damages to the Italian State where the damages were the result of gross negligence or willful misconduct and after having obtained specific and detailed evidence of such damages. A hearing in respect of the appeal has been set for March 24, 2013. Cirsa Italia also filed a separate appeal against the second November 2010 CdC partial ruling on the grounds that (among the other procedural objections) the liquidated damages requested by the CdC prosecutor constituted an illegal duplication of the fines claimed by the AAMS. A hearing in respect of this appeal has not yet been set.
Following the delivery of the technical consultant’s report, the CdC resumed its proceedings, and subsequently issued a decision on February 17, 2012 affirming the merit of the claim brought by the prosecutor against Cirsa Italia. The decision was entered on the grounds that Cirsa Italia’s conduct resulted in an indirect waste of public funds due to its failure to deliver a public service for which it received payment and ordered payment by Cirsa Italia of an amount equal to €120 million. Cirsa Italia filed its appeal against this judgment on April 23, 2012 on the basis that the decision is not based on solid evidence, that it violates substantive and procedural principles for evaluation and quantification of damages, and that it does not take into account the previous decision of the Italian Council of State on the same matter (as described below under “AAMS Proceedings”). In addition, we contested the fact that a decision on contractual damages falls within the jurisdiction of the CdC, which may only assess the existence of other damages. The filing of the appeal has automatically suspended the effectiveness of the decision taken by the CdC on February 17, 2012. The CdC has not yet set a date for the appellate hearing and it is therefore not possible to estimate the timing for the rendering of a final judgment by the CdC. Any such judgment would only be subject to further appeal before the Corte di Cassazione on jurisdictional grounds. Since the Supreme Court has previously ruled on certain jurisdictional claims, there can be no assurance that such an appeal would be successful.
AAMS Proceedings
In its proceedings against Cirsa Italia, the AAMS sought payment from Cirsa Italia of the same fines as claimed by the CdC, in the same amount of €3.3 billion, not to be duplicative of the fines requested by the CdC prosecutor. On July 25, 2007, the TAR denied the AAMS’s request. The AAMS has not appealed this ruling, and the ruling is final and no longer subject to appeal.
In March 2008, Cirsa Italia and the other nine operators executed a retroactive amendment to their respective concessions with AAMS. This amendment, which applies retroactively, reduced the standard of services required of the operators, concurrently reducing the fines applicable in case of failure to comply with the service standards, in line with an opinion of the Italian Council of State which had required the AAMS to redefine the service standards and applicable fines in accordance with the principles of fairness, impartiality and economic feasibility. The amendment reduced the service standards for most types of services; however, it did not define the standard, or the related fine, for certain services, having delegated their definition to a special commission, which commission was established in November 2008 and completed its tasks in July 2009. The AAMS recalculated the fines applicable to Cirsa Italia, as well as to the other operators, in accordance with the terms of the amended concession, in relation to all the services for which the amendment set out a defined service standard and related fine. The AAMS calculated that the fine actually applicable to
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Cirsa Italia for three of the four alleged violations was approximately equal to €156,000, instead of the approximately €300 million calculated by the CdC for the same three violations.
During September and October 2008, AAMS issued formal requests to Cirsa Italia for payment of the aggregate fines of approximately €156,000. Cirsa Italia challenged these requests before the TAR, on the grounds that the fines were not lawfully due. A hearing on the matter was held at the TAR on June 29, 2009, addressing all three requests. On November 26, 2009, the TAR ruled in favor of AAMS, confirming that its claims for approximately €156,000 of fines were lawful. We have appealed this ruling and on June 6, 2011, the Italian Council of State vacated the three alleged violations and related fine of approximately €156,000 and affirmed the absence of negligence or breach by Cirsa Italia.
As discussed above, in July 2009, the special commission issued a report defining the standards of service that the AAMS should take into account in order to determine the size of the fine for the fourth alleged violation. The commission report states that the alleged violation has not caused damage to the Italian state, and that in the event that the AAMS should impose a fine on Cirsa Italia and the other network operators, the amount should not exceed 10% of the annual revenue from providing interconnection services of Cirsa Italia and the other network operators. The commission report stated that the annual revenue should be considered to be, on average, 0.8% of the “coin in” (amounts wagered) for the network operators. Following the receipt of the commission report, the AAMS submitted a request to the Italian Council of State to confirm that the standards proposed by the special commission were appropriate. On September 30, 2010, the Italian Council of State issued a statement to the effect that if the fines were imposed on the network operators, the amount should not exceed 11% of annual revenue from providing interconnection services, which annual revenue is considered to be, on average, between approximately 0.25% and 1.20% of “coin in” (amounts wagered).
On October 29, 2010, Cirsa Italia and the other network operators entered into a new amendment to the concessions originally granted in 2004. In the amendment, the AAMS established that fines imposed as a consequence of violations of the concession shall not exceed 11% of the network operator’s actual compensation. Therefore, the maximum amount of the fine that can be imposed on the network operators for the fourth alleged violation is 11% of annual revenue from providing interconnection services (where such revenue may not exceed 3% of amounts wagered for each machine) during the period in question (2004 to 2007). Cirsa Italia presently believes that the maximum amount of the fine determined and imposed under such methodology should not be material to the business or results of operations of Cirsa Italia. In connection with entering into the amendment, Cirsa Italia and the other network operators have reserved the right to further appeal of the AAMS proceedings.
On February 20, 2012, AAMS notified Cirsa Italia of its determination that Cirsa was liable for payment of €10.2 million in regard to the fourth alleged violation. We filed our appeal against the determination of AAMS on April 15, 2012 on the substantive legal grounds which were used to set aside the first three alleged violations, as well as on the basis that, the proposed penalty is improperly calculated. In particular, we believe that the basis on which the penalty has been calculated (in percentage points) encompasses not only the amounts due to Cirsa Italia in its capacity as concessionaire and manager of the network, but it also improperly includes the amounts due to Cirsa Italia as operator of the network. On May 10, 2012, the TAR suspended the effectiveness of the fourth penalty as a matter of law pending a determination by the court on the merits of the case. The hearing to consider the merits of the case has been set for February 20, 2013. The TAR should issue a ruling within 45 days from the date of the hearing, though this date may be extended. In the event the TAR were to reject Cirsa Italia’s appeal, such decision would be subject to appeal before the Italian Council of State.
Conclusion
While we are vigorously challenging the claims that are the subject of the CdC and AAMS proceedings, there can be no assurance that the claims will not be successful and we will be found liable for some amount of damages or as to when the proceedings relating to the claims will be finally resolved. As described in preceding discussion, during the course of the proceedings, a number of rulings been issued and actions have been taken (including amendments to the concessions) that we believe can be expected to have the effect of significantly reducing the size of the initial claims by the CdC and the AAMS. Nevertheless, if the claims were to be determined adversely to us in the amount currently claimed (or any amount of a similar magnitude in comparison to the revenues and assets of our Italian slot business), and our subsequent appeals, if any, were not successful, the requirement to pay such amount (including any attempt to enforce such claim against Cirsa Italia) could have a material adverse effect on the business and results of operations of Cirsa Italia.
Other Litigation
We are involved in a number of other legal proceedings and claims incidental to the normal conduct of business. We believe that these other proceedings and claims will not, individually or in the aggregate, have a material adverse affect on our business, financial condition, or results of operations.
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REGULATION
European Union
There is currently no specific EU legislation governing games activities. Instead, general EU rules and principles under the Treaty on the Functioning of the European Union apply to gaming activities.
The EU Court of Justice has recognized that the legislation on games based on chance is one of the areas in which there are significant moral, religious and cultural differences between the EU Member States. In the absence of harmonization in the European Union on such matters, each EU Member State must determine, in accordance with its particular value system, what is required in order to ensure that the relevant interests are protected. EU Member States are free to set their policy objectives and restrictions on betting and gaming and, where appropriate, to define in detail the level of protection required. However, the restrictive measures that they impose may constitute restrictions to the freedom to provide services in the EU internal market and must accordingly satisfy the conditions laid down in the case law of the EU Court of Justice as regards their proportionality with respect to achieving the objectives of the relevant EU Member State.
Gaming activities which involve wagering a stake with pecuniary value in games of chance, including lotteries, gaming in casinos and betting transactions are excluded from the scope of EU Directive 2006/12/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market. This Directive aims to eliminate barriers to the development of service activities between Member States in order to strengthen the integration of the peoples in Europe and to promote balanced and sustainable economic and social progress. The implementation of this Directive has implied the material amendment of a large number of laws and regulations of each of the Member States.
On October 2012, the EU Commission sent to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, a communication towards a comprehensive European framework for on-line gambling. The EU Commission is not proposing EU-wide legislation on on-line gambling. It is proposing a comprehensive set of actions and common principles on, amongst others, protection of consumers, responsible gaming advertising and prevention of and responding to betting-related match-fixing.
Spain
Traditional Gaming
The traditional private gaming sector (where physical presence is a requirement) in Spain was legalized in 1977. Initially, the Spanish national government regulated the traditional private gaming sector (slot machines, bingo halls and casinos) through national regulations applicable to the entire country. The Spanish Constitution allowed the Spanish Autonomous Regions (each, a “Region” and together, the “Regions”), to regulate traditional gaming activities within the scope of their territory, as long as they did not invade the powers reserved to the State by the Spanish Constitution. Therefore, in Spain traditional gaming is generally regulated at a regional level, and where no regional legislation exists, exists but is not sufficient or the game covers more than one Region, the national legislation applies. At present, most of the Regions have passed extensive legislation governing traditional private gaming, including the granting of the relevant operating licenses and authorizations, tax measures and the monitoring of each type of private game. Additionally, the Regions can regulate the public traditional gaming market (lotteries) within their own territorial areas. Regulation of the traditional private gaming market is similar across each of the Regions. National laws and regulations on traditional private gaming, however, exist and are applicable in Regions under certain circumstances, as explained above. Certain residual responsibilities, such as assistance with standardization of slot machines and collection of industry statistical information, still remain within the purview of the Spanish Gaming Authority (Dirección General de Ordenación del Juego), which is the entity that has assumed the powers of the Spanish National Gaming Commission (Comisión Nacional del Juego) until its effective constitution. The Spanish Government has prepared a bill in order to create the “National Commission on Markets and Competition.” This bill is currently being discussed at the Spanish Parliament. After the relevant law creating this entity is passed, it is expected that the National Commission on Markets and Competition will assume the powers of existing regulators, including, amongst others, the Spanish National Gaming Commission (Comisión Nacional del Juego), currently being exercised by the Spanish Gaming Authority (Dirección General de Ordenación del Juego).
Any changes in the regulatory scheme in Spain or in any other jurisdiction in which we operate may have an adverse effect on our business. See “Risk Factors—Risks Related to the Gaming Industry and Our Business—The gaming industry is subject to extensive regulation and licensing requirements and our business may be adversely affected by our inability to comply with these extensive regulation and licensing requirements, regulatory changes and increases in the taxation of gaming.”
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Below is a summary of certain of the regulations and taxes that apply to the operation of slot machines, casinos and bingo halls in Spain. This summary does not purport to be complete and only refers to traditional versions of these games where physical presence is required. The Spanish traditional gaming regulatory regime is highly complex and regulation changes are frequent. Whether national or regional regulations apply depends on various factors, including the type of game operated and the Region in which the game is operated.
In addition to gaming and gaming taxes legislation, gaming operators and activities are subject to other legislation, governing, among other things, environmental, zoning, publicity and protection of minors matters. For instance, as a consequence of zoning and environmental legislation, gaming operators are obliged to obtain the relevant licenses from the local authorities of the city where the activities are carried out, in addition to the gaming sector authorizations described in this section.
General
In Spain, gaming operations (including authorizations, gaming activities and wages placed on slot machines and in casinos and bingo halls) and the opening of arcades and gaming halls, are subject to gaming taxes. In general, the gaming taxpayer is the person or entity to which the operating license has been granted. For example, the slot machine operator is the gaming taxpayer in connection with the operation of slot machines.
Unless a Region has established its own regulation, gaming taxes are assessed by applying a fixed tax rate to the total amount wagered by customers (the tax base) and, generally, are paid on a quarterly basis.
Slot Machines
Slot machine manufacturers, distributors and operators, as well as others engaged in the slot machines business, must comply with laws and regulations that govern all aspects of slot machines, including the physical characteristics of the slot machines, amounts wagered, prize payout statistics and locations where each type of slot machine may be placed. In certain Regions, a transfer of ownership interest in slot machine manufacturers and distributors is subject to prior authorization by, or prior notification to, the relevant Region. Regulations generally distinguish among three types of slot machines as described below:
• Amusement-only Slot Machines (known in the Spanish gaming industry as Type A slot machines). These are slot machines of mere leisure or amusement and they are limited to giving the player a certain length of playing time in exchange for the price of the game (or in certain Regions and under certain circumstances, a prize-in-kind). Amusement-only slot machines cannot give the player any kind of cash, chips or other type of prize that is exchangeable for cash or other items. Generally, amusement-only slot machines may be placed within bars, cafés, restaurants, arcades and sites that provide amusement-only slot machine entertainment. Possible locations include hotels, camp grounds, cruise ships, amusement centers, gaming halls, family entertainment centers, bingo halls and casinos.
• Amusement-with-prize Slot Machines (known in the Spanish gaming industry as Type B slot machines).
These slot machines are amusement-with-prize slot machines that, in exchange for the price of a game, give the player a certain length of playing time, and in accordance with the game program, reward the player with a cash prize. Amusement-with-prize slot machines are subject to regulatory approval in each Region in which they are sold. The regulations typically provide that, among other things, the slot machine must have a maximum wager of €0.20 (although all Regions allow “triple bet” (except for Galicia, which only allows “double bet”) slot machines, which provide that in certain circumstances up to €0.40 may be wagered), must have a maximum prize of 400 to 600 times the price of the wager (depending on the Region (240 times in Asturias) and must have a minimum payout of at least 70% (higher in certain Regions) of the amount wagered by players. Type B slot machines may be installed in gaming halls, certain areas of bingo halls, certain bars and restaurants and casinos. Certain Regions limit the number of amusement with prize slot machines that may be authorized. Video Type B slot machines are permitted throughout Spain.
• Casino-type Slot Machines (known in the Spanish gaming industry as Type C slot machines). Casino-type slot machines offer the player, in exchange for the price of the game, a certain length of playing time and, eventually, a prize that will always depend on chance. The main characteristics of Type C slot machines are: (i) in practice, the regulators allow higher maximum wagers (up to €9), and maximum prizes of up to two thousand times the value of the wager, excluding accruing jackpots or other special payouts, (ii) the minimum payout is required to be at least 80%. In Spain, only casinos may own and operate casino-style slot machines. For a discussion on the regulations regarding the operation of casinos and taxation of casino-style slot machines, see “—Casinos.”
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In most of the Regions certain slot machines located in bingo halls or arcades are permitted to be linked to other slot machines at the same location.
Each type of slot machine must comply with specific requirements set forth in the applicable laws and regulations of the relevant Region. These requirements are mandatory for the slot machine to be duly registered at the relevant models registry. Registration of each model is mandatory prior to obtaining any of the authorizations to manufacture, market, distribute or operate each slot machine model. Additionally, each slot machine must be marked with the name of manufacturer and the operating permit. Recently, most Regions have relaxed requirements for the operation of amusement-only, or Type-A, slot machines.
Before commencing operations, all slot machine manufacturers, distributors and operators, as well as others engaged in the slot machine business, must register with and be approved by the gaming authority of the Region in which they intend to conduct operations. The registration and authorization processes include, among other things, a demonstration of sufficient technical and financial resources and professional expertise to operate the slot machines, criminal background check and deposit of a guarantee to ensure regulatory compliance. Slot machine operators are also required to deposit an additional guarantee with the relevant regional authority in an amount which is based on the number of slot machines to be operated in the relevant Region. The amounts of the required guarantees vary across each Region.
In addition to regulations regarding the types of slot machines, there are regulations regarding the types of sites at which slot machines can be placed and the number of slot machines that can be placed in each type of site. For example, most Regions allow only one or two slot machines per bar, café or restaurant or a certain number per arcade or gaming hall. In addition, for each slot machine, the owner of the site and the operator of the slot machines must each file an application with the relevant Region to obtain approval to place the slot machines at the site. Most Regions provide approval for installation of slot machines for a period of one to five years. Some Regions require that a site owner use the same slot machine operator during the approved time period.
Slot machine operators are required to maintain certain documentation related to the slot machines they operate, including their authorizations to operate the slot machines, in the event an inspection takes place.
The slot machine operator is required to pay gaming tax on a quarterly basis to the Region in which the slot machine is operated for each Type B slot machine and Type C slot machine in operation.
In the case of slot machines, there is no taxable base, since an annual fixed amount must be paid for each of them. The annual fixed amount varies depending on the type of slot machine and can be increased when there can be more than one player at the machine at once or the wages per game modify the game’s maximum authorized price.
Each Region has a sanctioning regime in the event of breaches and infringements of the applicable gaming laws and regulations. Additionally, manufacturing, distributing and operating authorizations may be revoked if the relevant regional authority determines that a manufacturer, distributor or operator has not complied with applicable gaming laws and regulations.
Casinos
Authorizations to install and operate casinos are governed by each Region. Generally, when a Region intends to grant authorizations for a new casino, it conducts a public tender. Companies participating in the public tender provide proposals for the new casino to that Region that sets forth how the proposed casino falls within the requirements of the authorization that the Region intends to grant. Requirements for a new casino may include size, location, approximate number of jobs to be created, the types of financial guarantees to be provided by the applicant and the amount of the investment to be made in that Region. The Region will grant the authorization to the applicant whose proposal best matches the terms and conditions of the authorization that Region intends to grant. Generally, only a limited number of casinos may be authorized within a Region.
In addition to obtaining authorization from the Region to install a new casino, the applicant must also obtain authorization from that Region to operate the casino. The authorization to operate the casino is not transferable. A transfer of ownership interest in the casino, however, is permitted, so long as the Region is notified, or in some Regions, the Region approves the transfer. Similar to a company intending to operate a bingo hall, a company intending to operate a casino must satisfy certain requirements, such as having valid corporate status in Spain, having a primary business purpose of operating casinos, being organized by individuals and having a minimum fully subscribed share capital (for example, €6 million in Valencia or €12 million in Madrid). In addition, shares are to be nominative and participation in more than one to three casinos (depending on the Region) within the relevant Region is prohibited. In addition, the shareholders of record and directors of a casino company must not have been convicted of any criminal offense. These authorizations are usually granted for an initial period of one year and then are renewed for successive periods varying in
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length of up to 10 to 15 years, depending on the Region. Generally, an authorization holder must obtain prior approval from the granting Region if it intends to deviate substantially from the terms and conditions under which it was granted the authorization to install the casino or from the authorization to operate the casino. For instance, the change of location within the Region of an authorized casino in certain cases is forbidden and, in others, as in Valencia, subject to prior authorization by the Region. A sanctioning regime exists in the event of breach or infringement of the applicable casino laws and regulations. Additionally, the regional authorities may revoke the authorization of a company to operate a casino if they determine that such company has not complied with the applicable laws and regulations.
Generally, casinos are subject to periodic compliance inspections by the relevant regional authorities.
Casinos are required to provide certain services, including restaurant and bar services. Casinos must also comply with certain personnel requirements and maintain certain accounting records as required by applicable laws and regulations. Casinos operating slot-machines are also subject to compliance with the relevant laws and regulations approved by the relevant Region on this matter.
Casinos are also required to pay gaming taxes on a quarterly basis to the Region in which they are located. Taxes are based on applying a progressive tax scale to the amount equal to the difference between the total revenues generated and the prizes paid to players.
Bingo Halls
In some Regions, authorizations to establish and operate bingo halls are only granted to charitable, cultural or sporting institutions and hotels. These institutions usually enter into operating agreements with gaming companies that actually manage the bingo halls. In other Regions, an authorization may be awarded either to such institutions or directly to a gaming company which intends to establish and operate a bingo hall. In either case, a company or other entity intending to establish and operate a bingo hall must satisfy several requirements in order to obtain the relevant authorization. In the case of companies, amongst other requirements, they must have valid corporate status under Spanish law in order to be authorized to establish and operate a bingo hall. Such companies also must have a fully subscribed and paid in share capital in an amount that varies depending on the Region. In addition, the shareholders of record and directors of a bingo company must not have been convicted of a criminal offense. Furthermore, in some Regions (for example, in Aragon, Andalusia and Catalonia) neither an individual nor a legal entity is permitted to be a shareholder in more than a certain limited number of bingo hall companies. Other shareholding restrictions are imposed on directors of bingo hall companies in some Regions. Additionally, in other Regions, such as in Catalonia or Galicia, a company is not allowed to hold more than a certain limited number of bingo halls within the Region.
In addition to being registered with the relevant regional registry, a company or other entity is required to obtain two authorizations from the relevant Region in connection generally with the operation of bingo halls: first, authorization for the installation of the bingo hall premises and, second, authorization for the operation of the bingo hall. The requirements for obtaining authorization to install a bingo hall include proving the availability of a site, providing a guarantee to the relevant Region in order to assure compliance with regional regulations, and obtaining the relevant local permit to operate the bingo hall premises and the relevant local planning council’s permission to build on the proposed site. The requirements for obtaining approval from the regional authority to operate a bingo hall include local authorization to open the bingo hall premises, filing certain documents with the regional authority, such as a list of employees, and complying with an on-site inspection of the bingo hall premises. The authorization for operation of the bingo hall varies in duration from three to ten years depending on the Region, generally with automatic extensions for the same periods of time, on the terms established in the relevant regional laws and regulations. It is possible to transfer ownership interests in a bingo company, so long as the relevant Region is notified or, in some Regions, the Region approves the transfer. The transfer of the authorizations is possible in most of the Regions as long as the transferee qualifies to hold them and prior authorization is obtained from the Region. Generally, an authorization holder must obtain prior approval from the granting Region if it intends to deviate substantially from the terms and conditions under which it was granted the authorization to install a bingo hall or the authorization to operate the bingo hall were granted. Non-material deviations require only notification to the relevant regional authority. A sanctioning regime exists in each Region in the event of breach or infringement of the applicable bingo laws and regulations. Additionally, authorizations may be revoked if the respective holder does not comply with the relevant laws and regulations.
Bingo halls are subject to a number of regulations relating to location, size and opening hours of the bingo hall, the activities at the bingo hall and the activities of employees. The required bingo card price ranges from €1.50 to €6. There is a required minimum payout from 49% to 70%, depending on the Region, of the amount wagered by the bingo players on gaming cards in most Regions.
Bingo halls are required to pay gaming taxes on a quarterly basis to the Region in which they are located. These taxes are based on the actual value of the bingo cards and not on any discounted price at which bingo cards may be sold to customers.
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Generally, a limited number of amusement-with-prize slot machines may be operated in or adjacent to the bingo halls. Casino-type slot machines and other gaming activities are not permitted to be placed in bingo halls but only within casinos. Although the exact number varies by Region, generally, the average number of amusement-with-prize slot machines permitted in a bingo hall is one slot machine for every 50 seats according to the capacity of the bingo hall (approximately 10 slot machines), except, among others, Andalusia, which only allows nine amusement-with-prize slot machines, and La Rioja, which only allows five amusement with prize slot machines. Bingo companies are typically able to obtain the necessary authorizations to operate the stipulated number of amusement-with-prize slot machines.
Interconnected versions of bingo are operated in some Regions, such as Catalonia, Madrid and Andalusia. For example, in Catalonia, three times each evening, players in approximately 55 participating bingo halls play bingo against one another. The Basque Country also allows interconnected versions of bingo between Regions.
A national anti-smoking law came into force in Spain in 2006. The law has been implemented by each of the Regions, and the terms of such implementation vary among Regions. As of January 2, 2011, a strict new anti-smoking law took effect throughout Spain that bans smoking in many types of establishments, including bars, restaurants and casinos.
Arcades and Gaming Halls
In Spain, regional laws and regulations stipulate the requirements for operating slot machine arcades and gaming halls. While there are minor differences between the regional laws and regulations, the main obligations for arcades and gaming hall operators may be summarized as follows: (i) to be registered at the relevant regional registry as gaming hall operators, stating the slot machine type that they intend to manage and operate at the arcades and gaming halls; (ii) to obtain a specific authorization; (iii) to provide a guarantee securing compliance with regulatory requirements, the amount of which will depend on the regional regulation; (iv) to obtain the relevant operating licenses awarded by the municipality; (v) to communicate to the regional gaming authority any change in the information supplied to the regional authority for the purposes of registration (in some cases, such as license transfers or share purchases, the modification of such information may require prior approval by the regions); and (vi) in some regions (such as Castilla-La Mancha and Comunitat Valenciana), to furnish annual or monthly reporting of certain information to update the registry.
A sanctioning regime is provided for in each Region in the event of a breach or infringement of the applicable gaming hall and arcades laws and regulations.
On-line Gaming
Spanish State Law 13/2011, adopted May 27, 2011 on gaming (Ley 13/2011, de 27 de mayo, de Regulación del Juego) (the “Gaming Act”) is the primary legislation governing the national gaming sector in Spain and provides a framework for the management and conduct of gaming activities on a national level, in particular for those gaming activities conducted by means of electronic communication, including, among others, the internet, television, telephone, interactive systems and software tools where physical presence of players is ancillary (in contrast to traditional gaming activities played in person).
The Gaming Act aims, among other things, to encourage a varied and duly dimensioned gaming market in Spain, which allows for third parties to provide State-wide games (other than lottery) by means of electronic communication, subject to State control in order to protect the different interests involved and preserve public order. With respect to non-occasional lottery games, the Gaming Act designates the National Lottery Operator (Sociedad Estatal de Loterias y Apuestas del Estado) and the National Organization of the Blind (Organizacion Nacional de Ciegos Españoles) as the only operators authorized to operate such games on a national basis in Spain. The Gaming Act has been implemented with the approval of different regulations, including, amongst others, those related to licensing by Royal Decree 1614/2011 of 14 November, which develops the Gaming Act with respect to licenses, authorizations and gaming registers (Real Decreto 1614/2011, de 14 de noviembre, por el que se desarrolla la Ley 13/2011, de 27 de mayo, de regulación del juego, en lo relativo a licencias, autorizaciones y registros del juego), the technical aspects of gaming activities by Royal Decree 1613/2011 of 14 November, which develops the Gaming Act with regard to the technical requirements of gaming activities (Real Decreto 1613/2011, de 14 de noviembre, por el que se desarrolla la Ley 13/2011, de 27 de mayo, de regulación del juego, en lo relativo a los requisitos técnicos de las actividades de juego) and those governing various types of games (including, among others, horse betting, sports betting, poker, black jack, bingo and roulette). Non-regulated games are prohibited.
The purpose of the Gaming Act is to govern gaming activities carried out on a national basis in order to preserve public order, combat fraud, prevent addiction, protect the rights of minors and safeguard the rights of participants in gaming activities. The Gaming Act also regulates advertising, sponsorship and promotion activities relating to gaming. The Gaming Act additionally sets forth (i) the legal definition for certain games; (ii) the primary factors to be taken into
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account by the Spanish authorities when approving the regulations governing the types of games that may be provided; (iii) prohibited games; (iv) individuals prohibited from participating in games governed by the Gaming Act; (v) rules relating to consumer protection and responsible policies on gaming; (vi) the applicable licensing regime for state-wide gaming activities conducted by means of electronic communication; (vii) the authorization regime for lottery games; (viii) monitoring measures applicable to operators and participants; (ix) standardization of gaming technical systems; (x) sanctioning and tax regimes; and (xi) the entities that are authorized to operate non-occasional lottery games in Spain.
Anyone seeking to provide gaming activities on a regular basis must obtain a general license for the relevant category of game identified by the Gaming Act. These licenses are awarded by means of a public tender. After obtaining the general license, the operation of each of the games within the scope of a general license is subject to the grant of a specific license.
General licenses may be granted for a ten-year period with the possibility for renewal for a subsequent ten-year period, except in those cases where the number of general licenses awarded was limited and certain conditions set forth in the Gaming Act occur that justify the need to call for a new public tender after the initial term has elapsed. Specific licenses will be granted for a term of between one and five years, with the possibility of being renewed for subsequent terms of the same period. The regulation of each type of game establishes the term of the relevant specific license and the conditions for renewal. Guarantees linked to specific licenses to secure compliance with the Gaming Act and its implementing regulations may also be imposed. If a holder of a license intends to engage in advertising and promotional activities related to the license, the holder must obtain prior authorization to do so.
The primary obligations of holders of general and specific licenses include the following (among others): comply with the terms and conditions set forth in the license documents; record the relevant data the Register of Persons Associated to Gaming Operators (“Registro de Personas Vinculadas a Operadores de Juego”) and other records identified in the Gaming Act; comply with anti-money laundering and data protection laws and regulations; establish the relevant measures to prevent minors, disabled people and other people for whom gaming is prohibited pursuant to the Gaming Act to accessing gaming activities; adopt consumer protection policies; have their gaming technical systems duly standardised by the Spanish Gaming Authority (Dirección General de Ordenación del Juego); and, have a contract with users in accordance with the terms of the applicable laws and regulations.
Pursuant to the Gaming Act and its implementing regulations, gaming licences shall be terminated for the following reasons (among others): (a) not obtaining a favorable standardization report by the Spanish Gaming Authority (Dirección General de Ordenación del Juego) in order to convert the provisional licenses into final licenses; (b) at the specific written request of the holder of the license; (c) termination of its term without the holder requesting for renewal, if it was possible to do so according to the terms of the license; or, (d) upon the decision issued by the Spanish Gaming Authority (Dirección General de Ordenación del Juego) upon the occurrence of the following causes of termination (among others): (i) the discontinuation of all or any of the conditions whereby it was issued; (ii) death or incapacity of the individual or entity holding the permit, dissolution or extinction of the company holding the licence or permit, or discontinuation of the activity for which the licenses were issued or a lack of activity for at least one year, in the case of licences; (iii) declaration of bankruptcy or declaration of insolvency in any other proceeding; (iv) imposition as a sanction under the corresponding disciplinary proceeding; (v) non-performance of the basic conditions of the permit or licence; (vi) assignment or transfer of the license through merger, split, or share of a business branch without prior authorisation; (vii) holding a license obtained under false pretences or alteration of the conditions whereby it was granted, prior hearing of the license holder, where applicable. In those cases where the cause for termination can be cured, the Spanish Gaming Authority (Dirección General de Ordenación del Juego), may ask the holder of the license to cure it within a one month term. Should the cause of the termination be cured within the term provided, the procedure to terminate the license will be ended. Otherwise, the license will be deemed to be terminated.
On June 1, 2012 two general licenses, allowing for the exploitation of betting activities and other games (as defined in the Gaming Act), and six specific licenses, allowing for the exploitation of poker, roulette, sports betting, black jack, bingo and “punto y banca”, were granted to Cirsa Digital, S.A.U. by the Spanish Gaming Authority, and duly registered in the General Gaming Registry on June 14, 2012. These licenses also include the authorisation to engage in advertising and promotional activities related to such games. One of our competitors, Codere, has challenged the granting of these eight licenses to Cirsa Digital S.A.U. before the High Court of Justice of Madrid. Codere has likewise challenged the granting of licenses to thirteen other gaming operators. We believe that it is likely that Codere will base its appeal on the nullity of certain provisions of the Royal Decree which develops the Gaming Act with regard to the technical requirements of gaming activities. In the administrative appeal filed by Codere against the granting of the licenses, Codere argues that the provisions regulating the identification of participants and the control of subjective prohibitions to participate (articles 26.1 and 27 of Royal Decree 1613/2011, of November 14th) contradicts the Gaming Act. We cannot predict when the challenges made by Codere will be resolved or whether such challenges will be successful.
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The general licenses granted to Cirsa Digital, S.A.U. are conditioned upon the submission to the Spanish Gaming Authority of the final and favorable certification of technical gaming systems within a period of four months following the date when the licenses were granted (ending on October 1, 2012). Additionally, both the general licenses and the specific licenses are conditioned to final standardization (“homologación”) by the Spanish Gaming Authority within a period of six months following the date when the licenses were granted (ending on January 1, 2013). According to the applicable legislation, this six months period may be interrupted by the Spanish Gaming Authority under certain circumstances. On October 19, 2012, this term was formally suspended for a maximum three month period for the Spanish Data Protection Agency to issue a mandatory report. According to the information provided by the Spanish Gaming Authority (Dirección General de Ordenación del Juego) to Cirsa Digital, the view of such Authority is that this three month-term has not yet expired. When such period expires, the general six-month term will resume. Should the six-month term (taking into account formal suspensions) elapsed without the Spanish Gaming Authority issuing the relevant resolutions granting or denying the final standardization, the provisional licenses will be deemed extinguished. The Spanish Gaming Authority has informed Cirsa Digital S.A.U. that it expects to issue said resolutions shortly.
The authorization and organization of games, raffles, contests, bets games and other gaming activities provided on a national basis in Spain are subject to the new gaming tax established under the Gaming Act. In general terms, the new gaming tax is based on applying fixed tax rates ranging from 15.0% to 25.0%, depending on the gaming activity, to the relevant game’s gross revenue (in case of mutual bets, raffles and contests) or the relevant game’s net revenue (in case of bets with consideration or other games). In addition to the gaming tax, the Gaming Act also establishes a gaming duty, which seeks to cover costs of regulatory activities of the gaming authority over the gaming activities undertaken by gaming operators. As a general rule, such gaming duty is equal to 0.1% of the gross revenue of the relevant game and is paid on December 31st of each year. The Gaming Act establishes that the General Budget Act for the relevant year may set the percentage of gaming duty for that year in the range of 0.0075% to 0.1%. The General Budget Act for 2013 has not amended this percentage of 0.1% for 2013.
The Ministry of Taxation and Public Administration, through the Spanish Gaming Authority, regulates and oversees gaming activities in Spain. It has also assumed the powers of the Spanish National Gaming Commission (Comisión Nacional del Juego), an additional independent oversight body that is to be created under the Gaming Act, until its effective incorporation. The Commission will oversee the proper functioning of the gaming sector and safeguard the effective availability and provision of competitive gaming services for the benefit of users. Its main goal is to authorize, supervise, monitor and sanction, as the case may be, the development, conduct and marketing of games and other gaming activities. It safeguards integrity, safety, reliability and transparency of gaming operations, as well as compliance with gaming legislation and with the conditions established for the conduct of games. After the bill creating the “National Commission on Markets and Competition” being approved by the Spanish Parliament comes into force, this new entity will assume the powers of the Spanish National Gaming Commission, which are currently being exercised by the Spanish Gaming Authority.
The Regions, within the scope of their respective territories, also have the power to regulate gaming activities conducted by means of electronic communication, including, among others, the internet, television, telephone, interactive systems and software tools where physical presence of players is ancillary (in contrast to traditional gaming activities played in person), as long as they do not encroach on the powers reserved to the State by the Spanish Constitution, in the terms construed by the Spanish Constitutional Court. The Regions also have their own gaming authority, regulating, supervising and controlling gaming activities carried out within their respective territories
Certain Regions have already approved laws and regulations governing the provision of gaming activities by means of electronic communication (including Madrid, Extremadura, Aragón and Navarra).
Republic of Argentina
Each province in Argentina holds exclusive power to regulate the gaming industry. The Governor of each province, or a regulatory body with delegated authority, is responsible for awarding gaming licenses and establishing and supervising compliance with gaming regulations in the respective province. Gaming licenses are usually awarded by public tender.
Until 1995, the City of Buenos Aires was a Federal district and its gaming industry was regulated by the State Lottery of Argentina. In 1995 the City of Buenos Aires was decentralized from the Federal Government and adopted its own constitution. Under the new constitution the City of Buenos Aires issued a law prohibiting the gaming industry in the City of Buenos Aires including the gaming activities conducted on the riverboat of Casino Buenos Aires, which resulted in a jurisdictional dispute between the City of Buenos Aires and the State Lottery of Argentina.
To settle the dispute, the City of Buenos Aires and the State Lottery of Argentina executed an agreement on October 30, 2003 to determine the jurisdiction of the parties in connection with gaming activities during the term of the agreement, presumably within the limits of the City of Buenos Aires and areas that have access only through the City of
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Buenos Aires. Under the agreement the State Lottery of Argentina may not authorize new casinos without approval by the City of Buenos Aires, except for approvals granted prior to the execution date of the agreement. Among other things, the State Lottery of Argentina was granted the right to oversee gaming operations within the city limits. See “Risk Factors—Risks Related to the Gaming Industry and Our Business” and “Business—Litigation.”
Our subsidiary, Casino Buenos Aires, was awarded a license by public tender by the State Lottery of Argentina to operate a floating casino for a 15-year term, with the possibility of extending the license for an additional five years and exercising an option to operate an additional floating casino. Both the extension and the authorization to build an additional floating casino were granted in 2003. Casino Buenos Aires was given final authorization by the State Lottery of Argentina to open for business on October 8, 1999. The grant of the license, however, was subject to litigation. See “Business—Litigation.” As part of the authorization, we were required to construct a vessel in a local shipyard to serve as a second casino within 36 months from March 2004. This time period for construction of a vessel subsequently elapsed. In September 2008, we were granted an authorization to operate our existing second riverboat casino, Princess Casino, as the second riverboat casino through 2019, in lieu of the obligation to construct a vessel in a local shipyard.
In December 2003, Casino Buenos Aires also obtained a license to operate seven electronic casinos for a 10-year term in the Province of Mendoza.
In May 2006, Casino Club was awarded an exclusive 30-year concession to operate a concession in Rosario, Argentina. We have acquired a 50% interest in Casino de Rosario S.A., the company that holds the concession. In August 2008, the gaming authorities in the Province of Santa Fe granted Casino de Rosario its requested extension of the opening date of the casino to September 30, 2009. In connection with such grant, the gaming authorities imposed a penalty of Ps. 8.9 million.
Republic of Panama
The Gaming Control Board, a department of the Economy and Finance Ministry, regulates the gaming industry in Panama. The Gaming Control Board may authorize private parties to operate gaming activities through the execution of administrative licensing contracts under which the Gaming Control Board retains supervision. The Gaming Control Board also may conduct public tenders. The Directors of the Gaming Control Board, chaired by the Minister for Economy and Finance, is the primary decision making body of the Gaming Control Board. The Games Department of the Gaming Control Board is responsible for the supervision and administration of casinos, amusement-only slot machine halls (amusement-only slot machines are broadly defined by relevant regulations in Panama as slot machines that are activated by coins, tokens or paper money in which the results of the game are randomly determined), bingo halls, and similar gaming activities in Panama.
In February 1998, slot machines (broadly defined by Panamanian regulations as slot machines that register credits on a ticket, or by comparable means, as a measure of prizes or money won by the user which are redeemed) were re-classified as amusement-only slot machines and the respective authorizations for the operation of such slot machines, as granted by the Gaming Control Board, were declared valid for 20 years from their respective authorization dates. Each company that had been authorized by the Gaming Control Board to conduct gaming operations prior to February 1998 was permitted to only operate the number of slot machines authorized by the Gaming Control Board.
In Panama, we operate a traditional casino and electronic casinos. During the second half of 2009, there were a number of legislative changes and regulatory developments in the gaming industry in Panama, which particularly impacted our electronic casinos business. In response to these changes and developments, we have modified the ownership and operating structure of our Panamanian casinos business, including by increasing our ownership in our main Panamanian subsidiary, Gaming & Services de Panama S.A. (“Gaming & Services”), from 70.9% to 100% in December 2009. The legislative changes have also resulted in an increase in gaming tax rates.
Electronic Casinos
As of September 30, 2012, Gaming & Services has 26 licenses to operate electronic casinos in Panama. We operate 23 of the 26 electronic casinos in Panama. Ancon Entertainment, Inc. (50.1% owned by Cirsa International Gaming Corp.), operates two electronic casinos in accordance with two operation agreements with Gaming & Services and Inversiones Interactivas, S.A. (70% owned by Orbis Development, S.A., a wholly owned subsidiary of Cirsa International Gaming Corp.), operates one electronic casino in accordance with an operation agreement with Gaming & Services.
In August and September 2009, we had negotiations with the Government of Panama and the Gaming Control Board with respect to certain of our electronic casinos and the Panamanian government adopted a law that includes provisions relating to the gaming industry in Panama. As a result of these actions, and a subsequent agreement between Cirsa and the Gaming Control Board, the following measures have been implemented:
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• the 19 electronic casino licenses previously granted to Lucky Games S.A. (which was merged into Gaming and Services on April 5, 2010), Inversiones Interactivas S.A., Silver Cup Gaming S.A. and Competiciones Deportivas S.A. were revoked, effective on March 18, 2010, pursuant to Law 49 of September 17, 2009, but 12 of these licenses were reissued to Gaming & Services (in addition to the 14 licenses that Gaming & Services previously held) by an amendment to Gaming & Services’s existing agreement with the Government (which amendment became effective with its publication in the Official Gazette of the Republic of Panama). As a result and as described above, Gaming and Services held as of September 30, 2011 a total of 26 licenses, all of which will expire in December 2018;
• four electronic casinos that we operated deemed by the Panamanian government to be in socio-economically deprived areas of Panama were closed;
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• we have paid a total amount of $18 million over a four-year period to the Panamanian government in respect of “key money” payments for electronic casinos licenses and additional payments (of which we paid $6 million in December 2009, $4 million in December 2010, $4 million in December 2011 and $4 million in December 2012); and
• in December 2009 we increased our ownership interest in Gaming & Services from 70.9% to 100%.
Traditional Casinos
We have a 50% interest in the Majestic Casino, a traditional casino located in the Multicentro complex in Panama City. In 2003, our subsidiary, Gaming & Services, and Luna Brillante S.A., which holds an ownership interest in that group that owns the hotel and shopping mall Multicentro, entered into a joint venture and formed Multicasino S.A. Multicasino was issued a license by the Gaming Control Board permitting it to operate a casino in the Multicentro shopping mall located adjacent to the hotel for 20 years.
Taxation
Gaming companies generally must pay a previously established minimum amount to the Gaming Control Board or a 10% tax on their respective gross revenue, whichever is greater. During 2009, the tax rate for slot machines in electronic casinos has been increased from 10% to 16% for 2010 and 2011, to 19% for 2012 and to 22% for 2014. The tax rate for casinos increased from 10% to 12.5% for 2010 and 2011, and to 15% for 2012.
Republic of Venezuela
In July 1999, our subsidiary, Cirsa Caribe, C.A., obtained a license to operate its casino, Gran Casino Margarita, in the City of Porlamar, Nueva Esparta State.
In November 2005, our 50% owned company, Inversiones Recreativa Occidente, C.A., was granted a 10 year license to operate the Gran Bingo Maracaibo electronic casino in Maracaibo, Venezuela.
In mid 2011, the Venezuelan gaming authorities temporarily halted certain casino operations in order to evaluate and determine the future of the gaming industry in the country. Our two casinos in Venezuela were affected by this decision and forced to cease operations. We cannot anticipate when or if our casinos will be allowed to resume operations.
Dominican Republic
The gaming industry in the Dominican Republic is regulated by the Secretaria de Estado de Finanzas de la Républica Dominicana (The Secretary of State for Finance of the Dominican Republic) pursuant to national legislation concerning the regulation of games of chance adopted in 1964. The Secretary of State for Finance of the Dominican Republic is responsible for issuing gaming licenses. Casino licenses, for example, are issued to the owner of the site on which the casino will be operated. Three of our subsidiaries in the Dominican Republic have entered into operating agreements with local companies under which we manage three casinos.
Colombia
Gaming activity is a monopoly of the Colombian state and may only be conducted by entering into an agreement with Empresa Industrial y Comercial del Estado Administradora del Monopolio Rentístico de los Juegos de
Suerte y Azar (“COLJUEGOS”), a public entity created by Decree 4142 of 2011 which is responsible for the administration, operation and regulation of the national gaming sector. COLJUEGOS commenced operations on April 17, 2012 and replaced Empresa Territorial para La Salud—ETESA en Liquidación (“ETESA”), which was liquidated by Decrees 175 of 2010, 4816 of 2010 and 4961 of 2011 issued by the Colombian government. It was also determined by Decree 4142 of 2011, that all existing enforceable contracts and agreements entered into by ETESA (including our concession agreements) would continue with COLJUEGOS under the same terms and conditions.
The Colombian gaming market is highly regulated, and operators are required to: (i) prove legal ownership of the equipment and components used for the operation of the games; (ii) obtain zoning approvals from the municipal authority (mayor) where the casinos or slot machines are located; (iii) obtain an authorization to operate casinos or slot machines from COLJUEGOS; and (iv) once the competent authority grants the authorization, the game operator must execute a concession agreement with COLJUEGOS in order to operate casinos and/or slot machines. Applicable law requires that the term of the concession agreements for the operation of casinos and slot machines may not be less than three years or more than five years. The two concession agreements of the Winner Group are valid until October 2016 and March 2017.
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As of January 1, 2012, the National Directorate of Taxes and Customs, the Dirección de Impuestos y Aduanas Nacionales de Colombia (“DIAN”) was responsible for the collection of gaming taxes and administrative duties payable by gaming operators but in actuality, COLJUEGOS has assumed this function since it entered into operation. Currently, gaming taxes are levied at a fixed rate per month in the range of approximately $100 to $148 per slot machine (depending on the value of the bet) and $1,320 per casino table (e.g. black jack, poker, baccarat, craps and roulette). Administrative duties are levied at 1% of such payable gaming taxes. Following the mandated interconnection of all slot machines to the gaming authority’s central system for purposes of monitoring gross revenues, gaming taxes will be levied at the higher of the aforesaid fixed rates and 12% of the gross revenues less prize payouts. Colombian authorities were required to issue regulations with respect to the new gaming tax regime and such interconnection and to implement the interconnection by July 12, 2012, though this date was further extended. As of the date hereof, the interconnection of all slot machines to the central system has not yet been implemented. COLJUEGOS has ordered operators to provide an inventory of their slot machines by January 30, 2013. The new regime also establishes high penalties for illegal gaming activities.
From 2013, a corporate income tax of 25%, plus an additional income tax levied “for equity” at a rate of 9% through 2015 and 8% from 2016, is levied on all corporate profits.
Italy
We primarily operate in the Italian slot machines market. We also have minority interests in bingo halls in Italy. In October 2009, we initiated the procedure to be granted a concession to operate VLTs in the Italian market and to extend our concession to operate slot machines.
AAMS Decree No. 31857 of September 9, 2011 requires VLT and slot machines operators, including operators who already have contractual relations in the slot machines and/or VLT fields, to meet certain conditions and to register on a special list. Only the entities on such list will be authorized to operate VLTs and/or slot machines. In accordance with the abovementioned decree, the applicant must hold (i) the relevant license referring to the gaming machines as provided by Royal Decree no. 773 of June 18, 1931 (as subsequently integrated and amended), having a validity equal to the period of registration; (ii) the anti-mafia certificate in compliance with Law No. 575 of May 31, 1975; and, (iii) a deposit receipt of €150. In addition, the applicant must communicate if it holds any other licenses issued by the AAMS. The decree also establishes certain rules governing any violations of law by the applicant.
Slot Machines
Legislative Framework
The regulation of slot machines in Italy is principally governed by Royal Decree no. 773 of June 18, 1931, and its subsequent amendments. The Italian slot machines market is highly regulated.
The Italian regulatory regime authorizes, inter alia, machines that award a cash prize based on a player’s skill or otherwise provide entertainment value. The Italian regulatory framework also regulates the duration of a game, the price per game and the type and amount or value of prize that can be awarded for each game.
A governmental authorization is required for either the manufacture or import of each individual slot machine, and for its installation and operation in a specific location. The Italian regulator must also be notified in the event that a slot machine is relocated, transferred or scrapped.
The Italian slot machine regulatory regime changed in 2004 with the pronouncement that only interlinked slot machines would be permitted to operate in Italy after October 31, 2004. This requirement of interlinking allows regulatory authorities to monitor slot operators for regulatory and tax purposes. The regulation and oversight of the interlinked slot machine system is the responsibility of the AAMS.
The AAMS has awarded a series of concessions to slot machine companies to act as network system operators for slot machines in Italy. The last such concession was awarded (by way of an amendment deed) in early 2010. Cirsa Italia was granted a concession to act as a network system operator initially until October 31, 2009. During 2005, this term was extended until October 31, 2010, and in 2010, the term was further extended until December 31, 2011.
In August 2011, the AAMS called a tender for the award of new concessions to act as a network system operator for, inter alia, slot machines and VLTs. On December 23, 2011, we were awarded a new provisional concession to act as a network system operator for, inter alia, slot machines. On October 18, 2012, the provisional concession became permanent following our submission of documentation demonstrating our continuing compliance with the technical and economic requirements to act as a network system operator. Following the grant of such concession, we still must complete certain other requirements (such as the execution of the concession agreement and the posting of a performance bond) that remain pending.
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Under the concessions, operators can operate their own slot machines and also offer interconnection to third parties (operators that were not granted a concession) for a specified fee. The terms of the grant of the initial concessions to Cirsa Italia and a number of other operators established certain targets for the interconnection of slot machines by a specified date. While we (and the other operators) did not achieve such targets by such date, we have since achieved such targets and believe that we are in material compliance with the terms of the concession. Network operators are responsible for installing the network, conducting all activities directly or indirectly related to the management and operation of the network, and paying the so-called PREU tax levied on slot machine operation. Subject to certain conditions, a network operator can also charge to third parties that it interconnects to its network a fee of not higher than 3% of the revenues per machine. These concessions also include the service standards to be met by the operators. Further amendments to the concessions were entered into by the parties in 2010 in order, inter alia, to regulate the operation of VLTs.
During 2007, the AAMS adopted a series of new gaming regulations that, among other things, permitted the use of a new type of slot machine, reduced the amount of PREU tax assessed on amounts wagered (from 13.5% to 12%), changed the pay-out and increased the price per game and maximum prize size. Another separate tax assessed by the AAMS on amounts wagered increased from 0.3% to 0.8%. During January 2009, the amount of the PREU tax was increased from 12% to 12.6%; in October 2011 the amount of the PREU was decreased to 11.8% for the year 2012, while for the period from 2013 to 2015 the applicable PREU will be equal to 12.7% and, after January 1, 2015, it will be increased to 13%. Under the current regulatory framework, no less than 75% (74% from January 1, 2013 onwards) of wagers must be paid to players.
Venue requirements for slot machines and VLTs have been regulated by AAMS Decree No. 30011 of July 27, 2011. This decree permits the installation of slot machines in bingo halls, agencies for betting on sporting events, agencies for totalizer and fixed-odds betting on horse races, gaming shops whose primary activity is marketing public gaming products, public gaming rooms specifically established for the conduct of lawful gaming that provide a separate area for games reserved for underage players, and establishments dedicated exclusively to slot machines and VLTs. Slot machines can be installed in the abovementioned shops, halls or premises only on condition that such shops, halls or premises hold the specific gaming license in accordance with the Italian regulatory framework. The decree provides that the maximum amount of slot machines that can be installed and operated on any of these premises must be limited, proportionally to the premises’ surface area and/or to the total number of slot or other betting machines hosted.
Administrative Proceedings
For a discussion of certain administrative proceedings regarding our Italian slots business, see “Business—Litigation—Claims by Italian Judicial Body and Regulator.”
Video Lottery Terminals
In August 2009, the Italian government adopted Law no. 102 of August 3, 2009. The law provided for the extension for a period of nine years, until October 31, 2019, of the concessions of the ten existing network system operators for slot machines in Italy, to be perfected at the time these operators become authorized to operate VLTs. The law also established the technical and economic requirements for the ten network system operators to request authorization to install VLTs and to act as network system operators for VLTs. Having met the technical and economic requirements, Cirsa Italia has requested such authorization and paid the two installments for such authorization, and in November 2009 Cirsa Italia was authorized to act as a network system operator for VLTs in Italy for a testing period. The AAMS has approved the testing and Cirsa Italia commenced VLT operations in October 2010.
The AAMS called a tender for the award of concessions to act as a network system operator for, inter alia, slot machines and VLTs. On December 23, 2011, we were awarded a new provisional concession to act as a network system operator for, inter alia, VLTs. On October 18, 2012, the provisional concession became permanent following our submission of documentation demonstrating our continuing compliance with the technical and economic requirements to act as a network system operator. Following the grant of such concession, we still must complete certain other requirements (such as the execution of the concession agreement and the posting of a performance bond) that remain pending.
Since February 2010, the AAMS Decree No. 43593 of 22 January 2010, which includes the implementing regulations governing the operations of VLTs in Italy, is the legal regime applicable to VLTs. Under this decree, the VLTs and the related gaming systems must be connected to a control system and network operated by an authorized network system operator. The games played on the VLTs will be capable of being monitored remotely for regulatory and tax purposes. The AAMS decree also sets forth requirements for the testing and start-up of the gaming systems, the operating parameters for the games and the timing of introduction of VLTs into the Italian market.
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The maximum cost of an individual game is €10.00 and the minimum cost is €0.50. Payment for games may be made by coins or currency, tickets from ticket technology systems, prepaid cards, “smart” cards in respect of registered gaming accounts or the reinvestment of previous winnings.
The decree provides that the maximum payout for VLT games is €5,000. However, this amount is higher for jackpots: there is a €100,000 maximum jackpot for each gaming room and a €500,000 maximum jackpot for each gaming system. Under the decree, no less than 85% of wagers must be paid to players, and up to a maximum of 4% of wagers can be paid to players in jackpots.
Venue requirements for VLTs and Slot Machines are regulated by AAMS Decree No. 30011 of July 27, 2011. This decree permits the installation of VLTs in bingo halls, agencies for betting on sporting events, agencies for totalizer and fixed-odds betting on horse races, gaming shops whose primary activity is marketing public gaming products, public gaming rooms specifically established for the conduct of lawful gaming that provide a separate area for games reserved for underage players, and establishments dedicated exclusively to VLTs and slot machines. VLTs can be installed in the abovementioned shops, halls or premises only on condition that such shops, halls or premises hold the specific gaming license in accordance with the Italian regulatory framework. The decree provides that the maximum number of VLTs that can be installed and operated on any of these premises must be limited, proportionally to the premises’ surface area and/or to the total number of slot or other betting machines hosted.
The PREU tax levied on the amount wagered on VLTs will be 4% in 2012 and 4.5% from 2013 onwards, plus an additional 6% on the quota of wins exceeding €500. The application of the additional 6% of PREU tax was recently temporarily suspended by a preliminary injunction of the Administrative Regional Court of Lazio, dated January 26, 2012. Currently, such proceeding is on hold because the new fiscal measures currently under discussion in the Italian Parliament could amend the provisions concerning the additional 6% of PREU tax. In addition, as is the case for slot machines, we pay a separate tax to the AAMS of 0.8% of the amounts wagered.
Bingo Halls
We also have minority interests in bingo halls in Italy. Bingo halls have been permitted to operate in Italy since 2000. In Italy, 20% of the face value of the bingo card is required to be paid to the Italian tax authorities and 3.8% is required to be paid to the AAMS; however, from November 1, 2009 until December 31, 2012 such percentages are reduced respectively to 11%—payable to Italian tax authorities—and 1%—payable to the AAMS—under the pilot scheme implemented by the AAMS. Regulations require that 70% of the face value of the bingo be dedicated to prize payments.
On-line Gaming
Community Law of 2008 (Law No. 88 of July 7, 2009) unified two distinct Italian regulatory frameworks for on-line gaming activities, one with respect to on-line bingo and other with respect to other on-line gaming activities. With respect to on-line bingo, the AAMS adopted directorial decrees setting forth the relevant framework, which encompasses among other things, bingo card prices, prize pay-outs, player qualifications and licensing guidelines (including the eligibility of physical bingo licensees to operate on-line bingo activities). With respect to other on-line gaming activities, the AAMS adopted the “Bersani” decree on October 20, 2006, pursuant to which it awarded on-line sports betting licenses to certain operators. The scope of such licenses was subsequently extended to other on-line gaming activities such as poker and other card games.
Community Law of 2008 applies to the following on-line gaming activities: (a) fixed-odds or totalizer betting relating to sporting events or horse racing, (b) other betting on sporting events or horse racing, (c) national horse racing events, (d) skill games, (e) fixed-odds betting with direct interaction between the players, (f) bingo, (g) numeric games at national totalizer and (h) lotteries at instantaneous and deferred drawings. Community Law of 2008 allows on-line sports betting licensees (for a fee of €50,000), physical bingo licensees (for a fee of €300,000) and applicants without an existing on-line gaming license (for a fee of €350,000) to apply for a license to conduct the on-line gaming activities described in (a) through (f).
On March 9, 2011, the AAMS published Decree No. 2011/190/CGV, setting out the procedure for granting licenses for on-line gaming pursuant to Community Law of 2008, and published an application form for the award of licenses (up to a maximum of 200 licenses). The decree was applicable to (i) operators who had already entered into concession agreements to conduct permitted on-line gaming activities under pre-existing licenses, and (ii) other operators satisfying certain requirements provided for under Article 24, paragraph 15, of the Community Law of 2008.
We participated in the public selection process launched by the AAMS, and were awarded a license. On December 5, 2011, we were informed that the AAMS had executed the nine-year concession agreement with us setting out the terms and conditions of the license in respect of on-line gaming. We subsequently commenced our on-line
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gaming activities in Italy, including on-line poker, various casino games (roulette, blackjack, “punto y banca”) on-line sports betting and bingo.
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MANAGEMENT
Board of Directors
Pursuant to Spanish corporate law, Cirsa’s Board of Directors has ultimate responsibility for the organization and management of its affairs, including the appointment of key members of management, subject to the provisions of the estatutos sociales (the “by-laws”) and the resolutions of shareholders at the Junta General de Accionistas (“General Shareholders’ Meeting”). To the extent permitted to do so, Cirsa’s Board of Directors has delegated all of its powers to Manuel Lao Hernández and Manuel Lao Gorina, who are Cirsa’s Managing Directors. Pursuant to Spanish corporate law, Cirsa’s Board of Directors has also granted limited powers of attorney to certain individuals to conduct its affairs.
Cirsa’s by-laws provide for a Board of Directors of a minimum of three and a maximum of 15 directors appointed by the General Shareholders’ Meeting. The term of office of a director is five years and a director may serve any number of consecutive terms. If a director ceases to hold office prior to the expiration of his term, the Board of Directors may fill the vacancy by appointing, from among the shareholders of the company, a new interim director to replace the outgoing director. The director so appointed will hold office until the next General Shareholders’ Meeting, when his appointment may be confirmed. A director may resign or be removed from office by a resolution of the General Shareholders’ Meeting at any time. Shareholders may vote to appoint themselves to the Board of Directors.
The following is information about the members of the Board of Directors as of September 30, 2012:
Name Age Title
Manuel Lao Hernández .............................................................. 67 Chairman of the Board and Managing Director Manuel Lao Gorina .................................................................... 41 Vice Chairman of the Board and Managing Director María Esther Lao Gorina ........................................................... 36 Communication and Advertising Executive
Manuel Lao Hernández founded Cirsa in 1978 and has been Chairman of the Board of Directors and Managing Director since 1982 when we adopted a Board of Directors corporate structure. He has acted in the position of Sole Administrator of Nortia from its inception to 1997 and in the position of Joint and Several Administrator of Nortia since 1997. Manuel Lao Hernández is also the Chairman of each of the Fundación Estudios del Ocio (Foundation for Leisure Studies) since 1993 and the Confederación de Asociaciones y Federaciones de Empresarios del Recreativo (Confederation of Associations and Federations of Leisure Businesses) since 1994. Manuel Lao Hernández is also a member of the Consejo Consultivo de la Confederación Empresarial de Cataluña, Fomento del Trabajo Nacional (Advisory Council to the Business Confederation of Catalonia, Promotion of National Employment). Since January 1999, he has been a member of the Advisory Council to the Chairman of the Confederación de Empresarios de Andalucía (Confederation of Businesses of Andalusia).
Manuel Lao Gorina, the son of Manuel Lao Hernández, has been Vice-Chairman of Cirsa since 1998 and Joint and Several Administrator of Nortia since 1997. He was appointed to our Board of Directors in 1995. He has served with Cirsa and its affiliates for 10 years in various capacities, including as commercial agent for slot machine management, operational manager for slot machines, manager of hotel and real estate investments and services companies and Vice-Chairman. In 1997, he was appointed Chairman of the Asociación Nacional de Centros Familiares y de Diversión (National Association of Family Entertainment Centers). In 1998, he became a member of the Cambra de Comerç i Indústria de Terrassa (Chamber of Commerce and Industry of Terrassa). He received degrees in Business Management from Escuela Superior de Administración de Empresas (ESADE) in 2002 and from Sonnenfeld in 1990.
María Esther Lao Gorina, the daughter of Manuel Lao Hernández, has been a member of the Board of Directors since March 2000. She has served with Cirsa for five years in the position of Communication and Advertising Executive. Prior to joining Cirsa, she worked for Manufacturas Antonio Gassol, S.A. in the Marketing Department. She received a degree in Enterprise Communications from the Instituto Superior de Administración y Comunicación de Barcelona in 1997.
Executive and Divisional Officers
The following table presents, as of September 30, 2012, our executive and divisional officers that are not members of Cirsa’s Board of Directors:
Business Divisions Carlos Duelo .............................................................................. 44 Manager, Slots Division Enric Barba ................................................................................ 55 Manager, B2B Division Carlos Font ................................................................................ 50 Manager, Casinos Division Manel Estany ............................................................................. 50 Manager, Bingo Division
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Corporate Areas Isaac Lahuerta ............................................................................ 54 General Manager, Corporate Areas David Royo ................................................................................ 54 Chief Financial Officer Miquel Vizcaino ........................................................................ 49 Legal Xavier Cots ................................................................................ 51 Human Resources Antonio Hostench ...................................................................... 44 Corporate Development and Strategy
Set forth below is certain biographical information concerning the above individuals:
Joaquim Agut (Chief Executive Officer) joined Cirsa in 2006. Prior to joining Cirsa, Mr. Agut served as a leader of the European Corporate Executive Council of General Electric, Executive Chairman of Terra Lycos (2000-2003), and as Chairman and Chief Executive Officer of Endemol, B.V. (2004-2006). He received degrees in Business Administration from I.E.S.E. (1980) and electrical engineering from the Universidad Politécnica de Catalunya (1977).
Carlos Duelo (Manager, Slots Division) joined Cirsa in 1994. Mr. Duelo has served in a number of positions within the Slots Division. He received a degree in Economics from the Universitat Autonoma de Barcelona (1993) and a degree in Marketing from ESIC (1998).
Enric Barba (Manager, B2B Division) joined Cirsa in November 2006. Prior to joining Cirsa, Mr. Barba served as Senior Vice-President for Engineering at Terra Networks and General Manager for TV Manufacturing at Sony Spain. He received a PhD in Telecommunications Engineering (1992), a Masters in Business Administration (1990) and a degree in Telecommunications Engineering (1978) from the Universidad Politecnica de Catalunya.
Carlos Font (Manager, Casinos Division) joined Cirsa in March 2007. Prior to joining Cirsa, he served as a senior manager of Grupo Corporativo ONO S.A., Biocentury S.L. and the Joyco Group. He received a degree in Business Administration from ESADE.
Manel Estany (Manager, Bingo Division) joined Cirsa in 2009. Prior to joining Cirsa, Mr. Estany served as Marketing Manager for Moet Hennessy Spain and as General Manager for La Sirena. He received a degree in Business Administration from ESADE (1986).
Isaac Lahuerta (General Manager, Corporate Areas) joined Cirsa in 1999. Prior to joining Cirsa, he served as Managing Director of Banco Santander de Negocios (1989-1993) and as General Manager International Division of Ferrovial (1993-1997). He received degrees in Business Administration from ESADE (1986) and Engineering from ETSICC (1980).
David Royo (Director, Chief Financial Officer) joined Cirsa in 2000. Prior to joining Cirsa, Mr. Royo served as Managing Director of Financial Planning for Grupo Financiero Serfin (1992-1997) and as Managing Director of Grupo Financiero Bancrecer (1997-1999). He received a degree in Business Administration from ESADE (1982).
Miquel Vizcaino (Director, Legal) joined Cirsa in 1990. Prior to joining Cirsa, Mr. Vizcaino served as Legal Counselor of Gilabert Servicios S.L. (1987-1990). He received a degree in Business Law from IE (1987) and a degree in Law from Universidad Autónoma de Barcelona (1986).
Xavier Cots (Director, Human Resources) joined Cirsa in 2000. Prior to joining Cirsa, he served as Director of Human Resources of Gates Vulca (1996-1998) and as Director of Human Resources Europe for BIC Graphic Europe S.L. (1998-2000). He received a degree in Law from U.O.C. (2005), a degree in Business Administration from Universidad de Barcelona (1985) and a degree in Human Resources Management from EADA (1993).
Antonio Hostench (Manager, Corporate Development and Strategy) joined Cirsa in June 2008. Prior to joining Cirsa, he served as General Manager of N+1 Corporate Finance (2005-2008) and Managing Partner of Roland Berger Strategy Consultants (1996-2005). He received degrees in Business Administration from IESE (1994) and Engineering from the Universidad Politecnica de Cataluyna (1990).
The business address for each member of the Board of Directors and senior management of Cirsa is Terrassa (Barcelona), Ctra. de Castellar. 298.
Compensation of Managers and Executive and Divisional Officers
For the year ended December 31, 2011, we paid an aggregate of approximately €6.3 million to our directors and executive and divisional officers, including cash compensation for salary and bonuses. In 2012, our deferred compensation program will become payable, resulting in payments to certain of our executive and divisional officers in
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an aggregate amount of €4.4 million. In addition, company cars have been provided for certain of our directors and executive and divisional officers.
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PRINCIPAL SHAREHOLDERS
Cirsa Funding
As of September 30, 2012, Cirsa Funding Luxembourg S.A. had issued and outstanding 20,310 ordinary shares, all of which were held by Cirsa.
Cirsa
The following table sets forth, as of September 30, 2012, information regarding beneficial ownership of Cirsa’s outstanding ordinary shares (excluding treasury shares):
Name and Address of Owner of Record
Number of
Shares of
Record
Percentage
of Shares
of Record
Manuel Lao Hernández Ctra. de Castellar, 298 08226 Terrassa Barcelona, Spain................................................................................................................................ 57,322,923 47.08%
Nortia Business Corporation, S.L.(1) Ctra. de Castellar, 338-340 08226 Terrassa
(1) Manuel Lao Hernández owns 96.37% of the ordinary shares of Nortia. Members of his immediate family own the remaining 3.63%.
Accordingly, Manuel Lao Hernández beneficially owns 100% of Cirsa’s ordinary shares.
As of September 30, 2012, a total of 38,147,606 of Cirsa’s ordinary shares, or 31.04% of Cirsa’s issued and outstanding ordinary shares, are subject to pledges to secure certain obligations of Nortia under bank debt.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions with Nortia
Transactions in the ordinary course of business
We enter into a significant number of transactions on a regular basis with Nortia. Transactions in the ordinary course of business include lease agreements, professional and other corporate services, the charter of airplanes and the sale of goods.
We lease a majority of the premises used to conduct our business (including various corporate buildings, certain office space for our slot machine operators and bingo halls) from Nortia or its subsidiaries, pursuant to lease agreements with aggregate annual payments of approximately € 6.0 million. Most of these lease agreements are for a term of one year and are automatically renewable for subsequent yearly periods.
Nortia and its affiliates provide professional and other corporate services (public relations and marketing activities, real estate management, travel and insurance brokerage) which amounted to €4.7 million, € 3.5 million, €2.9 million, and €2.5 million for 2009, 2010, 2011, and the nine months ending September 30, 2012 respectively. We regularly provide to Nortia and its affiliate’s corporate management services, such as information technology, administrative, legal, financial and human resources, that amounted to €1.1 million in 2009, € 1.2 million in 2010, €0.9 million in 2011, and €0.7 million in the nine months ended September 30, 2012.
In addition to the above, and according to our business needs from time to time, we charter one or more airplanes from Executive Airlines, S.L. (“Executive Airlines”), a subsidiary of Nortia. Executive Airlines, in turn, leases the airplanes we charter under three leasing arrangements. The total amounts paid to Executive Airlines for the charter of airplanes in 2009, 2010, 2011, and the nine months ended September 30, 2012 were € 4.3 million, €3.2 million, €2.1 million, and €1.1 million respectively.
We expect to continue to enter into these types of transactions with Nortia in the future.
Financial Transactions
A long-term loan from Cirsa to Nortia is outstanding. This loan bears interest at a rate of 8.75% per annum and matures on December 31, 2015. In connection with our acquisition of a majority interest in the Winner Group, we acquired a 9% ownership interest from Nortia for a total consideration of $10 million. This amount was deducted from the intercompany loan between Nortia and Cirsa, and did not involve any cash payment. As of September 30, 2012, the aggregate amount of this loan was €43.4 million.
At December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2012 Nortia owed Cirsa, €7.2 million, €5.8 million, €4.8 million, and €4.3 million respectively, under certain promissory notes issued in connection with real estate transfers between Cirsa and Nortia. This includes promissory notes issued in 2004 in connection with the sale of property comprising the Unidesa R&D Center to Nortia.
As of September 30, 2012, a total of 38,147,606 of Cirsa’s ordinary shares, or 31.04% of Cirsa’s issued and outstanding ordinary shares, are subject to pledges to secure certain obligations of Nortia under bank debt.
Transactions with Opesa
We make direct sales of slot machines to subsidiaries of Opesa Internacional S.A. (“Opesa”), which holds non-controlling interests in slot machine operators. Opesa is a subsidiary of Nortia in which Mr. Manuel Lao Hernández has a 54.21% interest. Opesa and its subsidiaries compete directly with us in the slot machine operations business. For the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2012, approximately €9.1 million, €9.4 million, €10.4 million, and €6.1 million respectively, of our B2B sales of slot machines were to subsidiaries of Opesa, which benefits from significant volume discounts.
In addition, we regularly provide Opesa and its subsidiaries with corporate management services, such as information technology and legal and human resources, that amounted to €0.6 million, €0.9 million, €0.9 million, and €0.5 million in 2009, 2010, 2011, and the nine months ending September 30, 2012 respectively.
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Transactions with Directors
Cirsa maintains a cash account with shareholders and directors for the purpose of clearing business expenses. As of December 30, 2011 and September 30, 2012, the balance of this cash account was €0.8 million and €0.9 million, respectively.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain of our significant indebtedness as of September 30, 2012, excluding the notes offered in the offering. The summary is not complete and reference should be made to the full text of the documents for such indebtedness, including the indentures and supplemental indentures for the notes and the intercreditor agreement.
Total ..................................................................................... 121.0 36.9 83.7 18.6 7.6 674.4 942.3
As of September 30, 2012, after giving pro forma effect to the offering, we would have had total debt of €969.5 million (including principal amount and accrued interest).
Bank Loan Agreements
As of September 30, 2012, we were party to 97 bank loan agreements with 34 banks. As of September 30, 2012, the aggregate outstanding principal amount under these loans was €157.3 million with interest rates ranging between 1.8% and 10.5%. Some of these loan agreements are secured by certain of the assets of our Marbella casino. One loan agreement is secured by the shares of certain companies in our Bingo Division, as well as certain of their assets. The loan agreements typically contain financial maintenance and certain restrictive covenants.
Revolving Facilities
As of September 30, 2012, we were party to 43 revolving facilities with 25 banks which agreements provide for, subject to satisfaction of certain drawn down conditions, aggregate borrowings of up to €21.0 million. As of September 30, 2012, the aggregate outstanding principal amount under these credit facilities was €13.0 million with interest rates ranging between 1.9% and 8.0%.
These revolving facilities have an average term of three years, but can be terminated at the discretion of the lender annually.
Receivables Financing
We have entered into financing arrangements under which we obtain loans backed by a portion of our trade receivables. These arrangements do not have a maturity of more than 180 days. As of September 30, 2012, we were party to 14 receivable financing agreements with 9 banks which allow for borrowings of up to €6.7 million. As of September 30, 2012, the aggregate outstanding principal amount under these financing arrangements was €2.5 million, with interest rates ranging from between 2.4% and 6.0%.
Capital Leasing Agreements
As of September 30, 2012, we were party to 150 capital leasing agreements with 20 financial institutions. Most of these leasing agreements are granted under master leasing agreements that set forth the main terms and conditions of each lease and have a term of three to four years.
At September 30, 2012, the aggregate outstanding principal amount (including accrued interest) of these leasing agreements was €29.9 million.
Gaming Tax Deferrals
In Spain, gaming tax accrues annually and, in most of the Spanish autonomous regions, gaming tax is required to be paid in quarterly installments.
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We generally apply for a deferment of the payment of the gaming tax with the tax authorities of the various Spanish autonomous regions in which we operate for a period ranging from three to six months. Typically, gaming taxes may be deferred for three to six months, but, from time to time, some tax authorities expressly authorize the deferment of gaming taxes for a period greater than one year. As of September 30, 2012, our aggregate amount of deferred gaming taxes was €28.1 million.
Promissory Notes
We issue promissory notes from time to time to finance the purchase of gaming assets and primarily slot machine operations. As of September 30, 2012, the aggregate outstanding amount of such promissory notes was €4.6 million. Some of these notes may be secured by the assets of the acquired companies.
Casino de Rosario Loan Agreement
On April 3, 2008, Casino de Rosario S.A. entered into two loan agreements of up to $50 million each with International Game Technology providing for an aggregate of up to $100 million of advances. The loan agreements each have a term of six years, and interest is based on LIBOR. Both loan agreements are secured by substantially all of the assets of Casino de Rosario. Cirsa and Casino Buenos Aires are parties to one of the $50 million loan agreements between Casino de Rosario and International Game Technology, and have provided limited credit support in respect of the loan agreement. Cirsa’s partner in the Casino de Rosario joint venture, Casino Club S.A., is a party to the second of the $50 million loan agreements between Casino de Rosario and International Game Technology. Advances were drawn on a pro rata basis under the two loan agreements. The proceeds from the advances were used to fund a portion of the costs of the construction of the Rosario casino. The Rosario casino and related hotel complex commenced operations in October 2009. As of September 30, 2012, the aggregate outstanding amount payable by us under the two loan agreements was €16.0 million (or $20.7 million).
Other Obligations
In addition to obligations under our indebtedness, we have a number of contingent obligations. Among other things, as is customary in the gaming industry, we obtain performance bonds from financial institutions and other providers in order to guarantee our compliance with gaming regulations. We also obtain performance bonds for other purposes, such as tenders for gaming concessions and the purchase of materials and equipment. As of September 30, 2012, we had obtained approximately 659 performance bonds from approximately 32 financial institutions in an aggregate amount of €107.7 million. None of these performance bonds have been called during the last three fiscal years.
As of September 30, 2012, we had long-term obligations to our joint ventures and minority investees of €10.4 million, and short-term obligations to such entities of €4.7 million. Our net debt owed to our joint ventures and minority investees was €9.0 million.
Revolving Credit Facility
On May 5, 2010, Cirsa, as original borrower, and the Guarantors and Global Bingo Corporation S.A., as original guarantors (the “RCF Guarantors”), entered into the Revolving Credit Facility with Deutsche Bank AG, London Branch, as arranger, original lender, facility agent (“RCF Facility Agent”) and security trustee (“Security Trustee”). We amended the Revolving Credit Facility on February 4, 2011 to, amongst other things, increase the aggregate committed amount under the Revolving Credit Facility from €30 million to €50 million. The indenture for the notes and the Intercreditor Agreement permit up to €100 million to be drawn under a senior facility and for such facility to have the benefit of the Intercreditor Agreement as described herein. We intend to enter into an amendment and restatement agreement for the Revolving Credit Facility on or shortly after the date of the issuance of the Notes.
In addition to loans, the Revolving Credit Facility may be used to issue letters of credit. In addition, part of the Revolving Credit Facility can be designated, from time to time, as ancillary facilities.
We will use a portion of the proceeds from this offering to repay €50 million of indebtedness outstanding under the Revolving Credit Facility on the date of closing of this offering, but the total committed amount under our Revolving Credit Facility (€50 million) will remain available after such repayment. See “Use of Proceeds” and “Capitalization.” At January 15, 2013, the aggregate outstanding amount under the Revolving Credit Facility was €50.0 million.
Maturity and interest
The loans under the Revolving Credit Facility presently bear interest at EURIBOR (or LIBOR, as applicable) plus a margin of 3.00% per annum (plus mandatory costs, if any) payable on the last day of each applicable interest period (as determined in accordance with the terms of the Revolving Credit Facility), provided that at the end of each
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quarter during the term of the Revolving Credit Facility the margin will be adjusted by reference to our ratio of Net Debt to EBITDA (as each term is defined in the Revolving Credit Facility) at a rate per annum within a range between 2.50% and 3.00% per annum. The lower margin will be applicable if our ratio of Net Debt to EBITDA is less than 3.00: l while the higher margin will be applicable if our ratio of Net Debt to EBITDA is greater than or equal to 3.50: l. Upon the effectiveness of the amendment agreement to the Revolving Credit Agreement, the margin on the loans and the margin ratchet methodology will be reset so that the loans under the Revolving Credit Facility will initially bear interest at EURIBOR (or LIBOR, as applicable) plus a margin of 4.125% per annum (plus mandatory costs, if any).
The current termination date of the Revolving Credit Facility is May 15, 2105. At or shortly after the date of the issuance of the Notes in this offering, we intend to enter into an amendment and restatement agreement for the Revolving Credit Facility pursuant to which, amongst other things, the final termination date of the Facility will be extended from May 15, 2015 to January 31, 2018. The effectiveness of the amendment and restatement agreement and the amendments to the Revolving Credit Facility effected thereby, including, amongst other things, the extension of the termination date will be subject to the satisfaction of customary documentary conditions precedent.
Covenants and events of default
The Revolving Credit Facility contains certain covenants and events of default which, subject to certain conforming amendments, reflects the covenants and events of default contained in the notes. The Revolving Credit Facility also contains certain customary representations and warranties and information undertakings for facilities of this type.
Security and guarantees
The obligations under the Revolving Credit Facility are secured by a pledge over the shares of certain of Cirsa’s subsidiaries granted by Cirsa International Gaming Corporation S.A., and Global Bingo Corporation S.A. and a pledge over certain credit rights from current account agreements entered into by Global Bingo Corporation S.A. with certain of such subsidiaries (the “RCF Security”). Guarantees have been provided by Cirsa and the RCF Guarantors, subject to certain customary limitations relating to such matters as unlawful financial assistance or which would result in directors or officers acting in contravention of their fiduciary duties and/or would subject them to civil or criminal or personal liability as a result of providing such guarantees.
While the aggregate principal committed amount made available under the Revolving Credit Facility was presently €50 million, the lenders of any additional amounts that may be committed thereunder (up to an aggregate of €100 million) likewise shall have the benefit of such security (subject any local law limitations) and shall benefit from the terms of the intercreditor agreement.
Voluntary prepayments
Cirsa has the option to voluntarily prepay or cancel all or part of the Revolving Credit Facility in tranches of at least €1 million with five business days’ notice (or such shorter period as the majority lenders under the Revolving Credit Facility may agree). Cirsa has the option to voluntarily prepay an individual lender in the event that any sum payable to that lender is required to be increased due to a tax gross-up or indemnification or where increased costs are payable in certain circumstances.
Mandatory prepayments
Mandatory prepayment and cancellation of the Revolving Credit Facility will occur upon (i) certain change of control events and upon disposal of certain assets or (ii) it being illegal for a lender to provide or continue to provide funding (such prepayment will be limited to such lender’s share). In the case of any voluntary prepayment or mandatory prepayment, Cirsa would be required to pay break costs (if any).
Intercreditor Agreement
To establish the relative rights of our creditors under the Revolving Credit Facility and the indenture for the notes, the Issuer, Cirsa, the RCF Guarantors (Cirsa and the RCF Guarantors, together the “Obligors”) and Group Companies that are creditors in respect of certain intercompany debt have entered into an intercreditor agreement (the “Intercreditor Agreement”) dated May 5, 2010, with, among others, the lenders under the Revolving Credit Facility, the RCF Facility Agent, the Security Trustee and Deutsche Trustee Company Limited, as trustee for the notes (and any additional creditors providing additional revolving credit facility financing up to an aggregate of €100 million shall accede to the Intercreditor Agreement at such time as such party provides additional financing). By accepting a note, holders of notes will be deemed to have agreed to and accepted the terms and conditions of the Intercreditor Agreement.
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The Intercreditor Agreement sets out:
• the relative ranking of the indebtedness under the Revolving Credit Facility and the indebtedness under the notes and the Guarantees;
• certain provisions concerning enforcement action that can be taken in respect of that debt;
• the procedure of enforcement of the transaction security or any guarantee of the Revolving Credit Facility or the Guarantees and the allocation of proceeds resulting from such enforcement;
• the terms pursuant to which certain intercompany debt will be subordinated upon the occurrence of certain insolvency events; and
• turnover provisions.
The following description is a summary of certain provisions contained in the Intercreditor Agreement. It does not restate the Intercreditor Agreement in its entirety and, as such, we urge you to read that document because it, and not the discussion that follows, defines certain rights (and restrictions on entitlement) of the holders of the notes.
Priority of debts
The Intercreditor Agreement provides that outstanding debt under the Revolving Credit Facility (including the guarantees thereof), the notes and the Guarantees will rank, without any preference between them, in priority to any intercompany loans.
Enforcement
The Intercreditor Agreement sets forth procedures for the enforcement of the RCF Security.
The lenders under the Revolving Credit Facility may not independently enforce the RCF Security. Enforcement with respect to such security may only be taken by the Security Trustee upon the instruction of the RCF Facility Agent.
The proceeds of enforcement of any transaction security or any guarantees of the Revolving Credit Facility or the Guarantees and all other amounts paid to the Security Trustee under the Intercreditor Agreement shall be applied in the following order:
• first, in payment pari passu and ratably (i) of the fees, costs, expenses and liabilities (and all interest thereon) of the RCF Facility Agent, the Security Trustee, and any receiver, delegate, attorney or agent appointed under the security documents or the Intercreditor Agreement and (ii) owing to the trustee for the notes in respect of Notes Trustee Ordinary Course Amounts (as defined below);
• second, in payment pari passu and ratably of unpaid costs and expenses of the RCF Facility Agent and any other finance party under the Revolving Credit Facility (other than the Security Trustee, any receiver or delegate);
• third, in payment to the RCF Facility Agent for application towards the balance of the Revolving Credit Facility;
• fourth, in payment to the trustee for the notes for application towards the balance of the notes and the Guarantees; and
• fifth, in payment of the surplus (if any) to the Obligors or other persons entitled to it for intercompany liabilities or otherwise.
As used in the Intercreditor Agreement, the term “Notes Trustee Ordinary Course Amounts” means the fees, costs and expenses of the trustee for the notes (including any amount payable to that trustee for the notes personally by way of indemnity, remuneration or to reimburse it for expenses incurred) payable for its own account pursuant to the notes documents in respect of the ongoing day-to-day administration of the notes documents and the costs of any enforcement action (including legal and other professional advisory fees) which are recoverable pursuant to the terms of the indenture for the notes or any other document entered into in connection with the issuance of the notes.
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Release of Transaction Security, Guarantees and Intercompany Debt
Each holder of the notes, the lenders in respect of intercompany loans, the lenders under the Revolving Credit Facility and all other creditors (other than the Security Trustee) irrevocably authorizes the Security Trustee to unconditionally release in any manner whatsoever any guarantees of the Revolving Credit Facility, Guarantees, intercompany loans and/or transaction security and/or other liabilities in respect of such debt in connection with any Enforcement Action taken or to be taken by the Security Trustee in accordance with the provisions of the Intercreditor Agreement and the other relevant Finance Documents, and the Security Trustee (and the RCF Facility Agent, trustee for the notes and relevant intercompany lender) shall promptly execute any such release or take such other action as is reasonably required to effect any such release at the expense of Cirsa.
It is a condition to the release of any Guarantees of the notes and other liabilities in respect of the notes and the Guarantees that the proposed Enforcement Action taken or to be taken by the Security Trustee involves the sale of shares and/or assets and that:
• either (a) such sale is made pursuant to a public auction or a process or proceedings approved or supervised by or on behalf of any court of law; or (b) in connection with such sale, an internationally recognized investment bank selected by the Security Trustee has delivered an opinion to the trustee for the notes that the sale price is fair from a financial point of view after taking into account all of the relevant circumstances in connection with such sale;
• the proceeds of such sale will be received by the Security Trustee in the form of cash (or substantially all cash);
• immediately prior to or concurrently with the completion of such sale, the relevant Guarantor and each of its Subsidiaries is or will be simultaneously and unconditionally released from all guarantees of the Revolving Credit Facility, other liabilities in respect of the Revolving Credit Facility and any secured hedging obligations relating thereto and all intercompany debt owed by such Group Company (or such debt is sold or otherwise disposed of by the relevant creditors to the purchaser of the relevant Group Company) and such obligations are not assumed by the purchaser of such Guarantor or an affiliate of such purchaser; and
• the net cash proceeds of sale are applied as described under “—Enforcement.”
Intercompany debt
Pursuant to the Intercreditor Agreement, Cirsa and its subsidiaries party thereto that are creditors in respect of intercompany debt have agreed to subordinate intercompany debt to debt under the Revolving Credit Facility, the notes and related guarantees.
In addition, neither Cirsa nor any of its subsidiaries that are creditors in respect of intercompany debt may accept the benefit of any security, guarantee, indemnity or other assurance against financial loss in respect of intercompany debt. Neither Cirsa nor any obligor may make any payment on or otherwise acquire or satisfy any intercompany debt if an enforcement action has occurred or is continuing in relation to the Revolving Credit Facility or the notes without the consent of the RCF Facility Agent.
Cirsa has agreed to procure that any Group Company that makes available intercompany debt to an Obligor or Group Company over which security has been granted to the lenders under the Revolving Credit Facility shall become a party to the Intercreditor Agreement in respect of such intercompany debt.
Turnover
If any creditor (defined in the Intercreditor Agreement as the trustee for the notes on behalf of the holders of the notes, the Security Trustee, the lenders under the Revolving Credit Facility, the RCF Facility Agent and any receiver or delegate) or Cirsa or any of its subsidiaries receives or recovers a payment in contravention of the Intercreditor Agreement, such creditor shall hold such payment in trust and pay over such amounts to the Security Trustee for application in accordance with the provision described above under “—Enforcement.”
In addition, if the trustee for the notes on behalf of the holders or the Issuer receives any amount from a member of the Group after enforcement of the notes or the Revolving Credit Facility, such person shall hold such amount in trust and pay over to the Security Trustee for application in accordance with the provisions described under “—Enforcement.”
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DESCRIPTION OF THE NOTES
You can find the definitions of certain terms used in this description under the subheading “Certain Definitions.” In this description, the word “Issuer” refers only to Cirsa Funding Luxembourg S.A. and the word “Company” refers only to Cirsa Gaming Corporation, S.A. and not to any of its subsidiaries.
The Issuer will issue the notes as additional notes under an existing indenture dated May 5, 2010 among itself, the Company, the Subsidiary Guarantors (as defined below), Deutsche Trustee Company Limited, as trustee, Deutsche Bank AG, London Branch, as transfer agent and principal paying agent, and Deutsche Bank Luxembourg S.A., as registrar and Luxembourg transfer and paying agent, in a private transaction that is not subject to the registration requirements of the Securities Act. The Indenture will not incorporate or include any of the provisions of the U.S. Trust Indenture Act of 1939, as amended. See “Notice to Investors.” The offered notes are being offered as additional notes under the indenture pursuant to which the Issuer issued the Initial Notes on May 5, 2010 and the First Additional Notes on January 18, 2011. The Initial Notes, the First Additional Notes and the offered notes will constitute a single class of debt securities under the indenture. The terms of the notes are subject to the provisions of the indenture.
The following description is a summary of the material provisions of the indenture and the Intercreditor Agreement. It does not restate the indenture or the Intercreditor Agreement in their entirety. We urge you to read the indenture and the Intercreditor Agreement because they, and not this description, define your rights as holders of the notes. Copies of the indenture and the Intercreditor Agreement are available as set forth under “Where You Can Find Other Information.” Certain defined terms used in this description but not defined below under “—Certain Definitions” have the meanings assigned to them in the indenture.
The registered holder of a note will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture.
Subject to compliance with the covenant described under “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock,” the Issuer may also issue an unlimited amount of additional notes at later dates under the same indenture (“Additional Notes”). Any Additional Notes that the Issuer issues in the future will be identical in all respects to the notes that the Issuer is issuing hereby (including with respect to Guarantees of such notes), except that notes issued in the future will have different issuance prices and issuance dates. All notes, including any Additional Notes, will be treated as a single class for all purposes under the indenture, including (without limitation), with respect to waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, for all purposes of the indenture and this “Description of the Notes,” references to the notes include the notes offered hereby and any Additional Notes actually issued.
For purposes of any covenant summarized herein, any reference to an amount in “€” shall mean, in respect of any amount in any currency other than euro, the Euro Equivalent thereof.
Brief Description of the Notes, the Funding Loan, the Guarantees of the Notes and the Intercreditor Agreement
The Issuer will enter into a loan agreement to repay an amount equal to the principal amount of the notes issued under the indenture pursuant to a Funding Loan. The notes are initially guaranteed by the Company and the Subsidiary Guarantors as of the date of the indenture and may, in the future, be guaranteed by further of the Company’s Restricted Subsidiaries (each such guarantee, a “Guarantee”). A Guarantee given by a Subsidiary Guarantor may be released in certain circumstances described herein.
The Notes and the Funding Loans
The notes:
• are general unsecured senior obligations of the Issuer;
• rank pari passu among themselves; and
• are unconditionally guaranteed by the Company and the Subsidiary Guarantors (and any future Guarantors).
The Issuer had no other Indebtedness on the date of the indenture and will not be allowed to incur additional indebtedness under the indenture and any intercompany Indebtedness except any Additional Notes, other Public Debt and Hedging Obligations, in each case, to be incurred in compliance with the indenture. Upon completion of this offering, the Issuer’s only material assets are the obligation of the Company to make payments on the Funding Loan in respect of the Initial Notes, the Funding Loan in respect of the First Additional Notes and the Funding Loan in respect of the offered notes.
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Each Funding Loan is:
• a general unsecured senior obligation of the Company;
• effectively subordinated to all existing and future secured borrowings of the Company to the extent of the value of the assets so secured; and
• effectively subordinated (in an insolvency proceeding) to any non-related third party borrowings of the Company except for those borrowings that have been set aside as fraudulent by a court.
As of September 30, 2012, after giving pro forma effect to this offering and the application of the proceeds thereof, we would have had total debt, including the notes, of €969.5 million.
The Funding Loan requires the Company to make appropriate payments under the Funding Loan to enable the Issuer to fulfill its obligations under the indenture. Upon the issuance of any Additional Notes, the proceeds thereof will be loaned to the Company pursuant to an additional loan on substantially the same terms as the Funding Loan.
The Guarantees of the Notes
Each Guarantee of the notes is (and the Guarantee of the notes by any future Guarantors will be):
• a joint and several general unsecured obligation of the relevant Guarantor; and
• effectively subordinated to all existing and future claims that have a statutory priority under applicable law and secured debt of the Guarantor to the extent of such priority and the value of the assets so secured.
As of the date of the indenture, all of the Company’s Subsidiaries will be “Restricted Subsidiaries.” However, under the circumstances described below under the subheading “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries,” the Company will be permitted to designate certain of its Subsidiaries as “Unrestricted Subsidiaries.” The Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the indenture.
Not all of our Subsidiaries will initially guarantee the notes. In the event of a bankruptcy, liquidation or reorganization of any non-guarantor Subsidiaries, these Subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Company. The Company is a holding company dependent upon the cash flow of its operating company subsidiaries in order to satisfy its obligations under its Guarantee of the notes and the Funding Loan.
The Guarantors consist of the Company, which holds all of our Restricted Subsidiaries and also conducts some operations, and the Subsidiary Guarantors. The Subsidiary Guarantors, as at the date of the indenture, will consist of 14 Spanish companies, one Italian company and one Panamanian company. The Subsidiary Guarantors include both operating companies and various intermediate holding companies. For the twelve months ended September 30, 2012, the Subsidiary Guarantors represented approximately 45.0% of our consolidated EBITDA.
In addition, pursuant to the covenant entitled “—Additional Guarantees,” subject to certain exceptions, any Restricted Subsidiary (i) that after the date of the indenture is or becomes a Material Subsidiary (except for Restricted Subsidiaries which are Material Subsidiaries at the date of the indenture but not initial Guarantors and Restricted Subsidiaries that are not 90% or more owned by the Company) or (ii) that guarantees certain Indebtedness of other entities, will also be required to become a Guarantor.
The Guarantees of the notes are joint and several obligations of the Guarantors. The obligations of each Guarantor under its Guarantee are limited as necessary to prevent that Guarantee from constituting a fraudulent conveyance under applicable law and as otherwise required under applicable law. See “Risk Factors—Risks relating to the offered notes and this offering—Fraudulent conveyance laws and other limitations on the enforceability and the amount of the Guarantees may adversely affect the validity and enforceability of the Guarantees.”
A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person, other than the Company or another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or Event of Default exists; and
(2) either:
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(a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor under the indenture and its Guarantee of the notes pursuant to a supplemental indenture satisfactory to the trustee;
(b) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the indenture; or
(c) in any transaction between (i) the Company or a Guarantor and (ii) a Restricted Subsidiary that is not a Guarantor, the Company or such Guarantor is the surviving Person or the Restricted Subsidiary is the surviving Person and assumes all of the obligations of the Company or such Guarantor under the indenture and its Guarantee of the notes pursuant to a supplemental indenture satisfactory to the trustee.
Release of Guarantees
The Guarantee of a Guarantor will be released, other than in connection with a Share Pledge Enforcement Sale:
(1) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) a Restricted Subsidiary of the Company, if the sale or other disposition complies with the “Asset Sale” provisions of the indenture, and all obligations of that Guarantor with respect to other Indebtedness of the Company or its Restricted Subsidiaries are also released;
(2) in connection with any sale of all of the Capital Stock of that Guarantor to a Person that is not (either before or after giving effect to such transaction) a Restricted Subsidiary of the Company, if the sale complies with the “Asset Sale” provisions of the indenture, and all obligations of that Guarantor with respect to other Indebtedness of the Company or its Restricted Subsidiaries are also released;
(3) if the Company designates any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture;
(4) upon legal defeasance or covenant defeasance or discharge of the notes as described under the caption “Defeasance” and “Satisfaction and Discharge;”
(5) as described under the caption “Amendment, Supplement and Waiver;” or
(6) in the case of Guarantees granted pursuant to the covenant entitled “—Additional Guarantees,” upon the discharge of the Indebtedness or the release and discharge of the guarantee that gave rise to the obligation to guarantee the notes.
See “—Repurchase at the Option of Holders—Asset Sales.”
In connection with a Share Pledge Enforcement Sale, a Guarantee will only be released if (i) the trustee confirms to the agent under the Senior RCF that the release has been consented to by the holders of the Notes under the indenture (to the extent such consent is required under the indenture); or (ii) the relevant shares of the Guarantor are disposed of and:
(1) either (a) such disposal is made pursuant to a public auction or process or proceedings supervised or approved by or on behalf of any court of law; or (b) in connection with such disposal, an internationally recognized investment bank selected by the Security Trustee has delivered an opinion to the trustee that the disposal price of the shares of the relevant Guarantor is fair from a financial point of view after taking into account all the relevant circumstances in connection with such disposal;
(2) the proceeds of such disposal received by the Security Trustee are in the form of cash (or substantially all cash);
(3) immediately prior to or concurrently with the completion of such disposal, such Guarantor and each of its Subsidiaries is simultaneously and unconditionally released from all guarantees and other liabilities in respect of the Senior RCF, any secured hedging obligations relating thereto and any intercompany debt owed by such Guarantor (or such debt is sold or otherwise disposed of by the relevant creditors to the purchaser of such Guarantor) and such obligations are not assumed by the purchaser of such Guarantor or an affiliate of such purchaser; and
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(4) the net cash proceeds of such disposal are applied in accordance with the application of recoveries provisions summarized above under “Description of Certain Indebtedness—Intercreditor Agreement”.
Intercreditor Agreement
To establish the relative rights of creditors, the lenders under the Senior RCF, if any, the trustee for the holders of the notes, the Issuer, the Company and the Subsidiary Guarantors have entered into the Intercreditor Agreement. The Intercreditor Agreement provides that in the event of an enforcement of any Guarantee, the proceeds from such enforcement shall be applied first to pay fees and amounts due under the Senior RCF before any application of proceeds can be made towards any amounts due to the holders of the notes. Moreover, the trustee, the Issuer, the Company and the Subsidiary Guarantors will be required to turnover to the lenders under the Senior RCF any amounts received by any of them in contravention of the Intercreditor Agreement. See “Description of Certain Indebtedness—Revolving Credit Facility” and “Description of Certain Indebtedness—Intercreditor Agreement.”
Principal, Maturity and Interest and Payment of Notes
The Issuer will issue notes in minimum denominations of €50,000 and integral multiples of €1,000 in excess thereof. For so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of this exchange so require, the Issuer will publish a notice of any change in these denominations in a newspaper having a general circulation in Luxembourg (currently expected to be the Luxemburger Wort) or the website of the Luxembourg Stock Exchange (www.bourse.lu). The notes will mature on May 15, 2018.
Interest on the notes will accrue at the rate of 8.750% per annum and will be payable semi-annually in arrears on May 15 and November 15, commencing on May 15, 2013. The Issuer will make each interest payment to the holders of record on the immediately preceding May 1 and November 1. The reimbursement price of the notes at maturity will be 100% of the principal amount then outstanding.
Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
The Issuer will pay all principal, interest, premium, and Additional Amounts, if any, on the Global Notes (as defined below) at the corporate trust office or agency of the Principal Paying Agent (as defined below). All payments on the Global Notes will be made by wire transfer of immediately available funds to an account of the holder of the Global Notes in accordance with instructions given by the holder.
Payments of principal of, and premium, if any, on each note in definitive registered form (“Definitive Registered Notes”) will be made by transfer on the due date to an account maintained by the payee pursuant to details provided by the holder or, if requested by the holder, by check, in each case against presentation and surrender (or, in the case of partial payment only, endorsement) of the relevant Definitive Registered Note at the office of any Paying Agent. Payments of interest in respect of each Definitive Registered Note will be made by transfer on the due date to an account maintained by the payee (the holder and account details of which appear on the register of holders at the close of business on the relevant record date) or, if requested by the holder, by check mailed on the relevant due date (or if that is not a business day, the immediately succeeding business day) to the holder (or to the first named of joint holders) of the Definitive Registered Note appearing on the register of holders at the close of business at the address shown on the register of holders on such record date. Payments in respect of principal of, premium, if any, and interest on Definitive Registered Notes are subject in all cases to any tax or other laws and regulations applicable in the place of payment but without prejudice to the provisions under the headings “—Optional Tax Redemption” and “—Additional Amounts.” The Paying Agent may require payment of a sum sufficient to cover any transfer tax or similar governmental charge in connection with any payment transfer instructions received by the Paying Agent. Definitive Registered Notes, if issued, will only be issued in registered form.
Paying Agent and Registrar for the Notes
The Issuer will maintain one or more paying agents for the notes (i) in Luxembourg (the “Luxembourg Paying Agent”) for as long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of this exchange so require, and (ii) London, United Kingdom (the “Principal Paying Agent” and together with the Luxembourg Paying Agent, the “Paying Agents”). The initial Paying Agents are Deutsche Bank Luxembourg S.A. in Luxembourg and Deutsche Bank AG, London Branch in London. The Paying
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Agents also will act as Transfer Agent. The Transfer Agent is responsible for, among other things, facilitating any transfers or exchanges of beneficial interests in different global notes between holders.
In addition, the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the European Council of Economics and Finance Ministers (“ECOFIN”) meeting of November 26-27, 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive.
The Issuer also will maintain one or more registrars (each a “Registrar”). The initial Registrar will be Deutsche Bank Luxembourg S.A. The Registrar will maintain a register reflecting ownership of Definitive Registered Notes outstanding from time to time and will make payments on Definitive Registered Notes on behalf of the Issuer.
The Issuer may change the Paying Agents, the Transfer Agents or the Registrars without prior notice to the holders. For so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of this exchange so require, the Issuer will publish a notice of any change of Paying Agent, Transfer Agent or Registrar in a newspaper having a general circulation in Luxembourg (currently expected to be the Luxemburger Wort) or the website of the Luxembourg Stock Exchange (www.bourse.lu).
Form of Notes
The notes will be issued in the form of global notes in registered form and will be issued in minimum denominations of €50,000 principal amount and integral multiples of €1,000. The notes will be serially numbered. In no event will Definitive Registered Notes in bearer form be issued. See “Book-Entry, Settlement and Clearance.”
Additional Amounts
All payments made by the Issuer, any Guarantor or a successor of any of them (each a “Payor”) on the notes will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) unless the withholding or deduction of such Taxes is then required by law. If any deduction or withholding for, or on account of, any Taxes imposed or levied by or on behalf of:
(1) Luxembourg, Spain or any political subdivision or governmental authority of any thereof or therein having power to tax;
(2) any jurisdiction from or through which payment on the notes or a Guarantee is made, or any political subdivision or governmental authority thereof or therein having the power to tax; or
(3) any other jurisdiction in which a Payor is organized or otherwise considered to be a resident for tax purposes, or any political subdivision or governmental authority thereof or therein having the power to tax (each of clause (1), (2) and (3), a “Relevant Taxing Jurisdiction”),
will at any time be required from any payments made with respect to the notes, including payments of principal, redemption price, interest or premium, the Payor will pay (together with such payments) such additional amounts (the “Additional Amounts”) as may be necessary in order that the net amounts received in respect of such payments by each holder of the notes or the Guarantee, as the case may be, after such withholding or deduction (including any such deduction or withholding from such Additional Amounts), equal the amounts which would have been received in respect of such payments in the absence of such withholding or deduction; provided, however, that no such Additional Amounts will be payable with respect to:
(1) any Taxes that would not have been so imposed but for the existence of any present or former connection between the relevant holder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of power over the relevant holder, if the relevant holder is an estate, nominee, trust or corporation) and the Relevant Taxing Jurisdiction other than a connection resulting from the mere ownership or holding of such note or enforcement of rights thereunder or under any Guarantee or the receipt of payments in respect thereof;
(2) any Taxes that would not have been so imposed if the holder or the beneficial owner of a note had made a declaration of non-residence or any other claim or filing for exemption to which it is entitled (provided that (x) such declaration of non-residence or other claim or filing for exemption is required by the applicable law of the Relevant Taxing Jurisdiction as a precondition to exemption from the requirement to deduct or withhold such Taxes and (y) at least 30 days prior to the first payment date with respect to which such declaration of non-residence or other claim or filing for exemption is
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required under the applicable law of the Relevant Taxing Jurisdiction, the relevant holder at that time has been notified (in accordance with the procedures set forth in “—Selection and Notice”) by the Payor or any other Person through whom payment may be made that a declaration of non-residence or other claim or filing for exemption is required to be made);
(3) any note presented for payment (where presentation is required) more than 30 days after the relevant payment is first made available for payment to the holder (except to the extent that the holder would have been entitled to Additional Amounts had the note been presented during such 30 day period);
(4) any Taxes that are payable otherwise than by withholding from a payment of the principal of, premium, if any, or interest, on the notes or under any Guarantee;
(5) any estate, inheritance, gift, sale, transfer, personal property or similar tax, assessment or other governmental charge;
(6) any withholding or deduction imposed on a payment to an individual and required to be made pursuant to the European Union Directive on the taxation of savings income (the “Directive”) which was adopted by the ECOFIN Council of the European Union (the Council of EU finance and economic ministers) on June 3, 2003 or any other Directive implementing the conclusions of the ECOFIN meeting of November 26-27, 2000, or any law implementing or complying with, or introduced in order to conform to, the Directive; or
(7) any Taxes which could have been avoided by the presentation (where presentation is required) of the relevant note to another Paying Agent in a member state of the European Union.
Such Additional Amounts will also not be payable where, had the beneficial owner of the note been the holder of the note, it would not have been entitled to payment of Additional Amounts by reason of any of clauses (1) to (7) inclusive above.
The Payor will (i) make any required withholding or deduction and (ii) remit the full amount deducted or withheld to the Relevant Taxing Jurisdiction in accordance with applicable law. Upon request, the Payor will use all reasonable efforts to obtain certified copies of tax receipts evidencing the payment of any Taxes so deducted or withheld from each Relevant Taxing Jurisdiction imposing such Taxes and will provide such certified copies to each holder. In its response to such request, the Payor will attach to each certified copy a certificate stating (x) that the amount of withholding Taxes evidenced by the certified copy was paid in connection with payments in respect of the principal amount of notes then outstanding and (y) the amount of such withholding Taxes paid per € 1,000 principal amount of the notes. Copies of such documentation will be available for inspection during ordinary business hours at the office of the trustee by the holders of the notes upon request and will be made available at the offices of the Paying Agent located in Luxembourg if the notes are then listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market.
At least 30 days prior to each date on which any payment under or with respect to the notes or any Guarantee is due and payable (unless such obligation to pay Additional Amounts arises shortly before or after the 30th day prior to such date, in which case it shall be promptly thereafter), if the Payor will be obligated to pay Additional Amounts with respect to such payment, the Payor will deliver to the trustee an Officers’ Certificate stating the fact that such Additional Amounts will be payable, the amounts so payable and will set forth such other information necessary to enable the trustee to pay such Additional Amounts to holders on the payment date. Each such Officers’ Certificate shall be relied upon until receipt of a further Officers’ Certificate addressing such matters.
The indenture further provides that, if the Payor conducts business in any jurisdiction (an “Additional Taxing Jurisdiction”) other than a Relevant Taxing Jurisdiction and, as a result, is required by the law of such Additional Taxing Jurisdiction to deduct or withhold any amount on account of taxes imposed by such Additional Taxing Jurisdiction from payments under the notes or a Guarantee, as the case may be, which would not have been required to be so deducted or withheld but for such conduct of business in such Additional Taxing Jurisdiction, the Additional Amounts provision described above shall be considered to apply to such holders as if references in such provision to “Taxes” included taxes imposed by way of deduction or withholding by any such Additional Taxing Jurisdiction (or any political subdivision thereof or taxing authority therein).
Wherever in the indenture, the notes, any Guarantee or this description of the notes there are mentioned, in any context:
(1) the payment of principal,
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(2) purchase prices in connection with a purchase of notes,
(3) interest, or
(4) any other amount payable on or with respect to the notes or any Guarantee,
such reference shall be deemed to include payment of Additional Amounts as described under this heading to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.
The Payor will pay any present or future stamp, court or documentary taxes, or any other excise or property taxes, charges or similar levies which arise in any jurisdiction from the execution, delivery or registration of any notes or any other document or instrument referred to therein (other than a transfer of the notes), or the receipt of any payments with respect to the notes or any Guarantee, excluding any such taxes, charges or similar levies imposed by any jurisdiction outside Luxembourg, Spain, the United States, the United Kingdom or any jurisdiction in which a Paying Agent is located, other than those resulting from, or required to be paid in connection with, the enforcement of the notes, a Guarantee or any other such document or instrument following the occurrence of any Event of Default with respect to the notes.
The foregoing obligations will survive any termination, defeasance or discharge of the indenture and will apply mutatis mutandis to any jurisdiction in which any successor to a Payor is organized or any political subdivision or taxing authority or agency thereof or therein.
Optional Redemption
At any time prior to May 15, 2013, at the option of the Issuer or the Company, the Issuer may, upon giving not less than 30 nor more than 60 days’ notice to the holders of the notes (which notice will be irrevocable), on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture at a redemption price of 108.750% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, with the Net Cash Proceeds of one or more Equity Offerings; provided that:
(1) at least 65% of the aggregate principal amount of notes issued under the indenture remain outstanding immediately after the occurrence of such redemption (excluding notes held by the Issuer or the Company and its Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of such Equity Offering.
After May 15, 2014, at the option of the Issuer or the Company, the Issuer may redeem all or a part of the notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the notes redeemed, to the applicable redemption date, if redeemed during the twelve month period beginning on May 15 of the years indicated below:
In addition, the Issuer may on or prior to May 15, 2014, upon giving not less than 30 nor more than 60 days’ notice to the holders of the notes (which notice will be irrevocable), at its option on one or more occasions redeem all or a portion of the notes (which includes Additional Notes, if any) at a redemption price equal to the sum of:
(1) 100% of the principal amount thereof, plus
(2) accrued and unpaid interest, if any, to the redemption date, plus
(3) the Applicable Premium at the redemption date, subject to the right of holders of record on the relevant record date to receive interest due on any interest payment date occurring on or prior to the redemption date.
Mandatory Redemption
Neither the Issuer nor the Company is required to make mandatory redemption or sinking fund payments with respect to the notes.
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Optional Tax Redemption
The Issuer may redeem the notes in whole, but not in part, at any time upon giving not less than 30 nor more than 60 days’ notice to the holders of the notes (which notice will be irrevocable) at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date fixed for redemption (a “Tax Redemption Date”) (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date) and Additional Amounts, if any, then due and which will become due on the Tax Redemption Date as a result of the redemption or otherwise, if the Issuer determines that, as a result of:
(1) any change in, or amendment to, the law or treaties (or any regulations or rulings promulgated thereunder) of a Relevant Taxing Jurisdiction (as defined above) affecting taxation; or
(2) any change in position regarding the application, administration or interpretation of such laws, treaties, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction) (each of the foregoing in clauses (1) and (2), a “Change in Tax Law”),
the Issuer, with respect to the notes or a Guarantor, with respect to a Guarantee, as the case may be, is, or on the next interest payment date in respect of the notes would be, required to pay more than de minimis Additional Amounts, and such obligation cannot be avoided by taking reasonable measures available to it (including, for the avoidance of doubt, the appointment of a new Paying Agent in accordance with the second paragraph under “Paying Agent and Registrar for the Notes” or, where such payment method would be reasonable under the circumstances, payment through another Guarantor or the Issuer). In the case of a Guarantor, a successor of the Issuer or a successor of a Guarantor, the Change in Tax Law must become effective after the date that such entity first makes payment on the notes. Notice of redemption for taxation reasons will be published in accordance with the procedures described under “—Selection and Notice.” Notwithstanding the foregoing, no such notice of redemption will be given (a) earlier than 90 days prior to the earliest date on which the Payor would be obliged to make such payment or withholding if a payment in respect of the notes or the relevant Guarantee were then due and (b) unless at the time such notice is given, such obligation to pay such Additional Amounts remains in effect. Prior to the publication or mailing of any notice of redemption of the notes pursuant to the foregoing, the Issuer will deliver to the trustee (a) an Officers’ Certificate stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to its right so to redeem have been satisfied and (b) an opinion of an independent tax counsel reasonably satisfactory to the trustee to the effect that the circumstances referred to above exist.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each holder of notes will have the right to require the Issuer to repurchase all or any part (equal to €50,000 or integral multiples of €1,000 in excess thereof) of that holder’s notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, the Issuer will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, if any, on the notes repurchased, to the date of purchase. Within 30 days following any Change of Control, the Issuer will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. The Issuer and the Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes and the related Guarantees as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the indenture, the Issuer and the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change of Control provisions of the indenture by virtue of such conflict.
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On or prior to the Change of Control Payment Date, the Company will prepay the Funding Loan to the extent necessary to finance the repurchase by the Issuer of the notes tendered pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Issuer will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer;
(2) deposit with the relevant Paying Agent an amount equal to the Change of Control Payment in respect of all notes or portions of notes properly tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly accepted together with an officers’ certificate stating the aggregate principal amount of notes or portions of notes being purchased by the Issuer.
The relevant Paying Agent will promptly mail to each holder of notes properly tendered the Change of Control Payment for such notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new note equal in principal amount to any unpurchased portion of the notes surrendered, if any; provided that each new note will be in a principal amount of €50,000 or, if greater, an integral multiple of €1,000.
The provisions described above that require the Issuer to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a Change of Control, the indenture does not contain provisions that permit the holders of the notes to require the Issuer to repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction.
The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by the Issuer and purchases all notes properly tendered and not withdrawn under the Change of Control Offer. The Issuer also will not be required to make a Change of Control Offer following a Change of Control if it has theretofore issued a redemption notice in respect of all of the notes in the manner and in accordance with the provisions described under “—Optional Redemption” and thereafter purchases all of the notes pursuant to such notice.
The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of the Company and its Restricted Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require the Issuer to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Restricted Subsidiaries taken as a whole to another Person or group may be uncertain. In addition, it should be noted that recent case law suggests that, in the event that incumbent directors are replaced as a result of a contested election, issuers may nevertheless avoid triggering a change of control under a clause similar to clause (4) of the definition of “Change of Control,” if the outgoing directors were to approve the new directors for the purpose of such change of control clause. As a result, it may be unclear as to whether a Change of Control has occurred and whether a holder of notes may require the Issuer to make an offer to repurchase the notes as described above.
Subject to the covenants described below, the Company could enter into certain transactions, including acquisitions, refinancings or other recapitalizations which, though not constituting a Change of Control under the indenture, could increase the amount of outstanding debt or otherwise affect the Company’s capital structure or credit ratings. In addition, we may not be able to finance the payments required for a Change of Control Offer. See “Risk Factors—Risks relating to the offered notes and this offering—We may not be able to finance a change of control offer.”
Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of the Asset Sale at least equal to the Fair Market Value of the assets or Capital Stock issued or sold or otherwise disposed of; and
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(2) at least 75% of the consideration received in the Asset Sale by the Company or such Restricted Subsidiary is in the form of cash, other Cash Equivalents or Replacement Assets. For purposes of this provision, each of the following will be deemed to be cash:
(a) any liabilities, as shown on the Company’s or such Restricted Subsidiary’s most recent balance sheet, of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any Guarantee of the notes) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days of the receipt thereof, to the extent of the cash received in that conversion.
Within 360 days after the receipt of any Net Cash Proceeds from an Asset Sale, the Company may apply those Net Cash Proceeds, if any, at its option:
(1) to repay secured Indebtedness, Indebtedness of a Restricted Subsidiary that is not a Guarantor or Indebtedness incurred under Credit Facilities and, in each case, to correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a Permitted Business.
Pending the final application of any Net Cash Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest the Net Cash Proceeds in any manner that is not prohibited by the indenture. Notwithstanding the foregoing provisions of this covenant, the Company and the Restricted Subsidiaries will not be required to apply any Net Cash Proceeds in accordance with this covenant except to the extent that the aggregate Net Cash Proceeds from all Asset Sales which is not applied in accordance with this covenant exceeds €10 million.
Any Net Cash Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds exceeds €10 million, the Issuer will make an Asset Sale Offer to all holders of notes, and the Company will make any required offer to purchase pari passu Indebtedness containing similar asset sale provisions, to purchase the maximum principal amount of notes and such pari passu Indebtedness that may be purchased out of the Excess Proceeds and the Company will prepay the Funding Loan to the extent necessary to finance the repurchase of the notes by the Issuer. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and other pari passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer and, if applicable, purchase the amount of Excess Proceeds will be reset at zero.
The Issuer and the Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of notes and the related Guarantees pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the indenture, the Issuer and the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached their respective obligations under the Asset Sale provisions of the indenture by virtue of such conflict.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in compliance with the requirements, if any, of the principal national securities exchange on which the notes are listed as certificated to the trustee by the Issuer; or
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(2) if the notes are not listed on any national securities exchange, on a pro rata basis, by lot or by such method as the trustee deems fair and appropriate.
No notes may be redeemed in part such that the remainder of the note is less that €50,000 in aggregate principal amount. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the notes or a satisfaction and discharge of the indenture. Notices of redemption may not be conditional.
In addition, so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and its rules so require, the Issuer will publish notices (including with respect to optional redemptions, repurchases at the option of the holders or the exchange offer) in a leading newspaper having general circulation in Luxembourg (currently expected to be the Luxemburger Wort) or the website of the Luxembourg Stock Exchange (www.bourse.lu) and will inform the Luxembourg Stock Exchange of the outstanding principal amount of the notes then in issue.
If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the holder of notes upon cancellation of the original note and will be collectible at the office of the Paying Agent. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption.
Prescription
Claims against the Issuer, the Company or any Guarantor for the payment of principal of, or interest, premium, or Additional Amounts, if any, on the notes will become void unless presentation for payment is made as required in the indenture within a period of seven years, in the case of principal, or five years, in the case of interest, premium or Additional Amounts, if any, from the applicable original payment date therefor.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on account of the Company’s or any of its Restricted Subsidiaries’ Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company’s or any of its Restricted Subsidiaries’ Equity Interests in their capacity as such (other than (A) dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company, (B) dividends or distributions to the Company or a Restricted Subsidiary of the Company and (C) pro rata dividends or distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of any equivalent interest in the case of a Subsidiary that is an entity other than a corporation);
(2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any Parent Company;
(3) (x) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the notes, the Guarantees of the notes, or the Funding Loan, except a payment of interest or principal at the Stated Maturity thereof or (y) make any payment in respect of any Indebtedness of any of its Affiliates other than the Company or a Restricted Subsidiary; or
(4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) being collectively referred to as “Restricted Payments”),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment; and
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(2) the Company would, after giving pro forma effect to such Restricted Payment (including the application thereof) as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least €1.00 of additional Indebtedness (other than Permitted Debt) pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock;” and
(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), (6) of the next succeeding paragraph), is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the period taken as one accounting period from the first day of the first fiscal quarter commencing after the Issue Date to the end of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment or, if such aggregate Consolidated Net Income for such period is a deficit, less 100% of such deficit, plus
(b) 100% of the aggregate net cash proceeds received by the Company since the Issue Date as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of the Company that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of the Company), plus
(c) 100% of any dividends or distributions (including payments made in respect of loans or advances) received by the Company or a Restricted Subsidiary of the Company after the Issue Date from an Unrestricted Subsidiary of the Company or a Permitted Joint Venture, to the extent that such dividends or distributions were not otherwise included in Consolidated Net Income of the Company for such period (and provided that such dividends or distributions are not included in the calculation of that amount of Permitted Investments permitted under clause (12) of the definition thereof), plus
(d) to the extent that any Unrestricted Subsidiary of the Company is redesignated as a Restricted Subsidiary after the Issue Date, the lesser of (i) the Fair Market Value of the Company’s Investment in such Subsidiary as of the date of such redesignation or (ii) the Fair Market Value of such Subsidiary as of the date on which such Subsidiary was originally designated as an Unrestricted Subsidiary, plus
(e) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash or Cash Equivalents (including, without limitation, any sale for cash or other Cash Equivalents of an Equity Interest in an Unrestricted Subsidiary), the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration of the dividend, if at the date of declaration the dividend payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of the Company or any Restricted Subsidiary or of any Equity Interests of the Company by conversion into (in the case of subordinated Indebtedness) or in exchange for, or out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such Net Cash Proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition will be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the Net Cash Proceeds from an incurrence of Permitted Refinancing Indebtedness;
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(4) Any Restricted Payment made by exchange for, or out of the proceeds of the substantially current sale of, Equity Interests of the Company (other than Disqualified Stock) or a substantially concurrent cash capital contribution received by the Company from its shareholders; provided, however, that the Net Cash Proceeds from such sale or cash capital contribution shall be excluded from clause (3)(b) of the preceding paragraph;
(5) the repurchase, redemption or other acquisition for value of Equity Interests of any non-Wholly Owned Restricted Subsidiary of the Company if, as a result of such purchase, redemption or other acquisition, the Company increases its percentage ownership, directly or indirectly through its Restricted Subsidiaries, of such non-Wholly Owned Restricted Subsidiary;
(6) the repurchase, redemption or other acquisition for value of Equity Interests of the Company or its Restricted Subsidiaries representing fractional shares of such Equity Interests in connection with a merger, consolidation, amalgamation or other combination of the Company or any such Restricted Subsidiary;
(7) following the first Public Offering of the Company’s ordinary shares or the ordinary shares of any Parent Company, the payment by the Company of, or loans or advances, dividends or distributions to any Parent Company to pay dividends on the ordinary shares of the Company or any Parent Company, in an amount not to exceed in any fiscal year the greater of (A) an amount equal to the greater of (x) 7% of the Market Capitalization and (y) 7% of the IPO Market Capitalization, provided, in each case, that the aggregate of such payments shall not exceed the amount of the net cash proceeds received by the Company in any Public Offering or contributed in cash to the Company’s ordinary shares with the net cash proceeds of any such Public Offering and provided further, in each case, that after giving pro forma effect to the payment of such amount the Leverage Ratio shall be no greater than 4.00 to 1.00 and (B) 6% per annum of the net cash proceeds received by the Company in any Public Offering or contributed in cash to the Company’s ordinary shares with the net cash proceeds of any such Public Offerings by any Parent Company;
(8) loans or advances made to employees, officers or directors (not including the Principal or any Related Party) in amounts not exceeding € 2 million at any time outstanding;
(9) other Restricted Payments made after the date of the indenture in an amount (measured on the date each such Restricted Payment was made and without giving effect to subsequent changes in value) when taken together with all other Restricted Payments made pursuant to this clause (9) not to exceed €25 million, (provided that if an Investment is made pursuant to this clause in a Person that is not a Restricted Subsidiary and such Person is subsequently designated a Restricted Subsidiary, such Investment shall thereafter be deemed to have been made pursuant to clause (3) of the definition of “Permitted Investments” and not this clause),
provided, however, that after giving effect to any Restricted Payment referred to in clauses (5), (7), (8) or (9) of this paragraph, no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) will be the Fair Market Value on the date of the Restricted Payment of the assets or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The Fair Market Value of any assets or securities that are required to be valued by this covenant will be determined by the Board of Directors of the Company whose resolution with respect thereto will be delivered to the trustee. The Board of Directors’ determination must be based upon an opinion or appraisal issued by an independent national or international accounting, appraisal or investment banking firm if the Fair Market Value exceeds € 10 million, except in respect of a Restricted Investment in Persons other than a Related Party, in which case no such opinion or appraisal is required unless the Fair Market Value exceeds €20 million. In the event of any sale of Equity Interests in a Restricted Subsidiary as a result of which such Restricted Subsidiary is no longer a Restricted Subsidiary, the Company shall be deemed to have made a Restricted Investment equal to the Fair Market Value of any remaining Investment in such Restricted Subsidiary, or will by such Fair Market Value reduce the amount available for future Investments under one or more clauses of the definition of Permitted Investments, as the Company shall determine.
Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, “incur”) any Indebtedness (including Acquired Debt), and the Company will not issue any Disqualified
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Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that the Company, the Guarantors and any Financing Subsidiary may incur Indebtedness, the Company or any Guarantor may incur Acquired Debt and the Company may issue Disqualified Stock and any Guarantor may issue shares of preferred stock, if the Fixed Charge Coverage Ratio for the Company’s most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2.5 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence by the Company or its Restricted Subsidiaries of any of the following items of Indebtedness (collectively, “Permitted Debt”):
(1) the incurrence by the Company and any Restricted Subsidiary (other than any Financing Subsidiary) of additional Indebtedness and letters of credit under Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1) not to exceed €100 million less the aggregate amount of all commitment reductions with respect to any revolving credit borrowings under a Credit Facility that have been made pursuant to clause (1) of the second paragraph of the covenant entitled “—Repurchase at the Option of the Holders—Asset Sales” by the Company or any of its Restricted Subsidiaries since the date of the indenture;
(2) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness;
(3) the incurrence (a) by the Issuer of Indebtedness represented by the notes to be issued hereby (but not including any Additional Notes), (b) by the Company, the Subsidiary Guarantors and any future Guarantors of Indebtedness represented by a Guarantee of the notes (including Additional Notes incurred in compliance with the indenture), and (c) by the Company of Indebtedness represented by the Funding Loan;
(4) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings, sale and leaseback transactions or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred under clause (5) hereof to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), not to exceed €25 million at any time outstanding;
(5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (4) or (5) of this paragraph;
(6) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that:
(a) if the Company or any other Guarantor is the obligor on such Indebtedness (other than Indebtedness owed to any Financing Subsidiary in respect of Indebtedness issued by such Financing Subsidiary and borrowed by the Company or another Guarantor) and the creditor is not a Guarantor, such Indebtedness must be unsecured and expressly subordinated to the prior payment in full in cash of all Obligations with respect, in any bankruptcy, insolvency or winding up of such obligor, to its Guarantee of the notes and, in the case of the Company, its obligations under the Funding Loan, as applicable, and
(b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary of the Company and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary of the Company will be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (6);
(7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk or currency risk (i) with respect to any floating rate or non-euro denominated Indebtedness that is permitted by the terms of the indenture to be outstanding or (ii) for non-speculative purposes in the ordinary course of business;
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(8) the guarantee by the Company or any of the other Guarantors (subject to compliance with the covenant “—Certain Covenants—Additional Guarantees”) of Indebtedness of the Company or a Restricted Subsidiary of the Company (including any Financing Subsidiary) that was permitted to be incurred by another provision of this covenant;
(9) the incurrence by the Company or any Restricted Subsidiary (other than any Financing Subsidiary) of Indebtedness in connection with one or more standby letters of credit or performance bonds issued by the Company or a Restricted Subsidiary (other than any Financing Subsidiary) in the ordinary course of business or pursuant to self-insurance obligations and, in each case, not in connection with the borrowing of money or the obtaining of advances or credit;
(10) the incurrence by the Company or any Restricted Subsidiary (other than any Financing Subsidiary) of Indebtedness arising from agreements providing for indemnification or adjustment of purchase price or from guarantees or letters of credit securing any Obligations of the Company or any Restricted Subsidiary (other than any Financing Subsidiary) pursuant to such agreements, incurred in connection with the sale or other disposition of any business, assets or Restricted Subsidiary of the Company, other than guarantees or similar credit support by the Company or any Restricted Subsidiary of Indebtedness incurred by any Person acquiring such business, assets or subsidiary, provided that the maximum Indebtedness permitted by this clause (10) in respect of any such sale or other disposition of any business, assets or subsidiary shall not exceed the Net Cash Proceeds from such sale or other disposition;
(11) the incurrence by the Company or any Restricted Subsidiary (other than any Financing Subsidiary) of Indebtedness arising from guarantees to suppliers, lessors, licensees, contractors, franchisees or customers who are not, in each case, Affiliates, and incurred in the ordinary course of business;
(12) the incurrence by the Company or any Restricted Subsidiary (other than any Financing Subsidiary) of Indebtedness in respect of any obligations under workers’ compensation laws and similar legislation;
(13) the incurrence by the Company and/or other Guarantors of Indebtedness owed to a Financing Subsidiary in respect of Indebtedness issued by such Financing Subsidiary and of guarantees of such Indebtedness; provided that the Company would have been permitted to incur such Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of this covenant;
(14) the incurrence by the Company or any Restricted Subsidiary of guarantees of the Indebtedness of Permitted Joint Ventures in an amount not to exceed €50 million;
(15) Indebtedness, Disqualified Stock or preferred stock of Persons that are acquired by the Company or any Restricted Subsidiary of the Company or merged, consolidated, amalgamated or otherwise combined with (including pursuant to any acquisition of assets and assumption of related liabilities) the Company or a Restricted Subsidiary of the Company in accordance with the terms of the indenture; provided that such Indebtedness, Disqualified Stock or preferred stock are not incurred or issued in connection with such acquisition, merger, consolidation, amalgamation or other combination, and, after giving effect to such acquisition, merger, consolidation, amalgamation or other combination, either:
(a) the Company or such Restricted Subsidiary would be permitted to incur at least €1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first sentence, of this covenant; or
(b) the Fixed Charge Coverage Ratio of the Company is no less than immediately prior to such acquisition, merger, consolidation, amalgamation or other combination; and
(16) the incurrence by the Company or any Restricted Subsidiary of additional Indebtedness (including Acquired Debt) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (16), not to exceed €75 million.
To the extent any Restricted Subsidiary that is not a Guarantor is a joint obligor with respect to any Indebtedness, the entire amount of such Indebtedness shall be considered Indebtedness of a Restricted Subsidiary that is not a Guarantor for purposes of this covenant. The Issuer, the Company, and the Subsidiary Guarantors will not incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of the Issuer, the Company, or such Subsidiary Guarantor, as applicable, unless such Indebtedness is also contractually subordinated in right of payment to the notes (in the case of the Issuer), its Guarantee of the notes (in the case of the
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Company or any Subsidiary Guarantor) and the Funding Loan (in the case of the Company) on substantially identical terms; provided, however, that no Indebtedness of the Company, or any Subsidiary Guarantor will be deemed to be contractually subordinated in right of payment to any other Indebtedness of the Company, any Subsidiary Guarantor or a Restricted Subsidiary of the Company solely by virtue of being unsecured.
The accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Consolidated Interest Expense of the Company as accrued or paid in accordance with the definition of such term.
The incurrence by an Unrestricted Subsidiary of the Company of Non-Recourse Debt will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of such Unrestricted Subsidiary, such Indebtedness shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company that was not permitted by this covenant.
For purposes of determining compliance with this covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (16) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company will be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this covenant. Indebtedness under Credit Facilities outstanding on the date on which notes are first issued and authenticated under the indenture (other than debt refinanced thereby) will be deemed to have been incurred on such date in reliance on the exception provided by clause (4) of the second paragraph of the covenant entitled “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock.”
Liens
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind (other than Permitted Liens) upon any of its assets or property (including Capital Stock of Restricted Subsidiaries), whether owned on the date of the indenture or acquired after that date, which Lien is securing any Indebtedness, unless contemporaneously with the incurrence of such Lien effective provision is made to secure the Indebtedness due under the indenture and the notes equally and ratably with (or senior in priority to with respect to subordinated obligations) the Indebtedness secured by such Lien for so long as such Indebtedness is secured.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities as in effect on the date of the indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of those agreements; provided that the amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in those agreements on the date of the indenture;
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(2) (i) the indenture, the notes and the Guarantees of the notes and (ii) any notes and guarantees in connection with the subsequent issuance of debt securities by any Financing Subsidiary in accordance with and on terms no less onerous than the indenture;
(3) applicable law or regulation or the terms of any license, authorization, concession or permit to engage in a Permitted Business;
(4) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on that property of the nature described in clause (4) of the second paragraph of the covenant entitled “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock;”
(7) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under the provisions of the covenant entitled “—Certain Covenants—Liens” that limit the right of the debtor to dispose of the assets subject to such Liens;
(10) customary provisions in joint venture agreements, asset sale agreements, stock sale agreements and other similar agreements;
(11) provisions that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or other contract entered into in the ordinary course of business; and
(12) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business.
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Merger, Consolidation or Sale of Assets
The Company may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not the Company is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries taken as a whole, in one or more related transactions, to another Person; unless:
(1) either: (a) the Company is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, conveyance or other disposition has been made (the “Surviving Entity”) is a corporation organized or existing under the laws of (i) Spain, (ii) any other member of the European Union that has adopted the euro as its national currency, (iii) the United Kingdom or (iv) the United States, any state of the United States or the District of Columbia;
(2) the Surviving Entity (if other than the Company) assumes all the obligations of the Company under its Guarantee of the notes, the Funding Loan, the indenture, the Security Documents, the Intercreditor Agreement and any Additional Intercreditor Agreement, pursuant to agreements satisfactory to the trustee;
(3) immediately after giving effect to such transaction no Default or Event of Default exists or would exist; and
(4) the Company or the Surviving Entity, as the case may be, will:
(a) on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period, either (i) be permitted to incur at least €1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant entitled “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock” or (ii) the Fixed Charge Coverage Ratio of the Company (or, if applicable, the Surviving Entity) would equal or exceed the Fixed Charge Coverage Ratio of the Company immediately prior to giving effect to such transaction; and
(b) have delivered to the trustee a written instrument in form satisfactory to the trustee confirming the Guarantee of the notes by the Company.
In addition, the Company may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This “—Merger, Consolidation or Sale of Assets” covenant will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and any of the Guarantors. Notwithstanding clause (4)(a) of the foregoing, the Company or any Guarantor may merge with an Affiliate solely for the purpose of reincorporating the Company or such Guarantor in another jurisdiction to realize tax or other benefits.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an “Affiliate Transaction”), unless:
(1) the Affiliate Transaction is on terms no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of €6 million, a resolution of the Board of Directors of the Company set forth in an officers’ certificate certifying that such Affiliate Transaction complies with this covenant and that such Affiliate Transaction has been approved by a majority of the Qualified Directors or the sole Qualified Director; and
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(b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of € 12 million, or, if there is no Qualified Director, in excess of € 6 million, an opinion that such transaction or series of transactions is fair to the holders from a financial point of view, or is not less favorable than could reasonably be expected to be obtained at the time in an arm’s length transaction with a Person who was not an Affiliate of the Company, which opinion shall be issued by an independent accounting, appraisal or investment banking firm of international or national standing.
The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph:
(a) transactions between or among (i) the Company and/or (ii) its Restricted Subsidiaries;
(b) transactions with a Person (including any joint venture or equity investee) that is an Affiliate of the Company or a Restricted Subsidiary solely because the Company or a Restricted Subsidiary owns an Equity Interest in such Person;
(c) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company and payments of benefits and salaries to employees in the ordinary course of business;
(d) issuances or sales of Equity Interests of the Company (other than Disqualified Stock) to Affiliates of the Company;
(e) sales of gaming machines by the Company or a Restricted Subsidiary to Affiliates on terms (including, without limitation, the rate of discount) reflecting current market conditions, that are no less favorable, when taken as a whole, to the Company or such Restricted Subsidiary, as applicable, than those available from the Company or such Restricted Subsidiary to third parties;
(f) payments pursuant to real estate leases entered into in the ordinary course of business and on reasonable arms-length terms, not exceeding €8 million per annum in the aggregate;
(g) Restricted Payments that are permitted by the provisions of the indenture described above under the caption “—Certain Covenants—Restricted Payments” (other than Permitted Investments described in clauses (4), (6) and (12) of the definition of “Permitted Investments”); and
(h) performance of any agreement of the Company or a Restricted Subsidiary as in effect on the Issue Date and disclosed in the listing circular relating to the Initial Notes under “Certain Relationships and Related Party Transactions” and any amendment after the Issue Date (so long as such amendment is not disadvantageous to the holders of the notes in any material respect) to any such agreement (except as covered by clause (f) hereof).
Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company or any Restricted Subsidiary (other than a Financing Subsidiary) may enter into a sale and leaseback transaction if:
(1) the Company or such Restricted Subsidiary (as the case may be) could have (a) (i) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under the caption “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock” and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant entitled “—Certain Covenants—Liens;”
(2) the gross cash proceeds of that sale and leaseback transaction are at least equal to the Fair Market Value of the property that is the subject of that sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, the covenant described above under the caption “—Repurchase at the Option of Holders—Asset Sales.”
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Limitation on Issuances and Sales of Equity Interests in Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary of the Company to any Person (other than the Company or a Restricted Subsidiary of the Company or as permitted under “—Certain Covenants—Liens”), unless:
(1) after giving effect to such transfer, conveyance, sale, lease or other disposition:
(a) such Restricted Subsidiary would remain a Restricted Subsidiary; or
(b) such transaction would be permitted by the covenant described above under “—Certain Covenants—Restricted Payments,” and
(2) the Net Cash Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption “—Repurchase at the Option of Holders—Asset Sales.”
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors of the Company or, if required by applicable law, the shareholders of the Company may designate any Restricted Subsidiary (except any Financing Subsidiary) to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate Fair Market Value of all outstanding Investments owned by the Company and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be an Investment made as of the time of such designation and will either reduce the amount available for Restricted Payments under the first paragraph of the covenant entitled “—Certain Covenants—Restricted Payments” or reduce the amount available for future Investments under one or more clauses of the definition of Permitted Investments, as the Company shall determine. That designation will only be permitted if such Investment would be permitted at that time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors of the Company or, if required by applicable law, the shareholders of the Company may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default.
Additional Guarantees
The Company shall cause any Restricted Subsidiary that after the date of the indenture is or becomes a Material Subsidiary (except for any Restricted Subsidiary which was a Material Subsidiary at the date of the indenture but was not an initial Subsidiary Guarantor, any Restricted Subsidiary that is already a Guarantor, or any Restricted Subsidiary as to which the Company and its Restricted Subsidiaries do not own, directly or indirectly, greater than 90% of the Capital Stock) to execute and deliver a supplemental indenture providing for the Guarantee of the notes by such Restricted Subsidiary on the same terms as the Guarantees granted by the other Subsidiary Guarantees hereunder.
For so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of this exchange so require, the Issuer will publish a notice of such additional guarantees in a newspaper having a general circulation in Luxembourg (currently expected to be the Luxemburger Wort) or the website of the Luxembourg Stock Exchange (www.bourse.lu).
The Company will not permit any of its Restricted Subsidiaries, directly or indirectly, to guarantee the payment of any other Credit Facilities or other Public Debt of the Issuer or any Guarantor unless such incurrence is permitted by the covenant entitled “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock,” and such Restricted Subsidiary (if not already a Guarantor) simultaneously executes and delivers a supplemental indenture and supplemental intercreditor agreement pursuant to which such Restricted Subsidiary will guarantee payment of the notes on the same terms and conditions as those set forth in the indenture, the Intercreditor Agreement and any Additional Intercreditor Agreement and which Guarantee of the notes will be senior to or pari passu with such Restricted Subsidiary’s guarantee of such other Credit Facilities or other Public Debt; provided that no such additional Guarantee of the notes need be provided in respect of Credit Facilities or other Public Debt of the Issuer or any Guarantor (i) that does not exceed €5 million, in the aggregate with all other Credit Facilities or other Public Debt described under this clause (i), (ii) if the guarantee of such Indebtedness is pursuant to a regulatory requirement and such Credit Facilities or other Public Debt is owed to a regulatory body, or (iii) if such Credit Facilities or other Public Debt is guaranteed by such Restricted Subsidiary on the Issue Date and such Restricted Subsidiary is not a Guarantor.
The Company shall not be obligated to cause such Restricted Subsidiary to guarantee the notes pursuant to any of the first three paragraphs of this caption “—Additional Guarantees” to the extent that such Guarantee could reasonably be expected to give rise to or result in: (1) any violation of applicable law that cannot be avoided or otherwise prevented
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through measures reasonably available to the Company or such Restricted Subsidiary; or (2) any liability for the officers, directors or shareholders of such Restricted Subsidiary.
The Company shall not be obligated to cause such Restricted Subsidiary to guarantee the notes pursuant to either the first or the third paragraph of this caption “—Additional Guarantees” to the extent that such Guarantee could reasonably be expected to give rise to or result in: (1) any cost, expense, liability or obligation (including any Tax) other than reasonable out of pocket expenses and other than reasonable governmental or regulatory filing fees; or (2) a requirement under applicable law, rule or regulation to obtain or prepare financial statements or financial information of such Person to be included in any required filing with a legal or regulatory authority that the Company is not able to obtain or prepare without unreasonable expense.
Notwithstanding the preceding paragraphs of this covenant, any Guarantee of the notes by a Restricted Subsidiary will provide by its terms that it will be automatically and unconditionally released and discharged when (i) the Indebtedness that gave rise to the obligation to guarantee the notes is discharged, (ii) in the case of any Guarantee granted as contemplated under the third paragraph of this caption “—Additional Guarantees” as a result of a Restricted Subsidiary guaranteeing other Credit Facilities or Public Debt, when such other Indebtedness is released and discharged, or (iii) otherwise under the circumstances described above under the caption “—Brief Description of the Notes, the Funding Loan, the Guarantees of the Notes and the Intercreditor Agreement—The Guarantees of the Notes.” The form of the Guarantee of the notes will be attached as an exhibit to the indenture.
Impairment of Security Interest
The Company will not, and will not permit any Restricted Subsidiary to, take or omit to take any action that would have the result of materially impairing the security interest with respect to the Security (it being understood that the granting, and any releasing and retaking of Security to secure Indebtedness as permitted in the Security Documents, the Intercreditor Agreement and the indenture, shall under no circumstances be deemed to materially impair the security interest with respect to the Security) and the Company will not, and will not permit any Restricted Subsidiary to, grant to any Person other than the trustee and the Security Trustee for the benefit of the holders of the notes, any interest whatsoever in any Security, except as permitted in the Security Documents, the Intercreditor Agreement, any Additional Intercreditor Agreement and under “—Certain Covenants—Liens.”
Further Assurances
The Issuer, the Company and the Restricted Subsidiaries will execute any and all further documents, financing statements, agreements and instruments, and take all further action that may be required under applicable law, in order to grant, preserve, protect and perfect the validity and priority of the security interest created or intended to be created by the Security Documents in the Security.
Payments for Consent
The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture, the notes, the Security Documents, the Intercreditor Agreement or any Additional Intercreditor Agreement unless such consideration is offered to be paid and is paid to all holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary (other than any Financing Subsidiary) to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole.
The Issuer
The Issuer will not engage in any business activity or undertake any other activity, except any activity (a) relating to the offering, sale or issuance of the notes, other Public Debt and Hedging Obligations or the incurrence of Indebtedness by the Issuer represented by the notes, other Public Debt and Hedging Obligations, (b) undertaken with the purpose of, and directly related to, fulfilling its obligations under the notes or the indenture, other Public Debt and Hedging Obligations (including the lending of the proceeds from the notes or other Public Debt to the Company or another Guarantor pursuant to a Funding Loan or similar loan or loans and granting Liens in respect of such loans to secure Indebtedness), or (c) directly related to the establishment and maintenance of the Issuer’s corporate existence or (d) reasonably related to the foregoing. The Issuer shall not (a) incur any Indebtedness (except to the Company or a
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Wholly Owned Restricted Subsidiary of the Company) other than the notes, other Public Debt and Hedging Obligations, or (b) issue any Capital Stock (other than to the Company or a Wholly Owned Restricted Subsidiary of the Company), or (c) undertake any transaction that will require the Issuer to register as an “investment company” or an entity “controlled by an investment company” as defined in the U.S. Investment Company Act of 1940, as amended and the rules and regulations thereunder.
The Issuer and the Company will not, and will not permit any Restricted Subsidiary or any other Person that is an obligor under the Funding Loan, to (i) sell, dispose, encumber, prepay, repay, repurchase, redeem or otherwise acquire, reduce or retire any amounts outstanding under the Funding Loan except in connection with a redemption of outstanding notes in a manner permitted by the indenture, or (ii) amend, modify, supplement or waive any rights under the Funding Loan in a manner that would adversely affect the rights of the Issuer or its creditors with respect to the Funding Loan.
Suspension of Certain Covenants when Notes Rated Investment Grade
If on any date following the Issue Date, (1) the notes are rated (a) Baa3 or better by Moody’s and (b) BBB− or better by S&P (or, if either Moody’s or S&P ceases to rate the notes for reasons outside of the control of the Issuer or the Company, the equivalent investment grade credit rating from Fitch or, in the absence of such, any other “nationally recognized statistical rating organization” within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act selected by the Issuer or the Company as a replacement agency so that the notes are so rated by at least two such credit rating agencies); and (2) no Default or Event of Default shall have occurred and be continuing, then, beginning on that day and subject to the provisions of the following paragraph, the covenants specifically listed under the following captions in this listing circular will be suspended and, in each case, any related default provision of the indenture will cease to be effective and will not be applicable to the Company and its Restricted Subsidiaries:
(1) “—Repurchase at the Option of Holders—Asset Sales;”
(2) “—Certain Covenants—Restricted Payments;”
(3) “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock;”
(4) “—Certain Covenants—Dividend and Other Payment Restrictions Affecting Subsidiaries;”
(5) clause (4) of the covenant described under the caption “—Certain Covenants—Merger, Consolidation or Sale of Assets;”
(6) “—Certain Covenants—Transactions with Affiliates;”
(7) clauses (1)(a) and (3) of the covenant described under the caption “—Certain Covenants—Sale and Leaseback Transactions;”
(8) “—Certain Covenants—Limitation on Issuances and Sales of Equity Interests in Restricted Subsidiaries;” and
(9) “—Certain Covenants—Additional Guarantees.”
During any period that the foregoing covenants have been suspended, the Company’s Board of Directors may not designate any of its Subsidiaries as Unrestricted Subsidiaries pursuant to the covenant described below under the caption “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries” or the second paragraph of the definition of “Unrestricted Subsidiary.”
Notwithstanding the foregoing, if the rating assigned by any such rating agency should subsequently decline to below Baa3 or BBB−, as applicable, the foregoing covenants will be reinstituted as of and from the date of such rating decline. Such covenants will not, however, be of any effect with respect to actions properly taken during the period of suspension. Calculations under the reinstated “Restricted Payments” covenant will be made as if the “Restricted Payments” covenant had been in effect since the Issue Date except that no default will be deemed to have occurred by reason of a Restricted Payment made while that covenant was suspended. On the rating decline date, all Indebtedness incurred during the suspension period will be classified, at the Issuer’s option, as having been incurred pursuant to the first paragraph of the covenant described under the caption “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock” or one or more of the clauses set forth in the second paragraph of such covenant (to the extent such Indebtedness would be permitted to be incurred thereunder as of the rating decline date and after giving effect to Indebtedness incurred prior to the suspension period and outstanding on the rating decline date).
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To the extent that such Indebtedness would be so permitted to be incurred under the first two paragraphs of the covenant described under “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock,” such Indebtedness will be deemed to have been outstanding on the Issue Date, so that it is classified under clause (2) of the second paragraph of the covenant described under “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock.”
Reports
The Company will (x) make available to the investor website service maintained by Bloomberg L.P. (or if such service website is no longer maintained or accessible for these purposes, a similar service) or (y) post on its website, and in either case provide the trustee and holders the following reports:
(1) within 120 days after the end of the Company’s fiscal year, annual reports containing a level of detail that is comparable in all material respects to the listing circular relating to the Initial Notes and the following information: (a) audited consolidated balance sheets of the Company as of the end of the two most recent fiscal years and audited consolidated income statements and cash flow of the Company for the three most recent fiscal years, including appropriate footnotes to such financial statements, and the report of the independent auditors on the financial statements; (b) pro forma income statement and balance sheet information, together with summary explanatory footnotes, for any material acquisitions, dispositions or recapitalizations that have occurred since the beginning of the most recently completed fiscal year; (c) to the extent relating to annual periods, an operating and financial review of the audited financial statements, including a discussion of the results of operations, financial condition, and liquidity and capital resources, and a discussion of material commitments and contingencies and critical accounting policies; (d) a description of the business, management and shareholders of the Company, all material affiliate transactions and a description of all material contractual arrangements, including material debt instruments; and (e) material risk factors and material recent developments (provided that, in the case of cash flow numbers, these need only be provided as an audited footnote to the financial statements referred to above);
(2) within 60 days (except as provided below in relation to any Semi-Annual Report) following the end of the first three fiscal quarters in each fiscal year of the Company all quarterly financial statements containing the following information: (a) an unaudited condensed consolidated balance sheet as of the end of such quarter and unaudited condensed statements of income and cash flow for the most recent quarter year-to-date period ending on the unaudited condensed balance sheet date, and the comparable prior year periods, together with condensed footnote disclosure; (b) pro forma income statement and balance sheet information, together with summary explanatory footnotes, for any material acquisitions, dispositions or recapitalizations that have occurred since the beginning of the most recently completed fiscal quarter; (c) an operating and financial review of the unaudited financial statements, including a discussion of the results of operations, financial condition, and liquidity and capital resources, and a discussion of material commitments and contingencies and critical accounting policies; and (d) material recent developments and any material changes to the risk factors disclosed in the most recent annual report; provided that the report provided by the Company following the completion of the second quarter of each year (the “Semi-Annual Report”) shall include in addition a description of any material changes to all material contractual arrangements, including material debt instruments and to material affiliate transactions; and provided further that such Semi-Annual Report need not be provided by the Company until 75 days after the end of the second quarter of each year; and
(3) promptly after the occurrence of a material acquisition, disposition, restructuring, senior management or board of directors changes or change in auditors, a report containing a description of such event.
All financial statement and pro forma financial information shall be prepared on a consistent basis for the periods presented and the financial statements required under clause (1) may be presented in the same format as in the listing circular relating to the Initial Notes; provided, however, that the reports set forth in clauses (1), (2) and (3) above may, in the event of a change in applicable International Financial Reporting Standards, present earlier periods on a basis that applied to such periods, subject to the provisions of the indenture. No report need include separate financial statements or financial data for any Guarantors or non-guarantor Subsidiaries of the Company, provided that the annual report in clause (1) shall include a statement of the aggregate percentage of the consolidated EBITDA of the Company represented by the Subsidiary Guarantors. The Company shall use its best efforts to procure that any report of the Company’s auditors referred to in relation to clause (1) shall be unqualified.
At any time that any of the Company’s Subsidiaries are Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in the operating and financial review of the financial
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condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company.
In addition, so long as the notes remain outstanding and during any period during which the Company is not subject to Section 13 or 15(d) of the Exchange Act nor exempt therefrom pursuant to Rule 12g3-2(b), the Company will furnish to the holders, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
If and for so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of that exchange will so require, the above information will also be made available in Luxembourg through the offices of the Luxembourg Paying Agent.
Additional Intercreditor Agreements
At the request of the Issuer, in connection with the incurrence by the Company or its Restricted Subsidiaries of any Indebtedness permitted to be secured under the indenture, the Company, the Issuer, the relevant Restricted Subsidiaries, the trustee and the Security Trustee shall enter into with the holders of such Indebtedness (or their duly authorized representatives) an intercreditor agreement (an “Additional Intercreditor Agreement”) on substantially the same terms as the Intercreditor Agreement (or terms not materially less favorable to the holders (provided that the trustee and the Security Trustee shall have received an officer’s certificate and legal opinion to that effect)); provided, that such Additional Intercreditor Agreement will not impose any personal obligations on the trustee or the Security Trustee or, in the opinion of the trustee or the Security Trustee, adversely affect the rights, duties, liabilities or immunities of the trustee or the Security Trustee, as the case may be, under the indenture or the Intercreditor Agreement.
At the direction of the Issuer and without the consent of holders, the trustee and the Security Trustee shall from time to time enter into one or more amendments to any Intercreditor Agreement to: (1) cure any ambiguity, omission, defect or inconsistency of any such agreement, (2) increase the amount or types of Indebtedness covered by any such agreement that may be incurred by the Company or any Restricted Subsidiary that is subject to any such agreement (including with respect to any Intercreditor Agreement or Additional Intercreditor Agreement the addition of provisions relating to new Indebtedness ranking junior in right of payment to the notes), (3) add Restricted Subsidiaries to the Intercreditor Agreement or an Additional Intercreditor Agreement, (4) secure the notes (including Additional Notes), (5) make provision for equal and ratable pledges of the Security to secure Additional Notes or other Indebtedness permitted to be secured by the indenture or (6) make any other change to any such agreement that does not adversely affect the holders in any material respect (provided that the trustee and the Security Trustee shall have received an officer’s certificate and legal opinion to that effect). The Issuer may only direct the trustee and the Security Trustee to enter into any amendment to the extent such amendment does not impose any personal obligations on the trustee or the Security Trustee, in the opinion of the trustee or the Security Trustee, or adversely affect the rights, duties, liabilities or immunities of the trustee under the indenture, any Intercreditor Agreement or Additional Intercreditor Agreement.
Each holder, by accepting a note, shall be deemed to have agreed to and accepted the terms and conditions of the Intercreditor Agreement or an Additional Intercreditor Agreement (whether then entered into or entered into in the future pursuant to the provisions described herein).
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Additional Amounts with respect to, the notes;
(2) default in payment when due at maturity, upon redemption, upon repurchase, upon declaration or otherwise, of the principal of, or premium, if any, on the notes;
(3) failure by the Issuer or the Company or any of its Subsidiaries to comply with the provisions described under the caption “—Certain Covenants—Merger, Consolidation or Sale of Assets;”
(4) failure by the Issuer or the Company or any of its Subsidiaries for 30 days after written notice to comply with the provisions described under the captions “—Repurchase at the Option of the Holders” and “—Certain Covenants” (in each case, other than a failure to purchase notes which will constitute an Event of Default under clause (2) above and a failure to comply with the provisions described under the caption “—Certain Covenants—Merger, Consolidation or Sale of Assets” described in clause (3) above);
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(5) failure by the Issuer or the Company or any of its Subsidiaries for 60 days after written notice to comply with any of the other agreements in the indenture;
(6) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a “Payment Default”); or
(b) results in the acceleration of such Indebtedness prior to its express maturity;
and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates €20 million or more;
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(7) failure by the Company or any of its Restricted Subsidiaries to pay final judgments (which are not covered by insurance as to which a claim has been submitted and the insurer has not disclaimed or indicated an intent to disclaim responsibility for the payment thereof) aggregating in excess of €20 million, which judgments are not paid, discharged or stayed for a period of 60 days;
(8) except as permitted by the indenture, any Guarantee of the Company or any Significant Subsidiary of the notes shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor shall deny or disaffirm in writing its obligations under its Guarantee of the notes;
(9) any security interest under the Security Documents shall, at any time, cease to be in full force and effect (other than in accordance with the relevant Security Documents, the indenture, the Intercreditor Agreement or any Additional Intercreditor Agreement) for any reason other than satisfaction in full of all obligations of the Company and its Subsidiaries under the indenture or the release of any such security interest in accordance with the Security Documents, the indenture, the Intercreditor Agreement or any Additional Intercreditor Agreement, or the indenture or any security interest created pursuant to the indenture and the Security Documents shall be declared invalid or unenforceable or the Company shall assent in writing that any such security interest is invalid or unenforceable or any pledgor disaffirms in writing its obligations under the Security Documents and any such Default continues for 10 days;
(10) default under any other Indebtedness that is secured by the Security if such default results in the creditors under such Indebtedness commencing an enforcement action of their security rights over the Security; and
(11) certain events of bankruptcy or insolvency described in the indenture with respect to the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary.
In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.
Holders may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from holders notice of any continuing Default or Event of Default if it determines that withholding notice is in their interest, except a Default or Event of Default relating to the payment of principal, interest, or Additional Amounts.
The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest or Additional Amounts on, or the principal of, the notes.
The Company is required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default that would give either the trustee or the holders of at least 25% or more in aggregate principal amount of notes then outstanding the right to declare the notes immediately due and payable, the Issuer is required to deliver to the trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Issuer, the Company or any other Guarantor, as such, will have any liability for any obligations of the Issuer, the Company or the other Guarantors under the notes, the indenture or the Guarantees of the notes or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws of the United States.
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Legal Defeasance and Covenant Defeasance
The Issuer may, at its option or the option of the Company, and at any time, elect to have all of its obligations discharged with respect to the outstanding notes and all obligations of the Company and any other Guarantors discharged with respect to their Guarantees of the notes (“Legal Defeasance”) except for:
(1) the rights of holders of outstanding notes to receive payments in respect of the principal of, or interest or premium, and Additional Amounts, if any, on such notes when such payments are due from the trust referred to below;
(2) the Issuer’s obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and the Issuer’s, the Company’s and any other Guarantor’s obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Issuer may, at its option or the option of the Company, and at any time, elect to have the obligations of the Issuer, the Company and any other Guarantors released with respect to certain covenants that are described in the indenture (“Covenant Defeasance”) and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under “—Events of Default and Remedies” will no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Issuer must irrevocably deposit or cause to be deposited with the trustee, in trust, for the benefit of the holders of the notes, cash in euros, non-callable Government Securities, or a combination of cash in euros and non-callable Government Securities, in amounts as will be sufficient, in the opinion of an internationally recognized firm of independent public accountants, to pay the principal of, or interest and premium, and Additional Amounts, if any, on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and the Issuer must specify whether the notes are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Issuer has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that (a) the Issuer has received from, or there has been published by, the United States Internal Revenue Service a ruling or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Issuer has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the holders of the outstanding notes will not recognize income, gain or loss for United States federal income tax purposes as a result of such Covenant Defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the indenture) to which the Issuer, the Company or any of its Restricted Subsidiaries is a party or by which the Issuer, the Company or any of its Restricted Subsidiaries is bound;
(6) the Issuer must deliver to the trustee an officers’ certificate stating that the deposit was not made or caused to be made by the Issuer with the intent of preferring the holders over the other creditors of the
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Issuer or of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or the Company or others; and
(7) the Issuer must deliver to the trustee an officers’ certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture, the notes or the Guarantees of the notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes), and any existing default or compliance with any provision of the indenture, the notes or the Guarantees of the notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes). For so long as the notes are listed on the Official List of the Luxembourg Stock Exchange and admitted to trading on the Euro MTF Market and the rules of this exchange so require, the Issuer will inform the Luxembourg Stock Exchange and publish a notice of any such amendment, supplement or waiver in a newspaper having a general circulation in Luxembourg (currently expected to be the Luxemburger Wort) or the website of the Luxembourg Stock Exchange (www.bourse.lu).
Without the consent of holders of at least 90% of the aggregate principal amount of then outstanding notes affected (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, the notes), an amendment or waiver may not (with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or alter the provisions with respect to the redemption of the notes (other than provisions relating to the covenants described above under the caption “—Repurchase at the Option of Holders”);
(3) reduce the rate of or change the time for payment of interest on any note;
(4) waive a Default or Event of Default in the payment of principal of, or interest, premium, or Additional Amounts, if any, on the notes (except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of holders of notes to receive payments of principal of, or interest, premium, or Additional Amounts, if any, on the notes;
(7) waive a redemption payment with respect to any note (other than a payment required by one of the covenants described above under the caption “—Repurchase at the Option of Holders”);
(8) release the Company or any other Guarantor from any of its obligations under its Guarantee of the notes or the indenture, except in accordance with the terms of the indenture;
(9) release the security interest granted for the benefit of the holders of the notes in the Security other than pursuant to the terms of the Security Documents or as otherwise permitted by the indenture; or
(10) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes, the Issuer, the Company and the other Guarantors and the trustee and the other parties thereto may amend or supplement the indenture, the notes or the Guarantees of the notes, the Intercreditor Agreement, any Additional Intercreditor Agreement or the Security Documents:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of Definitive Registered Notes;
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(3) to provide for the assumption of Company’s obligations to holders in the case of a merger or consolidation or sale of all or substantially all of the Company’s assets;
(4) to make such changes as are necessary to provide for the issuance of Additional Notes in compliance with the covenants described herein, or to add guarantees in favor of the notes;
(5) to mortgage, pledge, hypothecate or grant security interest in favor of the Security Trustee to the extent necessary to grant a security interest for the benefit of any Person; provided that the granting of such security interest is not prohibited by the indenture and the covenant described under “—Certain Covenants—Impairment of Security Interest” is complied with;
(6) to add additional assets or property as Security;
(7) to confirm and evidence the release, termination, discharge or retaking of any guarantee or Lien (including the Security and the Security Documents) with respect to or securing the notes when such release, termination, discharge or retaking is provided for under the indenture, the Security Documents, the Intercreditor Agreement or any Additional Intercreditor Agreement; or
(8) to make any change that would provide any additional rights or benefits to the holders or that does not adversely affect the legal rights under the indenture of any such holder in any material respect.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or destroyed notes that have been replaced or paid and notes for whose payment money has been deposited in trust and thereafter repaid to the Issuer, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year and the Issuer, the Company or any other Guarantor has irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders, cash in euros, non-callable Government Securities, or a combination of cash in euros and non-callable Government Securities, in an aggregate amount as will be sufficient without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness on the notes not delivered to the trustee for cancellation for principal, premium, Additional Amounts, if any, and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the date of such deposit or will occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Issuer, the Company or any other Guarantor is a party or by which the Issuer, the Company or any other Guarantor is bound;
(3) the Issuer, the Company or any other Guarantor has paid or caused to be paid all sums payable by it under the indenture; and
(4) the Issuer has delivered irrevocable instructions to the trustee under the indenture to apply the deposited money toward the payment of the notes at maturity or the redemption date, as the case may be.
In addition, the Issuer must deliver an officers’ certificate and an opinion of counsel to the trustee stating that all conditions precedent to satisfaction and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of the Issuer, the Company or any other Guarantor, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days or resign. If the trustee becomes the owner or pledgee of the notes
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it may deal with the Issuer with the same rights it would have if it were not the trustee, Paying Agent, Registrar or such other agent.
The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default occurs and is continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. The trustee undertakes to perform such duties and only such duties as are specifically set forth in the indenture, and no implied covenants or obligations can be read into the indenture against the trustee. The trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of notes, unless such holder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense.
Judgment Currency
Any payment on account of an amount that is payable in euros (the “Required Currency”) which is made to or for the account of any holder of a note in lawful currency of any other jurisdiction (the “Other Currency”) whether as a result of any judgment or order or the enforcement thereof or the realization of any security or the liquidation of any of the Issuer, Company or any other Guarantor shall constitute a discharge of the Issuer’s, Company’s or such Guarantor’s obligation under the indenture, the notes or, the Guarantees of the notes, as the case may be, only to the extent of the amount of the Required Currency which such holder could purchase in the New York foreign exchange markets with the amount of the Other Currency in accordance with normal banking procedures at the rate of exchange prevailing on the first day (other than a Saturday or Sunday) on which banks in New York, are generally open for business following receipt of the payment first referred to above. If the amount of the Required Currency that could be so purchased is less than the amount of the Required Currency originally due to such holder, the Issuer, Company or such other Guarantor, as the case may be, shall indemnify and save harmless such holder from and against all loss or damage arising out of or as a result of such deficiency. This indemnity shall constitute an obligation separate and independent from the other obligations contained in the indenture, the notes or the Guarantees of the notes, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any holder of a note from time to time and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due hereunder or under any judgment or order.
Additional Information
Anyone who receives this listing circular may obtain a copy of the indenture without charge at the registered office of the Issuer and at the offices of the paying agent in London, Deutsche Bank AG, London Branch, or by writing to Cirsa Gaming Corporation, S.A., Carretera de Castellar, 298, 08226 Terrassa, Barcelona, Spain, Attention: Dirección Financiera.
Governing Law
The indenture, the notes, the Guarantees of the notes, and the Funding Loan are governed by the laws of the State of New York without regard to its conflict of laws rules, and New York courts have jurisdiction over any action or proceeding arising out of these agreements.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided.
“2012 Notes” means the 7.875% Senior Notes due 2012 issued by Cirsa Capital Luxembourg S.A.
“2014 Notes” means the 8.75% Senior Notes due 2014 issued by Cirsa Finance Luxembourg S.A.
“Acquired Debt” means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.
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“Additional Funding Loan” means each loan on substantially the same terms as the Funding Loan, between the Issuer, as obligee, and the Company, as obligor, in the amount of the gross proceeds received by the Issuer from the issue of Additional Notes.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and, in the case of any natural Person, any Immediate Family Member of such Person. For purposes of this definition, “control,” as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person will be deemed to be control. For purposes of this definition, the terms “controlling,” “controlled by” and “under common control with” shall have correlative meanings.
“Applicable Premium” means, with respect to a note at any redemption date, the greater of (1) 1% of the principal amount of such note at such time and (2) the excess of (A) the present value at such time of (i) the redemption price of such note on May 15, 2014 (such redemption price being described in the table appearing in the second paragraph under the caption “—Optional Redemption” exclusive of any accrued interest to such redemption date), plus (ii) any required interest payments due on such note through and including May 15, 2014 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Bund Rate plus 50 basis points, over (B) the principal amount of such note.
“Asset Sale” means:
(1) the sale, lease, conveyance or other disposition of any assets, other than sales of inventory in the ordinary course of business; provided that the sale, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the indenture described above under the caption “—Repurchase at the Option of Holders—Change of Control” and/or the provisions described above under the caption “—Certain Covenants—Merger, Consolidation or Sale of Assets” and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Capital Stock in any of the Company’s Restricted Subsidiaries or the sale by the Company or any of its Restricted Subsidiaries of Capital Stock in any of their respective Restricted Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be Asset Sales:
(1) any single transaction or series of related transactions that involves assets having a Fair Market Value of less than €5 million;
(2) a transfer of assets between or among the Company and its Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary of the Company to the Company or to another Restricted Subsidiary of the Company;
(4) the sale, lease, assignment or sublease of equipment, inventory, accounts receivable or other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment that is permitted by the covenant described above under the caption “—Certain Covenants—Restricted Payments;”
(7) a Permitted Investment;
(8) a disposition of obsolete or worn out equipment or equipment that is no longer useful in the conduct of the business of the Company and its Restricted Subsidiaries in the ordinary course of business;
(9) the grant of licenses of intellectual property rights to third parties in the ordinary course of business;
(10) the disposal or abandonment of intellectual property that is no longer economically practicable to maintain or which is not longer required for the business of the Company and its Restricted Subsidiaries;
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(11) any sale or disposal of slot machines in the ordinary course of business;
(12) a disposition by way of the granting of a Permitted Lien or foreclosures on assets; and
(13) the transfer of licenses, rights and assets in connection with the restructuring of our bingo hall and license ownership structure in Mexico as described in “Business—Our Divisions—Bingo Division;” provided, that any cash received shall be applied as provided under the caption “—Certain Covenants—Asset Sales.”
“Attributable Debt” in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP.
“Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular “person” (as that term is used in Section 13(d)(3) of the Exchange Act), such “person” will be deemed to have beneficial ownership of all securities that such “person” has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The terms “Beneficially Owns” and “Beneficially Owned” have a corresponding meaning.
“Board of Directors” means:
(1) with respect to a corporation, the board of directors of the corporation;
(2) with respect to a partnership, the board of directors of the general partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person serving a similar function.
“Bund Rate” means, with respect to any relevant date, the rate per annum equal to the equivalent yield to maturity as of such date of the Comparable German Bund Issue, assuming a price for the Comparable German Bund Issue (expressed as a percentage of its principal amount) equal to the Comparable German Bund Price for such relevant date, where:
(1) “Comparable German Bund Issue” means the German Bundesanleihe security selected by any Reference German Bund Dealer as having a fixed maturity most nearly equal to the period from such redemption date to May 15, 2014, and that would be utilized at the time of selection and in accordance with customary financial practice, in pricing new issues of euro-denominated corporate debt securities in a principal amount approximately equal to the then outstanding principal amount of the notes and of a maturity most nearly equal to May 15, 2014; provided, however, that, if the period from such redemption date to May 15, 2014 is less than one year, a fixed maturity of one year shall be used;
(2) “Comparable German Bund Price” means, with respect to any relevant date, the average of all Reference German Bund Dealer Quotations for such date (which, in any event, must include at least two such quotations), after excluding the highest and lowest such Reference German Bund Dealer Quotations, or if the Company obtains fewer than four such Reference German Bund Dealer Quotations, the average of all such quotations;
(3) “Reference German Bund Dealer” means any dealer of German Bundesanleihe securities appointed by the Company in consultation with the trustee; and
(4) “Reference German Bund Dealer Quotations” means, with respect to each Reference German Bund Dealer and any relevant date, the average as determined by the Company of the bid and offered prices for the Comparable German Bund Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference German Bund Dealer at 3:30 p.m. Frankfurt, Germany, time on the third business day preceding the relevant date.
“Capital Lease Obligation” means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP.
“Capital Stock” means:
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(1) in the case of a corporation, ordinary shares, preferred stock, corporate stock, share capital, acciones, participaciones or other participation in the share capital of such corporation;
(2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.
“Cash Equivalents” means:
(1) (a) euros or U.S. dollars or, (b) in respect of any Restricted Subsidiary of the Company, its local currency;
(2) securities or marketable direct obligations issued by or directly and fully guaranteed or insured by the government of (a) Spain, (b) the United States or (c) a member of the European Monetary Union having the highest rating obtainable from Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services or any agency or instrumentality of such government (provided that the full faith and credit of such government is pledged in support of those securities) having maturities of not more than twelve months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers’ acceptances with maturities not exceeding twelve months and overnight bank deposits, in each case, with any domestic commercial bank having capital and surplus in excess of €500 million and a Thomson Bank Watch Rating of “B” or better;
(4) repurchase obligations and reverse repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services and in each case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1)(a), (2), (3), (4) and (6) of this definition.
“Change of Control” means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries taken as a whole to another “person” (as that term is used in Section 13(d)(3) of the Exchange Act) (other than a “person” that is controlled by the Principal and its Related Parties);
(2) the adoption of a plan relating to the liquidation or dissolution of the Issuer or the Company, except as part of a merger, a consolidation, or a sale, assignment, transfer conveyance or other disposition of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries permitted under “—Certain Covenants—Merger, Consolidation or Sale of Assets;”
(3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any “person” (as defined in clause (1) above) or any “group” (as that term is used in Section 14(d) of the Exchange Act), other than the Principal and its Related Parties, becomes the Beneficial Owner, directly or indirectly, (a) prior to the first Equity Offering that is a Public Offering, of more than 50% of the Voting Stock of the Company or (b) on or after the first Equity Offering that is a Public Offering, of (i) more than 35% of the Voting Stock of the Company and (ii) a greater percentage of the Voting Stock of the Company held by the Principal and its Related Parties, measured, in the case of clause (a) or (b), by voting power rather than number of shares;
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(4) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors; or
(5) except as the result of a merger with and into the Company, the first day on which the Company (or any successor entity thereof) ceases to own, directly or indirectly, 100% of the outstanding Capital Stock of the Issuer.
“Consolidated EBITDA” means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any net loss realized by such Person or any of its Restricted Subsidiaries in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus
(3) Consolidated Interest Expense of such Person and its Restricted Subsidiaries for such period, to the extent that any such expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income and except to the extent already counted in clause (1) hereof; minus
(5) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue in the ordinary course of business; plus
(6) costs and expenses associated with the offering and sale of the 2012 Notes, the 2014 Notes and the notes,
in each case, on a consolidated basis and determined in accordance with GAAP.
“Consolidated Interest Expense” means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, Additional Amounts, non-cash interest payments, the interest component of any deferred payment obligations (which shall be deemed to be equal to the principal of any such payment obligation less the amount of such principal discounted to net present value at an interest rate (equal to the interest rate on one-year EURIBOR at the date of determination) on an annualized basis), the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on Indebtedness of another Person that is guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such guarantee or Lien is called upon) and (iv) the product of (a) all dividend payments on any series of preferred stock of such Person or any of its Restricted Subsidiaries, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current applicable statutory tax rate of such Person (if positive), expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP.
“Consolidated Net Income” means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting will be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person, a Wholly Owned Restricted Subsidiary of the Person or a Restricted Subsidiary of the Person that is not a Wholly Owned Restricted Subsidiary (but in the
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latter case, only a share of such dividend or distribution pro rated with respect to the direct or indirect ownership of such Restricted Subsidiary held be such Person);
(2) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation (based, for purposes of Spanish legal reserve requirements, on the reserve status as of the determination thereof at the most recent meeting of stockholders of the applicable Restricted Subsidiary) applicable to that Restricted Subsidiary or its stockholders, unless, in each case, such restriction has (a) been legally waived, or (b) constitutes a restriction described in clause (1) of the second paragraph of the covenant “Dividend and Other Payment Restrictions Affecting Subsidiaries” and, to the extent such restriction is in respect of Existing Indebtedness, disclosed in the listing circular relating to the Initial Notes;
(3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition will be excluded;
(4) the cumulative effect of a change in accounting principles shall be excluded; and
(5) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale or (b) the disposition of any securities by the Company or any of is Restricted Subsidiaries or the extinguishment of any Indebtedness of the Company or any of its Restricted Subsidiaries, shall be excluded.
For purposes of clause (2) above, the net income of a Restricted Subsidiary that could have or actually distributed such net income to the relevant Person shall be included in such net income.
“Consolidated Net Indebtedness” means, with respect to any Person, (x) the sum of the aggregate outstanding Indebtedness of that Person and its Restricted Subsidiaries as of the relevant date calculation less (y) the amount of cash and Cash Equivalents that would be stated on the balance sheet of such Person and its Restricted Subsidiaries as of such date, in each case, on a consolidated basis in accordance with GAAP.
“Continuing Directors” means, as of any date of determination, any member of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the indenture; or
(2) was nominated for election or elected to such Board of Directors with the approval of either (a) a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election or (b) the Principal and its Related Parties for so long as they own more than 50% of the Voting Stock of the Company.
“Credit Facility” means, one or more debt facilities or commercial paper facilities, in each case with banks, other institutional lenders or governmental lending agencies providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time by such debt facilities or commercial paper facilities.
“Default” means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default.
“Disqualified Stock” means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder of the Capital Stock), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder of the Capital Stock, in whole or in part, on or prior to the date that is 365 days after the date on which the notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders of the Capital Stock have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale will not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption “—Certain Covenants—Restricted Payments.”
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“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).
“Equity Offering” means any public or private sale of Equity Interests of the Company or a Parent Company (other than Disqualified Stock) whereby the Company or a Parent Company receives gross proceeds of not less than €75 million, other than public offerings with respect to common stock of the Company or a Parent Company registered on Form S-8 but, in the case of any such offering by a Parent Company, only to the extent the net cash proceeds thereof are contributed to the equity (other than through the issuance of Disqualified Stock) of the Company.
“Euro Equivalent” means, with respect to any monetary amount in a currency other than the euro, at any time for the determination thereof, the amount of euro obtained by converting such foreign currency involved in such computation into euro at the spot rate for the purchase of euros with the applicable foreign currency as quoted by Reuters at approximately 11:00 a.m. (New York City time) on the date not more than two business days prior to such determination. For purposes of determining whether any Indebtedness can be incurred (including Permitted Debt), any Investment can be made or any transaction described in the “—Certain Covenants—Transactions with Affiliates” covenant can be undertaken (a “Tested Transaction”), the Euro Equivalent of such Indebtedness, Investment or transaction described in the “—Certain Covenants—Transactions with Affiliates” covenant shall be determined on the date incurred, made or undertaken and, in each case, no subsequent change in the Euro Equivalent shall cause such Tested Transaction to have been incurred, made or undertaken in violation of the indenture.
“Event of Default” has the meaning set forth under “—Events of Default and Remedies.”
“Exchange Act” means the U.S. Exchange Act of 1934, as amended.
“Existing Indebtedness” means Indebtedness in existence on the date of the indenture.
“Fair Market Value” means, with respect to any asset or property, the price which could be negotiated in an arm’s length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. For purposes of “—Repurchase at the Option of Holders—Asset Sales,” and “—Certain Covenants—Restricted Payments,” the Fair Market Value of property or assets other than cash which involves an aggregate amount in excess of €5 million, shall be set forth in a resolution approved by at least a majority of the Board of Directors of the Company set forth in an offeror’s certificate delivered to the trustee. Except as otherwise provided herein, and for the purposes of “—Repurchase at the Option of Holders—Asset Sales” and “—Certain Covenants—Restricted Payments,” for all other purposes of the indenture, Fair Market Value will be determined in good faith by the Board of Directors of the Company, whose determination will be conclusive and evidenced by a resolution of the Board of Directors of the Company.
“Financing Subsidiary” means any Wholly Owned Restricted Subsidiary of the Company or a Restricted Subsidiary established solely for the purpose and engaged exclusively in the business of issuing debt securities and loaning the proceeds thereof to the Company or another Restricted Subsidiary.
“Fitch” means Fitch Ratings.
“Fixed Charge Coverage Ratio” means with respect to any specified Person for any period, the ratio of the Consolidated EBITDA of such Person for such period to the Consolidated Interest Expense of such Person for such period. In the event that the specified Person or any of its Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the “Calculation Date”), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom as if the same had occurred at the beginning of the applicable four-quarter reference period; provided, however, that the pro forma calculation of Consolidated Interest Expense shall not give effect to any Permitted Debt (as defined in “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock”) incurred on the date of determination or to any discharge on the date of determination of any Indebtedness to the extent such discharge results from the proceeds of Permitted Debt.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and
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Consolidated EBITDA for such reference period shall be calculated on a pro-forma basis, but without giving effect to clause (2) of the proviso set forth in the definition of Consolidated Net Income;
(2) the Consolidated EBITDA attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of or the operations of which are substantially terminated prior to the Calculation Date, shall be excluded; and
(3) the Consolidated Interest Expense attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Consolidated Interest Expense will not be obligations of the specified Person or any of its Subsidiaries following the Calculation Date.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of the Company. If an Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligation applicable to such Indebtedness). For purposes of this definition, whenever pro forma effect is to be given to any Indebtedness incurred pursuant to a revolving credit facility, the amount outstanding on the date of such calculation will be computed based on (1) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which the facility was outstanding or (2) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation. Interest on Indebtedness that may optionally be determined at an interest rate based on a prime or similar rate, a euro interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen or, if none, then based upon such optional rate chosen as the relevant Person may designate.
“Funding Loan” means the loan, dated the date of the indenture, between the Issuer, as obligee, and the Company, as obligor, in the amount of the principal amount of the notes issued pursuant to this offering, as well as any Additional Funding Loan, provided such Funding Loan and Additional Funding Loan, if any, are at all times held by the Issuer.
“GAAP” means International Financial Reporting Standards promulgated by the International Accounting Standards Board and as adopted by the European Union as in effect from time to time.
“guarantee” means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness.
“Guarantors” means each of Cirsa Gaming Corporation S.A., the Subsidiary Guarantors, and their respective successors and assigns.
“Hedging Obligations” means, with respect to any specified Person, the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or foreign exchange rates.
“Immediate Family” has the meaning specified in Rule 16a-1(e) of the Exchange Act;
“Indebtedness” means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof, except to the extent such reimbursement obligation relates to a trade payable and such obligation is satisfied within 30 days of incurrence);
(3) in respect of banker’s acceptances;
(4) representing Capital Lease Obligations;
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(5) representing the balance deferred and unpaid of the purchase price of any property (but not including, for the purpose of calculating the Fixed Charge Coverage Ratio, any amount deemed to represent interest pursuant to the definition of Consolidated Interest Expense);
(6) representing any Attributable Debt or Hedging Obligations; or
(7) in respect of deferred payments of amounts owed in respect of gaming taxes,
if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet (excluding the footnotes thereto) of the specified Person prepared in accordance with GAAP. In addition, the term “Indebtedness” includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the guarantee by the specified Person of any indebtedness of any other Person (to the extent guaranteed by such Person).
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value of the Indebtedness, in the case of any Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness in the case of any other Indebtedness.
“Intercreditor Agreement” means the Intercreditor Agreement dated on or about the Issue Date, among the Issuer, the Company, the Subsidiary Guarantors, the lenders and the other parties to the Senior RCF, the trustee for the notes and the security trustee under the Senior RCF as amended from time to time.
“Investments” means, with respect to any Person, all direct or indirect investments by such Person in other Persons (including Affiliates) in the forms of other extensions of credit, loans (including the maintenance of current accounts, cash accounts, and the extension of guarantees or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet (excluding the footnotes) prepared in accordance with GAAP. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company will be deemed to have made an Investment on the date of any such sale or disposition equal to the Fair Market Value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the last paragraph of the covenant described above under the caption “—Certain Covenants—Restricted Payments.” The acquisition by the Company or any Subsidiary of the Company of a Person that holds an Investment in a third Person will be deemed to be an Investment by the Company or such Subsidiary in such third Person in an amount equal to the Fair Market Value of the Investment held by the acquired Person in such third Person in an amount determined as provided in the last paragraph of the covenant described above under the caption “—Certain Covenants—Restricted Payments.”
“IPO Market Capitalization” means an amount equal to (i) the total number of issued and outstanding ordinary shares of the entity conducting the Public Offering at the time of closing of such Public Offering multiplied by (ii) the price per share at which such ordinary shares are sold in such Public Offering.
“Issue Date” means the date of the indenture, May 5, 2010, the issue date of the Initial Notes.
“Leverage Ratio” means for any Person as of any date of determination, the ratio of (x) Consolidated Net Indebtedness as such date to (y) the aggregate amount of Consolidated EBITDA for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which consolidated financial statements of that Person are available. In the event that the specified Person or any of its Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Leverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Leverage Ratio is made (the “Leverage Ratio Calculation Date”), then the Leverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom as if the same had occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Leverage Ratio:
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(1) acquisitions that have been made by the specified Person or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Leverage Ratio Calculation Date shall be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and Consolidated EBITDA for such reference period shall be calculated on a pro-forma basis, but without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income;
(2) the Consolidated EBITDA attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of or the operations of which are substantially terminated prior to the Leverage Ratio Calculation Date, shall be excluded; and
(3) the Consolidated Interest Expense attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Consolidated Interest Expense will not be obligations of the specified Person or any of its Subsidiaries following the Calculation Date.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of the Company. If an Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligation applicable to such Indebtedness). For purposes of this definition, whenever pro forma effect is to be given to any Indebtedness incurred pursuant to a revolving credit facility, the amount outstanding on the date of such calculation will be computed based on (1) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which the facility was outstanding or (2) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation. Interest on Indebtedness that may optionally be determined at an interest rate based on a prime or similar rate, a euro interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen or, if none, then based upon such optional rate chosen as the relevant Person may designate.
“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
“Market Capitalization” means an amount equal to (i) the total number of issued and outstanding ordinary shares of the entity conducting the Public Offering on the date of the declaration of the relevant dividend multiplied by (ii) the arithmetic mean of the closing price per ordinary share for the 30 consecutive trading days immediately preceding the date of declaration of such dividend.
“Material Subsidiary” means any Restricted Subsidiary that, for the most recently completed fiscal year after the Issue Date, accounts for 5 percent or greater of the consolidated EBITDA (as described in the listing circular relating to the Initial Notes) of the Company and its Restricted Subsidiaries.
“Moody’s” means Moody’s Investors Service, Inc.
“Net Cash Proceeds” means (a) the aggregate proceeds in cash or Cash Equivalents received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash in cash or Cash Equivalents received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result of the Asset Sale, taxes paid or payable as a result of the Asset Sale, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, and amounts required to be applied to the repayment of Indebtedness, secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP and (b) with respect to any issuance or sale of Capital Stock or Permitted Refinancing Indebtedness, the proceeds of such issuance or sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of attorneys’ fees, accountants’ fees,
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underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultants’ and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.
“Net Income” means, with respect to any specified Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends.
“Non-Recourse Debt” means Indebtedness:
(1) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness (other than the notes) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity (except for any such right that would arise pursuant to Existing Indebtedness or Credit Facilities including any refinancing in respect thereof permitted by the indenture); and
(3) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries.
“Nortia Loan” the credit loan from the Company, as lender, to Nortia Corporation, S.A., as borrower, as disclosed in the listing circular under “Certain Relationships and Related Party Transactions,” as extended from time to time.
“Obligations” means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness.
“Parent Company” means any corporation, association or other business entity that beneficially owns greater than 50% of the Capital Stock of the Company and of which the Company is a Subsidiary.
“Permitted Business” means the gaming and gaming related business and other businesses necessary for and incident to, connected with, ancillary or complementary to, arising out, or developed or operated to permit or facilitate the conduct of the gaming and gaming related business, and the ownership and operation of real estate, hotels, restaurants and entertainment facilities that are either (A) directly related to the operation of a gaming business, or (B) unrelated to the operation of a gaming business but not in excess, on a pro forma basis, of 20% of the Fair Market Value of the total assets of the Company and its Subsidiaries, taken as a whole.
“Permitted Investments” means:
(1) any Investment in the Company or a Restricted Subsidiary of the Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company; or
(b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash consideration including Replacement Assets from an Asset Sale (or a transaction excepted from the definition of Asset Sale) that was made pursuant to and in compliance with the covenant described above under the caption “—Repurchase at the Option of Holders—Asset Sales;”
(5) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company;
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(6) (i) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; and (ii) any Investments, Capital Stock, obligations or securities received in compromise of obligations of trade creditors or customers of such Persons incurred in the ordinary course of business of trade creditors or customers of such Persons that were incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer of such Persons, not exceeding in the aggregate €45 million at any one time;
(7) Loans and advances to, and guarantees of loans or advances to, employees in the ordinary course of business and on terms consistent with past practice, including without limitation, travel, relocation and other like advances;
(8) Loans or advances to gaming machine site owners or gaming machine sub-operators who are not Affiliates in the ordinary course of business;
(9) Lease, utility and other similar deposits in the ordinary course of business;
(10) the capitalization of interest accrued under the Nortia Loan and the extension of the maturity date of the Nortia Loan;
(11) Hedging Obligations;
(12) Investments made after the date of the indenture having an aggregate Fair Market Value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (12) that are at the time outstanding not to exceed (i) €75 million plus (ii) an amount equal to 100% of the dividends or distributions (including payments received in respect of loans and advances) received by the Company or a Restricted Subsidiary from a Permitted Joint Venture (which dividends or distributions are not included in the calculation in clauses (3)(a) through (3)(e) of the first paragraph of the covenant described under “—Certain Covenants—Restricted Payments” and dividends and distributions that reduce amounts outstanding under clause (i) hereof); provided that if an Investment is made pursuant to this clause in a Person that is not a Restricted Subsidiary and such Person is subsequently designated a Restricted Subsidiary pursuant to the covenant described under “—Certain Covenants—Restricted Payments,” such Investment shall thereafter be deemed to have been made pursuant to clause (3) of the definition of “Permitted Investments” and not this clause;
(13) Guarantees not prohibited by the covenant described under “Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock” and (other than with respect to Indebtedness) guarantees, keepwells and similar arrangements in the ordinary course of business;
(14) any Investment existing on the Issue Date or Investments in Permitted Joint Ventures pursuant to commitments or agreements in existence on the Issue Date and in each case disclosed in the listing circular relating to the Initial Notes;
(15) any Investments in Permitted Joint Ventures made after the date of the indenture, not exceeding, in aggregate, €100 million; and
(16) any Investment in the notes or the 2012 Notes.
“Permitted Joint Venture” means (a) any corporation, association or other business entity (other than a partnership) that is not a Restricted Subsidiary and that, in each case, is engaged primarily in a Permitted Business and of which at least 20% of the total equity and total Voting Stock is at the time of determination owned or controlled, directly or indirectly, by the Company or one or more Restricted Subsidiaries or a combination thereof and (b) any partnership, joint venture, limited liability company or similar entity that is not a Restricted Subsidiary and that, in each case, is engaged primarily in a Permitted Business and of which at least 20% of the capital accounts, distribution rights, total equity and voting interests or general or limited partnership interests, as applicable, are at the time of determination, owned or controlled, directly or indirectly, by the Company or one or more Restricted Subsidiaries or a combination thereof, whether in the form of membership, general, special or limited partnership interests or otherwise.
“Permitted Liens” means:
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(1) Liens on assets of the Company and any Restricted Subsidiary securing Indebtedness and other Obligations under Credit Facilities in a principal amount not exceeding €200 million that were permitted by the terms of the indenture to be incurred;
(2) Liens in favor of the Company or a Restricted Subsidiary (but not, in the case of a Restricted Subsidiary that is not a Guarantor, Liens in favor of such Restricted Subsidiary over the assets of a Guarantor);
(3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the property by the Company or any Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory or regulatory requirements, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (4) of the second paragraph of the covenant entitled “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock” covering only the assets acquired with such Indebtedness;
(7) Liens securing Permitted Refinancing Indebtedness of secured Indebtedness incurred by the Company or a Restricted Subsidiary provided, that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured the Indebtedness being refinanced;
(8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as is required in conformity with GAAP has been made therefor;
(9) Liens, pledges and deposits incurred in connection with workers’ compensation, unemployment insurance and other types of statutory obligations;
(10) Liens in favor of the trustee for the benefit of the holders or the trustee arising under the provisions in the indenture;
(11) Liens in favor of customs or revenue authorities to secure payment of customs duties in connection with the importation of goods in the ordinary course of business;
(12) Liens arising out of put/call agreements with respect to Capital Stock of any joint venture or similar arrangement pursuant to any joint venture or similar agreement;
(13) Liens securing Hedging Obligations;
(14) easements, rights-of-way, municipal and zoning ordinances, utility agreements, reservations, encroachments, restrictions and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries;
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(15) Liens on cash or Cash Equivalents set aside at the time of the incurrence of any Indebtedness, to the extent such cash or Cash Equivalents refund the payment of interest on such Indebtedness and are held in an escrow account or similar arrangement to be applied for such purpose;
(16) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries;
(17) Liens imposed by law, such as carriers’, landlords’, warehousemen’s, suppliers’, and mechanics’ Liens and other similar Liens, on the property of the Company or any Restricted Subsidiary arising in the ordinary course of business;
(18) Liens on property of the Company or any Restricted Subsidiary pursuant to conditional sale or title retention agreements;
(19) Liens on property of the Company or any Restricted Subsidiary arising as a result of immaterial leases of such property to other Persons;
(20) deposit arrangements entered into in connection with acquisitions or in the ordinary course of business excluding arrangements for borrowed money;
(21) Liens of the Company or any Restricted Subsidiary of the Company with respect to Obligations that do not exceed the greater of €25 million and 5% of total assets at any one time outstanding;
(22) Liens existing on the Issue Date;
(23) Liens on the Capital Stock and assets of a Permitted Joint Venture that secure the Indebtedness of such a Permitted Joint Ventures;
(24) Liens on assets of the Company and any Restricted Subsidiary securing Indebtedness and other Obligations under the Senior RCF in a principal amount not exceeding €30 million;
(25) Liens on any proceeds loan made by the Issuer or any other Financing Subsidiary in connection with any future incurrence of Indebtedness (other than Additional Notes) permitted under the indenture (without any requirement to secure the notes with a Lien on such proceeds loan); and
(26) any extension, renewal, refinancing or replacement, in whole or in part, of any Lien described in the foregoing clauses (1) through (25), provided that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the Indebtedness being refinanced or is in respect of property that is the security for a Permitted Lien hereunder.
“Permitted Refinancing Indebtedness” means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest on the Indebtedness and the amount of all expenses and premiums incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes or any Guarantee, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the notes or the Guarantee (as applicable) on terms at least as favorable to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and
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(4) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; provided that the Company, any Guarantor and any Financing Subsidiary may incur refinancing Indebtedness in respect of the Company, any Guarantor, or any Restricted Subsidiary (including any Financing Subsidiary).
“Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability company or government or other entity.
“Principal” means Manuel Lao Hernández.
“Public Offering” means any offering of ordinary shares that are listed on an exchange and/or publicly offered (which shall include an offering pursuant to Rule 144A and/or Regulation S under the Securities Act, to professional market investors or similar Persons).
“Qualified Director” means any member of the Board of Directors of the Company who (a) is not an Affiliate or a Related Party of the Principal, (b) has no direct or indirect financial, business, employment, contractual or other relationship to any transaction for which such director’s status as a Qualified Director is being determined that would interfere with the exercise of such director’s independent judgment and (c) who is not an employee or officer of the Company or any of its Subsidiaries or an employee or officer of an Affiliate of the Company.
“Related Party” means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or Immediate Family member (in the case of an individual) of the Principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist the Principal and/or such other Persons referred to in the immediately preceding clause (1).
“Replacement Assets” means, with respect to any Asset Sale by the Company or a Restricted Subsidiary, consideration received in the form of:
(1) properties and assets (other than cash or any common stock or other security) that will be used in a Permitted Business by the Company or a Restricted Subsidiary; or
(2) Capital Stock of any Person (i) that will become, be merged into, be liquidated into or otherwise combined or amalgamated with, on or within 90 days of the date of acquisition thereof, a Restricted Subsidiary, if such Person is engaged in a Permitted Business or (ii) that is or that will become a Restricted Subsidiary engaged in a Permitted Business upon the date of acquisition thereof.
“Restricted Investment” means an Investment other than a Permitted Investment.
“Restricted Subsidiary” of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary.
“S&P” means Standard and Poor’s Rating Group.
“Securities Act” means the U.S. Securities Act of 1933, as amended.
“Security” means any property, proceeds or rights that are mortgaged, pledged, encumbered or over which there is a lien, charge or other security interest for the benefit of the holders of the notes as such property, proceeds or rights may be added to, supplemented or replaced in accordance with the terms of the indenture.
“Security Trustee” means any Person acting as security trustee with respect to the Security pursuant to the indenture, the Security Documents, the Intercreditor Agreement and any Additional Intercreditor Agreement or such successor security trustee as may be appointed thereunder.
“Security Documents” means any agreement or undertaking governing the Security.
“Senior RCF” means the revolving credit facility dated on or about the Issue Date, by and among the Company, as borrower, Deutsche Bank AG, London Branch, as original lender, and the other parties thereto, together with related documents thereto (including guarantees and security documents), as amended, extended, renewed, restated,
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supplemented or otherwise modified (in whole or in part, and without limitations as to amount, terms, conditions, covenants and other provisions) from time to time, and any other one Credit Facility governing Indebtedness incurred to refinance, refund or renew, in whole or in part, such revolving credit facility or a successor of such revolving credit facility, whether by the same or any other lender, together with related documents thereto (including guarantees and security documents), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitations as to amount, terms, conditions, covenants and other provisions) from time to time; provided that the aggregate principal amount under any such revolving credit facility or such other one Credit Facility may in no event exceed in aggregate €100 million.
“Share Pledge Enforcement Sale” means any sale or disposition of Capital Stock pursuant to the enforcement of security that secures Indebtedness of the Issuer or any Restricted Subsidiary Incurred in compliance with the indenture.
“Significant Subsidiary” means any Subsidiary that would be a “significant subsidiary” as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof.
“Stated Maturity” means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.
“Subsidiary” means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).
“Subsidiary Guarantors” means (i) as of the date of the indenture, Cirsa Interactive Corporation, S.L.; Universal de Desarrollos Electrónicos, S.A.; Cirsa Slot Corporation, S.L.; Global Game Machine Corporation, S.A.; Uniplay, S.A.; Comercial de Desarrollos Electrónicos, S.A.; Genper, S.A.; Global Casino Technology Corporation, S.A.; Casino Cirsa Valencia S.A. (formerly named Casino Monte Picayo, S.A.); Casino Nueva Andalucía Marbella, S.A.; Cirsa International Gaming Corporation, S.A.; Global Bingo Madrid, S.A.; Global Bingo Stars, S.A.; Bingos de Madrid Reunidos, S.A.; Cirsa Italia, S.p.A.; and Gaming & Services de Panama S.A.; and (ii) any Restricted Subsidiary that becomes a Guarantor after the date of the indenture pursuant to the covenant entitled “—Certain Covenants—Additional Guarantees,” provided, in each case, that a Subsidiary Guarantor shall cease to be a Subsidiary Guarantor upon release of its Guarantee in accordance with the terms of the indenture.
“Unrestricted Subsidiary” means any Subsidiary of the Company (other than the Issuer, any Financing Subsidiary or its successor) that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries.
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Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be evidenced to the trustee by filing with the trustee a certified copy of the board resolution giving effect to such designation and an officers’ certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption “—Certain Covenants—Restricted Payments.” If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary will be deemed to be incurred by a Restricted Subsidiary of the Company as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock,” the Company will be in default of such covenant. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption “—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock and Disqualified Stock,” calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation.
“Voting Stock” of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person.
“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect of the Indebtedness, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
“Wholly Owned Restricted Subsidiary” of any specified Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors’ qualifying shares) will at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person.
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BOOK-ENTRY, SETTLEMENT AND CLEARANCE
General
Notes issued to qualified institutional buyers (as defined in Rule 144A under the U.S. Securities Act) will be represented by one global note in registered form without interest coupons attached (the “Rule 144A Global Note”) and notes issued to non-US persons outside the United States in reliance on Regulation S under the U.S. Securities Act will initially be represented by one global note in registered form without interest coupons attached (the “Regulation S Global Note” and, together with the Rule 144A Global Note, the “Global Notes”). The Global Notes will be deposited with a common depositary, and registered in the name of the nominee of the common depositary for the accounts of Euroclear and Clearstream.
Ownership of interests in the Rule 144A Global Note (the “Restricted Book-Entry Interests”) and ownership of interests in the Regulation S Global Note (the “Unrestricted Book-Entry Interests” and, together with the Restricted Book-Entry Interests, the “Book-Entry Interests”) will be limited to persons that have accounts with Euroclear and/or Clearstream or persons that hold interests through such participants.
Euroclear and Clearstream will hold interests in the Global Notes on behalf of their participants through customers’ securities accounts in their respective names on the books of their respective depositaries. Except under the limited circumstances described below, notes will not be issued in definitive form.
Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream and their participants. The laws of some jurisdictions, including some states of the United States, may require that certain purchasers of securities take physical delivery of those securities in definitive form. The foregoing limitations may impair your ability to own, transfer or pledge Book-Entry Interests. In addition, while the notes are in global form, holders of Book-Entry Interests will not be considered the owners or “holders” of notes for any purpose.
So long as the notes are held in global form, Euroclear and/or Clearstream, as applicable, will be considered the sole holder(s) of the Global Notes for all purposes under the indenture governing the notes. In addition, participants must rely on the procedures of Euroclear and Clearstream and indirect participants must rely on the procedures of the participants through which they own Book-Entry Interests to transfer their interests or to exercise any rights of holders under the indenture governing the notes. Neither we nor the trustee will have any responsibility or be liable for any aspect of the records relating to the Book-Entry Interests.
Payments on Global Notes
Payments of any amounts owing in respect of the Global Notes (including principal, premium, if any, interest and Additional Amounts, if any) will be made by us to the common depositary or its nominee for Euroclear and Clearstream. The common depositary or its nominee will distribute such payments to participants in accordance with their procedures. Payments of all such amounts will be made without deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature except as may be required by law. If any such deduction or withholding is required to be made by any applicable law or regulation of Luxembourg or otherwise as described under “Description of the Notes—Additional Amounts,” then, to the extent described under “Description of the Notes—Additional Amounts,” such Additional Amounts will be paid as may be necessary in order that the net amounts received by any holder of the Global Notes or owner of Book-Entry Interests after such deduction or withholding will equal the net amounts that such holder or owner would have otherwise received in respect of such Global Note or Book-Entry Interest, as the case may be, absent such withholding or deduction. We expect that payments by participants to owners of Book-Entry Interests held through those participants will be governed by standing customer instructions and customary practices. Under the terms of the indenture governing the notes, we and the trustee will treat the registered holder of the Global Notes (e.g., Euroclear or Clearstream (or their respective nominees)) as the owner thereof for the purpose of receiving payments and for all other purposes. Consequently, neither we, the trustee nor any of our or the trustee’s agents have or will have any responsibility or liability for:
(1) any aspect of the records of Euroclear or Clearstream or of any participant or indirect participant relating to or payments made on account of a Book-Entry Interest, or for maintaining, supervising or reviewing the records of Euroclear or Clearstream or any participant or indirect participant relating to or payments made on account of a Book-Entry Interest;
(2) Euroclear or Clearstream or any participant or indirect participant; or
(3) the records of the common depositary.
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Currency of payment for the Global Notes
The principal of, premium, if any, and interest on, and all other amounts payable in respect of, the Global Notes will be paid in euro.
Action by Owners of Book-Entry Interests
Euroclear and Clearstream have advised us that they will take any action permitted to be taken by a holder of notes only at the direction of one or more participants to whose account the Book-Entry Interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of notes as to which such participant or participants has or have given such direction. Euroclear and Clearstream will not exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Global Notes. However, if there is an Event of Default under the notes, Euroclear and Clearstream reserve the right to exchange the Global Notes for Definitive Registered Notes in certificated form, and to distribute such Definitive Registered Notes to its participants.
Transfers
Transfers between participants in Euroclear and Clearstream will be effected in accordance with Euroclear’s and Clearstream’s rules and will be settled in immediately available funds. If a holder of notes requires physical delivery of Definitive Registered Notes for any reason, including to sell notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder of notes must transfer its interest in the Global Notes in accordance with the normal procedures of Euroclear and Clearstream and in accordance with the procedures set forth in the indenture governing the notes.
The Global Notes will bear a legend to the effect set forth in “Notice to Investors.” Book-Entry Interests in the Global Notes will be subject to the restrictions on transfers and certification requirements discussed under “Notice to Investors.”
Transfer of Restricted Book-Entry Interests to persons wishing to take delivery of Restricted Book-Entry Interests will at all times be subject to such transfer restrictions.
Restricted Book-Entry Interests may be transferred to a person who takes delivery in the form of any Unrestricted Book-Entry Interest only upon delivery by the transferor of a written certification (in the form provided in the indenture governing the notes) to the effect that such transfer is being made in accordance with Regulation S or Rule 144 (if available) under the U.S. Securities Act.
Any Book-Entry Interest in one of the Global Notes that is transferred to a person who takes delivery in the form of a Book-Entry Interest in the other Global Note will, upon transfer, cease to be a Book-Entry Interest in the first mentioned Global Note and become a Book-Entry Interest in such other Global Note, and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to Book-Entry Interests in such other Global Note for as long as it remains such a Book-Entry Interest.
Definitive Registered Notes
Under the terms of the indenture governing the notes, owners of the Book-Entry Interests will receive Definitive Registered Notes only:
(1) if Euroclear or Clearstream notifies us that it is unwilling or unable to continue to act and a successor is not appointed by us within 90 days; or
(2) if Euroclear or Clearstream so requests following an Event of Default under the indenture governing the notes.
Information concerning Euroclear and Clearstream
Euroclear and Clearstream hold securities for participating organizations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide to their participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear or Clearstream is also available to others such as banks, brokers, dealers and
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trust companies that clear through or maintain a custodian relationship with Euroclear or Clearstream participants, either directly or indirectly.
Trustee’s Powers
In considering the interests of the holders of the notes, while title to the notes is registered in the name of a nominee for a clearing system, the trustee may have regard to any information provided to it by that clearing system as to the identity (either individually or by category) of its accountholders with entitlements to notes and may consider such interests as if such accountholders were the holders of the notes.
Enforcement
For the purposes of enforcement of the provisions of the indenture governing the notes against the trustee, the persons named in a certificate of the holder of the notes in respect of which a Global Note is issued shall be recognized as the beneficiaries of the trusts set out in the indenture governing the notes to the extent of the principal amounts of their interests in notes set out in the certificate of the holder, as if they were themselves the holders of notes in such principal amounts.
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MATERIAL TAX CONSIDERATIONS
Material U.S. Federal Income Tax Consequences to U.S. Holders
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the Internal Revenue
Service (the “IRS”), we inform you that: (i) any U.S. Federal tax advice contained in this document is not intended
or written by us to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties under
the Code; (ii) such advice was written in connection with the promotion or marketing of the transactions or
matters addressed herein; and (iii) taxpayers should seek advice based on their particular circumstances from an
independent tax advisor.
This section summarizes the material U.S. Federal income tax consequences to a U.S. Holder (as defined below) of the purchase, ownership and disposition of the offered notes. This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations (the “Regulations”) and rulings and decisions currently in effect, all of which are subject to change (possibly with retroactive effect). This discussion does not purport to deal with all aspects of U.S. Federal income taxation that may be relevant to particular investors in light of their personal investment circumstances (for example, to persons whose functional currency is not the U.S. dollar, or to persons holding offered notes as a position in a “straddle,” as part of a “hedge,” “constructive sales transaction” or “conversion transaction”), nor does it discuss U.S. Federal income tax considerations applicable to certain types of investors subject to special treatment under the U.S. Federal income tax laws (such as banks, regulated investment companies, real estate investment trusts, dealers in securities, traders in securities electing to mark-to-market, insurance companies, tax-exempt organizations, investors liable for the alternative minimum tax, individual retirement accounts, other tax-deferred accounts and financial institutions). In addition, this discussion does not consider the effect of any alternative minimum taxes or any foreign, state, local, gift, estate or other tax laws that may be applicable to a particular investor. This discussion assumes that investors purchase the offered notes as part of the offering and that they hold the offered notes as capital assets within the meaning of Section 1221 of the Code.
If you are considering buying offered notes, we strongly suggest that you consult your tax advisors about
the tax consequences of holding the offered notes in your particular situation.
For purposes of the following discussion, a “U.S. Holder” means a beneficial owner of an offered note that is, for U.S. Federal income tax purposes:
• an individual citizen or resident of the United States;
• a corporation (or other entity treated as a corporation for U.S. Federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
• an estate the income of which is subject to U.S. Federal income taxation regardless of its source; or
• a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or the trust has elected to be treated as a domestic trust for U.S. Federal income tax purposes.
If a partnership or other entity treated as a partnership for U.S. Federal income tax purposes holds offered notes, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. Partners of entities treated as partnerships for U.S.Federal income tax purposes holding offered notes should consult their tax advisors.
Stated Interest and Additional Amounts
The gross amount of stated interest on an offered note (including Additional Amounts, if any) will generally be taxable to a U.S. Holder as ordinary interest income at the time it is accrued or received in accordance with the U.S. Holder’s method of accounting for U.S. Federal income tax purposes.
Should any Additional Amounts be required to be paid, in determining a U.S. Holder’s U.S. Federal income tax liability, such holder will be treated as actually receiving any amount withheld by us with respect to an offered note as well as any Additional Amount payable by us. Such treatment will be required even though the net amount actually received by the U.S. Holder will generally equal the amount the U.S. Holder would have received had payments of Additional Amounts not been required.
If a U.S. Holder uses the cash method of accounting for U.S. Federal income tax purposes, the amount of interest income such holder will realize will be the U.S. dollar value of the payment in euros based on the spot rate of
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exchange on the date such holder receives the payment. A U.S. Holder generally will not have exchange gain or loss on the interest payment but may have exchange gain or loss when the holder disposes of any euros the holder receives.
If a U.S. Holder uses the accrual method of accounting for U.S. Federal income tax purposes, the amount of interest income such holder will realize will be the U.S. dollar value of the interest income accrued in a taxable year based on the average exchange rate in effect during the interest accrual period (or with respect to an interest accrual period that spans two taxable years, at the average rate for the partial period within the taxable year). Alternatively, an accrual basis U.S. Holder may elect to translate all interest income on the offered notes at the spot rate on the last day of the accrual period (or the last day of the taxable year, in the case of an accrual period that spans more than one taxable year) or the date that such holder receives the interest payment if that date is within five business days of the end of the accrual period. If a U.S. Holder makes this election, the holder must apply it consistently to all debt instruments from year to year and cannot change the election without the consent of the IRS. If a U.S. Holder uses the accrual method of accounting for tax purposes, the holder will recognize foreign currency exchange gain or loss on the receipt of an interest payment if the exchange rate in effect on the date payment is received differs from the rate applicable to the accrual of that interest income. This exchange gain or loss will generally be treated as U.S. source ordinary income or loss but generally will not be treated as an adjustment to interest income received on the offered notes.
Original Issue Discount (“OID”)
The offered notes will have the same U.S. Federal income tax characteristics (including “issue date”, “issue price” and “adjusted issue price”) as the Initial Notes, provided that the offered notes are issued in a “qualified reopening” for U.S. Federal income tax purposes. While the matter is not free from doubt, based on information available to the Issuer, the Issuer believes and intends to take the position that the offered notes are being issued in a “qualified reopening” and the remainder of this discussion assumes this is the case. If, as expected, the price of the offered notes in the offering is greater than the adjusted issue price of the Initial Notes (excluding any amount paid in respect of accrued interest), a U.S. Holder will be entitled to reduce or eliminate its periodic inclusions of OID to reflect this “acquisition premium,” and may be entitled to reduce its inclusion of interest to reflect “amortizable bond premium,” as discussed below.
Because the offered notes will have the same characteristics as the Initial Notes, the offered notes will be considered to be issued with OID in an amount equal to the difference between the principal amount of the offered notes and the issue price of the Initial Notes. A U.S. Holder will be required to include in taxable income for any particular taxable year the daily portion of the OID described in the preceding sentence that accrues on the offered note for each day during the taxable year on which such holder holds the offered note, whether reporting on the cash or accrual basis of accounting for U.S. Federal income tax purposes. Thus, a U.S. Holder will be required to include OID in income in advance of the receipt of the cash to which such OID is attributable and generally will have to include increasingly greater amounts of OID over the life of the Notes. The daily portion is determined by allocating to each day of an accrual period (generally, the period between interest payments or compounding dates) a pro rata portion of the OID allocable to such accrual period. The amount of OID that will accrue during an accrual period other than the final accrual period is the product of the “adjusted issued price” of the offered note at the beginning of the accrual period and the yield to maturity of the offered note, less the amount of any stated interest allocable to such accrual period. The “adjusted issue price” of an offered note at the beginning of an accrual period will equal the issue price of the Initial Notes, increased by the aggregate amount of OID that has accrued on the offered note in all prior accrual periods (including accrual periods of the Initial Notes that occur prior to the issuance of the offered notes in the offering), determined without regard to the amortization of any acquisition or bond premium, as described below, and decreased by any payments made during all prior accrual periods, other than payments of stated interest on the offered note. OID allocable to a final accrual period is the difference between the amount payable at maturity, other than any amount paid in respect of accrued interest, and the adjusted issue price at the beginning of the final accrual period. Special rules will apply for calculating the OID for an initial short accrual period.
A U.S. Holder generally must include in income the U.S. dollar value of the euro OID in the manner discussed above for accrual basis taxpayers. Upon receipt of previously accrued OID, a U.S. Holder generally will recognize foreign currency exchange gain or loss equal to the difference between the U.S. dollar amount of the OID previously accrued and the U.S. dollar value of the euro received at the spot exchange rate on the date of receipt. For these purposes, all receipts on a note will be viewed (i) first, as the receipt of any stated interest payments called for under the terms of the note, (ii) second, as receipts of previously accrued OID (to the extent thereof), with payments considered made for the earliest accrual periods first, and (iii) third, as the receipt of principal.
Acquisition Premium
A U.S. Holder that purchases offered notes in the offering for an amount (excluding any amount paid in respect of accrued interest) less than or equal to the offered note’s principal amount but in excess of the adjusted issue price of the offered note (this excess being “acquisition premium”) and that does not make the election described below under
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“Election to Treat All Interest as Original Issue Discount” will reduce the daily portions of OID by a fraction, the numerator of which is the excess of the U.S. Holder’s adjusted basis in the offered note immediately after its purchase over the offered note’s adjusted issue price, and the denominator of which is the excess of the offered note’s principal amount over the offered note’s adjusted issue price. Acquisition premium will be computed in euros and acquisition premium that is taken into account currently will reduce OID income in units of euros. On the date acquisition premium offsets OID income, a U.S. Holder will recognize U.S. source exchange gain or loss (taxable as ordinary income or loss) on the amount of such acquisition premium measured by the difference between the spot rate in effect on that date and on the date the offered notes were acquired by the U.S. Holder.
Offered Notes Purchased at a Premium
A U.S. Holder that purchases an offered note for an amount in excess of its principal amount (excluding any amount paid in respect of accrued interest) will not be required to include any OID in income. A U.S. Holder may elect to treat the excess as “amortizable bond premium”, in which case the amount of interest on the offered note required to be included in the U.S. Holder’s income each year will be reduced by the amount of amortizable bond premium allocable (based on the offered note’s yield to maturity) to that year. The amount of amortizable bond premium for each taxable year is the sum of the daily portions of bond premium with respect to the offered note for each day during the taxable year or portion of the taxable year on which the U.S. Holder holds the offered note. The daily portion is determined by allocating to each day in any “accrual period” a pro rata portion of the bond premium allocable to that accrual period. Accrual periods with respect to an offered note may be of any length selected by the U.S. Holder and may vary in length over the term of the offered note as long as (i) no accrual period is longer than one year; and (ii) each scheduled payment of interest or principal on the offered note occurs on either the final or first day of an accrual period. The amount of bond premium allocable to an accrual period equals the excess of (a) the sum of the payments of stated interest on the offered note allocable to the accrual period over (b) the product of the offered note’s adjusted acquisition price at the beginning of the accrual period and the offered note’s yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period). The “adjusted acquisition price” of an offered note at the beginning of any accrual period is the U.S. Holder’s purchase price for the offered note, decreased by the amount of bond premium for each prior accrual period. Bond premium will be computed in euros and amortizable bond premium that is taken into account currently will reduce interest income in units of euros. On the date amortized bond premium offsets interest income, a U.S. Holder will recognize U.S. source exchange gain or loss (taxable as ordinary income or loss) on the amount of such amortizable bond premium measured by the difference between the spot rate in effect on that date, and on the date the offered notes were acquired by the U.S. Holder. A U.S. Holder that does not elect to take bond premium into account currently will recognize a market loss when the offered note matures. Any election to amortize bond premium applies to all bonds (other than bonds the interest on which is excludible from gross income for U.S. Federal income tax purposes) held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder, and is irrevocable without the consent of the IRS.
Election to Treat All Interest as Original Issue Discount
A U.S. Holder may elect to treat all interest on an offered note as OID and calculate the amount includible in gross income under the constant yield method described above. The election is to be made for the taxable year in which a U.S. Holder acquires an offered note and may not be revoked without the consent of the IRS. U.S. Holders should consult with their own tax advisors about this election.
The rules regarding OID are complex. U.S. Holders are strongly urged to consult their own tax advisors regarding the application of these rules in light of their particular circumstances.
Pre-Issuance Accrued Interest
A portion of the purchase price of the offered notes will be attributable to the amount of interest accrued after November 15, 2012 and prior to the date the offered notes are issued, or “pre-issuance accrued interest.” In accordance with applicable Regulations, for U.S. federal income tax purposes an election may be made to treat a portion of the first interest payment as a nontaxable return of the pre-issuance accrued interest. If this election is not made, the U.S. federal income tax treatment of any pre-issuance accrued interest is not entirely clear. U.S. Holders should consult their tax advisers concerning the U.S. federal income tax treatment of pre-issuance accrued interest.
Disposition of Offered Notes
Upon the sale, exchange, retirement or other disposition of an offered note, a U.S. Holder will generally recognize taxable gain or loss equal to the difference between the amount realized (not including any amounts received that are attributable to accrued and unpaid stated interest, which will be taxable as interest income, and exchange gain or loss on such accrued and unpaid interest, as set out above) and the U.S. Holder’s adjusted tax basis in the offered note. A U.S. Holder’s adjusted tax basis in an offered note generally will be its U.S. dollar cost calculated at the exchange rate in
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effect on the date of purchase, increased by any OID included in the U.S. Holder’s income prior to the disposition of the offered note and decreased by any amortizable bond premium applied to reduce stated interest on the offered note and payments received on the offered note other than stated interest. If an offered note is sold or otherwise disposed of for an amount denominated in foreign currency, the amount realized will generally be based on the spot rate of exchange in effect on the date of such sale or disposition.
If, however, the offered notes are traded on an established securities market, a special rule applies for the determination of the amount realized and the basis of the offered notes held by a cash basis taxpayer. Pursuant to this rule, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the settlement date of the purchase or sale. An accrual basis taxpayer may elect the same treatment required of cash basis taxpayers with respect to purchases and sales of offered notes that are traded on an established securities market, provided the election is applied consistently from year to year. Such election may not be changed without the consent of the IRS.
Gain or loss on the sale, exchange or retirement of an offered note that is attributable to changes in currency exchange rates will be ordinary income or loss and will be characterized as exchange gain or loss. Exchange gain or loss will generally equal the difference between (i) the U.S. dollar value of the issue price of the offered note in euros determined using the spot exchange rate on the date of the sale, exchange or retirement, or if the offered notes are traded on an established securities market, the spot rate on the settlement date, in the case of a cash basis or an electing accrual basis U.S. Holder and (ii) the U.S. dollar value of the issue price of the offered note in euros determined using the spot exchange rate on the date the U.S. Holder acquired the offered note. Such gain or loss will be recognized only to the extent of the total gain or loss realized by the U.S. Holder on the sale, exchange or retirement of the offered note, and will generally be treated as U.S. source ordinary income or loss for U.S. Federal income tax purposes.
Gain or loss in excess of exchange gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the offered note was held for more than one year at the time of the disposition. Certain U.S. Holders (including individuals) are eligible for preferential rates of U.S. Federal income tax in respect of long-term capital gain. The deduction of capital losses is subject to significant limitations. Gain or loss recognized by a U.S. Holder generally will be treated as U.S. source income or loss. Prospective investors should consult their own tax advisors with respect to the treatment of capital gains and losses.
Discharge
Were we to obtain a discharge of the indenture within one year of the offered notes becoming due and payable with respect to all of the offered notes then outstanding, as described above under “Description of the Notes—Satisfaction and Discharge”, such discharge would generally be deemed to constitute a taxable exchange of the offered notes outstanding for other property, namely, the funds deposited with the trustee. In such case, a U.S. Holder would be required to recognize taxable gain or loss in connection with such deemed exchange in a manner comparable to that discussed above under “—Disposition of Offered Notes.” In addition, after such deemed exchange, a U.S. Holder might also be required to recognize income (likely interest and/or OID) from the property deemed to have been received in such exchange over the remaining life of the transaction in a manner or amount that is different than had the discharge not occurred.
Foreign Tax Credit Considerations
Interest (including any accrued OID) and Additional Amounts, if any, paid on the offered notes will constitute foreign source income for foreign tax credit limitation purposes. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific “baskets” of income. For this purpose, the interest on the offered notes should generally constitute “passive category income.” However, in the case of certain persons engaged in financial businesses, the interest income will be in the “general category income” basket.
If a U.S. Holder does not meet a minimum holding period with respect to the offered notes during which the holder is not protected from risk of loss, such holder will not receive a foreign tax credit for foreign taxes imposed with respect to the offered notes. The rules governing the foreign tax credit are complex. Prospective investors should consult their own tax advisors as to the foreign tax credit implications of such interest paid or accrued in respect of an offered note.
Reportable Transactions
Regulations meant to require the reporting of certain tax shelter transactions could be interpreted to cover transactions generally not regarded as tax shelters, including certain foreign currency transactions. Under the Regulations, certain transactions are required to be reported to the IRS including, in certain circumstances, a sale, exchange, retirement or other taxable disposition of an offered note or foreign currency received in respect of an offered note to the extent that such sale, exchange, retirement or other taxable disposition results in a tax loss in excess of a
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threshold amount ($50,000 for individuals). Holders considering the purchase of the offered notes should consult with their own tax advisors to determine the tax return obligations, if any, with respect to an investment in the offered notes, including any requirement to file IRS Form 8886 (Reportable Transaction Disclosure Statement).
Information Reporting and Backup Withholding
In general, information reporting requirements may apply to payments of principal, interest and accruals of OID on an offered note and to the proceeds of a sale of an offered note made to U.S. Holders. Backup withholding may apply to such payments, including payments of accrued OID, or proceeds if the beneficial owner fails to provide a correct taxpayer identification number or to otherwise comply with the applicable backup withholding rules. Certain persons that provide an appropriate certification or otherwise qualify for exemption are not subject to the backup withholding and information reporting requirements.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment made to a holder generally may be claimed as a refund or credit against such holder’s U.S. Federal income tax liability provided the appropriate information is furnished to the IRS.
Foreign Financial Asset Reporting
Recently enacted legislation imposes new reporting requirements on the holding of certain foreign financial assets, including debt of foreign entities, if the aggregate value of all of these assets exceeds $50,000 at the end of the taxable year or $75,000 at any time during the taxable year. The offered notes are expected to constitute foreign financial assets subject to these requirements unless the Notes are held in an account at a financial institution (in which case, the account may be reportable if maintained by a foreign financial institution). U.S. Holders should consult their tax advisors regarding the application of this legislation.
Taxation in the Kingdom of Spain
This section does not purport to deal with all aspects of Spanish taxation that relate to investment in notes or that may be relevant to particular investors in light of their personal investment circumstances. If you are considering buying notes, you should consult your own tax advisor concerning the tax consequences of holding the notes in your particular situation.
Although no clear precedent with regard to the position of the Spanish tax authorities exists regarding similar transactions, income payments made under the Guarantee by the Guarantor may be deemed to be Spanish source income by them on the basis that the Guarantor has assumed all the obligations of the issue. In the event that income payments made under the Guarantee by the Guarantor are deemed to be Spanish source income, such payments will be subject to taxation pursuant to Spanish law either (i) in the case of Spanish individual tax residents at a 27% tax rate (although a 21% tax rate will apply to the first €6,000 and a 25% tax rate will apply to the next €18,000 - the 27% rate be reduced as of January 1, 2014 onwards to 21%, except for the first €6,000 to which a 19% flat rate will apply); (ii) in the case of non-Spanish tax residents without a permanent establishment in Spain, at a 21% tax rate (to be reduced to 19% from January 1, 2014 onwards), subject to the exceptions referred to in the paragraph below; or (iii) in the case of Spanish corporate tax residents or non-residents operating through a permanent establishment in Spain to which the income is attributable, at the corresponding Spanish corporate income tax rate.
Any interest payments and capital gains under the Guarantee, however, will not be subject to Spanish withholding tax in case of holders of notes being residents, for tax purposes, of a European Union Member State other than Spain and not acting through a territory considered as a tax haven pursuant to Royal Decree 1080/1991 of 5 July 1991 nor through a permanent establishment in Spain. In addition, Spanish withholding tax, if any, may be reduced or eliminated pursuant to, and in accordance with, any applicable double taxation treaty to which the Kingdom of Spain is a party and that may be applicable in respect to any interest payment due or that becomes due under the notes. For these tax benefits to apply, a certificate of tax residency issued by the competent tax authority required by the Spanish tax authorities must be submitted to the Guarantor showing that the holders of the notes are residents of the relevant European Union Member State or Treaty State. The certificate must be dated not more than 12 months prior to the date of application.
Luxembourg Taxation
The following is a summary of certain Luxembourg tax considerations applicable to certain holders of the notes. This information is of a general nature only and does not purport to be a comprehensive description of all tax implications that might be relevant to an investment decision. Holders of the notes who are in doubt as to their tax position should consult their professional advisers.
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Withholding tax and self-applied tax
All payments of interest and principal by the Issuer in the context of the holding, disposal, redemption refund or exchange of the notes can be made free and clear of any withholding or deduction for or on account of any taxes of whatsoever nature imposed, levied, withheld, or assessed by Luxembourg or any political subdivision or taxing authority thereof or therein, in accordance with applicable Luxembourg law, subject to the application of the laws dated 21 June 2005 implementing in Luxembourg domestic law the Council Directive 2003/48/EC of 3 June 2003 (the “EU Savings Directive”) and several agreements concluded with certain dependent or associated territories and providing for the possible application of a withholding tax (35%) on interest paid to certain non-Luxembourg resident investors (individuals and certain types of entities called “residual entities”) in the event of the Issuer appointing a paying agent in Luxembourg within the meaning of the above mentioned directive (see paragraph “EU Savings Directive” below) or agreements, as well as subject to the application, regarding Luxembourg resident individuals, of the Luxembourg law of 23 December 2005, which has introduced a 10% withholding tax (which is final when Luxembourg resident individuals are acting in the context of the management of their private wealth) on savings income (i.e., with certain exemptions, savings income within the meaning of the Luxembourg laws of 21 June 2005 implementing the EU Savings Directive).
In addition, pursuant to the law of 23 December 2005 as amended by the law of 17 July 2008, Luxembourg resident individuals who are the beneficial owners of savings income paid by a paying agent established outside Luxembourg, in a Member State of either the European Union or the European Economic Area, or in a jurisdiction having concluded an agreement with Luxembourg in connection with the EU Savings Directive can opt to self declare and pay a 10% tax on this savings income. This 10% tax is final when Luxembourg resident individuals are acting in the context of the management of their private wealth.
Responsibility for the withholding of tax in application of the above mentioned Luxembourg laws of 21 June 2005 and 23 December 2005 is assumed by the Luxembourg paying agent within the meaning of these laws and not by the Issuer.
Taxes on Income and Capital Gains
Luxembourg resident holders of notes will not be liable for any Luxembourg income tax on repayment of principal.
Interest received by an individual resident in Luxembourg is, in principle, subject to withholding tax or to the self-applied 10 per cent. tax (see above “Withholding tax and self-applied tax”—Luxembourg residents). This withholding tax or self applied tax represents the final tax liability for Luxembourg individual resident taxpayers receiving the interest payment in the course of their private wealth. Individual Luxembourg resident holders of notes receiving the interest as business income must include this interest in their taxable basis. If applicable, the 10 per cent. Luxembourg withholding tax levied will be credited against their final income tax liability.
Luxembourg resident individual holders of notes are not subject to taxation on capital gains upon the disposal of the notes, unless the disposal of the notes precedes the acquisition of the notes or the notes are disposed of within six months of the date of acquisition of these notes. Upon the sale, redemption or exchange of the notes, accrued but unpaid interest will be subject to the 10 per cent. withholding tax, if applicable. Individual Luxembourg resident holders of notes receiving the interest as business income must also include the portion of the price corresponding to this interest in their taxable income. The 10 per cent. Luxembourg withholding tax levied will be credited against their final income tax liability.
Luxembourg resident corporate holders of notes, or holders of notes who have a permanent establishment, a permanent representative or a fixed base of business in Luxembourg with which the holding of the notes is connected, must for income tax purposes include in their taxable income any interest (including accrued but unpaid interest) as well as the difference between the sale or redemption price and the lower of the cost or book value of the notes sold or redeemed.
Luxembourg resident corporate holders of notes which are companies benefiting from a special tax regime (such as family wealth management companies subject to the law of 11 May 2007, undertakings for collective investment subject to the law of 17 December 2010 or specialized investment funds subject to the law of 13 February 2007) are tax exempt entities in Luxembourg, and are thus not subject to any Luxembourg tax (i.e., corporate income tax, municipal business tax and net wealth tax) other than the annual subscription tax calculated on their (paid up) share capital (and share premium) or net asset value.
Net Wealth Tax
Luxembourg net wealth tax will not be levied on a holder of a note unless:
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(1) such holder is, or is deemed to be, resident in Luxembourg for the purpose of the relevant provisions, with the exception of the following entities that are net wealth tax exempt, being (i) undertakings for collective investment within the meaning of the laws of 17 December 2010 or of 13 February 2007, (ii) investment companies in risk capital (SICARs) within the meaning of the law dated 15 June 2004, (iii) securitization entities within the meaning of the law dated 22 March 2004 and (iv) family wealth management companies within the meaning of the law of 11 May 2007; or
(2) such note is attributable to an enterprise or part thereof which is carried on through a permanent establishment or a permanent representative in Luxembourg.
Regarding individuals, the Luxembourg law of 23 December 2005 abolished the net wealth tax with effect from the year 2006.
Inheritance and Gift Tax
Where the notes are transferred for no consideration:
(1) No Luxembourg inheritance tax is levied on the transfer of the notes upon death of a holder of a note in cases where the deceased holder was not a resident of Luxembourg for inheritance tax purposes;
(2) Luxembourg gift tax will be levied in the event that the gift is made pursuant to a notarial deed signed before a Luxembourg notary or is registered in Luxembourg.
Value Added Tax
There is no Luxembourg value added tax payable in respect of payments in consideration for the issue of the notes or in respect of the payment of interest or principal under the notes or the transfer of a note; provided that Luxembourg value added tax may, however, be payable in respect of fees charged for certain services rendered to the Issuer, if for Luxembourg value added tax purposes such services are rendered, or are deemed to be rendered, in Luxembourg and an exemption from value added tax does not apply with respect to such services.
Other Taxes and Duties
Under Luxembourg tax law and current administration practice, it is not compulsory that the notes be recorded or enrolled with any court or other authority in Luxembourg or that registration tax, transfer tax, capital tax, stamp duty or any other similar tax or duty (other than court fees and contributions for the registration with the Chamber of Commerce) be paid in respect of or in connection with the execution, delivery and/or enforcement by legal proceedings (including any foreign judgment in the courts of Luxembourg) of the notes in accordance therewith, except that in case of court proceedings in a Luxembourg court (including but not limited to a Luxembourg Insolvency Proceeding), registration of the notes may be ordered by the court (and even in the absence of such order, registration could in principle be required in the event the notes are produced either directly or by way of reference before such Luxembourg court, including in any act introducing legal proceedings), in which case the notes will be subject to a fixed duty of €12 or an ad valorem duty. Registration would in principle further be ordered, and the same registration duties could be due, when the notes are produced, either directly or by way of reference, before an official authority (autorité constituée) in Luxembourg.
Residence
A holder of a note will not become resident, or deemed to be resident, in Luxembourg by reason only of the holding of such note or the execution, performance, delivery and/or enforcement of that or any other note.
EU Savings Directive
On 3 June 2003, the EU Council of Economic and Finance Ministers adopted a new directive regarding the taxation of savings income (the “EU Savings Directive”). The EU Savings Directive is, in principle, applied by Member States as from 1 July 2005 and has been implemented in Luxembourg by the laws of 21 June 2005. Under the EU Savings Directive, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a paying agent within the meaning of the EU Savings Directive to an individual resident or certain types of entities called “residual entities” established in that other Member State (or certain dependent and associated territories i.e., Jersey, Guernsey, Isle of Man, Montserrat, British Virgin Islands, Aruba and Curaçao, Sint Maarten, as well as Bonaire, Saba and Saint Eustatius (i.e., the former Netherlands Antilles)). For a transitional period, however, Austria, Belgium and Luxembourg are permitted to apply an optional information reporting system whereby if a beneficial owner does not comply with one of two procedures for information reporting, the Member
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State will levy a withholding tax on payments to such beneficial owner. By Royal Decree dated 27 September 2009 and published in the Belgian Official Gazette on 1 October 2009, the Belgian State elected to abandon the transitional withholding system and provide information in accordance with the Directive as from 1 January 2010. The current rate of withholding is of 35% and the withholding tax system will apply for a transitional period. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments. See “European Union Directive on the Taxation of Savings Income in the Form of Interest Payments” (Council Directive 2003/48/EC).
Also with effect from 1 July 2005, a number of non-EU countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino) and certain dependent or associated territories (Jersey, Guernsey, Isle of Man, Montserrat, British Virgin Islands, Anguilla, Turks and Caïcos, Cayman Islands, Aruba and Curaçao, Sint Maarten, as well as Bonaire, Saba and Saint Eustatius (i.e., the former Netherlands Antilles)) have agreed to adopt similar measures (either provision of information or transitional withholding) in relation to payments made by a paying agent (within the meaning of the EU Savings Directive) within its jurisdiction to, or collected by such a paying agent for, an individual resident or a residual entity established in a Member State. In addition, the Member States have entered into reciprocal provision of information or transitional withholding arrangements with certain of those dependent or associated territories (Jersey, Guernsey, Isle of Man, Montserrat, British Virgin Islands, Aruba, Curaçao, Sint Maarten, as well as Bonaire, Saba and Saint Eustatius (i.e., the former Netherlands Antilles)) in relation to payments made by a paying agent (within the meaning of the EU Savings Directive) in a Member State to, or collected by such a paying agent for, an individual resident or a residual entity established in one of those territories.
On 15 September 2008 the European Commission issued a report to the Council of the European Union on the operation of the Directive, which included the Commission’s advice on the need for changes to the Directive. On 13 November 2008, the European Commission published a detailed proposal for amendments to the Directive. The European Parliament approved an amended version of this proposal on 24 April 2009. If any of those proposed changes are made in relation to the Directive they may amend or broaden the scope of the requirements described above.
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ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the purchase of the notes by employee benefit plans that are subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or provisions under any Federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (collectively, “Similar Laws”), and entities whose underlying assets are considered to include “plan assets” of such plans, accounts and arrangements pursuant to the U.S. Department of Labor “plan assets” regulation, 29 CFR Section 2510.3-101, as amended by Section 3(42) of ERISA (each, a “Plan”).
General Fiduciary Matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code (an “ERISA Plan”) and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such an ERISA Plan or the management or disposition of the assets of such an ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the notes of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to the fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.
Prohibited Transaction Laws
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest”, within the meaning of Section 3(14) of ERISA, or “disqualified persons”, within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.
The acquisition and/or holding of the notes by a Plan with respect to which the Issuers or any of their affiliates are considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions (“PTCEs”) that may apply to the acquisition and holding of the notes. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers. There can be no assurance that any class exemption or any other exemption will be available with respect to any particular transaction involving the notes, or that if an exemption is available, it will cover all aspects of any particular transaction.
Because of the foregoing, the notes should not be purchased or held by any person investing “plan assets” of any Plan, unless such purchase and holding will not constitute or result in a non-exempt prohibited transaction under ERISA and the Code or a violation of any applicable Similar Laws.
Representation
Accordingly, by acceptance of a Note or any interest therein, each purchaser and holder (including each transferee) will be deemed to have represented and warranted at the time of its purchase and throughout the period that it holds such Note or interest therein, that (A) either (i) it is not, and is not acting on behalf of (and for so long as it holds such Note (or any interest therein) will not be, or be acting on behalf of), a Plan, and is not acquiring the Note directly or indirectly with the assets of a person who is or while the Note is held will be, a Plan, or (ii) the purchase and holding of the notes will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or a violation under any applicable Similar Laws and will not subject the Issuer to any laws, rules, or regulations applicable to such Plan solely as a result of the investment in the Issuer by such Plan, (B) neither the Issuer nor any of its affiliates is a “fiduciary” (within the meaning of ERISA Section 3(21) or any Similar Laws) with respect to the purchaser or holder in connection with such person’s purchase or holding of the notes, or as a result of any exercise
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by the Issuer or any of its affiliates of any rights in connection with the notes, and (C) it will not sell or otherwise transfer any such Note or interest to any person without first obtaining these same foregoing deemed representations, warranties and covenants from that person.
The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing the notes on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the purchase and holding of the notes.
The sale of notes to a Plan is in no respect a representation by the Issuers that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate for Plans generally or any particular Plan.
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NOTICE TO INVESTORS
The Issuer has not registered the notes under the U.S. Securities Act and, therefore, the notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Accordingly, the notes are only to be offered and sold to:
• QIBs in compliance with Rule 144A under the U.S. Securities Act; and
• in offers and sales that occur outside the United States to foreign purchasers, that is, purchasers who are not U.S. persons.
The term “foreign purchasers” includes dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners, other than an estate or trust, in offshore transactions meeting the requirements of Rule 903 of Regulation S. We use the terms “offshore transaction,” “U.S. person” and “United States” with the meanings given to them in Regulation S.
If you purchase notes, you will be deemed to have represented and agreed as follows:
(1) You understand and acknowledge that the notes have not been registered under the U.S. Securities Act or any other applicable securities laws and that the notes are being offered for resale in transactions not requiring registration under the U.S. Securities Act or any other securities laws, including sales pursuant to Rule 144A, and, unless so registered, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the U.S. Securities Act or any other applicable securities laws, pursuant to an exemption therefrom, or in a transaction not subject thereto, and in each case in compliance with the conditions for transfer set forth in paragraph (4) below.
(2) You are not our “affiliate” (as defined in Rule 144), you are not acting on our behalf and you are either:
(a) a QIB and are aware that any sale of these notes to you will be made in reliance on Rule 144A and such acquisition will be for your own account or for the account of another QIB; or
(b) not a “U.S. person” as defined in Regulation S or purchasing for the account or benefit of a U.S. person (other than a distributor) and you are purchasing notes in an offshore transaction in accordance with Regulation S.
(3) You acknowledge that neither the Issuer, the Initial Purchaser nor any person representing the Issuer or the Initial Purchaser has made any representation to you with respect to the Issuer or the offer or sale of any of the notes, other than the information contained in this listing circular, which listing circular has been delivered to you and upon which you are relying in making your investment decision with respect to the notes. You acknowledge that the Initial Purchaser makes no representation or warranty as to the accuracy or completeness of this listing circular. You have had access to such financial and other information concerning us and the notes, including an opportunity to ask questions of, and request information from, the Issuer and the Initial Purchaser.
(4) You are purchasing notes for your own account, or for one or more investor accounts for which you are acting as a fiduciary or agent, in each case for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the U.S. Securities Act, subject to any requirement of law that the disposition of your property or the property of such investor account or accounts be at all times within your or their control and subject to your or their ability to resell such notes pursuant to Rule 144A, Regulation S or any other available exemption from registration available under the U.S. Securities Act. You agree on your own behalf and on behalf of any investor account for which you are purchasing the notes, and each subsequent holder of these notes by its acceptance thereof will agree, to offer, sell or otherwise transfer such notes prior to (x) the date which is one year (or such shorter period of time as permitted by Rule 144(k) under the U.S. Securities Act or any successor provision thereunder) after the later of the date of the original issue of these notes and the last date on which the Issuer or any of its affiliates were the owner of such notes (or any predecessor thereto) or (y) such later date, if any, as may be required by applicable law (the “Resale Restriction Termination Date”) only:
(a) to us;
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(b) pursuant to a registration statement which has been declared effective under the U.S. Securities Act;
(c) for so long as the notes are eligible for resale pursuant to Rule 144A, to a person you reasonably believe is a QIB that purchases for its own account or for the account of another QIB to whom you give notice that the transfer is being made in reliance on Rule 144A;
(d) pursuant to offers and sales to non-U.S. persons occurring outside the United States within the meaning of Regulation S; or
(e) pursuant to any other available exemption from the registration requirements of the U.S. Securities Act,
subject in each of the foregoing cases to any requirement of law that the disposition of the seller’s property or the property of an investor account or accounts be within the seller or account’s control, and in compliance with any applicable state securities laws.
The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. You acknowledge that the Issuer, the trustee and the registrar reserve the right prior to any offer, sale or other transfer of the notes pursuant to clause (d) above prior to the end of the 40-day distribution compliance period within the meaning of Regulation S or pursuant to clause (e) above prior to the Resale Restriction Termination Date of the notes to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to us, the trustee and the registrar.
Each purchaser acknowledges that each Note will contain a legend substantially in the following form:
“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “U.S. SECURITIES ACT”), OR OTHER SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT.
THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS ONE YEAR (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE U.S. SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE LAST DAY ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WERE THE OWNERS OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE “RESALE RESTRICTION TERMINATION DATE”), OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE U.S. SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE U.S. SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A UNDER THE U.S. SECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE U.S. SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT, AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE ISSUER, THE TRUSTEE AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) PRIOR TO THE END OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD WITHIN THE MEANING OF REGULATION S UNDER THE U.S. SECURITIES ACT OR PURSUANT TO CLAUSE (E) PRIOR TO THE RESALE RESTRICTION TERMINATION DATE TO REQUIRE THAT AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE ISSUER, THE TRUSTEE AND THE REGISTRAR IS COMPLETED AND DELIVERED BY THE TRANSFEROR. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS “OFFSHORE
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TRANSACTION,” “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE U.S. SECURITIES ACT.”
If you purchase notes, you will also be deemed to acknowledge that the foregoing restrictions apply to holders of beneficial interests in these notes as well as to holders of these notes.
(1) You acknowledge that the registrar will not be required to accept for registration of transfer any notes acquired by you, except upon presentation of evidence satisfactory to us and the registrar that the restrictions set forth herein have been complied with.
(2) You acknowledge that:
(a) the Issuer, the Initial Purchaser and others will rely upon the truth and accuracy of your acknowledgements, representations and agreements set forth herein and you agree that, if any of your acknowledgements, representations or agreements herein cease to be accurate and complete, you will notify us and the Initial Purchaser promptly in writing; and
(b) if you are acquiring any notes as fiduciary or agent for one or more investor accounts, you represent with respect to each such account that:
(i) you have sole investment discretion; and
(ii) you have full power to make the foregoing acknowledgements, representations and agreements.
(3) You agree that you will give to each person to whom you transfer these notes notice of any restrictions on the transfer of the notes.
(4) If you are a purchaser in a sale that occurs outside the United States within the meaning of Regulation S, you acknowledge that until the expiration of the “distribution compliance period” (as defined below), you shall not make any offer or sale of these notes to a U.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902 under the U.S. Securities Act. The “distribution compliance period” means the 40-day period following the issue date for the notes.
(5) You understand that no action has been taken in any jurisdiction (including the United States) by the Issuer or the Initial Purchaser that would permit a public offering of the notes or the possession, circulation or distribution of this listing circular or any other material relating to the Issuer or the notes in any jurisdiction where action for that purpose is required. Consequently, any transfer of the notes will be subject to the selling restrictions set forth under “Plan of Distribution.”
Each purchaser and subsequent transferee of notes will also be deemed to have made the representations and warranties set forth in “ERISA Considerations,” above.
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PLAN OF DISTRIBUTION
The Issuer, the Guarantors and the Initial Purchaser have entered into a purchase agreement with respect to the notes. The Initial Purchaser has agreed to purchase, and the Issuer has agreed to sell, all of the notes. The purchase agreement with respect to the notes provides that the obligation of the Initial Purchaser to purchase and accept delivery of the notes are subject to the approval by its counsel of certain legal matters and to certain other conditions.
The purchase price for the notes is the initial offering price set forth on the cover page of this listing circular less an initial purchaser discount. The Initial Purchaser proposes to offer the notes at the initial offering price. After the notes are released for sale, the Initial Purchaser may change the offering price and other selling terms.
The notes have not been and will not be registered under the U.S. Securities Act. The Initial Purchaser has agreed that it will only offer or sell the notes (1) outside the United States in offshore transactions in reliance on Regulation S under the U.S. Securities Act and (2) in the United States to QIBs in reliance on Rule 144A. The terms used above have the meanings given to them by Regulation S and Rule 144A.
In connection with the sales outside the United States, the Initial Purchaser has agreed that it will not offer, sell or deliver the notes to, or for the account or benefit of, U.S. persons (1) as part of the Initial Purchaser’s distribution at any time or (2) otherwise until 40 days after the later of the commencement of this offering or the date the notes were originally issued. The Initial Purchaser agreed to send to each dealer to whom it sells such notes during such 40-day period a confirmation or other notice setting forth the restrictions on offers and sales of the notes within the United States by a dealer or to, or for the account or benefit of, U.S. persons.
In addition, until 40 days after the commencement of the offering, an offer or sale of any notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A or pursuant to another exemption from registration under the U.S. Securities Act.
The Issuer delivered the notes against payment therefor on February 5, 2013, the fifth business day following the date of pricing of the notes. Under Rule 15(c)6-1 under the U.S. Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days unless the parties to such trade expressly agree otherwise. Accordingly, purchasers who wished to trade the notes on the date of pricing were required, by virtue of the fact that the notes initially settled five business days following the date of pricing of the notes, to specify an alternative settlement cycle at the time of such trade to prevent a failed settlement. Purchasers of the notes who wished to trade the notes on the date of pricing or the next two succeeding business days should have consulted their own advisors.
In connection with the offering, the Initial Purchaser may purchase and sell notes in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the Initial Purchaser of a greater number of notes than it is required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the notes while the offering is in progress.
These activities by the Initial Purchaser may stabilize, maintain or otherwise affect the market price of the notes. As a result, the price of the notes may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the Initial Purchaser at any time. These transactions may be effected in the over-the-counter market or otherwise.
The Initial Purchaser also agrees that: (1) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the “FSMA”) with respect to anything done by it in relation to the notes in, from, or otherwise involving the United Kingdom; and (2) it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any of the notes in circumstances in which Section 21(1) of the FSMA does not apply to us.
No action has been taken in any jurisdiction, including the United States, by us or the Initial Purchaser that would permit a public offering of the notes or the possession, circulation or distribution of this listing circular or any other material relating to us or the notes in any jurisdiction where action for this purpose is required. Accordingly, the notes may not be offered or sold, directly or indirectly, and neither this listing circular nor any other offering material or advertisements in connection with the notes may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction. This listing circular does not constitute an offer to purchase or a solicitation of an offer to sell in any jurisdiction where such offer or solicitation would be unlawful. Persons into whose possession this listing circular comes are advised to inform
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themselves about and to observe any restrictions relating to the offering of the notes, the distribution of this listing circular and resale of the notes. See “Notice to Investors.”
The Issuer has agreed to indemnify the Initial Purchaser against certain liabilities, including liabilities under the U.S. Securities Act. The Issuer will pay the fees and expenses related to this offering.
The Initial Purchaser and its affiliates have from time to time performed certain investment banking and other financial services for us and our affiliates, for which it received customary fees and reimbursement of certain expenses. The Initial Purchaser and affiliates of the Initial Purchaser are lenders to us, including certain bank indebtedness that will be repaid with a portion of the proceeds of the offering, and are the arranger, original lender, facility agent and security trustee under the Revolving Credit Facility. At or shortly after the date of the issuance of the Notes in this offering, we intend to enter into an amendment and restatement agreement for our Revolving Credit Facility pursuant to which, amongst other things, the final termination date of the Facility will be extended from May 15, 2015 to January 31, 2018. The effectiveness of the amendment and restatement agreement and the amendments to the Revolving Credit Facility effected thereby, including, amongst other things, the extension of the termination date will be subject to the satisfaction of customary documentary conditions precedent. The Initial Purchaser and its affiliates may in the future provide investment banking or other financial services to us, for which they will receive customary fees.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon for us by Linklaters LLP, as to matters of United States Federal, New York and Luxembourg law, by Studio Legale Associato in association with Linklaters LLP, as to matters of Italian law and by J&A Garrigues, S.L.P. as to matters of Spanish law. Certain legal matters in connection with this offering will be passed upon for the Initial Purchaser by Simpson Thacher & Bartlett LLP, as to matters of United States Federal and New York law and by Clifford Chance S.L. as to matters of Spanish law. Certain legal matters in connection with this offering will be passed upon by Cabanellas • Etchebarne • Kelly, as to matters of Argentine Law, by Morgan & Morgan, as to matters of Panamanian law, and Gómez-Pínzón Zuleta Abogados S.A., as to matters of Colombian law.
WHERE YOU CAN FIND OTHER INFORMATION
Each purchaser of the notes from the Initial Purchaser will be furnished with a copy of this listing circular and any related amendments or supplements to this listing circular. Each person receiving this listing circular and any related amendments or supplements to the listing circular acknowledges that:
(1) such person has been afforded an opportunity to request from us, and to review and has received, all additional information considered by it to be necessary to verify the accuracy and completeness of the information herein;
(2) such person has not relied on the Initial Purchaser or any person affiliated with the Initial Purchaser in connection with its investigation of the accuracy of such information or its investment decision; and
(3) except as provided pursuant to (1) above, no person has been authorized to give any information or to make any representation concerning the notes offered hereby other than those contained herein and, if given or made, such other information or representation should not be relied upon as having been authorized by us or the Initial Purchaser.
For so long as any of the notes remain outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the U.S. Securities Act, the Issuer will, during any period in which it is not subject to Section 13 or 15(d) under the U.S. Securities Exchange Act of 1934, as amended, nor exempt from reporting thereunder pursuant to Rule 12g3-2(b), make available to any holder or beneficial holder of a Note, or to any prospective purchaser of a Note designated by such holder or beneficial holder, the information specified in, and meeting the requirements of Rule 144A(d)(4) under the U.S. Securities Act upon the written request of any such holder or beneficial owner. Any such request should be directed to: Cirsa Funding Luxembourg S.A., 58, rue Charles Martel, L-2134, Luxembourg.
INDEPENDENT AUDITORS
The financial statements included in this listing circular have been audited by our independent auditors Ernst & Young S.L. and Cartés, Pérezy Cía Auditores S.L.P.
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SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES
The Issuer is incorporated under the laws of Luxembourg and none of its directors are residents of the United States. Furthermore, a substantial portion of the Issuer’s assets and a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Issuer or such persons, or to enforce against them judgments of U.S. courts predicated upon the civil liability provisions of U.S. Federal or state securities laws.
We have been advised by our Luxembourg counsel that the United States and Luxembourg are not currently bound by a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitral awards rendered in civil and commercial matters. According to such counsel, an enforceable judgment for the payment of monies rendered by any U.S. Federal or state court based on civil liability, whether or not predicated solely upon the U.S. securities laws, would not directly be enforceable in Luxembourg. However, a party who received such favorable judgment in a U.S. court may initiate enforcement proceedings in Luxembourg (exequatur) by requesting enforcement of the U.S. judgment by the District Court (Tribunal d’Arrondissement) pursuant to Section 678 of the New Luxembourg Code of Civil Procedure. The District Court will authorize the enforcement in Luxembourg of the U.S. judgment if it is satisfied that all of the following conditions are met:
• the U.S. judgment is enforceable (executoire) in the United States;
• the U.S. court awarding the judgment has jurisdiction to adjudicate the respective matter under applicable U.S. Federal or state jurisdiction rules, and that jurisdiction is recognized by Luxembourg private international and local law;
• the U.S. court has applied to the dispute the substantive law which would have been applied by Luxembourg courts;
• the principles of natural justice have been complied with;
• the U.S. judgment does not contravene international public policy or order as understood under the laws of Luxembourg or has been given in proceedings of a criminal nature;
• the U.S. court has acted in accordance with its own procedural laws; and
• the judgment was granted following proceedings where the counterparty had the opportunity to appear, and if it appeared, to present a defense.
In practice, Luxembourg courts now tend not to review the merits of a foreign judgment, although there is no clear statutory prohibition of such review.
Cirsa and certain other of the Guarantors are organized under the laws of Spain with limited liability. The controlling shareholder of Cirsa, and the directors and the executive officers of Cirsa and the other Spanish Guarantors are non-residents of the United States and a significant portion of the assets of such persons are located outside the United States. As a result, in order to enforce in Spain a judgment entered in another jurisdiction, the service of process on such persons or Cirsa or the other Spanish Guarantors outside Spain must be made in accordance with the Law of Civil Procedure (Ley de Enjuiciamiento Civil). An investor may also experience difficulty in effecting service of process on or enforcing judgments against such persons or Cirsa or the other Spanish Guarantors based on civil liability provisions of the U.S. Federal and state securities laws or other laws.
We have been advised by our Spanish counsel that the United States and Spain are not currently bound by a treaty providing for reciprocal recognition and enforcement of judgements. In the absence of any such treaty or proof that similar Spanish judgements are not recognized and enforced in the jurisdiction rendering the judgment (in which case the judgment will not be recognized in Spain), such judgment will be recognized and enforced in Spain provided that it meets the following requirements:
(i) the judgment must be final, translated into Spanish and apostilled;
(ii) the judgment shall not be contrary to Spanish public policy;
(iii) there shall not be a pending proceeding between the same parties and in relation to the same issues in Spain;
191
(iv) there shall not be a judgment rendered between the same parties and for the same cause of action in Spain or in another country provided that in this latter case the judgment has been recognized in Spain;
(v) where rendering the judgment, the courts rendering it must have not infringed an exclusive ground of jurisdiction provided for in Spanish law or have based their jurisdiction on exorbitant grounds;
(vi) the rights of defense of the defendant should have been protected where rending the foreign judgment, including but not limited to a proper service of process carried out with sufficient time for the defendant to prepare its defense and appear before the courts;
(vii) the legal action has to be taken with acknowledgment and appearance of the defendant in the proceeding; and
(viii) the obligation that the petitioner tries to execute has to be lawful in Spain.
The Italian Guarantor, Cirsa Italia S.p.A., is a stock corporation organized and existing under the laws of Italy. Its directors and executive officers (and their equivalents) reside principally in Italy. In addition, all of Cirsa Italia S.p.A.’s assets and a substantial portion of the assets of its directors and executive officers (and their equivalents) are located in Italy. As a result, it may not be possible for an investor outside of Italy to effect service of process within the United States, upon Cirsa Italia S.p.A. or its directors and executive officers (and their equivalents), or to enforce against Cirsa Italia S.p.A. or any such other persons any judgments obtained by U.S. courts.
However, we have been advised by our Italian counsel that the recognition and enforcement in Italy of a judgment rendered by a U.S. Federal or state court based on civil liability is governed by Article 64 of the Private International Law Act (i.e. Law 218 of May 31 1995) (the “PIL Act”) (and certain other provisions of the PIL Act).
Pursuant to the PIL Act, any judgment issued by a U.S. federal or New York state court should automatically be recognized in Italy provided that the following requirements are met:
• the relevant U.S. federal or New York state court had appropriate jurisdiction to pass judgment upon the matter (in accordance with the Italian rules on jurisdiction);
• the defendant had received the summons in accordance with the laws of the state in which the proceedings have taken place, and the defendant had not been deprived of his fundamental right to a defense;
• the parties had appeared in the proceedings in accordance with the local procedural law, or the proceedings were conducted in absentia (in contumacia) in accordance with such local procedural law;
• the judgment rendered by the U.S. federal or New York state court must be final and binding (passato in giudicato) according to the law of the state in which it was issued;
• the judgment rendered by the U.S. federal or New York state court is not in conflict with any earlier final and binding judgment issued by an Italian court;
• there is no pending proceeding before any Italian court in relation to the same subject matter and between the same parties which started prior to the commencement of the proceedings before the relevant U.S. federal or New York state court; and
• the judgment rendered by the U.S. federal or New York state court is not contrary to Italian public policy.
In addition, according to Article 67 of the PIL Act, if the judgment rendered by the U.S. federal or New York state court is not complied with, its recognition is challenged or it is necessary to enforce such judgment, a proceeding must be instituted in the competent Court of Appeal to this end. The competent Court of Appeal does not consider the merits of the case but reviews exclusively the existence of all the requirements set out above (including that requiring that the judgment rendered by the U.S. federal or New York state court is not contrary to public policy in Italy).
The Panamian Guarantor, Gaming & Services de Panama S.A., is incorporated under the laws of the Republic of Panama and none of its directors or executive officers are residents of the United States. Furthermore, a substantial portion of its assets and a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Panamanian Guarantor or such persons, or to enforce against them judgments of U.S. courts predicated upon the civil liability provisions of U.S. Federal or state securities.
192
We have been advised by our Panamanian counsel that the United States and the Republic of Panama are not currently bound by a bilateral treaty providing for reciprocal recognition and enforcement of judgments (exequatur). According to such counsel, a U.S. judgment that is enforceable in the United States for the payment of monies rendered by any U.S. Federal or state court based on civil liability, whether or not predicated solely upon the U.S. securities laws, would not be directly enforceable in the Republic of Panama. In the absence of any such treaty or proof that similar Panamanian judgments are not recognized and enforced in the jurisdiction rendering the judgment (in which case the judgment will not be recognized in the Republic of Panama), judgments rendered by a foreign court will be recognized and enforced in the Republic of Panama provided that it meets the following requirements contemplated in the article 1419 of the Judicial Code of Panama:
• that the foreign judgment was rendered as a consequence of the exercise of an action in personam, with the exception of what the law especially regulates for successions in other countries;
• that the foreign judgment was rendered as part of a proceeding in which the lawsuit was personally served on the defendant;
• that the obligation which is sought to be enforced in Panama is legal and not contrary to public policy in the territory of the Republic of Panama;
• that the copy of the foreign judgment must be authentic (that is, it must have been authenticated either by the Panamanian Consul of the place where it was issued or by apostille prior to its submission in the Republic of Panama as part of the request of enforcement); and
• that a copy of the judgment is translated into Spanish by a licensed translator in Panama.
A petition must be submitted to the Supreme Court of Panama, to determine if the foreign judgment can or cannot be enforced in Panama. The Supreme Court’s Fourth Chamber will deliver a copy of the petition to the party against whom the judgment will be enforced and to the Attorney General of Panama, giving each a term of five days to submit arguments in connection with the petition.
The Issuer and the Guarantors have agreed that any suit, action or proceeding arising out of or based upon the indenture, the notes or the Guarantees may be instituted in any Federal or state court located in New York City, and the Issuer and the Guarantors have appointed CT Corporation System as their agent for service of process in any such suit, action or proceeding.
LISTING AND GENERAL INFORMATION
Application has been made for the offered notes to be listed on the Official List of the Luxembourg Stock Exchange and to be admitted for trading on the Luxembourg Stock Exchange’s Euro MTF Market in accordance with the rules and regulations of that exchange.
The offered notes sold pursuant to Regulation S and the notes sold pursuant to Rule 144A of the U.S. Securities Act have been accepted for clearance through the facilities of Euroclear and Clearstream.
The initial, temporary common code number and international securities identification number for the offered notes sold pursuant to Regulation S under the U.S. Securities Act are 088238486 and XS0882384869, respectively. After the expiration of the 40-day period following the issue date the common code number and international securities identification number for the offered notes sold pursuant to Regulation S under the U.S. Securities Act are 050659151 and XS0506591519, respectively.
The initial, temporary common code number and international securities identification number for the offered notes sold pursuant to Rule 144A under the U.S. Securities Act are 088243064 and XS0882430647, respectively. After the expiration of the one year period following the issue date the common code number and international securities identification number for the offered notes sold pursuant to Rule 144A of the U.S. Securities Act are 050659313 and XS0506593135, respectively.
For as long as the offered notes are listed on the Official List of the Luxembourg Stock Exchange and admitted for trading on the Luxembourg Stock Exchange’s Euro MTF Market and the rules and regulations of that exchange require, copies of the following documents may be inspected and obtained at the registered offices of the Issuer and the Luxembourg paying agent:
• the organizational documents of the Issuer and the Guarantors;
193
• the documents listed in the Index to Financial Statements below, including the annual consolidated financial statements, any interim financial statements and any other documents or reports to be published by the Company and furnished to holders of the notes; and
• the indenture for the offered notes (which includes the forms of the offered notes and the terms of the guarantees and matters concerning the trustee).
As long as the offered notes are listed on the Official List of the Luxembourg Stock Exchange and the rules and regulations of the Luxembourg Stock Exchange shall so require, we will maintain a paying and transfer agent in Luxembourg. We reserve the right to vary such appointment and we will publish notice of such change of appointment in a newspaper having a general circulation in Luxembourg. We have appointed Deutsche Bank Luxembourg S.A. as paying agent in Luxembourg to make payments on, and transfers of, the notes.
The Company prepares annual audited consolidated financial statements. English translations of all future audited consolidated financial statements of the Company will be available free of charge at the office of the paying agent in Luxembourg. In addition, the Company prepares quarterly unaudited consolidated financial statements. English translations of all future quarterly unaudited consolidated financial statements of the Company will also be available free of charge at the office of the paying agent in Luxembourg.
The issuance of the offered notes and the giving of the guarantees have been authorized pursuant to (i) resolutions duly adopted by the board of directors of the Issuer dated January 28, 2013, (ii) resolutions duly adopted by the board of directors of the Company dated January 22, 2013 and (iii) resolutions duly adopted by the boards of directors (or equivalent body) of the Panamanian Guarantor dated January 24, 2013, the Italian Guarantor dated January 24, 2013 and the Spanish Guarantors dated January 22, 2013.
There has been no significant change in the financial or trading position of the Issuer, the Company or the Guarantors since September 30, 2012 and no material adverse change in the financial position or prospects of the Issuer, the Company or the Guarantors since September 30, 2012.
Except as disclosed or described in this listing circular, we believe that the ongoing litigation that the Issuer or Guarantors are involved in, will not have a material adverse affect on our business, financial condition, or results of operations.
THE ISSUER
Cirsa Funding Luxembourg S.A. is a public limited liability company (société anonyme) incorporated and existing under the laws of the Grand Duchy of Luxembourg on November 20, 2009, its registered office is at 58, rue Charles Martel, L-2134 Luxembourg and it is registered with the Register of Trade and Companies of Luxembourg under number B149519. The articles of association of the Issuer were published in the Receuil du Mémorial on December 22, 2009 and amended on December 8, 2010 and January 19, 2012, which amendments were published in the Receuil du Mémorial on March 2, 2011 and March 13, 2012, respectively. Pursuant to Article 3 of its articles of association, the corporate purpose of the Issuer includes the granting of loans or other forms of financing; borrowing, raising and securing the payment of money through the issuance of notes and other debt instruments; and the acquisition and holding of interests in Luxembourg and/or foreign companies and the administration, development and management of such interests.
The Issuer has issued and outstanding 20,310 ordinary shares with a par value of €1.00 each, all of which have been paid up and are held by Cirsa Gaming Corporation, S.A. The Issuer has no outstanding convertible or exchangeable debt securities or debt securities with warrants attached. The Issuer’s only indebtedness is the 2018 Notes and it has no loan capital, contingent liabilities or other borrowings, and its only significant assets and sources of revenue are the funding loans to the Company equal to the aggregate principal amount of the 2018 Notes. The financial statements of the Issuer as of and for the years ended December 31, 2010 and 2011 are included in this Listing Circular. The Issuer does not prepare interim financial statements and there have been no significant changes from the most recent financial statement other than the issuance of the offered notes and the funding loan in respect thereof.
The directors of the Issuer are Mathieu Gangloff, John Kleynhans and Noel McCormack, each with a business address of 58, rue Charles Martel, L-2134 Luxembourg and Manuel Lao Gorina and Isaac Lahuerta, each with a business address of Terrassa (Barcelona), Ctra. de Castellar. 298.
THE COMPANY
Cirsa Gaming Corporation S.A. is a public limited liability company (sociedad anónima) incorporated under the laws of Spain on May 10, 1978 under Barcelona Commerce Register number B-380, page 102 and volume 42002. The
194
Company acts as a holding company by virtue of being the parent company of the Cirsa Group. The Company’s share capital (including treasury shares) is €24,577,442.40, divided into 122,887,121 authorized and issued shares of common stock with a par value of €0.20 each, all of which have been paid up. Nortia Business Corporation, belonging to Mr. Manuel Lao Hernández and his family owns 52.92% and Mr. Manuel Hernández owns 47.08% of the share capital of the Company (in each case, excluding treasury shares). The corporate purpose of the Company, as described in Article 2 of its articles of association, consists of acquiring, subscribing, transmitting, disposing of and negotiating all kinds of shares, debentures, bonds and other signs representative of participations, rights or credits, including in foreign companies, but specifically excluding the activities characteristics of collective investment companies that invest in risk capital, insurance brokers, insurance and reinsurance agencies. It may also render computer science services, including the reception and processing of existing programs and the creation of new ones: communications and related activities; image creation and maintenance for individuals as well as companies, businesses, firms and brand names; public relations, marketing, promotion, studies of sectors, brands and markets; technical assistance services for companies engaged in basic and applied electronics; personnel selection services and business organization and consulting services not specifically reserved by law for other organizations, entities and professionals. The Company’s registered address and principal place of business is Terrassa (Barcelona), Ctra. de Castellar. 298.
INDEX TO FINANCIAL STATEMENTS
Page
Nine Months Ended September 30, 2012 Interim Consolidated Statement of Financial Position at September 30, 2012 and 2011 ............ F-2 Interim Consolidated Statement of Comprehensive Income for the Nine Month Period Ended
September 30, 2012 and 2011 ................................................................................................ F-3 Interim Consolidated Statement of Changes in Equity for the Nine Month Period Ended
September 30, 2012 and 2011 ................................................................................................ F-4 Interim Consolidated Cash Flow Statement for the Nine Month Period Ended September 30,
2012 and 2011 ........................................................................................................................ F-6 Notes to the Interim Consolidated Financial Statements for the Nine Month Period Ended
September 30, 2012 and 2011 ................................................................................................ F-7
Year Ended December 31, 2011 Independent Auditors’ Report .................................................................................................... F-15 Consolidated Statement of Financial Position at December 31, 2011 and 2010 ......................... F-20 Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2011
and 2010 ................................................................................................................................. F-21 Consolidated Statement of Changes in Equity for the Years Ended December 31, 2011 and
2010 ........................................................................................................................................ F-22 Consolidated Cash Flow Statement for the Years Ended December 31, 2011 and 2010 ............ F-23 Notes to the Consolidated Financial Statements for the Year Ended December 31, 2011 .......... F-24 Consolidated Management Report for the Year Ended December 31, 2011 ............................... F-75
Year Ended December 31, 2010 Independent Auditors’ Report .................................................................................................... F-83 Consolidated Balance Sheet at December 31, 2010 and 2009 .................................................... F-88 Consolidated Income Statement for the Years Ended December 31, 2010 and 2009 ................. F-89 Consolidated Statement of Changes in Equity for the Years Ended December 31, 2010 and
2009 ........................................................................................................................................ F-90 Consolidated Cash Flow Statement for the Years Ended December 31, 2010 and 2009 ............ F-91 Notes to the Consolidated Financial Statements for the Year Ended December 31, 2010 .......... F-92 Consolidated Management Report for the Year Ended December 31, 2010 ............................... F-141
Year Ended December 31, 2009 Independent Auditors’ Report .................................................................................................... F-149 Consolidated Statement of Financial Position at December 31, 2009 and 2008 ......................... F-154 Consolidated Statement of Comprehensive Income for the years ended December 31, 2009
and 2008 ................................................................................................................................. F-155 Consolidated Statement of Changes in Equity for the years ended December 31, 2009 and
2008 ........................................................................................................................................ F-156 Consolidated Statement of Cash Flows for the years ended December 31, 2009 and 2008 ........ F-157 Notes to the Consolidated Financial Statements for the year ended December 31, 2009 ........... F-158 Consolidated Management Report for the Year Ended December 31, 2009 ............................... F-207
Combined guarantor/non-guarantor financial information for the Nine Month Period
Ended September 30, 2012................................................................................................... F-215
Issuer Annual Accounts at December 31, 2011 and Independent Auditor’s Report ........... F-217
Issuer Annual Accounts at December 31, 2010 and Independent Auditor’s Report ........... F-233
- 1 -
Cirsa Gaming Corporation Group
Interim consolidated statements of financial positionat September 30, 2012
Current assets 335,711 316,817Inventories 15,160 13,854Trade and other receivables 201,977 188,574Financial assets 37,224 39,430Other current assets 9,795 8,304Cash and cash equivalents 8 71,555 66,655
Total assets 1,397,345 1,389,649
EQUITY AND LIABILITIES
(Thousands of euros) Notes
September 30, 2012
Unaudited
December 31, 2011Audited
Equity 36,092 35,621Share capital 24,577 24,577Share premium 9,500 9,500Treasury shares (184) (184)Retained earnings 58,587 78,931Cumulative translation reserve (125,520) (123,011)Profit (loss) for the period attributable to equity holders of the parent 2,588 (25,421)Non-controlling interests 66,544 71,229
Net income and expense for the nine-month period recognized directly in equity - - - - (31,731) (3,572) (35,303)
Loss for the nine-month periodended September 30, 2011 - - - (25,594) - 7,281 (18,313)
Total income and expense for the nine-month period ended September 30, 2011 - - - (25,594) (31,731) 3,709 (53,616)
Other changes:
Changes in percentage of interest - - - - - 18 18
Dividends - - - - - (8,117) (8,117)
At September 30, 2011 24,577 9,500 (184) 53,337 (130,035) 66,069 23,264
F-5
- 5 -
Cirsa Gaming Corporation Group
Interim consolidated cash flow statement for the nine-month period ended September 30, 2012
(Thousands of euros)2012
Unaudited2011
Unaudited
Cash-flows from operating activitiesProfit before tax, as per the interim consolidated income statement 52,418 12,233Adjustments to non-cash income and expenses:
Change in trade provisions 4,127 2,074Depreciation, amortization and impairment 119,315 118,570Losses from sale/disposal of non-current assets 1,135 2,444Finance costs, net 58,141 74,863Exchange losses 4,846 4,760Other 1,512 1,489
Change in:Inventories (2,598) (3,751)Receivables (7,015) (4,367)Payables (11,167) (1,491)Taxes payable on gaming (8,033) (2,416)Accruals, net (6,077) (14,482)
Income tax paid (32,001) (25,466)Net cash-flows from operating activities 174,603 164,460
Cash-flows from (used in) investing activitiesPurchase and development of property, plant and equipment (95,567) (86,300)Purchase and development of intangible assets (15,779) (17,278)Proceeds from sale of non-current assets 17,831 12,243Acquisition of business, net of cash acquired (10,388) (2,492)Current account with Nortia Business Corporation, S. L. – Outflows (42,251) (36,561)Current account with Nortia Business Corporation, S. L. – Inflows 42,313 37,749Purchase of other financial assets (8,152) (4,873)Interest received on granted loans and cash revenue from other financial assets 5,344 5,041Net cash-flows used in investing activities (106,649) (92,471)
Cash-flows from (used in) financing activities:Proceeds from bank borrowings 678,882 883,903Repayment of bank borrowings (665,791) (912,809)Issuance of bonds - 285.700Purchase of bonds - (4.200)Repayment of bonds - (239.485)Capital lease payments (8,911) (8,534)Interest paid on financial debt (50,769) (59,523)Other (13,612) (7,402)
Net cash-flows from (used in) financing activities (60,201) (62,350)
Net variation in cash and cash equivalents 7,753 9,639
Net foreign exchange difference (2,853) 350
Cash and cash equivalents at January 1 66,655 65,160
Cash and cash equivalents at September 30 71,555 75,149
F-6
- 6 -
Cirsa Gaming Corporation Group
Notes to the interim condensed consolidated financial statementsfor the nine-month period ended September 30, 2012
1. CORPORATE INFORMATION
Cirsa Gaming Corporation, S. A. (hereinafter the Company), domiciled in Terrassa (Barcelona), and its subsidiaries (hereinafter the Group as a whole) consist of a set of companies operating in the gaming and leisure sector, engaged in the following activities:
Design and manufacture of slot machines, which are sold to Group companies and third parties, and development of interactive gaming systems.
Operating, both in Spain and abroad, of slot machines, bingo halls, casinos and lotteries.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
2.1 Basis of presentation
The interim condensed consolidated financial statements for the nine-month period ended September 30, 2012 have been prepared in accordance with IAS 34 Interim Financial Reporting.
The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as of December 31, 2011.
2.2 Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended December 31, 2011, except for the following amendments to IFRS effective as of January 1, 2012:
IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets
The amendment clarified the determination of deferred tax on investment property measured at fair value and introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. It includes the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on or after 1 January 2012 and has had no effect on the Group’s financial position, its performance or its disclosures.
The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Group’s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about the entity’s continuing involvement in derecognized assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after 1 July 2011. The Group does not have any assets with these characteristics so there has been no effect on the presentation of its financial statements.
IFRS 1 First-Time Adoption of International Financial Reporting Standards (Amendment) – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters
The IASB provided guidance on how an entity should resume presenting IFRS financial statements when its functional currency ceases to be subject to hyperinflation. The amendment is effective for annual periods beginning on or after 1 July 2011, and has had no impact to the Group.
The Group has not adopted early any other standard, interpretation or amendment that has been issued but is not yet effective.
3. BUSINESS ACQUISITIONS AND OTHER VARIATIONS IN THE CONSOLIDATION PERIMETER
During the nine-month period ended September 30, 2012, the Group’s legal structure has experienced certain changes, as described below.
Acquisitions
The Group acquired 50 % of Majestic Food Services, Inc. and Canaria de Explotaciones Recreativas y de Juego, S. L. in January and June 2012, respectively. The acquisition price amounted, altogether, to 44 thousand euros, and no goodwill arose from these minor transactions.
These companies are consolidated using the proportional consolidation method. Total assets included in the consolidated statement of financial position at September 30, 2012 in respect of these companies amount to 76 thousand euros, while the related operating revenues included in the consolidated statement of comprehensive income for the nine-month period then ended amount to 342 thousand euros. The Group gains contributed by these joint ventures since the acquisition dates, as well as those that would have been contributed had the acquisitions been done at the beginning of the period, are immaterial.
In 2012 the Group also acquired 20% of Magic Star, S. A. That investment is accounted for under the equity method; at September 30, 2012 the amount recorded in the consolidated statement of financial position is 7,850 thousand euros, The portion of the balance of Share of the associates’ profit / loss in the consolidated statement of comprehensive income in respect of such investee amounts to 403thousand euros.
Disposal of companies
During 2012 the Grup sold Recreativos Jeroni Orfila, S. L. and Happy Games, S.R. L. The total assets included in the consolidated statement of financial position at December 31, 2011 corresponding to these companies amounted to 1,366 thousand euros, while the operating revenues included in the consolidated statement of comprehensive income for the nine-month period ended September 30, 2012 amounted to 1,033 thousand euros.
F-8
- 8 -
Changes in percentage of interest
In 2012 the Group sold 49% of its equity interest in Macrojuegos, S. A., formerly a wholly owned subsidiary, and 10% of its investment in Juegomatic, S. A., thus decreasing its shareholding from 75% to 65%. These transactions gave rise to an increase in the balance of Non-controlling interests and Retained earnings of 181 and 5,077 thousand euros, respectively. In addition, the participation in UTE CBA-CIESA, a joint venture consolidated through the proportional method, changed from 50% to 45%.
Other
A company (Baru Speles, S. A.) was legally dissolved and liquidated during the year.
4. SEASONALITY OF OPERATIONS
Neither the business as a whole (gaming and leisure sector) nor any of the Group’s segments are highly seasonal.
F-9
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F-10
- 10 -
6. GOODWILL
Balance variation
The variation in the balance of Goodwill between December 31, 2011 and September 30, 2012 reflects translation exchange differences (3.281 thousand euros) and impairment adjustments recorded during the period (12.747 thousand euros, as commented below).
Impairment
Goodwill is tested for impairment annually (as of December 31) and when circumstances indicate thatthe carrying value may be impaired. The Group’s impairment test for goodwill is based on value-in-use calculations that use a discounted cash flow model.
At September 30, 2012 the Group has conducted an impairment test, in view of the unfavourable trend of results and cash-flows in certain cash generating units during the last months. As a result of the impairment test, the Group has written-down the balance of goodwill by 12.747 thousand euros, by debiting expenses of the nine-month period ended September 30, 2012. The adjustment mostly corresponds to bingo halls.
The general criteria used to determine the recoverable amount for the different cash generating units are conceptually the same discussed in the annual financial statements for the year ended December 31, 2011, and have been applied to updated forecast magnitudes based on current expectations. The discount rates applied have been 9.5% to the cash generating units in Spain, 10.0% to those located in Italy, and 13.0% to those in Latin America.
The financial projections prepared by the Group for impairment test purposes include certain premises referred to the bingo business whose future occurrence is hard to predict: positive effects from the implementation of the electronic bingo, relaxation of the smoking ban in the so-called “smokers club” in the bingo parlours, and favourable evolution of the legislation on gaming taxes. Should these assumptions finally differ from the reality, additional impairment adjustments might be necessary.
The interim consolidated statement of comprehensive income for the period ended September 30, 2011 includes a goodwill impairment adjustment of 15,279 thousand euros. Information about that entry is provided in the consolidated financial statements at December 31, 2011.
7. PROPERTY, PLANT AND EQUIPMENT AND OTHER INTANGIBLE ASSETS
Investments
During the nine-month period ended September 30, 2012 the Group acquired property, plant and equipment with a cost of 111.4 million euros (103.6 million euros at the end of the third quarter of 2011). These additions in 2012 correspond mainly to the following investments:
59.0 million euros for the expansion of our existing halls in Panama, Colombia and Argentina;
20.7 million euros to replace slot machines in Spain; and
9.2 million euros in connection with the enlargement of key halls in Mexico.
Investments in other intangible assets during the nine-month period ended September 31, 2012 mainly correspond to installation rights, for an amount of 10.3 million euros. The corresponding figure at the end of the third quarter of the preceding year was 17.3 million euros.
F-11
- 11 -
Impairment
The Group assesses at least at each year end whether there is an indication that a non-current asset (other than goodwill) may be impaired. If any indication exists, the Group estimates the asset’s recoverable amount. Simultaneously to the impairment test referred to goodwill, the Group has evaluated the recoverable amount of its non-financial long-term assets with lower profitability levels, based on their estimated value in use, which has been determined by applying similar parameters to those used to evaluate goodwill. As a result of the tests conducted, the Group has written-down the balance of Other intangible assets by 152 thousand euros, by debiting expenses of the nine-month period ended September 30, 2012.
The interim consolidated statement of comprehensive income for the period ended September 30, 2011 includes an impairment adjustment of 10,126 thousand euros. Most of that figure (7,780 thousand euros) corresponds to exceptional charges associated with the close-down of certain operations in Venezuela and Ecuador.
8. CASH AND CASH EQUIVALENTS
For the purpose of the interim consolidated cash flow statement, cash and cash equivalents as of September 30 are broken down as follows:
(Thousands of euros) 2012 2011
Cash at bank and in hand 71,148 74,867Short-term deposits 407 282
71,555 75,149
9. FINANCIAL DEBT
The net increase of the balances of financial debt between December 31, 2011 and September 30, 2012 (30,764 thousand euros) mostly reflects the accrued interest of bonds, paid on November 15, 2012. The average interest of debt with financial institutions at September 30, 2012 is 5.87 %. The interest rate of the bonds, which mature in 2018, is 8.75%.
10. INCOME TAXES
Expense for the period
The major components of income tax expense in the interim consolidated statements of comprehensive income are:
(Thousands of euros) 2012 2011
Current 33,271 23,806Deferred 7,352 6,740
Income tax expense 40,623 30,546
F-12
- 12 -
The difference between the income tax expense for the nine-month period ended September 30, 2012(million euros) and the amount that would result from applying the statutory tax rate in Spain (30%) to the balance of profit before taxes (52.4 million euros) mainly corresponds to the combined effect of (a) the write-down of deferred tax assets amounting to 7.5 million euros, as discussed below; (b) the goodwill impairment adjustment of 12.7 million euros, commented above, which is not deductible for tax purposes; (c) the existence of tax credits by 3.2 million euros arising from losses during the period that do not meet the conditions to be capitalized; and (d) higher tax rates in Latin America and Italy.
Deferred tax assets
The Group annually evaluates the recoverability of its deferred tax assets. To that end, projections of the expected profits before taxes within the timeframe allowed for compensation or utilization are prepared. As a result of the review of these assets at September 30, 2012, the Group has written down their balance by 7,500 thousand euros, by debiting the interim consolidated statement of comprehensive income.
11. RELATED PARTIES
The Group conducts several trade and financial transactions with its main shareholder Nortia Business Corporation, S.L., and its subsidiaries. The volume of transactions with related parties during the nine-month period ended September 30 is as follows:
(Thousands of euros) 2012 2011
Sale of slot machines 6,072 9,475Revenue for rendering of services 1,181 1,302Operating expenses (7,718) (7,985)Interest income 3,612 3,278Interest expenses (1,125) (6)
Transactions with related entities correspond to normal trading activity and are carried out at market prices in a manner similar to transactions with unrelated parties.
Balances arising from these transactions at September 30 are as follows:
(Thousands of euros) 2012 2011
Non-current receivable from financial transactions 72,868 67,432Current receivable from financial transactions 580 1,614Trade receivables 3,700 6,008Non-current payable from financial transactions (13,335) (1,126)Trade payables (2,204) (845)
61,609 73,083
F-13
- 13 -
12. DIRECTORS AND SENIOR EXECUTIVES
The breakdown of the remuneration earned by the members of the Company’s Board of Directors and senior executives at September 30 is as follows:
(Thousands of euros) 2012 2011
DirectorsSalaries 821 1,176
Senior executivesSalaries 3,630 3,559
At September 30, 2012 there are current accounts receivables with Directors amounting to 882thousand euros (735 thousand euros at September 30, 2011). These accounts accrue an annual interest of 4.25%.
The Group companies have no pension plans, life insurance policies or dismissal indemnities for former or current members of the Board of Directors or senior executives of the Company.
13. CONTINGENCIES
Contingencies reported in the consolidated financial statements at December 31, 2011 have not experienced significant variations during the nine-month period ended September 30, 2012. No new contingencies have appeared during that period.
F-14
<+
Independent Audit Report
CIRSA GAMING CORPORATION GROUP Consolidated Financial Statements and
Consolidated Management Report for the year ended December 31, 2011
F-15
<+
Ernst & Young, S.L. Cortés, Pérez & CIA. Auditores, S.L.P. Edificio Sarriá Forum - Av. Sarrià, 102-106, Ático. 08017 Barcelona Passeig de Gràcia, 11 esc. A 2º 2ª. 08007 Barcelona Teléfono: 933 663 700 - Fax: 934 053 784 Teléfono: 93 270 24 14 - Fax: 93 2702 415 www.ey.com/es www.cyp.es Domicilio Social: Plaza Pablo Ruiz Picasso, 1. 28020 Madrid. Domicilio Social: Gutenberg, 3-13, 5º A. 08224 Terrassa Inscrita en el Registro Mercantil de Madrid al Tomo 12749 Inscrita en el Registro Mercantil de Barcelona, Tomo 25.321 Libro 0, Folio 215, Sección 8ª, Hoja M-23123, Inscripción 116. Folio 200, Hoja B.87184. Nº Insc. I.C.J.C.E 57 C.I.F. B78970506 N.I.F. B-08770802
Translation of a report and consolidated financial statements originally issued in Spanish. In the event of discrepancy, the Spanish-language version prevails
(See Note 30)
AUDIT REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders of Cirsa Gaming Corporation, S.A.: We have audited the consolidated financial statements of Cirsa Gaming Corporation, S.A. (hereinafter, the Company) and its controlled entities (hereinafter, the Group), which comprise the consolidated statement of financial position at December 31, 2011, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flow, and the notes thereto for the year then ended. As indicated in note 2 to the accompanying consolidated financial statements, the Company’s directors are responsible for the preparation of the Group's consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, and other provisions in the regulatory framework applicable to the Group. Our responsibility is to express an opinion on the aforementioned consolidated financial statements taken as a whole, based upon work performed in accordance with prevailing audit regulations in Spain, which require the examination, through the performance of selective tests, of the evidence supporting the consolidated financial statements, and the evaluation of whether their presentation, the accounting principles and criteria applied and the estimates made are in agreement with the applicable regulatory framework for financial information.
In our opinion, the accompanying 2011 consolidated financial statements give a true and fair view, in all material respects, of the consolidated equity and consolidated financial position of Cirsa Gaming Corporation, S.A. and its controlled entities at December 31, 2011, and the consolidated results of operations and consolidated cash flow for the year then ended, in conformity with International Financial Reporting Standards, as adopted by the European Union, and other applicable provisions in the regulatory framework for financial information.
F-16
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- 2 -
The accompanying 2011 consolidated management report contains such explanations as the directors of Cirsa Gaming Corporation, SA. consider appropriate concerning the situation of the Group, the evolution of its business and other matters; however, it is not an integral part of the consolidated financial statements. We have checked that the accounting information included in the aforementioned consolidated management report agrees with the 2011 consolidated financial statements. Our work as auditors is limited to verifying the consolidated management report in accordance with the scope mentioned in this paragraph, and does not include the review of information other than that obtained from the accounting records of the Group entitites.
ERNST & YOUNG, S.L. CORTÉS, PÉREZ & CIA. AUDITORES, S.L.P. (Signature on the original in Spanish) (Signature on the original in Spanish)
____________________ _________________ Joan J. Torrebadella Jaume Cetrà Oliva April 2, 2012
F-17
Cirsa Gaming Corporation Group
Consolidated Financial Statements for the year ended December 31, 2011 in conformity with the international financial reporting standards adopted by the
European Union (IFRS-EU) and Consolidated Management Report
F-18
CONTENTS
Consolidated Financial Statements
� Consolidated statement of financial position at December 31, 2011 and 2010
� Consolidated statement of comprehensive income for the years ended December 31, 2011 and 2010
� Consolidated statement of changes in equity for the years ended December 31, 2011 and 2010
� Consolidated statement of cash flows for the years ended December 31, 2011 and 2010
� Notes to the consolidated financial statements for the year ended December 31, 2011
Consolidated Management Report
Appendix Consolidation perimeter at December 31, 2011 and 2010
F-19
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
1
Cirsa Gaming Corporation Group Consolidated statement of financial position at December 31 ASSETS (Thousands of euros) Notes 2011 2010 Non-current assets 1,072,832 1,050,018 Goodwill 5 227,381 241,070 Other intangible assets 6 136,174 127,662 Property, plant and equipment 7 477,968 466,808 Financial assets 8 140,373 133,031 Deferred tax assets 18.4 90,936 81,447 Current assets 316,817 299,102 Inventories 11 13,854 13,568 Trade and other receivables 8 188,574 162,621 Other financial assets 8 39,430 49,606 Other current assets 8,304 8,147 Cash and cash equivalents 12 66,655 65,160 Total assets 1,389,649 1,349,120
EQUITY AND LIABILITIES (Thousands of euros) Notes 2011 2010 Equity 35,621 84,979 Share capital 13.1 24,577 24,577 Share premium 9,500 9,500 Treasury shares 13.2 (184) (184) Retained earnings 13.3 78,931 97,976 Translation differences (123,011) (98,304) Loss for the year attributable to equity holders of the parent (25,421) (19,045) Non-controlling interests 13.4 71,229 70,459 Non-current liabilities 881,786 843,646 Bonds 14 654,518 602,431 Bank borrowings 15 108,434 126,457 Other creditors 16 58,631 64,474 Provisions 17 14,233 17,007 Deferred tax liabilities 18.4 45,970 33,277 Current liabilities 472,242 420,495 Bonds 14 6,118 9,785 Bank borrowings 15 80,392 79,630 Suppliers 125,600 104,952 Other creditors 16 222,091 197,007 Current income tax payable 18.2 38,041 29,121 Total equity and liabilities 1,389,649 1,349,120
F-20
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
2
Cirsa Gaming Corporation Group Consolidated statement of comprehensive income for the years ended December 31
(Thousands of euros) Notes 2011 2010 Gaming income 1,583,602 1,607,111 Other operating income 163,192 167,092 Total operating revenues 1,746,794 1,774,203 Bingo prizes (247,715) (310,066) Variable rent (241,897) (219,673) Net operating revenues 3.1 1,257,182 1,244,464 Consumptions (86,737) (87,579) Personnel 20.1 (224,806) (228,572) External supplies and services 20.2 (245,192) (253,429) Gaming taxes (410,446) (414,863) Depreciation, amortization and impairment 5, 6 and 7 (149,551) (140,418) Change in trade provisions (5,511) (4,556) Finance income 11,085 11,088 Finance costs (107,521) (92,316) Change in financial provisions (395) (1,685) Share of the associates’ profit 8.1 66 238 Foreign exchange results 20.3 (6,231) (477) Results on sale/disposals of non-current assets (5,159) (9,390) Profit before income tax 26,784 22,505 Income tax expense 18.2 (43,704) (33,097) Net loss (16,920) (10,592) Other comprehensive income (loss) Translation differences (27,665) (12,775) Other comprehensive loss for the year (27,665) (12,775) Total comprehensive loss for the year (44,585) (23,367) Net profit (loss) attributable to:
Equity holders of the parent (25,421) (19,045) Non-controlling interests 13.4 8,501 8,453 (16,920) (10,592)
Total comprehensive income (loss) attributable to: Equity holders of the parent (50,128) (30,400) Non-controlling interests 13.4 5,543 7,033 (44,585) (23,367)
F-21
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
3
Cirsa Gaming Corporation Group Consolidated statement of changes in equity for the years ended December 31
(Thousands of euros)
Share capital
(Note 13.1) Share
premium
Treasury shares
(Note13.2)
Retained earnings
(Note 13.3) Translation differences
Non-controlling interests
(Note 13.4)
Total
At December 31, 2009 24,577 9,500 (184) 125,522 (86,949) 18,381 90,847 Net profit for the year 2010 - - - (19,045) - 8,453 (10,592) Other comprehensive income (loss) - - - - (11,355) (1,420) (12,775) Total comprehensive income (loss) for the year 2010 (19,045) (11,355) 7,033 (23,367) Other changes: � Changes in percentage of
business combinations in the year - - - - - 20,870 20,870 � Dividends paid - - - - - (8,696) (8,696) At December 31, 2010 24,577 9,500 (184) 78,931 (98,304) 70,459 84,979 Net profit for the year 2011 - - - (25,421) 8,501 (16,920) Other comprehensive income (loss) - - - - (24,707) (2,958) (27,665) Total comprehensive income (loss) for the year 2011 - - - (25,421) (24,707) 5,543 (44,585) Other changes: � Additions in the year – Creation of
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
4
Cirsa Gaming Corporation Group Consolidated statement of cash flows for the years ended December 31
(Thousands of euros) Notes 2011 2010 Cash-flows from operating activities Profit before tax 26,784 22,505 Adjustments to profit:
Changes in operating provisions 5,511 4,556 Depreciation and amortization of non-current assets 5, 6 and 7 149,551 140,418 Losses from sales and disposals of non-current assets 5,159 9,390 Finance income and costs 96,765 82,675 Exchange losses 20.3 6,231 477 Other income and expenses 1,895 1,000
Change in: Inventories 812 3,700 Trade and other receivables 2,223 2,668 Suppliers and other payables 399 4,387 Gaming taxes payable 2,494 (3,419) Other operating assets and liabilities (11,448) (15,240)
Income tax paid (42,829) (26,697) Net cash-flows from operating activities 243,547 226,420 Cash-flows from (used in) investing activities Purchase of property, plant and equipment (127,534) (105,368) Purchase of intangibles (32,632) (35,380) Proceeds from disposal of property, plant and equipment 4,865 1,101 Acquisition of business, net of cash acquired (14,905) (30,800) Current account with Nortia Business Corporation, S. L. – Outflows (56,800) (74,722) Current account with Nortia Business Corporation, S. L. – Inflows 56,800 74,722 Other financial assets (10,399) (14,638) Interest received and cash revenues from financial assets 6,419 6,760 Net cash-flows used in investing activities (174,186) (178,325) Cash-flows from (used in) financing activities Proceeds from bank borrowings 1,093,707 2,071,907 Repayment of bank borrowings (1,111,001) (2,097,969) Repayment of bonds (239,485) (278,000) Issue of bonds 14 285,700 391,600 Acquisition of own bonds 14 (4,200) (10,000) Finance leases (12,332) (12,135) Interest paid (96,301) (88,787) Funds from loans from Nortia Business Corporation, S.L. 22.200 - Other (5.606) (9.604) Net cash-flows used in financing activities (67.318) (32,988)
Net variation in cash and cash equivalents 2,043 15,107 Net foreign exchange difference on cash balances (548) (258) Cash and cash equivalents at January 1 65,160 50,311 Cash and cash equivalents at December 31 12 66,655 65,160
F-23
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
5
1. DESCRIPTION OF THE GROUP 1.1 Group activity Cirsa Gaming Corporation, S. A. (hereinafter “the Company”) and its controlled entities (hereinafter “the Group”) consist of a set of companies operating in the gaming and leisure sector, carrying out the following activities:
• Designing and manufacturing slot machines, which are sold to Group companies and third parties, and development of interactive gaming systems
• Operating, both in Spain and abroad, slot machines, bingo halls, casinos and lotteries
1.2 Composition and structure of the Group The Company, domiciled in Terrassa (Barcelona) at Carretera Castellar, 298, belongs to a group, of which Nortia Business Corporation, S.L., also domiciled in Terrassa (Barcelona), is the parent company. The companies invested by the Company at December 31, 2011 and 2010 are detailed in the Appendix I, grouped in the following categories: • The subsidiaries are companies where most of the voting rights are controlled either directly or
indirectly by the Company so that it can manage the financial and operating policies in order to obtain profit from the investment.
• The jointly controlled companies are entities ruled by a contractual arrangement between the
partners whereby they establish joint control on the business, which requires the unanimous consent of the venturers regarding the operating decisions.
• The affiliated companies are enterprises not included in the previous two categories and in which
there is an ownership interest on a long-term basis that favors their activity, but with limited influence over their management and control.
(NOTE: The column percentage of ownership in the Appendix is obtained by multiplying the different successive percentages along the corresponding chain of control, thereby reflecting the final ownership at the Company’s level).
F-24
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
6
1.3 Variations in the consolidation perimeter During 2011 and 2010, the Group’s legal structure has experienced certain changes, as described below: 2011
• Acquisition of companies (Thousands of euros)
% voting
rights
Consolidation method
Total assets included in the consolidated statement of
financial position at December 31, 2011
Operating revenues included in the 2011
consolidated statement of
comprehensive income
Gonmatic, S.L. 100% Full 6,898 2,539 Recreativos OVE, S.L. 100% Full 3,540 1,009 Gestión Integral de Máquinas
Recreativas, S.L. 100% Full
340 57 Binbaires, S.A. 33% Proportional 4,277 2,668 La Barra de Panamá, S.A. 100% Full 658 3,242 Agrup. de Explotaciones Recreativas y de
Juego, S.L. 25% Proportional
701 108 Bingo Electrónico de Euskadi, S.L. 25% Proportional 75 - Enjoy with us, S.L. 50% Proportional 289 45 16,778 9,668 Data regarding 2011 business combinations are included in Note 4.
• Creation of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2011
Operating revenues included in the 2011 consolidated
statement of comprehensive income
Sportium Apuestas Navarra, S.A. 11,019 - Sportium Apuestas Aragón, S.L.U. 1,739 - Sportium Apuestas Levante, S.A.U. 1,002 - IVISA – Casino Buenos Aires, UTE 6,553 9,761 CirsaCom, S.R.L. 558 - Recreativos del Istmo, S.A. 3,613 2,111 Ancon Entertainment, S.A. 11,133 1,165 Binred Madrid, S.A. 49 - Servicios Especialidades del Juego, S.A. de C.V. 275 796 Administradores de Personal y Entretenimientos, S.A. de C.V. 399 988 Cirsa Digital, S.A.U. 890 2 B2B Central de Reporting, S.A. de C.V. 3 - Pol Management Corporation, B.V. 5 - La Barra de Ancón, S.A.U. 327 185 Bingos Electrónicos de Panamá, S.A. 227 - 37,792 15,008
• Sale of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2011
Operating revenues included in the 2011 consolidated
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
7
• Changes in percentage of ownership Consolidation method Percentage 2011 2010 At December 31, 2011 At December 31, 2010 Bumex Land, S.L. Full Proportional 65.3% 50.00% • Other changes in the perimeter
(a) Dissolution and liquidation of dormant companies:
Accord Investment, S.A. Blu Game Europa, S.R.L. Unidesa Venezuela, C.A. Infinity Games, Ltda Udesa (b) Dissolution of companies due to merger within the Group:
comprehensive income Accord Investment, S.A. 8,469 33,007 Universal de Casinos, S.A. 32,707 35,015 Edmo, S.R.L. 5,631 13 Hispania Investment, S.A. 626 681 47,433 68,716 Accord Investment, S.A. has ownership interests in several joint ventures (All Games, S.R.L., Andy Games, S.R.L., Giochigenova, S.R.L., Intensa Giochi, S.R.L., Royal Games, S.R.L., Royalbet, S.R.L., Royal Bet, S.R.L., SGR, S.R.L., Happy Games, S.R.L. and Fly Games, S.R.L.). Note 4 includes information on business combinations of the year. Edmo, S.R.L. is the mere owner of a real estate property, so its acquisition represents an indirect acquisition of assets, and as such is recognized in these consolidated financial statements, instead of being recognized as a business combination.
F-26
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
8
• Creation of companies The Group has not created any new companies in 2010.
• Sale of companies
(Thousands of euros)
Total assets included in the consolidated
statement of financial position at
December 31, 2009
Operating revenues included in the 2009
consolidated statement of
comprehensive income Full Games, S.R.L. 166 1,266 Restaurante Jai Alai de Acapulco, S.A. 31 - Valenciana de Productos Eléctricos, S.L. 409 -
606 1,266 • Changes in percentage of ownership Consolidation method Percentage
At December 31,
2010 At December
31, 2009 At December
31, 2010
At December 31, 2009
Complejo Hotelero Monte Picayo, S.A. Full Proportional 100.00% 50.00% Jesalí, S.A. Full Proportional 100.00% 50.00% Promociones e Inversiones de Guerrero, S.A. Full Full 100.00% 96.00% Winner Group, S.A. Full Full 50.01% 75.00% Bumex Land, S.A. Proportional Full 50.00% 60.00% Inversiones Interactivas, S.A. Full Proportional 70.00% 70.00% Integración Inmobiliaria World de México, S.A. Full Full 100.00% 96.00% Global Gaming, S.A. Full Full 100.00% 70.00%
The changes in non-controlling interests arisen from the operations to change the consolidation method are shown in Note 4. The changes in percentages of ownership that have not resulted in a change in the consolidation method are as follows: (Thousands of euros)
Changes in non-controlling interests
Changes in accumulated results
Promociones e Inversiones de Guerrero, S.A. 5,467 (5,467) Winner Group, S.A. 27,293 (22,082) Other 111 -
32,871 (27,549) • Other changes in the perimeter
(a) Dissolution and liquidation of dormant companies:
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
9
(b) Dissolution of companies due to merger within the Group:
Inversiones Larimar, S.A. Padova Giochi, S.R.L. Juan Carlos Espinilla, S.L.
Prodigy Investment Corporation Global Britton 07, S.L.
Lucky Games, S.A. 2. BASIS OF PRESENTATION AND ACCOUNTING STANDARDS 2.1 Basis of presentation The 2011 consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union published by the International Accounting Standards Board (IASB) and further interpretations. The Company belongs to a group, whose parent is Nortia Business Corporation, S.L. (Nortia Group), domiciled in Terrassa (Spain). The Company meets the criteria for exemption from preparing consolidated financial statements under article 43 of the Commercial Code. Consequently, these consolidated financial statements are considered voluntary. The consolidated financial statements of Nortia Group and the consolidated management report for the year ended December 31, 2010 were approved on March 31, 2011 and filed with the Barcelona Mercantile Registry together with the corresponding audit report. The consolidated financial statements and consolidated management report for the year ended December 31, 2011 will be approved in the due manner and filed, together with the audit report, with the Barcelona Mercantile Registry according to the legal deadlines. The financial statements of the companies composing the Group for the year ended December 31, 2011 have not yet been submitted for approval by the shareholders in general meeting. Nevertheless, the Board of Directors of the Company expects that they will be approved without modification and, therefore, will not have any impact on the present consolidated financial statements. The accounting policies applied in the preparation of the accompanying consolidated financial statements comply with the IFRS prevailing at the date of their preparation. For certain cases, the IFRS-EU provide alternative applications. The options applied by the Group are described in the accounting policies listed in the accompanying notes. For comparative purposes, the accompanying consolidated financial statements, which have been prepared at historical cost, include the figures of 2011 in addition to those of 2010 for each item of the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows, and the consolidated notes thereto, except for the information on late payment of suppliers in commercial transactions.
Information on late payment to suppliers in commercial transactions
2010 was the first year in which the Resolution of December 29, 2010, passed by the Institute of Accounting and Auditors of Accounts ("Instituto de Contabilidad y Auditoría de Cuentas" in Spanish), is applicable to the information concerning late payment to suppliers in commercial transactions, to be included in the notes to the financial statements. By virtue of the stipulations in Transitional Provision Two for first-time application, the Company only provided information related to the overdue amounts payable to suppliers which at year end exceeded the legal payment deadline. This information is only presented regarding the companies located in Spain consolidated using the full consolidation method.
Taking into account the paragraph above, 2011 has been the first year in which the Company has presented information on: i) total amounts paid to suppliers in the current year, differentiating between
F-28
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
10
payments exceeding the legal late payment limit; ii) the exceeded weighted average deadline of payments; and (iii) overdue balances payable to suppliers which at year end exceed the legal payment deadline. Therefore, it will not be possible to compare the information provided in 2010, for first-time application of the abovementioned Resolution, with the information presented in the current year. Classification of Venezuela as a hyperinflationary economy Throughout 2009 and in the first days of 2010, a number of factors arose in the Venezuelan economy that led the Group to reconsider the treatment it followed with respect to the translation of the financial statements of investees, as well as the recovery of its financial investments in that country. Within these factors it was worth highlighting the level of inflation reached in 2009 and the cumulative inflation over the last three years; the restrictions to the official foreign exchange market and, finally, the devaluation of the Bolivar fuerte by decision of the Government on January 8, 2010. As a result, in accordance with the applicable standard, Venezuela had to be considered as a hyperinflationary economy in 2009. The main implications of this were as follows:
� Adjustment of the historical cost of non-monetary assets and liabilities and the various items of equity of these companies from their date of acquisition or inclusion in the consolidated statement of financial position to the end of the year to reflect the changes in purchasing power of the currency caused by the inflation. The cumulative impact of the accounting restatement to adjust for the effects of hyperinflation for years prior to 2009 was reflected in the translation differences at the beginning of the 2009 financial year.
� Adjustment of the consolidated statement of comprehensive income to reflect the financial loss caused by the impact of inflation in the year on net monetary assets (loss of purchasing power).
� The various components of the consolidated statement of comprehensive income and statement of cash flows were adjusted according to the inflation index since their generation, with a balancing entry in financial results.
� All components of the financial statements of the Venezuelan companies have been translated at the closing exchange rate, which at December 31, 2011 was to 11.29 Bolivares fuertes per euro (5.75 Bolivares fuertes per euro at December 31, 2010).
At December 31, 2011 and 2010 the Venezuelan economy continued to be considered hyperinflationary in terms of IFRS application, and the main impacts for 2011, 2010 and 2009 are as follows:
(Thousands of euros) 2011 2010 2009 Revenue 1,413 3,774 4,107 EBITDA 411 1,227 1,914 Profit (loss) in the net monetary position* (1,327) (3,629) (4,857) Net income (1,587) (4,725) (5,248)
*Loss in the net monetary position is included in the financial expense of the consolidated statement of comprehensive income. The Venezuelan consumer price index issued by the Central Bank of Venezuela was used to identify inflation rates. Its value at December 31, 2011 and 2010 was 265.6 and 208.2, with an increase during 2011 and 2010 of 27% and 71%, respectively.
F-29
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
11
2.2 Estimates and judgments The preparation of the consolidated financial statements requires the management of the Group to exercise judgment, to make estimates and to make assumptions which affect the application of the accounting policies and the recorded amounts of assets, liabilities, revenues and expenses. The estimates and assumptions taken into account have been based upon historical experience and other factors which were considered to be reasonable in the light of the circumstances. Consequently, the actual results could differ from those assumptions. The estimates and assumptions are reviewed periodically, such that any changes made in accounting estimates are posted in the period in which they are reviewed, in the event that such review only affects that period, or in the period of the review and future periods if the revision affects both. The key estimates and judgments are as follows: • Impairment of assets The Group assesses for impairment at year end for all non-financial assets which carrying amount could be unrecoverable. Goodwill and intangible assets with an indefinite useful life are tested for impairment annually, or when there is evidence of impairment, based on financial projections and estimates of future operating cash flows. In 2011 the Group has recognized goodwill impairment losses amounting to 15.3 million euros (2010: 19.3 million euros) (Note 5). • Non-current assets with finite useful life The Group reviews periodically useful lives of non-current assets, adjusting prospectively amortization methods where applicable. In 2011 and 2010 it was not necessary to make any adjustment in the useful life of non-current assets with definite useful lives. • Recoverability of deferred tax assets When the Group or a group company recognizes deferred tax assets, the estimated taxable profits that will be generated in future years are reviewed at year end in order to assess their recoverability, and any impairment loss is recognized accordingly. At December 31, 2011 the Group has recognized deferred tax assets amounting to 90,936 thousand euros (2010: 81,447 thousand euros), as described in Note 18.4. • Provisions for taxes and other risks Provisions are recognized for taxes and risks that will probably arise based on related studies. At December 31, 2011 the Group has recognized provisions for taxes and other risks amounting to 14,233 thousand euros (2010: 17,007 thousand euros), as described in Note 17. • Business combinations and goodwill The Group assesses for each business combination, the fair value of assets, liabilities and acquired contingent liabilities, allocating the cost of the business combination to the identified elements. Likewise, goodwill arising from the acquisition is assigned to its corresponding cash-generating unit, based on expected synergies, for subsequent impairment tests (Note 5). 2.3 Changes in accounting policies and disclosure of information effective in 2011 The accounting policies applied in the preparation of the consolidated financial statements for the year ended December 31, 2011 are the same as those used in the prior year, except for the adoption, on January 1, 2011, of the following standards, amendments and interpretations published by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee, and adopted by the European Union for its application in its member states.
F-30
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
12
IAS 32 “Classification of rights issues” This amendment changes the definition of financial liability mentioned in IAS 32. As a result, the rights issues, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency are equity instruments if they are offered pro-rata to all the existing owners of the same class of the entity’s own non-derivative equity instruments. The adoption of this amendment has had no impact on the financial position or performance of the Group. IAS 24 “Related party disclosures” The following amendments are included in this standard: the definition of related party is clarified and a partial exemption is included for government-related entities, which requires the disclosure of information regarding balances and transactions with them, only if they are significant, taken individually or collectively. The adoption of these amendments has had no impact on these consolidated financial statements. IFRIC 14 “Prepayments of a minimum funding requirement” This amendment is applied in specific circumstances in which the company is required to make annual minimum contributions related to its defined benefit post-employment plans and make early payments to meet such requirements. The amendment permits the company to recognize the economic benefits arisen from prepayments as an asset. The adoption of these criteria has had no impact on the financial position or performance of the Group. IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” This interpretation establishes that when the terms of a financial liability are renegotiated and, as a result, the entity issues equity instruments to the creditor to extinguish all or part of the financial liability, the instruments issued are considered part of the consideration paid to extinguish the financial liability. These equity instruments are measured at their fair value, unless it cannot be reliably estimated. In such case, the new instruments should be measured to reflect the fair value of the financial liability extinguished; and any difference between the carrying amount of the financial liability extinguished and the initial value of the equity instruments issued is recognized in the income statement for the period. The adoption of the criteria included in this new interpretation has had no impact on the financial position or performance of the Group. Improvements to IFRS (May 2010) In May 2010, the ISAB issued its third omnibus of amendments to standards within the framework of the annual improvement process, with a view to removing inconsistencies and clarify wording. There are separate transitional provisions for each standard. The adoption of the following amendments results in a change in the accounting policies, but has had no impact on the financial position or performance of the Group.
• IFRS 3 Business combinations: The possible measurement options for minority interest have been amended. Only the components of minority interest in the acquiree that are present ownership interests and entitle their holder to a proportionate share of the entity’s net assets in the event of liquidation should be measured at either fair value or at the proportionate share that the present equity instruments represent in the recognized amounts of the acquiree’s identifiable net assets. All other components of minority interest are measured at their acquisition date fair value.
• IFRS 7 Financial Instruments - Disclosures: The amendment is intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by requiring qualitative information to put the quantitative information in context. Cirsa has included the disclosures required.
• IAS 1 Presentation of Financial Statements: The amendment clarifies that an entity may present an analysis of each component of other comprehensive income either in the statement of changes in equity or in the notes to the financial statements.
F-31
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
13
• IAS 34 Interim Financial Statements: The amendment requires additional disclosures for fair values and changes in classification of financial assets, as well as changes to contingent assets and liabilities in interim condensed financial statements.
• IFRS 3 Business combinations: It clarifies that the contingent consideration arising from a business combination prior to the adoption of IFRS 3 (as revised in 2008) is accounted for under IFRS 3 (2005).
• IFRS 3 Business combinations: It clarifies the accounting treatment in a business combination of the acquirer’s share-based payment agreements replaced by the agreements held by the acquiree’s employees.
• IAS 27 Consolidated and separate financial statements: Adoption of transition requirements for amendments made as a result of IAS 27 (revised in 2008).
• IFRIC 13 Customer loyalty programmes: In determining the fair value of award credits, an entity must consider the discounts and incentives that would be offered to customers who have not earned award credits.
Changes adopted in 2010 In 2010, the Group adopted the following new accounting standards that had no significant impact on the reported figures or the presentation and disclosure of the financial statements.
• IFRS 3 (2008), Business combinations.
• Amendment to IAS 27, Consolidated and separate financial statements.
• IFRIC 12 Service Concession Agreements. The impacts of this standard were included and described in the 2010 consolidated financial statements.
• IFRIC 15 Agreements for the Construction of Real Estate.
• IFRIC 17 Distributions of Non-cash Assets to Owners.
• IFRIC 18 ‘Transfers of Assets from Customers’
• Changes in IFRS 5 ‘Non-current assets held for sale and discontinued operations’ included in improvements in IFRSs issued in May 2008.
• Improvements in IFRSs issued in April 2009.
F-32
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
14
2.4 Standards and interpretations approved by the European Union but not yet mandatory in
the current year
The Group has not adopted any early standard, interpretation or modification published which has not yet come into force.
The Group is currently analyzing the effect that the following amendment, issued by the IASB and approved by the European Union, but not effective yet, could have on the accounting policies, the financial position or the performance of the Group:
• Amendment to IFRS 7 “Disclosures – Transfers of financial assets”: Effective for annual periods beginning on or after July 1, 2011.
2.5 New standards and interpretations issued by the IASB and not yet approved by the
European Union At the date of preparation of these consolidated financial statements, the following standards, amendments and interpretations had been issued by the IASB, but were not yet mandatory and had not been approved by the European Union.
• Amendment to IAS 12 “Deferred taxes– Recovery of Underlying Assets”, effective for annual periods beginning on or after January 1, 2012.
• Amendments to IAS 1, Presentation of Items of Other Comprehensive Income, effective for annual periods beginning on or after July 1, 2012.
• IFRS 9, Financial instruments, effective for annual periods beginning on or after January 1, 2013.
• IFRS 10, Consolidated Financial Statements, effective for annual periods beginning on or after January 1, 2013.
• IFRS 11, Joint Arrangements, effective for annual periods beginning on or after January 1, 2013.
• IFRS 12, Disclosure of Involvement with Other Entities, effective for annual periods beginning on or after January 1, 2013
• IFRS 13, Fair value measurement, effective for annual periods beginning on or after January 1, 2013.
• IAS 19 revised, Employee Benefits, effective for annual periods beginning on or after January 1, 2013.
• IAS 27 revised, Separate Financial Statements, effective for annual periods beginning on or after January 1, 2013.
• IAS 28 revised, Investments in Associates and Joint Ventures, effective for annual periods beginning on or after January 1, 2013.
• IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, effective for annual periods beginning on or after January 1, 2013.
• Amendment to IFRS 7 Transfer of Financial Assets, effective for annual periods beginning on or after January 1, 2013.
• Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities, effective for annual periods beginning on or after January 1, 2014.
F-33
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
15
If adopted, none of the abovementioned standards and interpretations would have an impact on the Group’s financial statements, except for the change in the consolidation method of multigroup companies that are currently consolidated using the proportional consolidation method and that as of January 1, 2013 will have to be consolidated under the equity method. 2.6 Consolidation methodology The consolidation methodology is described in the following sections: Consolidation methods The methods applied in the consolidation process are as follows: • Full consolidation method for subsidiaries • Proportional consolidation method for jointly controlled companies • Equity method for affiliated companies Harmonization The financial year of the companies within the consolidation perimeter ends on December 31. For consolidation purposes the corresponding 2011 financial statements of each company have been used. The accounting principles applied by the companies comply with Group policies and, accordingly, no harmonization adjustments were necessary. Elimination of intergroup transactions The intercompany balances arising from financial operations, rental agreements, payment of dividends, financial assets and liabilities, purchase and sale of inventories and non-current assets and rendering of services have been eliminated. In regard with purchase and sale transactions, the unrealized margin on assets, as well as depreciation, has been adjusted in order to show the assets at their original cost to the Group. Translation of financial statements in foreign currency The financial statements of foreign companies have been translated into euros prior to their consolidation following the year-end rate method, except for the financial statements of Venezuelan companies as stated in Note 2.1. Accordingly, assets and liabilities are translated at the spot rate prevailing at December 31, capital and reserves at the historical rates, and revenues and expenses at the averages rate for the year. Differences arisen from this process have been recorded directly under Translation differences in net equity. 2.7 Business combinations When Group gains control over one constituted business, or directly over a business’ net assets, the consideration transferred is assigned to assets and liabilities, measured at fair value. The difference between the sum of fair values and the sum of the consideration transferred plus the amount of any non-controlling interest in the acquiree at acquisition date is recognized as goodwill where it is positive or as income in the consolidated statement of comprehensive income where the difference is negative. The consideration transferred in a business combination is measured at fair value. This is calculated as the sum of the acquisition fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree, and the equity interests issued by the acquirer. The costs related to the acquisition, such as finder’s fees, advice, legal, accounting valuation and other professional or consulting fees, are recognized as expenses in the years when they are incurred and the services are provided.
F-34
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
16
2.8 Intangible assets Intangible assets are initially measured at acquisition cost less accumulated amortization and any impairment loss. Goodwill is not amortized for having indefinite useful life. Instead, it is tested for impairment at least annually as well as non-amortized intangible assets. Likewise, the net carrying amount of intangible assets having finite useful life is tested for impairment when there is evidence or changes of not recovering the carrying amount, similar to the criteria established for property, plant and equipment. Research expenses are charged to expenses when incurred, while development costs related to an individual project are capitalized when the Group can demonstrate the technical feasibility and profitability, the availability of financing resources and incurred costs can be measured reliably. Development expenses to be capitalized, including the cost of materials, personnel expenses directly attributable and a fair proportion of overheads, are amortized using the reducing balance amortized method (50% the first year) over the period for which they expect to obtain profits or income from such project, which generally comprises three years. Amounts paid to the owners of the sites where the slot machines are located on an exclusivity basis are capitalized as installation rights. They are amortized on a straight-line basis over the contract term. Administrative concessions are amortized on a straight-line basis, according to the concession term, as well as transfer rights of leased premise Software is amortized on a straight-line basis over three years. 2.9 Property, plant and equipment Property, plant and equipment are measured at acquisition cost less accumulated depreciation and any recognized impairment loss. The Group assesses whether there is an indication that the net carrying amount of property, plant and equipment may be impaired. If any indication exists, assets or cash-generating units are recorded at their recoverable amount. Expenses for repairs which do not prolong the useful life of the assets, as well as maintenance expenses, are taken to the consolidated statement of comprehensive income in the year incurred. Expenses incurred for expansion or improvements which increase the productivity or prolong the useful life of the asset are capitalized. Future expenses for restoring and retirement are recognized, at present value, as a cost component, with a liability provision as counterpart. Depreciation charges are calculated over the estimated useful lives of the assets. Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful life. The declining balance depreciation is used alternatively for some assets, basically slot machines, since it better follows the actual pattern of income related to these assets.
Method Rate Commercial buildings (new/used) and plant Straight line 2-4% Riverboats Straight line 6,6% Production installations (new/used) Straight line 8-16% Other installations Straight line 8-12% Production machinery Straight line 10% Other production equipment Straight line 20% New slot machines (“A” and “B” / “V” and “C”) Declining/Straight line 20% Used slot machines Straight line 40% Furniture (new/used) Straight line 10-20% Vehicles (new/used) Declining/Straight line 10-32% Tools and furniture (new/used) Straight line 30-60% EDP equipment (new/used) Declining/Straight line 25-50% Molds and dices Straight line 25% Other PP&E items Straight line 16%
F-35
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
17
The finite useful life of exploiting slot machines is necessarily subject to exogenous factors (mainly market and competence) of difficult forecast. In the event that such equipment completes its useful life before the base period used for depreciation, the net balance of the related good at the removal date is charged as depreciation for the year, given its recurrent and typical features, as well as its corrective nature of systematic depreciation performed on related goods. 2.10 Investments in associates Investments are accounted for under the equity method, i.e. they are accounted initially at cost and its carrying amount is increased or decreased in order to recognize the part of the result of the invested company attributed to the Group from the acquisition date. Part of the profit (loss) for the year of the invested company is recorded in the Group consolidated statement of comprehensive income. Dividends received reduce the amount of the investment. Changes in the invested company’s equity different than those generated by income of the period are directly recorded as changes in the Group’s net equity. 2.11 Financial assets Financial assets are initially recorded at fair value. For investments not measured at fair value with changes in results, directly attributable transaction costs are added. The Group establishes the classification of financial assets at the initial recognition, and, when appropriate and allowed, the classification is assessed again at each year end. Available-for-sale financial assets Available-for-sale financial assets are non-derivative instruments having neither maturity date (or not expected to be held until maturity), nor nature of trading portfolio, nor derived from trading activities or Group loans. Upon initial recognition, where possible, they are measured at fair value, recognizing changes in fair value directly within a separate caption in equity until the investment is derecognized or impaired, at which time the accumulated profit or loss previously recorded in equity is taken to the consolidated statement of comprehensive income. In 2011 and 2010 the Group available-for-sale investments have been measured at acquisition cost, since they cannot be measured reliably at fair value. Loans and receivables The Group recognizes in this category trade and non-trade receivables, which include financial assets with fixed or determinable payments not quoted on active markets and for which the Group expects to recover the full initial investment, except, where applicable, in cases of credit deterioration. Following initial recognition, these financial assets are measured at amortized cost. Nevertheless, non-trade receivables which mature within less than one year with no contractual interest rate, as well as prepayments and loans to personnel, the amount of which is expected in the short term, are carried at nominal value both at initial and subsequent measurement, when the effect of not discounting cash flows is not significant.
F-36
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
18
2.12 Cancelation of financial assets and liabilities
Financial assets (or, when applicable, part of a financial asset or part of a group of similar financial assets) are derecognized when:
− Rights to related cash flows have expired; − The Group has retained the right to receive related cash flows, but has assumed the liability of
fully paying them within the established terms to a third party under a transfer agreement; − The Group has transferred the rights to receive related cash flows and (a) has substantially
transferred the risks and rewards incidental to the ownership of the financial asset, or (b) has not transferred or retained the asset’s risks and rewards, but has transferred the control over the asset.
Financial liabilities are derecognized when the related liability is settled, cancelled or expired. When a financial liability is replaced for other from the same borrower but with substantially different terms, or the conditions of the existing liability are substantially modified, such change or modification is recorded as a disposal of the original liability and an addition of a new liability. Difference of related carrying amounts is recognized in the consolidated statement of comprehensive income. 2.13 Inventories Inventories are accounted for at the lower of the acquisition cost and the recoverable amount. The recoverable amount of raw materials is the replacement cost. Nevertheless, no provision is set aside for raw materials and other consumables used in production, if the finished products in which they are incorporated are sold above cost. The recoverable value of finished products corresponds to the estimated sales price less related selling expenses. The cost value of finished products includes materials measured at the weighted average acquisition price, third-party work, labor and production overhead. 2.14 Cash and cash equivalents This heading includes cash, current accounts, bank deposits and other financial investments maturing within less than three months from the acquisition date, provided that risks of the substantial alteration of their value are not significant. In terms of the consolidated statement of cash flows, cash and cash equivalents include the abovementioned concepts, net of bank overdrafts, if applicable. 2.15 Impairment of assets Non-financial assets The Group assesses at each year end whether there is an indication that a non-current asset may be impaired. If any indication exists, and when an annual impairment test is required, the Group estimates the asset’s recoverable amount. The recoverable amount is the higher of the cash-generating unit (CGU) fair value less cost to sell and value in use, and it is established for each separate asset, unless for assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and its carrying amount is reduced to the recoverable amount. To assess value in use, expected cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. Impairment losses from continuing activities are recognized in the consolidated statement of comprehensive income.
F-37
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
19
The Group assesses at year end indicators of impairment losses previously recorded in order to verify whether they have disappeared or decreased. If there are indicators, the Group estimates a new recoverable amount. A previously recognized impairment loss is reversed only if the circumstances giving rise to it have disappeared, since the last loss for depreciation was recognized. In this regard, the asset’s carrying amount increases to their recoverable amount. The reversal is limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset. The reversal is recognized in the consolidated statement of comprehensive income. Upon such reversal, the depreciation expense is adjusted in the following periods to amortize the asset’s revised book value, net of its residual value, systematically over the asset’s useful life. Financial assets The Group assesses at year end if financial assets or group of financial assets are impaired. To assess the impairment of certain assets, the following criteria are applied: • Assets measured at amortized cost If there is objective evidence that there is an impairment loss of loans and other receivables recorded at amortized cost, the loss is measured as the difference between the net carrying amount and the present value of estimated cash flows, discounted at the current market rate upon initial recognition. The net carrying amount is reduced by an allowance, and the loss is recorded in the consolidated statement of comprehensive income. Impairment loss is reversed only if the circumstances giving rise to it have ceased to exist. Such reversal is limited to the carrying amount of the financial asset that would have been recognized on the reversal date had no impairment loss been recognized. In regard with trade and other receivables, when there is objective evidence of not collecting them, an adjustment is made based on identified bad debts risk. • Available-for-sale financial assets If a financial asset available-for-sale is impaired, the difference between its cost (net of any repayment) and present fair value, less any previous impairment loss recognized in equity is taken to the consolidated statement of comprehensive income. Reversals related to equity instruments classified as available-for-sale are not recognized in the consolidated statement of comprehensive income, but the associated increase in value is directly recorded in equity. 2.16 Treasury shares Treasury shares are recorded as a direct decline in the Group’s equity. They are measured at cost value, without recognizing any impairment loss. No gain or loss is recognized in the consolidated statement of comprehensive income on the purchase or sale of the Group’s own equity instruments. 2.17 Provisions Provisions are recognized when: − the Group has a present obligation either legal, contractual or constructive as a result of past
events; − it is probable that an outflow of resources will be required to settle the obligation; and − the amount of the obligation can be reliably measured.
When the effect of the cash temporary value is significant, the provision is estimated as the present value of the future cash flows required to settle the obligation.
F-38
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
20
The discount rate applied in the assessment of the obligation’s present value only corresponds to the temporary value of money and does not include the risks related to the estimated future cash flows related to the provision. The increase of the provision derived from the aforementioned discount is recorded as a financial expense. 2.18 Interest yield loans and credits Loans and credits are initially measured at cost value, which is the fair value of the contribution received, net of issuance costs related to the debt. Upon initial recognition, interest yield loans and credits are recognized at amortized cost using the effective interest rate method, including any issuance cost and discount or settlement premium. 2.19 Translation of balances in foreign currency Transactions in foreign currency are translated at the spot rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated at the spot rate prevailing at the closing date. Unrealized exchange gains or losses are recognized in the consolidated statement of comprehensive income. As an exception, exchange gains or losses arising from intergroup monetary assets and liabilities that reflect investments in foreign subsidiaries are recorded in Translation differences in equity, with no impact on the consolidated statement of comprehensive income. 2.20 Leases Leases are considered to be financial leases when all risks and rewards incidental to ownership of the leased item are substantially transferred to the Group. Assets acquired under financial lease arrangements are recognized as property, plant and equipment at the beginning of the lease term in the consolidated statement of financial position, recording an asset equivalent to the fair value of the leased item or, if lower, the present value at the commencement of the lease of the minimum lease payments. A financial liability is recorded for the same amount. Lease payments are apportioned between finance charges and reduction of the lease liability, in order to maintain a constant interest rate of the outstanding debt. The finance charges are recorded directly in the consolidated statement of comprehensive income. These assets are depreciated, impaired, and derecognized using the same criteria applied to assets of a similar nature. Leases are considered to be operating leases when all risks and rewards incidental to ownership of the leased item are substantially maintained by the lessor. Operating lease payments are recognized as expense in the consolidated statement of comprehensive income when accrued over the lease term. 2.21 Revenues Revenues are recognized when it is probable that the economic benefits from the transaction will flow to the Group and the amount of income and costs incurred or to be incurred can be reliably measured. Revenues from exploiting slot machines are measured at the collected amount. The percentage of the amount collected from slot machines attributable to the owner of the premises where the machine is located is included as operating expense under Variable rent. Revenue from bingo cards are recognized for the total amount of sold cards, based on their face value, while recognizing the prizes granted to players as operating expense. The card cost is recorded in Consumptions, and the gaming tax rate over purchased bingo cards is included under Gaming taxes.
F-39
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
21
Revenue from casinos is recorded for the net amount from the game (“win”), after deducting prizes removed by players. Revenue from sale of finished products is measured when risks and significant benefits incidental to the ownership of the assets have been transferred to the buyer and the outcome can be estimated reliably, circumstance that generally arises with the effective goods delivery. Interest income is recorded based on the time passed, including the asset’s effective yield. 2.22 Restructuring expenses Expenses incurred in restructuring processes, mainly indemnities to personnel, are recognized when a formal and detailed plan exists to perform such process by identifying the main parameters (i.e. main locations, functions and approximate number of affected employees, estimated payments and the implementation schedule) and creating a real and valid expectation among affected employees in regard with the process. 2.23 Income tax Deferred income tax is recognized on all temporary differences at the closing date between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax liabilities are recognized for all temporary differences, except for taxable temporary differences arisen from an acquired goodwill, which amortization is not tax deductible and those arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Likewise, a deferred tax liability is recognized for all taxable temporary differences from investments in subsidiaries, associates or jointly controlled companies, except when both the following conditions are met: (a) when the Group is able to manage the reversal date of the temporary difference and (b) to the extent that the temporary difference will not be reversed in the future. In this regard, when the results are generated in subsidiaries in countries where there is not an agreement to avoid double taxation and the Group’s policy is the repatriation of dividends, the Group records a deferred tax related to the effective amount that would be filed when profits are repatriated. Deferred tax assets are recognized for all deductible temporary differences, tax credits and unused tax loss carryforwards, to the extent that it is probable that future taxable profit will be available against which these assets may be utilized, except for deductible temporary differences arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Furthermore, only a deferred tax asset is recognized for all deductible temporary differences from investments in subsidiaries, associates or jointly controlled companies when both the following conditions met: (a) to the extent that the temporary difference will be reversed in the future, and (b) to the extent that it is probable that future taxable profit will be available against which these temporary differences may be utilized. The recovery of deferred tax assets is reviewed at year end, reducing the amount in assets to the extent that it is probable that future taxable benefits will not be available and consequently these assets could not be utilized. Deferred taxes are measured based on the tax legislation and charge rates enacted or to be enacted, at the date of consolidated statement of financial position. Deferred tax assets and liabilities are not discounted and are classified as non-current assets or non-current liabilities, respectively.
F-40
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
22
2.24 Contingencies When unfavorable outcome of a situation that leads to a potential loss is likely to occur (i.e. more than 50% of possibilities), the Group establishes a provision which is recorded based on the best estimate of present value of expected future disbursement. On the other hand, if expectations of favorable resolution are more likely, no provision is recorded, which is reported in the notes of existing risks, unless the possibility of a negative outcome is clearly considered remote. 2.25 Classification of current and non-current assets and liabilities Assets and liabilities are classified in the consolidated statement of financial position as current and non-current according to their maturity date. Current assets mature within one year from the closing date, and non-current assets mature in more than such period. 3. SEGMENT INFORMATION The Group’s activities are organized and managed separately based on the nature of the provided services and products. Each segment represents a strategic business unit, which provides several services and offers product to different markets. The related operating results are assessed regularly by the Group’s highest management body in order to decide which resources should be allocated to the segment and to assess its yield. The Group has classified as operating segment the identified Group component in charge of supplying a single product or service, or a group of them, which is subject to risks and returns of different nature to those related to other segments within the Group. The main factors considered in identifying the segments have been the nature of products and services, the nature of the production process and the type of customer. Assets, liabilities, income and expenses by segments include those directly and reasonably assignable. The captions not assigned by the Group correspond to deferred tax assets and liabilities accounts. The transfer prices between segments are calculated based on the actual costs incurred, which have been increased by a fair trading margin. 3.1 Operating segments The distribution of detailed operating segments meets the information usually managed by the Management. Segments, as defined by the Group, are as follows: Slots: Owns and operates slot machines in bars, cafes, restaurants and recreation rooms in Spain and Italy. Also provides interconnected machines in Italy. B2B: Designs, manufactures and distributes slot machines and game kits for the Spanish and international market. The division sells directly or through distributors to other divisions of the Group, mainly slot division, and third parties. Casinos: The Group operates with two types of casinos, traditional casinos which include table games and casino slot machines, and electronic casinos which only operate with casino slot machines.
F-41
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2011
23
Bingos: Operation of bingo halls mainly in Spain and to a lesser extent, in Italy and Mexico. These rooms operate through the sale of bingo cards to customers, and to a lesser extent through the operation of slot machines and restoration services. Other segments: Segments that as a whole represent less than 10% of total external and internal revenue, less than 10% of the combined result of all segments with added benefits and less than 10% of total assets, have been considered as irrelevant and no specific information has been provided, grouped under this generic title. The following chart shows information on revenue and results, information about assets and liabilities, and other information related to the different operating segments as for December 31, 2011 and 2010.
F-42
- 24
-
2011
(T
hous
ands
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)
Slot
s
B2B
Cas
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Elim
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ions
and
ot
her
To
tal
A
sset
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seg
men
t
N
on-c
urre
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ed
246,
967
100,
714
565,
257
115,
381
(46,
423)
98
1,89
6 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
- -
- 90
,936
90
,936
C
urre
nt a
sset
s as
sign
ed
121,
850
24,7
28
255,
328
31,2
77
(116
,366
) 31
6,81
7 To
tal a
sset
s 36
8,81
7 12
5,44
2 82
0,58
5 14
6,65
8 (7
1,85
3)
1,38
9,64
9
Liab
ilitie
s by
seg
men
t
Li
abili
ties
assi
gned
(2
92,4
85)
(50,
055)
(5
19,0
36)
(194
,903
) (2
51,5
79)
(1,3
08,0
58)
Liab
ilitie
s no
t ass
igne
d -
- -
- (4
5,97
0)
(45,
970)
To
tal l
iabi
litie
s (2
92,4
85)
(50,
055)
(5
19,0
36)
(194
,903
) (2
97,5
49)
(1,3
54,0
28)
R
even
ue
Sal
es to
ext
erna
l cus
tom
ers
474,
488
56,6
51
488,
809
239,
609
(2,3
74)
1,25
7,18
2 In
terg
roup
sal
es
1,71
1 49
,539
1,
270
1,58
1 (5
4,10
1)
- To
tal n
et o
pera
ting
reve
nue
476,
199
106,
190
490,
079
241,
190
(56,
475)
1,
257,
182
Pr
ofit
for t
he y
ear
EB
ITD
A (*
) 99
,324
20
,587
17
2,53
4 18
,020
(2
0,46
4)
290,
001
Fina
nce
inco
me
4,81
8 8,
022
13,1
37
814
(15,
706)
11
,085
Fi
nanc
e co
sts
(11,
445)
(6
,289
) (3
7,57
3)
(12,
586)
(3
9,62
8)
(107
,521
) P
rofit
bef
ore
inco
me
tax
23,3
02
16,9
32
77,1
61
(22,
574)
(6
8,03
7)
26,7
84
Inco
me
tax
expe
nse
(16,
263)
(4
,173
) (4
2,75
8)
2,43
8 17
,052
(4
3,70
4)
Net
pro
fit fr
om c
ontin
uing
ope
ratio
ns
7,03
8 12
,759
34
,403
(2
0,13
5)
(50,
985)
(1
6,92
0)
N
on-m
onet
ary
expe
nses
D
epre
ciat
ion,
am
ortiz
atio
n an
d im
pairm
ent
(61,
441)
(3
,487
) (6
5,73
3)
(24,
462)
5,
572
(149
,551
) C
hang
es in
trad
e pr
ovis
ions
(3
,383
) (8
54)
(1,2
73)
(1)
- (5
,511
)
Oth
er s
igni
fican
t exp
ense
s
P
erso
nnel
(4
6,19
1)
(19,
426)
(9
8,25
2)
(48,
876)
(1
2,06
1)
(224
,806
) E
xter
nal s
uppl
ies
and
serv
ices
(6
6,53
4)
(20,
149)
(1
13,2
99)
(68,
886)
23
,676
(2
45,1
92)
Gam
ing
taxe
s (2
22,2
69)
(1,0
28)
(94,
013)
(9
2,84
8)
(288
) (4
10,4
46)
O
ther
info
rmat
ion
by s
egm
ents
In
vest
men
t in
non-
curr
ent a
sset
s 57
,117
3,
326
62,7
57
36,5
93
353
160,
146
Inve
stm
ents
in a
ssoc
iate
s 60
8 60
8 73
6 -
944
2,89
6
(*) F
or fi
nanc
ial i
nfor
mat
ion
purp
oses
, EB
ITD
A is
def
ined
as
prof
it (lo
ss) b
efor
e in
com
e ta
x, fi
nanc
ial r
esul
t, ga
ins
(loss
es) f
rom
inve
stm
ents
in a
ssoc
iate
s, g
ains
(los
ses)
fro
m d
ispo
sal/w
rite-
off o
f non
-cur
rent
ass
ets,
cha
nge
in o
pera
ting
prov
isio
ns, a
nd im
pairm
ent c
harg
es, d
epre
ciat
ion
and
amor
tizat
ion.
F-43
Cirs
a G
amin
g C
orpo
ratio
n G
roup
N
otes
to th
e co
nsol
idat
ed fi
nanc
ial s
tate
men
ts fo
r the
yea
r end
ed D
ecem
ber 3
1, 2
011
25
2010
(T
hous
ands
of e
uros
)
Slot
s
B2B
Cas
inos
Bin
go
Elim
inat
ions
and
ot
her
To
tal
A
sset
s by
seg
men
t
N
on-c
urre
nt a
sset
s as
sign
ed
290,
688
65,5
36
590,
469
218,
206
(196
,327
) 96
8,57
2 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
- -
- 81
,447
81
,447
C
urre
nt a
sset
s as
sign
ed
99,9
13
78,8
17
206,
703
44,2
87
(130
,619
) 29
9,10
1 To
tal a
sset
s 39
0,60
1 14
4,35
3 79
7,17
2 26
2,49
3 (2
45,4
99)
1,34
9,12
0
Liab
ilitie
s by
seg
men
t
Li
abili
ties
assi
gned
(2
54,4
27)
(117
,814
) (6
51,3
11)
(193
,000
) (1
4,31
3)
(1,2
30,8
65)
Liab
ilitie
s no
t ass
igne
d -
- -
- (3
3,27
6)
(33,
276)
To
tal l
iabi
litie
s (2
54,4
27)
(117
,814
) (6
51,3
11)
(193
,000
) (4
7,58
9)
(1,2
64,1
41)
R
even
ue
Sal
es to
ext
erna
l cus
tom
ers
432,
497
58,1
96
460,
252
288,
150
5,36
9 1,
244,
464
Inte
rgro
up s
ales
1,
953
33,3
59
1,00
1 1,
458
(37,
771)
-
Tota
l net
ope
ratin
g re
venu
e 43
4,45
0 91
,555
46
1,25
3 28
9,60
8 (3
2,40
2)
1,24
4,46
4
Prof
it fo
r the
yea
r
E
BIT
DA
(*)
88,3
67
16,4
14
142,
188
30,8
97
(17,
844)
26
0,02
2 Fi
nanc
e in
com
e 4,
050
5,36
5 14
,881
90
6 (1
4,11
4)
11,0
88
Fina
nce
cost
s (9
,488
) (7
,096
) (4
2,00
5)
(13,
463)
(2
0,26
4)
(92,
316)
P
rofit
bef
ore
inco
me
tax
25,4
79
9,56
7 50
,013
(1
7,98
7)
(44,
567)
22
,505
In
com
e ta
x ex
pens
e (9
,934
) (3
,191
) (3
0,97
9)
349
10,6
58
(33,
097)
N
et lo
ss
15,5
45
6,37
6 19
,034
(1
7,63
8)
(33,
909)
(1
0,59
2)
N
on-m
onet
ary
expe
nses
D
epre
ciat
ion,
am
ortiz
atio
n an
d im
pairm
ent
(45,
817)
(3
,265
) (6
0,51
0)
(36,
771)
5,
945
(140
,418
) C
hang
es in
trad
e pr
ovis
ions
(3
,840
) (1
09)
(591
) (7
) (9
) (4
,556
)
Oth
er s
igni
fican
t exp
ense
s
P
erso
nnel
(4
5,62
0)
(18,
953)
(9
8,46
5)
(49,
888)
(1
5,64
6)
(228
,572
) E
xter
nal s
uppl
ies
and
serv
ices
(5
6,41
8)
(17,
217)
(1
27,3
42)
(70,
063)
17
,611
(2
53,4
29)
Gam
ing
taxe
s (2
11,4
72)
(779
) (8
2,50
2)
(120
,086
) (2
4)
(414
,863
)
Oth
er in
form
atio
n by
seg
men
ts
Inve
stm
ent i
n no
n-cu
rren
t ass
ets
48,3
70
2,36
4 67
,972
21
,905
13
7 14
0,74
8 In
vest
men
ts in
ass
ocia
tes
578
525
702
81
944
2,83
0
(*) F
or fi
nanc
ial i
nfor
mat
ion
purp
oses
, EB
ITD
A is
def
ined
as
prof
it (lo
ss) b
efor
e in
com
e ta
x, fi
nanc
ial r
esul
t, ga
ins
(loss
es) f
rom
inve
stm
ents
in a
ssoc
iate
s, g
ains
(los
ses)
fro
m d
ispo
sal/w
rite-
off o
f non
-cur
rent
ass
ets,
cha
nge
in o
pera
ting
prov
isio
ns, a
nd im
pairm
ent c
harg
es, d
epre
ciat
ion
and
amor
tizat
ion.
F-44
26
3.2 Geographic segments In the presentation of information by geographic segments, sales are based on the destination country and the assets on their location. The following chart shows this information as for December 31, 2011 and 2010. 2011
4. BUSINESS COMBINATIONS AND ACQUISITIONS OF PARTICIPATING COMPANIES 4.1 2011 The breakdown of the companies in which the Company has gained unilateral and exclusive control in 2011 is summarized as follows: (Thousands of euros)
Name and description of companies and business Acquisition date
% of voting rights
Acquisition price
Fair value of acquired net
assets
Goodwill arising on acquisition
Gonmatic, S.L. (*) October 2011 100% 16,829 16,829 -
Recreativos Ove, S.L. February 2011 100% 2,519 2,519 -
La Barra de Panamá, S.A. April 2011 100% 7 7 - Bumex Land S.L. October 2011 15,3% 432 432 -
19,787 19,787 - The fair value of the net assets acquired from Gonmatic, S.L. includes, apart from the ones contributed by that company itself at the date of acquisition, the fair value of the assets and liabilities contributed by Gestión de Máquinas Recreativas, S.L. (company 100% owned by the latter), and the fair value of the assets of several activity businesses, which amounted to 11,366 thousand euros, acquired in an operation related to the first one and which consisted of several recreational machine stocks in the Spanish market. Consequently, the operation described above has been recognized as a single business combination. The fair value of the assets acquired from Recreativos Ove, S.L. includes, apart from the ones contributed by the company itself at the date of acquisition, the fair value of the assets and liabilities contributed by Gestión de Máquinas Recreativas, S.L. (company 100% owned by the latter).
F-45
27
The figure in column Acquisition price is higher than the amount for that concept shown in the consolidated statement of cash flows, since there are deferred payments regarding business combinations in the current year. The value of identifiable assets and liabilities at the date of gaining control over these acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition Carrying
value Property, plant and equipment 4,247 1,849 Goodwill - 3,874 Intangible assets 11,974 1,882 Other non-current assets 21 21 Current assets 4,840 4,840 Liabilities (including generated deferred taxes) (1,295) (958) 19,787 11,508
If acquisitions had occurred at the beginning of the year, consolidated operating revenue and consolidated profit for the year 2011 would have increased by 7,117 thousand and 95 thousand euros, respectively. Additionally, the Group’s gains contributed by these companies since the acquisition date amount to 85 thousand euros. 4.2 2010 The breakdown of the companies in which the Company has gained unilateral and exclusive control in 2010 (some of which were already invested in in prior years) is summarized as follows:
(Thousands of euros)
Name and description of companies and business
Acquisition date
% of voting rights
Acquisition price
Fair value of acquired net
assets
Non-controlling interests arisen in the business
combination
Goodwill arising on acquisition
Accord Investment, S.A. March 2010 100.0% 3,900 3,900 - -
Universal de Casinos, S.A. May 2010 50.01% 17,700 35,392 17,692 -
Jesalí, S.A./Complejo Hotelero Monte Picayo, S.A. (*) April 2010 100.0% 2,980 2,980 - -
Inversiones Interactivas, S.A. January 2010 70.0% - 3,178 3,178 -
Hispania Investments, S.A. November 2010 100.0% 3,121 708 - 2,413
27,701 46,158 20,870 2,413 (*) In 2010, Cirsa acquired 50% of Jesali, S.A. shares (obtaining 100% of its shares, since it already held the other 50%). In turn, Jesalí, S.A., owned 100% of Complejo Hotelero Monte Picayo, S.A. shares. The Group chose to measure non-controlling interests arisen in these business combinations according to its percentage of ownership applied on the fair value of acquired net assets at the date of gaining control over the company, instead of measuring them at the fair value of its minority financial investment. The figure in column Acquisition price is lower than the amount for that concept shown in the consolidated statement of cash flows, since deferred payments regarding business combinations from prior years were settled in 2010.
F-46
28
The value of identifiable assets and liabilities at the date of gaining control over those acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition Carrying
value Property, plant and equipment 37,803 33,927 Goodwill 2,413 - Intangible assets 14,159 3,540 Financial investments 10,421 10,421 Other non-current assets 77 77 Current assets 28,527 28,547 Liabilities (including generated deferred taxes) (44,829) (40,480) 48,571 36,032
If acquisitions had occurred at the beginning of the year, consolidated operating revenue and consolidated profit for the year 2010 would have increased by 25,700 thousand and 410 thousand euros, respectively. Additionally, the Group’s gains contributed by these companies since the acquisition date amount to 3,518 thousand euros. 5. GOODWILL The breakdown of goodwill by operating segments is as follows: (Thousands of euros) 2011 2010 Bingos 85,977 88,134 Slots 63,733 74,142 Casinos 74,193 75,316 Other 3,478 3,478 227,381 241,070
The balance of goodwill at December 31, 2011 and 2010 is shown net of impairment loss allowances, which according to the applicable accounting standards are not revertible, amounting to 51,580 and 36,301 thousand, respectively. In 2011 an impairment loss on goodwill amounting to 15,279 thousand euros has been recognized basically as a result of the lower expectations in generating cash flows from certain operators in Spain (10,409 thousand euros) and certain bingo halls (2,567 thousand euros). In 2010 impairment losses amounting to 19,300 thousand euros were recognized, basically related to goodwill associated to Spanish bingo halls. The evolution of the goodwill amount recorded in books, net of impairment loss, is as follows: (Thousands of euros) 2011 2010 Balance at January 1 241,070 250,625
Goodwill recognized in the year (Note 4) - 2,413 Impairment losses (15,279) (19,300) Net exchange differences arising during the period 1,590 7,332
Balance at December 31 227,381 241,070
Note 9 includes several elements related to the study on the possible impairment of Group’s assets.
F-47
29
6. OTHER INTANGIBLE ASSETS 6.1 Movements 2011 (Thousands of euros)
January 1,
2011
Additions
Disposals
Transfers
Translation differences and other
December 31, 2011
COST
Development costs and patents
44,454
2,283
-
114
(3)
46,848 Administrative concessions 50,838 6,783 (74) 14,372 575 72,494 Installation rights 121,951 26,740 (11,551) - - 137,140 Transfer rights 3,412 534 (224) 37 (42) 3,717 Software 17,423 841 (51) 77 (165) 18,125 Prepayments and other 33,759 2,406 (5) (14,600) 14 21,574 271,837 39,587 (11,905) - 379 299,898 AMORTIZATION
Development costs and patents
(39,208)
(1,960)
-
-
(11)
(41,179) Administrative concessions (16,939) (4,588) - - (572) (22,099) Installation rights (66,948) (19,270) 9,070 - 4 (77,144) Transfer rights (671) (84) 224 - 19 (512) Software (15,181) (1,282) 50 - 310 (16,103) (138,947) (27,184) 9,344 - (250) (157,037) Impairment loss (5,228) (1,459) - - - (6,687) Net carrying amount 127,662 10,944 (2,561) - 129 136,174 2010 (Thousands of euros)
January 1,
2010
Additions
Disposals
Transfers
Translation differences and other
December 31, 2010
COST Development costs and patents 44,391 1,800 (1,737) - - 44,454 Administrative concessions 24,001 1,282 - 24,472 1,083 50,838 Installation rights 113,963 20,957 (12,969) - - 121,951 Transfer rights 939 2,458 - - 15 3,412 Software 15,763 1,466 (113) - 307 17,423 Prepayments and other 37,728 19,278 - (24,472) 1,225 33,759 236,785 47,241 (14,819) - 2,630 271,837 AMORTIZATION Development costs and patents (37,089) (2,119) - - - (39,208) Administrative concessions (12,446) (2,795) - - (1,698) (16,939) Installation rights (59,392) (17,007) 9,453 - (2) (66,948) Transfer rights (610) (61) - - - (671) Software (12,931) (2,753) 110 - 393 (15,181) (122,468) (24,735) 9,563 - (1,307) (138,947) Impairment loss (6,965) - 1,737 - - (5,228) Net carrying amount 107,352 22,506 (3,519) - 1,323 127,662 Additions in 2011 include the effects of business combinations (Note 4), which amounted to a gross value of 13,243 thousand euros and an accumulated depreciation of 1,701 thousand euros (2010: 14,159 thousand euros of net carrying amount in 2010). These amounts are almost entirely related to installation rights and administrative concessions. Additions in 2011 included in Installation rights mainly relate to the non-refundable payment in exchange of the exclusive rights to operate the premises where the recreational machines are located.
F-48
30
The disposals in this caption mainly relate to installation rights pending amortization in premises which are closed, or it was decided not to operate the machine for profitability reasons. In 2010 additions under Prepayments and other correspond to the payment of the second installment of the concession of 2,583 licenses for video lottery machines in Italy amounting to 19.3 million euros. The total cost of the concession was 38.7 million euros and it was settled in two installments: October 2009 and November 2010. In 2011 transfers under the caption Prepayments and other (see Note 6.3) correspond to licenses of video lottery of Cirsa Italia, SpA in operation at December 31, 2011, and therefore, they have been transferred to Administrative concessions, for an amount of 14.3 million euros. In 2010 transfers under the caption Prepayments and others (Note 6.3) correspond to the following:
• Licenses acquired in 2009 to operate slot machines in Panama amounting to 13.6 million euros. These licenses were effective as of March 10, 2010 and therefore they were transferred in 2010 to the caption Administrative concessions.
• Licenses of video lottery machines of Cirsa Italia SpA in operation at December 31, 2010 and therefore they were also transferred to Administrative concessions for an amount of 10.8 million euros.
6.2 Development costs and patents They correspond mainly to the following: • Industrial companies: Creation of new models of slot machines and technological innovations for
them. Net value as of December 31, 2011 and 2010 is 2,263 and 2,480 thousand euros, respectively.
• Lottery and interactive products companies: Development of software applications for on-line
games. Net value as of December 31, 2011 and 2010 is 3,929 and 3,891 thousand euros, respectively.
The internal cost of developing new models of slot machines and software for on-line games by the B2B division of the Group are capitalized as an increase in the value of developments costs and patents. The total amount of works performed by the Group for the intangible assets in 2011 and 2010 amounted to 1,770 and 1,003 thousand euros, respectively. Research and development expenses recognized as expenses in 2011 amounted to 253 thousand euros (31 December 2010: 709 thousand euros). 6.3 Administrative concessions The gross balance of official licenses to operate as of December 31, 2011 mainly corresponds to:
• An official contract to operate slot machines in Panama amounting to 29,914 thousand euros (28,967 thousand euros at December 31, 2010). The net value of this concession at December 31, 2011 amounts to 15,832 thousand euros (17,826 thousand euros at December 31, 2010).
• Ownership interest in an Argentinean company that operates a lottery employing disabled people amounting to 1,906 thousand euros at December 31, 2011 (2,054 thousand euros at December 31, 2010). The net value of these concessions at December 31, 2011 and 2010 is zero.
• Licenses of video lottery machines acquired by Cirsa Italia S.p.A. for an amount of 25.6 million euros (11.3 million euros at December 31, 2010) (Note 6.1). The net value of this concession at December 31, 2011 is 23.2 million euros (10.7 million euros at December 31, 2010). The increase in 2011 is due to the amount transferred from prepayments to administrative concessions mentioned in Note 6.1.
F-49
31
6.4 Installation rights Installation rights correspond to the amounts paid in exchange for the exclusive use of the premises in which slot machines are located. 6.5 Impairment loss The balance of impairment loss basically covers the net value of certain administrative concessions in Argentina (1,096 and 2,054 thousand euros at December 31, 2011 and 2010, respectively), and investments in research and development projects based on implementing new technologies in the gaming industry (1,745 thousand euros at December 31, 2011 and 2010). The additions in 2011 mainly correspond to the write-down of installation rights of impaired businesses. Note 9 includes several elements in relation to a test of the potential impairment of the Group's assets. 6.6 Other information At December 31, 2011, the net value of intangible assets in foreign companies of the Group amounted to 66,606 thousand euros (2010: 64,315 thousand euros). 7. PROPERTY, PLANT AND EQUIPMENT 7.1 Movements 2011
Additions in 2011 correspond to both the effect of the business combinations (Note 4) and the addition of assets as a result of the acquisition of the joint ventures detailed in Note 1.3, amounting in total to a gross value of 13,883 thousand euros (84,461 thousand euros in 2010) and 3,760 thousand euros of accumulated depreciation (2010: 46,658 thousand euros). These items basically correspond to Land and Buildings and Machinery, representing 60% and 24%, respectively, of total net value of the additions derived from such operations (2010: 32% and 58%, respectively). Disposals in 2011 and 2010 show sales of assets and other disposals, mainly due to the substitution of slot machines, which amounted to a loss of 3,469 thousand euros in 2011 (a loss of 4,531 thousand euros in 2010). 7.2 Work performed by the Group for property, plant and equipment The cost value of the slot machines manufactured by Group companies and sold to slot machine operators of the Group, are recognized as property, plant and equipment by crediting the corresponding expenses in the consolidated statement of comprehensive income. The amount of work performed by the Group for property, plant and equipment in 2011 and 2010 amounted to 40,200 and 16,840 thousand euros, respectively. 7.3 Assets subject to guarantees Several property, plant and equipment items, whose net value as of December 31, 2011 and 2010 was 82,115 thousand and 89,189 thousand euros, respectively, were used as guarantee for mortgage loan debts.
F-51
33
7.4 Availability of assets All assets are unrestricted, except for those acquired through financial lease contracts, whose net book value amounted to 33,610 thousand euros at December 31, 2011 (30,361 thousand euros at December 31, 2010) (Note 19.2). 7.5 Property, plant and equipment located abroad The net value of property, plant and equipment located abroad was 349,182 thousand euros at December 31, 2011 (2010: 326,040 thousand euros). 7.6 Investment commitments At December 31, 2011 there are no investment commitments. At December 31, 2010 investment commitments amounted to 13,000 thousand euros and mainly corresponded to investments in video lottery machines in Italy amounting to 10 million euros and to the extension of bingo halls in Mexico amounting to 3 million euros. 8. FINANCIAL ASSETS This caption is composed by the following balances:
2011 2010
(Thousands of euros) Non-
current Current Total Non-
current Current Total Investments in associates Investments accounted for under
equity method 2,896 , 2,896 2,830 - 2,830 Available-for-sale financial assets Equity instruments measured at cost 3,018 - 3,018 3,018 - 3,018 Loans and receivables Nortia Business Corporation, S.L. 69,696 - 69,696 64,702 - 64,702 Loans to jointly-controlled business
and associates 13,865 12,631 26,496 11,465 11,733 23,198 Loans to third parties 37,170 - 37,170 40,728 - 40,728 Public administrations 1,154 - 1,154 1,154 - 1,154 Deposits and guarantees 10,797 30,739 41,536 11,378 21,971 33,349 Fixed-income securities and deposits - 2,842 2,842 - 4,158 4,158 Trade and other receivables - 199,918 199,918 - 190,775 190,775 Other 5,182 6,528 11,710 1,938 11,744 13,682 143,778 252,658 396,436 137,213 240,381 377,594 Impairment loss (3,405) (24,654) (28,059) (4,182) (28,154) (32,336) 140,373 228,004 368,377 133,031 212,227 345,258
Current portion of Nortia Business Corporation, S.L., and of Loans to third parties and Receivables from Public administrations is included in the caption Trade and other receivables.
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The Group estimates that fair values of these assets do not differ significantly from the recorded amounts. The accumulated balance of impairment loss of non-current financial assets mainly corresponds to loans to third parties, while impairment loss of current financial assets corresponds to trade and other receivables (24,654 and 28,154 thousand euros at December 31, 2011 and 2010, respectively). 8.1 Investments in associates This caption includes the following investments: 2011
(Thousands of euros) Book value Assets Liabilities Operating revenues
The variation for the year of the caption Investments in associates is as follows: (Thousands of euros) 2011 2010 Balance at January 1 2,830 3,127 Investment in associate’s profit 151 243 Investment in associate’s losses (85) (5) Sale of investment - (535) Balance at December 31 2,896 2,830
Transactions in 2011 and 2010 between companies mentioned above and other companies consolidated through the full and proportional consolidation method are irrelevant.
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8.2 Loans and receivables Nortia Business Corporation, S.L. The non-current debtor balance of Nortia Business Corporation, S.L. includes the following entries:
(Thousands of euros) 2011 2010
Loan maturing in 2018, at 8.75% interest rate 42,754 42,754 Long-term promissory notes from the sale of real state, discounted at 5% interest rate 3,619 1,706 Accrued interests 23,323 20,242
69,696 64,702
The effective interest rate of the loan granted to Nortia Business Corporation (6.0%) does not match the nominal interest rate (8.75%), since interest will be paid upon the maturity of the loan. At December 31, 2011 and 2010 the carrying amount of this loan was similar to its fair value. Credits to jointly-controlled business and associates This caption is broken down as follows (*): (Thousands of euros) 2011 2010 Loans granted to a joint venture domiciled in Argentina. These loans are
expressed in US dollars and accrue interest at an annual rate of Libor (six months) and mature between 2012 and 2013 10,451 9,687
Current accounts with jointly-controlled business and associates 12,631 11,733 Other 3,414 1,778 26,496 23,198
(*) The above amounts are the remaining balances after the eliminations derived from the proportional consolidation process. The maturity date of these assets is as follows: (Thousands of euros) 2011 2010 Within one year 12,631 11,733 Between one and two years 853 5,287 Between two and three years 853 5,287 Between three and four years 11,305 444 Between four and five years 854 447 More than five years - - 26,496 23,198
The average interest rate of these assets in 2011 and 2010 was at 5.6% and 6.3%, respectively.
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Loans to third parties The breakdown of non-current loans to third parties is as follows:
(Thousands of euros) 2011 2010 Mortgage loan in Venezuelan currency granted to Inversiones Pueblamar, CA for the deferred collection of the sale of a building in 2002 to the owner company of a hotel in Isla Margarita, Venezuela, where a casino operated by the Group is located. No explicit interests are accrued; therefore a discount rate of 9.27% has been applied. 1,311 2,775
Mortgage loan in US dollars to a company that owns a hotel in Dominican Republic where a casino operated by the Group is located. It earns an annual interest of 7.25%. 1,332 1,404
Loan to the minority shareholder of a Spanish operating company of the Group. This loan accrues a variable interest rate that will be reviewed annually (2011: 1.89%, 2010: 1.48%) 15,106 11,092
Non-trade loan with annual variable maturity dates until 2014 (Spain). It does not yield any explicit interest and therefore a 5% discount rate has been applied. 3,866 4,784
Loans to the minority shareholder of a Colombian company. They earn an interest rate of 4.5% and mature in 2012, but paid in advance in 2011. - 3,525
Other 15,555 17,148 37,170 40,728
In October 2009 the Bolivarian Republic of Venezuela acquired by compulsory purchase the hotel Margarita Hilton & Suites owned by Inversiones Pueblamar, CA, where Cirsa Caribe, C.A. operates. These assets were transferred to the Venezuelan tourism company VENETUR, S.A. The casino managed by Cirsa Caribe in Isla Margarita is currently closed. The Group estimates that as a result of the negotiations with Venezuelan authorities the casino will be reopened in 2012. Additionally, the Group considers that there is no uncertainty in regard with the solvency of Inversiones Pueblamar, CA; thus, the recovery of the granted loan of 1.3 million euros is considered reasonably beyond doubt. The breakdown of maturity dates for non-current loans to third parties is as follows: (Thousands of euros) 2011 2010 Between one and two years 23,972 24,133 Between two and three years 5,024 4,422 Between three and four years 3,578 3,842 Between four and five years 2,022 2,325 More than five years 2,574 6,006 37,170 40,728
Trade and other receivables This caption is broken down as follows: (Thousands of euros) 2011 2010 Trade receivables 37,805 45,935 Impairment losses (24,654) (28,154) Other related parties 3,581 5,676 Receivables from Public administrations 37,572 33,661 Other receivables 120,357 103.854 Nortia Business Corporation, S.L. – Promissory notes from sale of assets 603 1,649 175,264 162,621
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Receivables from Public administrations mainly correspond to VAT and other tax receivables. The balance of trade and other receivables is shown net of impairment loss. The movements in the impairment loss allowance are as follows. (Thousands of euros) 2011 2010 Balance at January 1 28,154 29,340 Allowance 6,794 5,935 Write-off of bad debts (10,294) (7,121) Balance at December 31 24,654 28,154
The Group has established credit periods between 90 and 150 days, while the average collection period is approximately of 120 days at December 31, 2011 (120 days at December 31, 2010). 8.3 Available-for-sale financial assets The caption of available-for-sale financial assets includes the participation of 8.4% in a real estate company of the Nortia Business Corporation Group, with a cost of 3,018 thousand euros. These assets are measured at cost, as they cannot be determined with reasonable accuracy at fair value. In any case, the Group estimates that under no circumstances these investments could be impaired. 9. IMPAIRMENT TEST 9.1 Goodwill Cash-generating units Goodwill acquired through business combinations and intangible assets with indefinite useful lives has been attributed to cash-generating units for impairment test. The breakdown of cash-generating units is as follows: • Industrial companies, as a whole • Each regional branch of slot machines • Each group of bingos jointly acquired • Each casino managed individually • Each differentiated interactive activities Key assumptions • Budgeted gross margins - to determine the value assigned to the budgeted gross margins, the
average gross margin achieved in the year immediately preceding the year budgeted is used, increased by the expected efficiency improvements. The period used in these projections is 5 years. From the fifth year the figures are extrapolated using a growth rate similar to expected inflation.
• Increase in costs - to determine the value assigned to the increase in raw materials prices, the
price index expected during the year for each country where the Group operates is used. The values assigned to key assumptions are consistent with respect to external sources of information.
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• The discount rate applied to projected cash flows is determined by the specific risk of each cash-generating unit, taking into account the type of activity and country where it is located. The following chart shows the discount rates used based on business and geographic area:
Country Activity Discount rate (before tax)
Spain Gaming 9.63% Spain Industrial 9.63% Spain Interactive 9.63% Italy Gaming 10.15% Latin America Gaming 12.56%
In 2010 discount rates applied ranged between 9.66% and 11.47% Test results As a consequence of the tests performed, impairment loss has been recognized in 2011 amounting to 15,279 thousand euros, basically for the reduction in the estimate of future cash flows of certain operators in Spain (10,409 thousand euros) and certain bingo halls (2,567 thousands euros). In 2010 the impairment loss recognized amounted to 19,300 thousand euros and corresponded to the goodwill related to bingos. 9.2 Other assets Impairment indicators used by the Group to determine the need of an impairment test on other non-current assets, amongst others, are as follows: • Significant drop of the result over the same period in the prior year, and/or over the budget. • Legislative changes in progress or planned, which could lead to negative effects. • Change of strategy or internal expectations regarding a particular business or country. • Position of competitors and their launches of new products. • Slowdown of income or difficulties in selling at expected prices. • Change in habits and attitudes of users, and other elements specific to each division. As a result of the tests performed, apart from the impairment losses described in the paragraph below, an impairment loss amounting to 2,343 thousand euros was recognized (731 thousand euros related to the bingo segment and 1,612 thousand euros related to the slots segment) (700 thousand euros in 2010). In Venezuela, the temporary close-down of the gaming activities ordered by the Government has given rise to an impairment of assets of one of the two casinos operated by the Group amounting to 6.7 million euros. In the other casino operated by the Group in Venezuela (Isla Margarita) the activity is expected to resume in the short term, and therefore, assets have not been impaired. As for Ecuador, the prohibition of gaming activities in the country has resulted in an impairment adjustment of the assets of the Ecuadorean subsidiary amounting to 1,076 thousand euros. 10. INTERESTS IN JOINTLY CONTROLLED COMPANIES Jointly controlled companies have been incorporated in the consolidated financial statements through the proportional method.
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The information on the related companies is detailed in Appendix. Other relevant information related to these companies is detailed in the following chart:
Data affected by % of
equity interest (Thousands of euros) 2011 2010 Non-current assets 170,410 164,623 Current assets 177,447 121,206 Non-current liabilities (80,587) (94,069) Current liabilities (67,196) (49,871) Revenues 376,224 348,978 Expenses (318,632) (310,378) Net profit for the year 57,592 38,600
11. INVENTORIES The breakdown of inventories by category, net of impairment, is as follows: (Thousands of euros) 2011 2010 Raw and auxiliary materials 3,441 4,039 Spare parts and other 7,790 7,154 Finished products 724 446 Work in progress 759 711 Prepayments to suppliers 1,140 1,218
13,854 13,568 Inventories correspond mainly to the manufacture and trade of slot machines carried out by Group companies. The balance of inventories is shown net of impairment loss. Movements in the impairment loss allowance are as follows: (Thousands of euros) 2011 2010 Balance at January 1 2,796 3,213 Additions 1,092 613 Write-off (1,608) (1,030)
Balance at December 31 2,280 2,796 The write-off in 2011 and 2010 corresponds to the destruction of several inventories from the industrial division. 12. CASH AND CASH EQUIVALENTS For consolidated cash-flow statement purposes, cash and cash equivalents include the following items: (Thousands of euros) 2011 2010 Cash 13,836 13,132 Current accounts 51,992 48,562 Deposits 827 3,466
66,655 65,160 These assets are unrestricted and earn market interest rates.
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13. EQUITY 13.1 Share capital At December 31, 2011 and 2010 the Company’s share capital consisted of 122,887,121 shares with a par value of 0.20 euros each. All shares bear the same political and economic rights. The breakdown of the Company’s shareholders and their equity interest at December 31 is as follows: 2011 2010 Nortia Business Corporation, S.L., company belonging to:
Mr. Manuel Lao Hernández and his family 52.43% 52.43% Mr. Manuel Lao Hernández 46.65% 46.65%
Treasury shares 0.92% 0.92% 100.00% 100.00%
Part of the Company’s shares (31.04% at December 31, 2011 and 2010) and shares of several subsidiaries are pledged in favor of Institut Català de Finances as a guarantee for a loan granted to Nortia Business Corporation S.L., main shareholder of the Company. 13.2 Treasury shares At December 31, 2011 and 2010, the Company has 1,131,421 treasury shares at an average cost of 0.1626 each, which are shown reducing the Group’s net equity. 13.3 Retained earnings The balance of this caption includes two reserves of the Company, which are non-distributable. Legal reserve In accordance with the Spanish Capital Companies Law, companies obtaining profit will assign 10% of profit to the legal reserve, until its balance is equivalent to at least 20% of share capital. As long as it does not exceed this limit, the legal reserve can only be used to offset losses if no other reserves are available. This reserve can also be used to increase capital by the amount exceeding 10% of the new capital after the increase. At December 31, 2011 and 2010 the Company’s legal reserve amounted to 4,915 thousand euros. Additionally, the Group Spanish subsidiaries have provided the reserves at the amount required by the prevailing legislation. Treasury shares reserve As indicated in Note 13.2 above, the Group acquired treasury shares. In accordance with prevailing mercantile legislation, the Group has provided the corresponding non-distributable reserve by the amount of treasury shares, maintained until sold or amortized.
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13.4 Non-controlling interests The balances related to non-controlling interests are as follows:
Amount in statement of
financial position Participation in results (Thousands of euros) 2011 2010 2011 2010 Division Casinos 66,072 64,877 8,078 8,004 Slots 5,157 5,582 423 449 71,229 70,459 8,501 8,453
The inter-annual variation of balances in the consolidated statement of financial position is as follows: (Thousands of euros) 2011 2010 Balance at January 1 70,459 18,381 Net profit for the year attributable to non-controlling interest 8,501 8,453 Translation differences (2,958) (1,420) Disposals or additional acquisition up to total amount of shares - 5,579 Additions for acquisition of companies or changes in consolidation methods (from
proportional to full) 687 48,162 Dividend payments (5,460) (8,696) Balance at December 31 71,229 70,459
14. BONDS This caption basically refers to the following: The issue of bonds by a subsidiary located in Luxembourg amounting to 680 million euros, including an initial amount of 400 million euros, issued in 2010 below par, at a 97.89% price, and an additional issue in January 2011 with an issue premium of 280 million euros as an extension of the former one. These bonds are listed on the Luxembourg Stock Exchange, accruing an annual interest of 8.75% paid each six months and maturing in 2018. At December, 2011 certain bonds related to this issue, the par value of which amounted to 5 million euros, were not recognized in the Group’s liabilities, since they had been acquired in the present year.
At December 31, 2010 in addition to the first part of the issue mentioned above, an issue of bonds made also by a subsidiary located in Luxembourg amounting to 230 million euros and which were listed on the Luxembourg Stock Exchange, accruing an annual interest of 7.875%, which was paid each six months, and matured in 2012. At December 31, 2010, certain bonds related to this issue and whose nominal value amounted to 10 million euros were not recognized in the Group’s liabilities, since they had been acquired by the Group during the prior year. Additionally, this issue has been settled in advance in January 2011, with the second part of the issue of bonds mentioned in the paragraph above, which represented expenses amounting to 21,416 thousand euros recognized in 2011. In May 2010 an issue of bonds amounting to 270 million euros was cancelled. These bonds accrued an annual interest rate of 8.75% and matured in 2014. The repurchase of these bonds generated expenses amounting to 12,469 thousand euros recognized in the consolidated statement of comprehensive income. Contracts subscribed in relation to the bonds issued by the subsidiaries in Luxembourg regulate certain obligations and commitments by the Group, which include, among others, the supply of periodic information, the maintenance of titles of ownership in subsidiaries, the restriction on disposal of significant assets, the compliance with certain debt ratios, the limitation on payment of dividends,
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the limitation on starting-up new businesses, and the restriction on the Group granting guarantees and endorsements to third parties. The Company’s Directors consider that all contractual obligations have been met. The shares of several Group companies have been assigned as security for these liabilities. At December 31, 2011 the quoted price of the bonds recognized in the liabilities side of the balance sheet was 80% of their par value. 15. BANK BORROWINGS
2011 2010
(Thousands of euros) Non-
current Current Total Non-
current Current Total Mortgage and pledge loans 26,338 27,096 53,434 28,699 22,672 51,371 Other loans 62,370 28,613 90,983 77,921 34,817 112,738 Financial lease agreements (Note
Average interest rates accrued by these borrowings are as follows: % 2011 2010 Loans 5.87% 4.73% Financial lease agreements 4.85% 4.43% Credit and discount lines 5.83% 4.88%
The annual maturity date of these liabilities is as follows: (Thousands of euros) 2011 2010 Within one year 80,392 79,630 Between one and two years 32,720 37,388 Between two and three years 21,856 28,284 Between three and four years 17,407 17,166 Between four and five years 13,620 13,693 More than five years 22,831 29,926 188,826 206,087
Part of these liabilities, equal to 39,401 and 47,781 thousand euros at December 31, 2011 and 2010, respectively, is denominated in U.S. dollars. At December 31, 2011, shares of several subsidiaries are pledged in favor of Deutsche Bank London AG as a security for the credit line of 50 million euros received from that entity in 2010. At December 31, 2011 the drawn amount of this credit line amounts to 25 million euros, and it is recognized as a current liability since at December 31, 2011 the contractual maturity for this credit line was 2012. However, before the approval of these consolidated financial statements, the Group has renegotiated its maturity, which is has been set for 2015. At December 31, 2010 these shares were pledged in favor of Deutsche Bank London AG as a security for a credit line of 30 million euros. At December 31, 2011 the amount of credit and discount lines not used is 9,822 and 6,723 thousand euros, respectively. These figures amounted to 22,415 and 7,580 thousand euros, respectively, at 2010 year end.
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Finally, at December 31, 2011 and 2010 the guarantees given by credit institutions and insurance companies to the Group, in connection with official gaming concessions and licenses were 103,592 and 83,277 thousand euros, respectively 16. OTHER CREDITORS The breakdown of this caption is as follows:
2011 2010
(Thousands of euros) Non-
current Current Total Non-
current Current Total Public administrations 2,981 88,076 91,057 2,510 86,620 89,130 Bills payable 834 2,586 3,420 1,881 6,995 8,876 Sundry creditors 54,816 131,429 186,245 60,083 103,392 163,475 58,631 222,091 280,722 64,474 197,007 261,481
In 2011 non-current part of liabilities with Public administrations refers mainly to deferral on gaming taxes granted by the corresponding authorities, which accrues an annual interest rate of 5% (2010: 5%). The current portion corresponds to gaming taxes with a short-term maturity (2011: 62,050 thousand euros, 2010: 65,794 thousand euros), and tax return of personal income tax, VAT, social security contributions and similar concepts pending to be filed. Bills payable correspond mainly to debts arising from the acquisition of companies and operational of recreational machines with deferred payment, discounted at market interest rate. The caption Non-current sundry creditors includes an amount of 22,292 thousand euros corresponding to the payable balance of the long-term current account with Nortia Business Corporation, S.L., which earns annual interest at a rate of 8.75%. Additionally, Sundry creditors mainly correspond to debts from acquisition of assets, acquisition of licenses in Panama, which will be settled in two maturity dates at December 31, 2011 and 2012 amounting to 4 million USD each. It also corresponds to a loan received in 2008 from International Game Technology (IGT) for an amount used by the Group at December 31, 2011 of 23,576 thousand euros (30,506 US dollars) and 32,615 thousand euros (43,579 US dollars) at December 31, 2010, including principal and interest. The loan was obtained to finance the investment being made by Casino de Rosario, S.A. (joint venture). It has a right of mortgage on the company’s building, accrues an annual interest rate of Libor plus 5.75% and will be cancelled in 48 equal monthly consecutive amounts from September 2010. Finally, the caption Sundry creditors also includes employee benefits payable, according to the amounts indicated in Note 20.1. 17. PROVISIONS The breakdown of this caption is as follows: (Thousands of euros) 2011 2010 Obligations in relation to employees 6,264 9,583 Tax assessments appealed by the Group 957 1,430 Other 7,012 5,994 Balance at December 31 14,233 17,007
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The amount recognized in “Obligations in relation to employees” mainly consists of probable contingencies with the personnel in Italy, the provision of which must be accounted for according to Note 2.17. At December 31, 2011 and 2010 the caption “Others” mainly consisted of provisions for several risks, fines and labor trials that are individually irrelevant. The inter-annual variation of the balance is as follows: (Thousands of euros) 2011 2010 Balance at January 1 17,007 10,723 Allowances 3,331 6,196 Applications (1,965) (977) Changes in the consolidation perimeter - 1,065 Reclassifications to payables – Employee benefits payable (4,140) - Balance at December 31 14,233 17,007
18. TAXES 18.1 Tax Group The Company, together with 79 Spanish subsidiaries, which comply with tax legislation requirements, files tax returns on a consolidated basis. Additionally, 11 Spanish subsidiaries, controlled by the subsidiary Orlando Play, S.A., are part of another consolidated tax group. Other Group companies file income tax returns individually in accordance with applicable tax legislation. 18.2 Accrued and payable income tax The income tax expense, which has been fully recognized in the consolidated statement of comprehensive income, is broken down as follows: (Thousands of euros) 2011 2010 Current 40,499 33,289 Deferred for (increase) decrease of tax credits for taxable bases (5,672) (8,861) Deferred for temporary differences 8,877 8,017 Other - 652 43,704 33,097
The breakdown of current income tax payable is as follows: (Thousands of euros) 2011 2010 Current income tax 40,499 33,289 Withholdings and payments on account (2,458) (4,168) 38,041 29,121
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18.3 Analysis of income tax expense (Thousands of euros) 2011 2010 Profit before tax 26,784 22,505 Tax rate prevailing in Spain 30% 30,0% Theoretical income tax expense 8,035 6,752
Adjustments – Effect of: Different tax rates prevailing in other countries 3,716 2,760 Countries with no income taxation and/or compensation of tax losses (491) 974 Impairment losses for exclusive consolidation purposes 7,621 6,000 Credits for tax loss carryforwards not capitalized 10,259 5,246 Translation differences deductible / taxable for tax purposes (497) 1,596 Losses in net monetary position (Venezuelan hyperinflation) 398 1,088 Difference due to the payment of taxes from prior years 3,533 - Tax inspection expense 1,684 - Non-deductible expenses and other 9,446 8,681
43,704 33,097 At December 31, 2011 and 2010 the effect of adjustments of different tax rates mainly corresponds to the application of higher taxes in Argentina and Colombia. At December 31, 2011 and 2010 non-deductible expenses mainly consist of financial investment impairment allowances carried out by subsidiaries in Argentina and Panama, as well as taxes on gaming activities and exchange differences in Venezuela. The impact of assets impairment merely for consolidation purposes basically relates to the prevailing tax rate applicable to the impairment of goodwill or assets in Spain amounting to 25.9 million euros (19.3 million euros at December 31, 2010) (Note 5). 18.4 Deferred tax assets and liabilities (Thousands of euros) 2011 2010 Assets Tax loss carryforwards from the tax groups 44,205 38,675 Tax loss carryforwards from other group companies 5,448 5,306 Deductions pending application from the tax groups 2,838 2,838 Deductible temporary differences: --- Impaired receivables 7,581 6,415 --- Impaired securities portfolio 6,461 9,593 --- Goodwill impaired in individual books 3,192 2,036 --- Intragroup margin write-off 6,142 5,726 --- Other 15,069 10,858
90,936 81,447 Liabilities Taxable temporary differences: --- Reinvestment of profit from sale of non-current assets (663) (1,335) --- Initial statement of non-current assets at fair value (6,596) (7,202) --- Provision for maximum gaming prizes (8,615) (8,474) --- Difference between tax depreciation and accounting depreciation (6,825) (6,402) --- Non-accounting impairment for tax purposes (11,452) (6,472) --- Margin write-offs (2,859) (1,703) --- Business combinations (6,874) - --- Other (2,086) (1,689)
(45,970) (33,277)
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The Group estimated the taxable profits which it expects to obtain within the utilization period based on budgeted projections. It also analyzed the reversal period of taxable temporary differences, identifying those that reverse in the years in which unused tax loss carryforwards may be used. Based on this analysis, the Group has recorded deferred tax assets for unused tax loss carryforwards as well as deductions pending application and deductible temporary differences for which it is considered probable that sufficient taxable profit will be generated in the future against which they can be utilized. The breakdown of unused tax losses carryforwards at December 31, 2011 for the tax group whose parent company is the Company and for the tax group whose parent is the subsidiary Orlando Play, S.A. is as follows:
(Thousands of euros) Taxable basis
Arising in Last year for utilization Tax group whose parent
206,346 1,816 (*) Tax group whose parent is a company representing a joint venture consolidated through the proportional consolidation method. Therefore, tax assets included in this table are affected by the 50% of ownership held. Tax group whose parent is the Company At December 31, 2011 and 2010 the Group has recognized deferred tax assets amounting to 44,007 and 38,228 thousand euros, respectively, relating to unused tax loss carryforwards of the tax group. No deferred tax assets were recorded for the rest of unused tax losses carryforwards that at December 31, 2011 amounted to 21,795 thousand euros (2010: 9,557 thousand euros), since their future application is uncertain. In addition to tax losses carryforwards, the tax group whose parent is the Company holds additional tax credits amounting to 57,845 thousand euros at December 31, 2011 (2010: 47,914 thousand euros), for unused tax deductions. The abovementioned total amounts include 55.007 thousand euros at December 31, 2011 (2010: 45,076 thousand euros) from unused deductions that were not capitalized for not having met the terms to be used.
(Thousands of euros)
Last year for utilization Unused deductions at December 31, 2011
Tax group whose parent is Orlando Play, S.A. In 2010 the tax group whose parent is Orlando Play, S.A. was constituted. Since the Group owns 50% of Orland Play, S.A. shares, tax assets contributed by the Group are affected by this percentage of ownership. At December 31, 2011 the Group has recognized deferred tax assets amounting to 188 thousand euros, related to unused tax loss carryforwards of this tax group. For the rest of unused tax loss carryforwards no deferred tax assets have been recognized, which at December 31, 2011 amounted to 433 thousand of euros (364 thousand euros at December 31, 2010) (amounts affected by percentage of ownership). 18.5 Other tax information Under prevailing tax regulations, tax returns may not be considered final until they have either been inspected by tax authorities or until the inspection period has expired. At December 31, 2011 Spanish companies (which mostly file taxes under a consolidated tax group) are open to inspection of all taxes to which they are liable for the last four years. In general, the prescription periods for countries where the Group has significant presence are between four and five years after the end of the statutory period for filing tax returns. The Group considers that, in the event of a tax inspection, no significant tax contingencies having effect on consolidated financial statements would arise. On March 8, 2012, Cirsa Management was notified of an inspection for all the years open to inspection and for all taxes of Cirsa Gaming Corporation, S.A., Universal de Desarrollos Electrónicos, S.A, Global Game Machine Corporation, S.A., Cirsa International Gaming Corporation, S.A. and Cirsa Slot Corporation, S.A. All these companies belong to the Spanish tax group. The Group expects that no liabilities will arise from this inspection that may have a significant impact on these consolidated financial statements. 19. LEASES 19.1 Operating leases The Group has leases on several buildings for an average term between three and five years, with no renewal clauses. The future minimum payments under non-cancellable operating leases at December 31 are as follows: (Thousands of euros) 2011 2010 Within one year 62,249 61,792 Between one and five years 258,957 254,583 More than 5 years 69,357 68,547 390,563 384,922
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19.2 Finance leases The Group has financed several acquisitions of property, plant and equipment (mainly slot machines) through financial lease agreements. The future minimum payments under financial leases and their present value are as follows:
2011 2010
(Thousands of euros) Minimum payments
Present value of
payments
Minimum payments
Present value of
payments
Within one year 11,689 9,364 14,854 11,900 Between one and five years 29,969 19,726 30,527 19,837 41,658 29,090 45,381 31,737
Acquisition of property, plant and equipment through financial lease agreements, not recorded as cash flows in investing activities in the consolidated statements of cash flows, amounted to 9,400 thousand euros in 2011 and 10,024 thousand euros in 2010. 20. INCOME AND EXPENSES 20.1 Personnel (Thousands of euros) 2011 2010 Wages and salaries 167,598 172,093 Social security 40,459 39,507 Indemnities 6,106 5,482 Other personnel expenses 10,643 11,490 224,806 228,572
Remunerations pending payment at year end of 2011 and 2010 (23,577 and 16,272 thousand euros, respectively) are recognized in the caption Other creditors. The breakdown of the average headcount by professional category and gender is as follows:
2011 2010 Men Women Total Men Women Total Directors 324 74 398 325 86 411 Technicians, production and sales staff 5,677 4,491 10,168 6,344 4,547 10,891 Administrative personnel 895 835 1,730 671 663 1,334 6,896 5,400 12,296 7,340 5,296 12,636
The headcount at December 31, 2011 and 2010 by category and gender does not significantly differ from the breakdown shown in the table above regarding the average headcount for those years.
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20.2 External supplies and services (Thousands of euros) 2011 2010 Rent and royalties 68,951 62,511 Advertising, promotion and public relations 35,683 40,144 Professional services 20,908 22,720 Sundry services 24,620 25,816 Supplies 26,273 25,058 Travel expenses 11,860 13,465 Repair and maintenance 17,926 19,711 Security 8,858 9,343 Postal services, communications and telephone 10,197 8,682 Insurance premiums 5,220 10,828 Cleaning services 6,502 6,846 Bank services and similar 4,974 4,843 Transportation 2,967 2,753 Research and development expenses 253 709
245,192 253,429 20.3 Foreign exchange results (Thousands of euros) 2011 2010 Income 5,570 8,111 Expenses (11,801) (8,588)
(6,231) (477) Net exchange differences from translation of financial balances in foreign currency between Group companies, are recognized in Translation differences, as a component that decreases the shareholders’ equity at December 31, 2011 by an amount of 1,658 thousand euros (2010: 10,641 thousand euros), since they are considered as exchange differences arising from monetary components of a net investment in a foreign business. 21. RELATED PARTIES The Group conducts several trade and financial transactions with its main shareholder Nortia Business Corporation, S.L., and its subsidiaries, which are broken down as follows: (Thousands of euros) 2011 2010 Sale of slot machines 10,456 9,418 Revenues for rendering of services 1,747 2,012 Operating expenses (10,768) (12,402) Interest income 4,058 4,564 Interest expenses (158) (19)
Transactions with related entities correspond to Group normal trading activity and are carried out at market prices in a manner similar to transactions with unrelated parties. Accounts receivable derived from these transactions at year end are described in Note 8. The non-current payable balance amounting to 22,292 thousand euros corresponding to the current account with Nortia Business Corporation, S.L. is detailed in Note 16 Other Creditors. Finally, Accounts payable, arising from commercial transactions, amount to 845 and 2,578 thousand euros at December 31, 2011 and 2010, respectively, and are recognized under Trade payables.
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22. CONTINGENCIES Venezuela Tax authorities raised assessments against a subsidiary (in which the Group has a percentage of ownership of 70%) that operates a casino in Isla Margarita (Venezuela), relating to the supposed non-compliance with an obligation to withhold taxes on gaming prizes as established by a generic tax regulation in that country that does not specifically contemplate the activities of casinos. The related amount, for the year 1998 to 2003, is over 3.8 million euros. This amount was raised by the tax authorities through a global estimation process that did not consider the features of a casino that make it almost impossible to make withholding on prizes. The assessment was appealed against, arguing both the non-applicability of this obligation to a casino and the existence of severe legal deficiencies in the assessment itself. Based on advice of legal counsel, the Group considers that its position will prevail and, therefore, no provision is included in the consolidated financial statements. Tax law for the activities of games on chance published in June 2007 by the Venezuelan tax authorities establishes an additional tax to that paid by a Group company (in which the Group has a 67.5% percentage of ownership) related to the operation of machines, which for 2007 amounted to approximately 0.9 million euros. The Group, in accordance with its legal advisors, estimates a sentence in favor of its interests of appeals; accordingly no provision has been recorded in this regard. Argentina In October 1999, an Argentinean group company opened a floating casino in waters of Río de la Plata on the basis of an official license granted by the Federal Authorities. The Government of the Autonomous City of Buenos Aires challenged the competence of the Federal Authorities (“Lotería Nacional, SE”) in gaming matters. In particular, it claimed that gaming activities fell under its jurisdiction in the City of Buenos Aires, and hence raised objections against the license granted to the subsidiary Casino Buenos Aires, S.A. (CBA). These circumstances led to a co-participation agreement for gaming matters that was signed between the Federal Authorities (LNSE) and the Government of the Autonomous City of Buenos Aires. Conveniently, this agreement was ratified by Decree 1155/2003 of PEN, dated December 1, 2003 (B,O, 02/12/2003) and Law 1,182 of the Legislation of the Government of the Autonomous City of Buenos Aires, dated November 13, 2003 (BOCBA 01/12/2003). The agreement matured four years after, but it was renewed since there was a clause that stated that if neither party –the City or the State- notified the other to the contrary, it would be renewed automatically for four more years. The agreement is currently being analyzed by the parties. Despite the abovementioned agreement, the Government of the Autonomous City of Buenos Aires has continued to request CBA to pay the tax on gross revenues from the activity carried out by the Group since 1999 as operator of an Argentinean floating casino in waters of Río de la Plata. This fact prompted CBA to request precautionary measures against the Government of the Autonomous City of Buenos Aires to stop the latter from conducting any action to collect taxes on gross revenues derived from the floating casino’s turnover. The last precautionary measures requested by CBA were accepted by the Federal Authorities in November 2011. The Government of the Autonomous City of Buenos Aires has lodged an appeal against the abovementioned precautionary measures. The Group and its legal advisors consider that the rights conveniently agreed upon with LNSE are consolidated and rejects the payment of the tax on gross revenues from the activity conducted in floating casinos based on: a) the signing of the agreement between LNSE and the Bet and Gambling Institute of the Autonomous City of Buenos Aires and b) the interpretation that no territorial basis can be claimed to collect taxes on the operation of a casino located in a boat anchored in river waters. Therefore, the Group’s legal advisors consider that an unfavorable result of this matter is remote. Italy In 2007 the Italian Court of Auditors (Corte dei Conti) started proceedings against Cirsa Italia, SpA and the rest of online recreational machine operators, alleging that they had not fulfilled some obligations
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51
they had as authorized operators, and imposed a fine on such company amounting to 3,300 million euros (98,000 million euros on all the online operators as a whole). The Group and the rest of online operators lodged an appeal against such fine. On February 17, 2012 the Italian Court of Auditors issued a ruling whereby Cirsa Italia has been fined 120 million euros (2,500 million euros for all the operators as a whole). The management of the Group and legal advisors consider that the ruling has no legal arguments based on:
• The ruling does not consider the technical report issued by an expert appointed by the Court of Auditors itself.
• The methodology used to calculate the damage caused to the State of Italy has no foundation.
The Group intends to appeal against the ruling before a higher court, which will suspend its execution. Consequently, no provision has been recognized in the statement of financial position at December 31, 2011. In any case, the fine imposed only relates to Cirsa Italia, SpA and does not affect any other group company, according to the Group’s legal advisors. 23. INFORMATION ON ENVIRONMENTAL ISSUES Given the activities and features of the Group, neither capital expenditures nor expenses took place in connection with the prevention, reduction or damage repair of environmental matters 24. AUDIT FEES Fees and expenses referred to the audit of the 2011 financial statements of the Group’s companies rendered by the primary auditors and other firms belonging to the auditor’s international network amounted to 1,423 thousand euros in 2011 and 1,485 thousand euros in 2010. In addition, fees and expenses paid during the year corresponding to other services rendered by the primary auditors or other firms within their international network amounted to 335 thousand euros in 2011 and 94 thousand euros in 2010. 25. DIRECTORS AND SENIOR EXECUTIVES The breakdown of the remuneration earned by members of the Company’s Board of Directors and senior executives is as follows: (Thousands of euros) 2011 2010 Directors
Salaries 1,505 1,500 Senior executives
Salaries 4,800 4,800
6,305 6,300
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At December 31, 2011 there are current accounts receivable with the Company’s Directors amounting to 766 thousand euros (735 thousand euros in 2010). These accounts accrue an annual interest of 4.25%. The Group companies have no pension plans, life insurance policies or dismissal indemnities for former or current members of the Board of Directors and senior executives of the Company. Pursuant to articles 229 and 230 of the Spanish Capital Companies Law, the Directors have informed the Company that there are no situations representing a conflict for the Group and that they hold the following equity investments and/or carry out duties in companies whose activity is identical, similar or complementary to the activity which comprises the Group’s corporate purpose:
26. OBJECTIVES AND POLICIES OF FINANCIAL RISK MANAGEMENT The Group is exposed to credit risk, interest risk, exchange risk and liquidity risk during the normal development of its activities. The Group's main financial instruments include bonds, bank loans, credit and discount lines, financing obtained through the deferral of gaming taxes, financial leases, deferred payments for purchase of businesses, cash and current deposits. The Group's policy establishes that no trading in derivatives (exchange rates insurance) to manage exchange rate risks arising from certain fund sources in U.S. dollars will be undertaken. The Group neither uses financial derivatives to cover fluctuations in interest rates. 26.1 Credit risk Most of the operations carried out by the Group are in cash. For receivables from other activities, the Group has established a credit policy and risk exposure in collection is managed in the ordinary course of business. Credit assessments are carried out for all customers who require a limit higher than 60 thousand euros. Guarantees on loans and the credit risk exposure are shown in Note 8. 26.2 Interest rate risk External finance is mainly based on the issuance of corporate bonds at fixed interest rate. Bank borrowings (credit policies, trading discounts, financial lease agreements) as well as deferred payments with public administrations and other long-term non-trade debts have a variable interest rate that is reviewed annually. Previous Notes show interest rates of debt instruments.
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The breakdown of liabilities that accrue interests at 2011 and 2010 year end is as follows:
At December 31, 2011 and 2010 financial liabilities at a fixed interest rate represented 72% and 68%, respectively, of total liabilities. In this regard, the Group’s sensitivity to fluctuations in interest rates is low: a variation of 100 basis points in floating rates would lead to a change in the result amounting to 2,538 thousand euros and 2,860 thousand euros in 2010. The Group estimates that fair value of the financial liabilities’ instruments does not differ significantly from the accounted amounts. The breakdown of assets that accrue interests at 2011 and 2010 year end is as follows:
2011 2010
(Thousands of euros) Fixed
interest rate Floating
interest rate Fixed
interest rate Floating
interest rate
Nortia Business Corporation, S.L. 69,696 - 64,702 - Loans to jointly-controlled business and associates 12,631 13,865 11,733 11,465 Loans to third parties 6,509 30,661 8,963 31,765 Deposits and guarantees 41,536 - 33,349 - Fixed-income securities and deposits 2,842 - 4,158 - Trade and other receivables 1,342 - 1,649 -
134,556 44,526 124,554 43,230 The Group estimates that the fair value of the assets’ financial instruments does not differ significantly from the net book value, except for the comment in Note 14. 26.3 Foreign currency risk The Group is exposed to foreign currency risk in businesses located in Latin America, mainly in Argentina, which affect significantly revenues and expenses, Group results and the value of certain assets and liabilities in currencies other than the euro. It is also affected to a lesser extent by granted and received loans. Currencies that basically generate exchange risks are the Argentinean peso and the US dollar. In order to reduce risks, the Group conducts policies aimed to keep balanced collection and payments in cash of assets and liabilities in foreign currency. The following study on sensitivity shows the foreign currency risk: • Sensitivity of the profit for the year before tax against fluctuations of the exchange rate US
These variations correspond basically to the impact on operating magnitudes, and not on financial figures, since approximately 90% of Group financial liabilities, in both years, are paid in euros. 26.4 Liquidity risk The exposure to unfavorable situations of debt markets can make difficult or prevent from hedging the financial needs required for the appropriate development of Group activities. At December 31, 2011 and 2010, like in prior years, the Group shows negative working capital. This should be read within the context of the Group’s activities, which are mostly based on revenues that generate cash every day, resulting in very high cash flows from operations, as observed in the consolidated statements of cash flows. Additionally, the Group obtains very high EBITDA, as observed in the consolidated statement of comprehensive income, which allows it to face debt service without cash difficulties. Additionally, to manage liquidity risk, the Group applies different measures:
• Diversification of financing sources through the access to different markets and geographical areas. In this regard, the Group has an additional borrowing capacity (see data in Note 15).
• Credit facilities committed for the sufficient amount and flexibility. Accordingly, the Group has available cash and cash equivalents amounting to 67 million euros at December 31, 2011 (2010: 65 million euros), to meet unexpected payments.
• The length and repayment schedule for financing through debt is established based on the
financed needs. In this regard, the Group’s liquidity police ensure to meet its payment obligations without requiring the access to funds in costly terms. Additionally, it is noteworthy that both at Group and individual business level, the Group performs projections regularly on the generation and expected cash needs, in order to determine and monitor the Group’s liquidity position. The relevant information on the maturity dates of financial liabilities based on contractual terms is broken down in Notes 14, 15 and 16. 27. CAPITAL MANAGEMENT POLICY The main objectives of the Group's capital management are to ensure financial stability in the short and long term, appropriate return rates, increased business value and ensure proper and adequate financing of investments and projects to be conducted in a framework of controlled expansion.
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The Group's strategy, both in 2011 and 2010, is to enhance the more profitable business and to act decisively on the deficit operations, to significantly improve the results and net cash flows. Control of investments and costs restraint have been also established as a priority action, with satisfactory results. As stated in Note 14, the contracts entered into in relation to corporate bonds issued include limitations on the payment of dividends. The Company does not intend to distribute dividends in the short to medium term given that the Group policy is not to distribute dividends. 28. INFORMATION ON LATE PAYMENT TO SUPPLIERS
With respect to Law 15/2010 of July 5, modifying Law 3/2004 of December 29, which establishes measures to be taken in combating arrears in commercial transactions, the Company includes a breakdown of the total amounts paid to suppliers in the current year, differentiating between payments exceeding the legal late payment limit, the exceeded weighted average deadline and overdue balances payable to suppliers which at year end exceed the legal payment deadline:
Payments made and overdue
balances at year end 2011 Amount % Within maximum legal deadline (*) 200,334 93.69% Rest 13,496 6.31% Total payments during the year 213,830 100.00% EWAD (days) of payments 62.33
Late payments exceeding maximum legal deadline at year end 1,153
(*) The legal payment deadline would be based, in each case, on the characteristics of the good or service received by the
company in accordance with Law 3/2004 of December 29, which establishes measures to be taken in combating arrears in commercial transactions.
At December 31, 2010 the overdue balances payable to suppliers which exceeded the legal payment deadline amounted to 408 thousand euros. 29. EVENTS AFTER THE BALANCE SHEET DATE At the date of preparation of these financial statements no significant event has occurred after the balance sheet date. 30. ADDITIONAL NOTE FOR ENGLISH TRANSLATION These consolidated financial statements were originally prepared in Spanish. In the event of discrepancy, the Spanish-language version prevails. These financial statements are presented on the basis of International Reporting Standards adopted by the European Union which for the purposes of the Group are not different from those issued by the International Accounting Standards Board (IASB). Consequently, certain accounting practices applied by the Group do not conform with generally accepted principles in other countries. March 30, 2012
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Cirsa Gaming Corporation Group
Consolidated Management Report
Year ended December 31, 2011 In 2011, despite the complex economic situation, the Group’s revenues from prizes have increased by 12,718 thousand euros (1.02%) mainly due to the good performance shown by the International Casino Division. This year’s EBITDA was 290,001 thousand euros, compared to 260,002 thousand euros last year, which represents a 11.5% increase (+29,979 thousand euros) mainly due to the improvement in the way the Group has managed its business, focusing on achieving profitable growth and consolidating its already existing business activities. In particular, we highlight the performance of the activities in Latin America. In order to maintain the Group’s position of leadership at a domestic level, as well as tackling and competing in international markets and offer a larger range of products in traditional sectors and in those related to new technologies, the Group has continued, as in previous years, to invest significant level of resources in Research and Development. This year the total amount allocated for projects carried out by the Group’s Research and Development department amounted to 2,283 thousand euros. The Group’s strategy for the future is focused on continuing to consolidate and make its already existing business activities profitable, applying its policy of efficiency and productivity programs, combined with selectively chosen investments, analyzed and conducted strictly. On May 28, 2004, the Parent Company acquired 2.47% of the shares of the said company at an acquisition cost of 31,007 thousand euros. On July 13, 2007, the Company transferred 1.55% of its treasury stock to Nortia Business Corporation, S.L. as a consideration for the acquisition of a group of slot machine operators. The remaining shares (0.92%) are being held in the treasury stock portfolio. The Group has not recognized any derivatives or financial instruments in its financial statements that would be significant for measuring its assets, liabilities, financial situation or results. March 30, 2012
F-75
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a de
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asta
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ofag
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leC
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ino
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alam
a, S
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.C
asin
os54
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54,8
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irsa
Cas
inos
de
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o de
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le, S
.A.
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alam
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, S.A
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irsa
Cas
inos
de
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o de
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.A.
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inos
54,8
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Cirs
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ital,
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ratio
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irsa
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ing
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pora
tion,
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llar,
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ssa
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l, 58
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stad
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amin
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l Gam
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tern
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nal G
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Zout
mau
stra
at, 3
5O
ranj
esta
dA
ruba
- 1 -
F-76
App
endi
x I
List
of s
ubsi
diar
ies
Per
cent
a ge
Per
cent
age
of o
wne
rshi
pof
ow
ners
hip
Com
pany
Act
ivity
2011
2010
Inve
stm
ent h
olde
rB
usin
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addr
ess
City
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vinc
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ount
ry
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enez
uela
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inos
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100,
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a In
tern
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nal G
amin
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ratio
n,
S.A
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D. M
arin
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ueva
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arta
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lam
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om, S
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ratio
nal
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Cen
tro D
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fiori ,
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b P
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mad
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stro
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acio
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gos
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ingo
s de
Mad
rid R
euni
dos,
S.A
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Avd
a. M
orat
alaz
, 42
bajo
sM
adrid
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ridC
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cial
de
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ctró
nico
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pera
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l Gam
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ratio
n, S
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plej
o H
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te P
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loba
l Cas
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Tech
nolo
gy C
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loba
l Gam
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n, S
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ime
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n,5
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ulla
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rago
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lect
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cos
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isa,
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Ope
ratio
nal
100,
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Cirs
a S
lot C
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ratio
n, S
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rmin
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ano,
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ridM
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pres
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xplo
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el J
uego
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go, S
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gos
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Inte
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iona
l Bin
go T
echn
olog
y, S
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. y
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nido
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guila
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rid
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gos
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bal B
ingo
Cor
pora
tion,
S.A
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Glo
bal
Bin
go M
adrid
, S.A
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Ferro
carri
l, 38
Mad
ridM
adrid
Gam
ing
& S
ervi
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anam
á, S
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asin
os10
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irsa
Inte
rnat
iona
l Gam
ing
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pora
tion,
C
alle
50
y 73
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e S
an F
ranc
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.C.
Cas
inos
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tern
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amin
g C
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ratio
n,
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Gra
u, 1
006
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aP
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k, S
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.B
2B-
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tera
ctiv
e C
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ratio
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t, 10
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gos
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tern
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tión
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tern
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nal B
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ta. C
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gral
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inos
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tera
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n, S
.LC
/de
la R
esin
a, 2
2-24
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rta 8
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adrid
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pera
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%-
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ivos
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, S.L
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pera
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Gam
ing
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pora
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tra. C
aste
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298
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ssa
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celo
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loba
l Bin
go C
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ratio
n, S
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ing
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tion,
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ll de
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t, 10
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arce
lona
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celo
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l Bin
go M
adrid
, S.A
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gos
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a G
amin
g C
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ratio
n, S
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Cap
itán
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a, 3
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cha
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ridM
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bal B
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rs, S
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ingo
s10
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irsa
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ing
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pora
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n H
aya,
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dch
a.M
adrid
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ridG
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l Cas
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gy C
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asin
os10
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irsa
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tion,
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tra. d
e C
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298
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ssa
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stre
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l Bin
go C
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n, S
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. y G
loba
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rmin
a S
evill
ano,
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ridM
adrid
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ame
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hine
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tion,
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ratio
nal
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lot C
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ratio
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amin
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t Cor
pora
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tella
r, 29
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amin
g, S
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os10
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inne
r Gro
up, S
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Cal
le 3
8 N
orte
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-35
Cal
iC
olom
bia
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bal M
anuf
actu
ring
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pora
tion,
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100,
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a G
amin
g C
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ratio
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Con
sell
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ent,
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108
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celo
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mat
ic, S
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lot C
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ratio
n, S
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ridM
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spla
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omga
r, S
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v. G
ener
alita
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pora
tion,
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tra. d
e C
aste
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298
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ssa
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celo
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oste
bar 9
8, S
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gos
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Glo
bal B
ingo
Cor
pora
tion,
S.A
.U. y
M
adril
eña
de S
ervi
cios
par
a el
Bin
go,
Ferro
carri
l, 38
Mad
ridM
adrid
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ity G
ames
, Ltd
a.C
asin
os-
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Cirs
a In
tern
atio
nal G
amin
g C
orpo
ratio
n,
S.A
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Avd
a.19
de
Nov
iem
bre,
122
-64
San
ta F
e de
B
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áD
CC
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obili
aria
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ld d
e M
exic
o, S
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De
C.V
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ingo
s10
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rom
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nes
e In
vers
ione
s de
Gue
rrero
, S
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Bos
que
de c
iruel
os, 1
86M
éxic
o D
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ico
Inte
rnat
iona
l Bin
go T
echn
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ingo
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loba
l Bin
go C
orpo
ratio
n, S
.A.U
Pi i
Mar
gall,
201
Terra
ssa
Bar
celo
naIn
tern
atio
nal G
amin
g M
anuf
actu
ring,
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.U.
B2B
100,
00%
100,
00%
Cirs
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asin
o C
orpo
ratio
n, S
.L.U
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onse
ll de
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t, 10
6-10
8B
arce
lona
Bar
celo
naIn
tesa
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chi,
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pera
tiona
l50
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50,0
0%R
oyal
Gam
es, S
.R.L
.V
ia C
asat
i Fel
ice,
32
Milá
nIta
lyIn
vers
ione
s In
tera
ctiv
as, S
.A.
Cas
inos
70,0
0%70
,00%
Orb
is D
evel
opm
ent,
S.A
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Av.
Oba
rrio,
57
Pan
amá
Pan
amá
Inve
rsio
nes
Rec
reat
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de
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iden
te, C
.A.
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inos
67,5
0%67
,50%
Cirs
a In
tern
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nal G
amin
g C
orpo
ratio
n,
S.A
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Cal
le 7
7, E
dif.
Bin
goM
arac
aibo
Ven
ezue
laIn
vest
men
t & S
ecur
ities
, S.A
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inos
100,
00%
100,
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Cirs
a In
tern
acio
nal G
amin
g C
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ratio
n,
Cal
le 5
0 y
73 E
ste
San
Fra
ncis
coP
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isa
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ino
Bue
nos
Aire
s, U
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2B10
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ino
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nos
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s, S
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C/ A
dolfo
Als
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172
9 P
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nos
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rgen
tina
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li, S
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asin
os10
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ompl
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o M
onte
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ayo,
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plej
o H
otel
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Mon
te P
icay
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agun
toV
alen
cia
Jueg
omat
ic, S
. A.
Ope
ratio
nal
75,0
0%75
,00%
Glo
bal G
ame
Mac
hine
Cor
pora
tion,
S.A
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Av.
Vel
ázqu
ez, 9
1M
álag
aM
álag
aJu
e gos
y B
ingo
s, S
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ingo
s10
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0,00
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tern
atio
nal B
ingo
Tec
hnol
ogy,
S.A
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Ent
enza
, 96
bajo
sB
arce
lona
Bar
celo
naK
LC N
egoc
ios
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roye
ctos
, S.A
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asin
os70
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0%C
irsa
Ven
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la, C
.A.U
.A
vda.
Fco
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Mira
nda
Car
acas
Ven
ezue
laLa
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ra A
ncon
, S.A
.C
asin
os50
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-A
ncon
Ent
erta
inm
ent,
S.A
.C
alle
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y 73
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e S
an F
ranc
isco
Pan
amá
Pan
amá
La B
arra
Pan
ama,
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App
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List
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F-78
App
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e N
ovie
mbr
e, 1
22-6
4S
anta
Fe
de
Bog
otá
DC
Col
ombi
a
Yum
bo S
an F
erna
ndo,
S.A
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ingo
s60
,00%
60,0
0%B
inga
mes
, S.A
.U. y
Glo
bal B
ingo
C
orpo
ratio
n, S
.A.U
.S
an F
erna
ndo,
48
San
tand
erC
anta
bria
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jueg
o, S
.L.U
.O
pera
tiona
l-
100,
00%
Glo
bal G
ame
Mac
hine
Cor
pora
tion,
S.A
.U.
Jaim
e Fe
rrar,
P.I.
La
Cog
ulla
daZa
rago
zaZa
rago
za
- 4 -
F-79
App
endi
x I
List
of j
oint
ly c
ontr
olle
d co
mpa
nies
Per
cent
age
Per
cent
age
of o
wne
rshi
pof
ow
ners
hip
Com
pany
Act
ivity
2011
2010
Inve
stm
ent h
olde
rB
usin
ess
addr
ess
City
Pro
vinc
e/C
ount
ry
Agr
upac
ión
De
Exp
lota
cion
es R
ecre
ativ
as Y
D
e Ju
ego,
S.L
.B
ingo
s25
,00%
-M
etro
nia,
S.A
. Y S
ervi
troni
c A
ndal
ucia
, S.L
.C
/ Ras
trillo
, 4S
evill
aS
evill
a
Ala
vera
, S.A
.C
asin
os50
,00%
50,0
0%S
acre
s, S
.A.
Av.
Alic
ia M
orea
u de
Jus
to, 1
960
Bue
nos
Aire
sA
rgen
tina
And
y G
ames
, S.R
.L.
Ope
ratio
nal
25,5
0%25
,50%
Roy
al G
ames
, S.R
.L.
Com
une
di M
ilano
Milá
nIta
lyA
OG
, S.r.
l.B
ingo
s50
,00%
50,0
0%C
irsa
Inte
rnat
iona
l Gam
ing
Cor
pora
tion,
S
.A.U
. y G
ema
Srl.
U.
Vía
Gal
ieo
Gal
ilei,
20S
ilea
(TV
)Ita
ly
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, S.A
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2B50
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50,0
0%C
irsa
Inte
rnat
iona
l Gam
ing
Cor
pora
tion,
S
.A.U
. R
io B
amba
, 927
, 14-
EB
ueno
s A
ires
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entin
aA
utom
átic
os L
aom
ar, S
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pera
tiona
l50
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50,0
0%O
rland
o P
lay,
S.A
.C
/Sie
rra T
elar
, 40
Via
tor
Alm
eria
Aut
omát
icos
Man
cheg
os, S
.L.
Ope
ratio
nal
50,0
0%50
,00%
Glo
bal A
mus
emen
t Par
tner
s C
orpo
ratio
n,
Pio
III,
13A
lcaz
ar d
e S
an J
uan
Ciu
dad
Rea
lB
inba
ires ,
S.A
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asin
os33
,33%
-C
irsa
Inte
rnat
iona
l Gam
ing
Cor
pora
tion,
P
inam
arP
inam
arA
rgen
tina
Bin
elec
, S.L
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2B50
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50,0
0%U
nive
rsal
de
Des
arro
llos
Ele
ctró
nico
s, S
.A.
Ate
nas,
45
Mál
aga
Mál
aga
Bin
go A
mic
o, S
.r.l.
Bin
gos
50,0
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Gem
a, S
.r.l.U
.P
z. F
erre
to, 5
5 A
Mes
treIta
lyB
ingo
Ele
ctró
nico
de
Eus
kadi
, S.L
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ingo
s25
,00%
-E
sjal
u, S
.A. Y
Pla
y to
Win
, S.L
.C
/ Ant
onio
Cab
ezon
, 89
Mad
ridM
adrid
Bin
go E
lect
róni
co d
e M
éxic
o, S
.L. D
e C
.V.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.B
osqu
e de
Dur
azno
s, 6
1 3
b, B
osqu
es
Lom
asC
iuda
d de
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ico
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ico
Bin
gos
And
aluc
es, S
.A.
Bin
gos
50,0
0%50
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Glo
bal B
ingo
Cor
pora
tion,
S.A
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Asu
nció
n, 3
S
evill
aS
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s B
enid
orm
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ingo
s50
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0%G
loba
l Bin
go C
orpo
ratio
n, S
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laza
Doc
tor F
lem
ing,
s/n
Ben
idor
mA
lican
teB
insa
vo, S
. A.
Bin
gos
50,0
0%50
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Glo
bal B
ingo
Cor
pora
tion,
S.A
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Rui
z M
orot
e, 5
Alc
azar
de
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Jua
nC
iuda
d R
eal
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ino
de R
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io, S
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Cas
inos
50,0
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Cas
ino
Bue
nos
Aire
s, S
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C/C
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ba, 1
365,
Pis
o 5
of. 5
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anta
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Ros
ario
Arg
entin
aC
asin
o la
Toj
a, S
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Cas
inos
50,0
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Glo
bal C
asin
o Te
chno
logy
Cor
pora
tion,
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la d
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l Gro
veP
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SA
, UTE
Cas
inos
50,0
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Cas
ino
Bue
nos
Aire
s, S
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C/R
awso
n de
Del
lepi
ane,
s/n
Bue
nos
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sA
rgen
tina
Com
diba
l 200
0 , S
. L.
B2B
50,0
0%50
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Glo
bal M
anuf
actu
ring
Cor
pora
tion,
S.L
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Pl.
Els
Bel
lots
, c/ d
el A
ire, 1
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ssa
Bar
celo
naC
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ticio
nes
Dep
ortiv
as, S
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Cas
inos
50,0
0%50
,00%
Gam
ing
& S
ervi
ces
de P
anam
á, S
.A.U
.C
alle
50
y 73
Est
e S
an F
ranc
isco
Pan
amá
Pan
amá
Com
prav
enta
Máq
uina
s R
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ativ
as M
oran
, S
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pera
tiona
l-
50,0
0%O
rland
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lay,
S.A
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erm
an B
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cer,
22 P
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lche
P
arqu
e In
d.E
lche
Alic
ante
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o, S
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Bin
gos
-50
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A.O
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S.r.
l.V
ia G
iorg
io W
ashi
ngto
n, 9
7M
ilán
Italy
Ele
ctró
nico
s P
isue
rga,
S.A
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2B-
50,0
0%G
loba
l Man
ufac
turin
g C
orpo
ratio
n, S
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etal
, 2V
alla
dolid
Val
lado
lidE
lect
róni
cos
Tru j
illan
os, S
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Ope
ratio
nal
50,0
0%50
,00%
Glo
bal A
mus
emen
t Par
tner
s C
orpo
ratio
n,
Avd
a. G
uada
lupe
, 14
Truj
illo
Các
eres
Em
juca
sa, S
.A.
Cas
inos
50,0
0%50
,00%
Cirs
a In
tern
atio
nal G
amin
g C
orpo
ratio
n,
S.A
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Bac
aca y
, 278
9 pi
so 5
-20
Bue
nos
Aire
sA
rgen
tina
Enj
oy W
ith U
s, S
.L.
Bin
gos
50,0
0%-
Pla
y To
Win
, S.L
.C
/ Ant
onio
Cab
ezon
, 89
Mad
ridM
adrid
Ext
rem
eña
de e
xplo
taci
ones
recr
eativ
as y
de
jueg
o, S
.L.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.C
/Ant
onio
de
Cab
ezón
, 89
Mad
ridM
adrid
Fest
iland
ia, S
.L.U
.O
pera
tiona
l-
50,0
0%R
esta
val,
S.A
.A
veni
da d
el M
edite
rráne
o, 2
0B
enid
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ante
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ingo
Eur
omat
ic-1
00, S
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pera
tiona
l50
,00%
50,0
0%O
rland
o P
lay,
S.A
.P
.l. L
a Ju
aida
, C/S
ierra
Tel
ar, 4
0V
iato
rA
lmer
íaG
hist
, S.R
.L.
Ope
ratio
nal
-25
,00%
Roy
al G
ames
, S.R
.L.
Via
le M
onte
grap
pa, 4
Pav
iaIta
lyG
ioch
igen
ova,
S.R
.L.
Ope
ratio
nal
50,0
0%50
,00%
Cirs
a Ita
lia, S
.A.U
.V
ia C
ol D
ino,
6G
enov
aIta
lyG
oldp
lay,
S.A
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ntes
Cam
porro
, S.A
.)O
pera
tiona
l-
50,0
0%O
rland
o P
lay,
S.A
.S
ierra
Tel
ar, s
/n P
.I. L
a Ju
aida
Via
tor
Alm
ería
Gol
den p
lay,
S.L
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Ope
ratio
nal
50,0
0%50
,00%
Orla
ndo
Pla
y, S
.A.
Ger
man
Ber
nace
r, 22
P.I.
Elc
he
Par
que
Ind.
Elc
heA
lican
teH
appy
Gam
es, S
.R.L
.O
pera
tiona
l25
,00%
25,0
0%R
oyal
Gam
es, S
.R.L
.V
ia Z
appe
llini
, 6B
usto
Ars
izio
Italy
Jueg
os S
an J
osé,
S. A
.B
ingo
s47
,50%
47,5
0%G
loba
l Bin
go C
orpo
ratio
n, S
.A.U
.G
ener
al M
as D
e G
amin
de, 4
7 B
ajos
Las
Pal
mas
G.C
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ran
Can
aria
La C
afet
ería
del
Bin
go, S
.L.
Bin
gos
50,0
0%50
,00%
Glo
bal B
ingo
Cor
pora
tion,
S.A
.U.
Asu
nció
n, 3
Sev
illa
Sev
illa
Mad
rileñ
a de
Exp
lota
cion
es R
ecre
ativ
as y
de
Jue
go, S
.A.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.C
/Ant
onio
de
Cab
ezón
, 89
Mad
ridM
adrid
Mar
cham
atic
Inda
lo, S
.L.U
.O
pera
tiona
l50
,00%
50,0
0%O
rland
o P
lay,
S.A
.C
/Sie
rra T
elar
, 40
Via
tor
Alm
eria
Med
iterra
nea
de e
xplo
taci
ones
recr
eativ
as y
de
jueg
o, S
.L.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.C
/Ant
onio
de
Cab
ezón
, 89
Mad
ridM
adrid
Met
roni
a C
R, S
.A.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.S
an J
osé-
Tiba
s S
an J
uan
100m
nor
te
450
m o
este
Tiba
sC
osta
Ric
aM
etro
nia
Pan
ama ,
S.A
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ingo
s50
,00%
50,0
0%P
lay
To W
in, S
.L.
Av.
Bal
boa
Edi
f.Bay
Hal
l Pla
zaC
iuda
d de
Pan
amá
Pan
amá
Mol
ljoc
S. X
XI,
S.A
.U.
Bin
gos
50,0
0%50
,00%
Res
iden
cial
Tib
idab
o, S
.A.
Mal
lorc
a, 2
70B
arce
lona
Bar
celo
naM
onte
carlo
And
aluc
ía, S
.L.
Bin
gos
50,0
0%50
,00%
Glo
bal B
ingo
Cor
pora
tion,
S.A
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Av.
Cru
z de
l Cam
po, 4
9S
evill
aS
evill
a
- 5 -
F-80
App
endi
x I
List
of j
oint
ly c
ontr
olle
d co
mpa
nies
Per
cent
age
Per
cent
age
of o
wne
rshi
pof
ow
ners
hip
Com
pany
Act
ivity
2011
2010
Inve
stm
ent h
olde
rB
usin
ess
addr
ess
City
Pro
vinc
e/C
ount
ry
Mul
ticas
ino,
S.A
.C
asin
os50
,00%
50,0
0%G
amin
g &
Ser
vice
s de
Pan
amá,
S.A
.U.
Cal
le 5
0, C
alle
73
Est
eC
iuda
d de
Pan
amá
Pan
amá
New
Lao
mar
, S.L
.U.
Ope
ratio
nal
50,0
0%50
,00%
Orla
ndo
Pla
y, S
.A.
c/S
ierra
Tel
ar, 4
0V
iato
rA
lmer
iaO
pa S
ervi
ces,
S.r.
l.B
ingo
s30
,00%
30,0
0%A
.O.G
., S
.r.l.
Gal
leria
del
Cor
so, 3
Rom
aIta
lyO
pera
dora
de
Exp
lota
cion
es R
ecre
ativ
as y
de
Jue
go, S
.L.
Bin
gos
50,0
0%50
,00%
Pla
y To
Win
, S.L
.A
nton
io C
abez
ón, 8
9M
adrid
Mad
ridO
rland
o Ita
lia, S
.r.l.
Ope
ratio
nal
50,0
0%50
,00%
Orla
ndo
Pla
y, S
.A.
Mila
no F
iori,
Stra
da 2
, Pal
azzo
D4
Ass
ago
Italy
Orla
ndo
Pla
y, S
.A.
Ope
ratio
nal
50,0
0%50
,00%
Glo
bal G
ame
Mac
hine
Cor
pora
tion,
S.A
.U.
Sie
rra T
elar
, 40
P.I.
La
Juai
daV
iato
rA
lmer
íaP
lay
to W
in, S
.L.
Bin
gos
50,0
0%50
,00%
Glo
bal B
ingo
Cor
pora
tion,
S.A
.U.
Ant
onio
Cab
ezón
, 89
Mad
ridM
adrid
Pol
ispa
ce, S
.L.U
.B
2B50
,00%
50,0
0%B
inel
ec, S
.L.
Ate
nas,
45
Mál
aga
Mál
aga
Pos
bint
ra, S
.A.
Bin
gos
50,0
0%50
,00%
Glo
bal B
ingo
Cor
pora
tion,
S.A
.U.
Mal
lorc
a, 2
70B
arce
lona
Bar
celo
naR
ecre
ativ
os B
igar
, S.L
.O
pera
tiona
l50
,00%
50,0
0%C
irsa
Slo
t Cor
pora
tion,
S.L
.U.
Pas
eo U
barb
uru,
37
San
Seb
astiá
nG
uipú
zcoa
Rec
reat
ivos
Jer
oni O
rfila
, S.L
.O
pera
tiona
l50
,00%
50,0
0%C
irsa
Slo
t Cor
pora
tion,
S.L
.U.
C/E
mili
Dar
der B
atle
, 4P
alm
a de
Mal
lorc
aB
alea
res
Rec
reat
ivos
Man
cheg
os, S
.L.
Ope
ratio
nal
50,0
0%50
,00%
Glo
bal A
mus
emen
t Par
tner
s C
orpo
ratio
n,
C/P
ío II
I, 13
Alc
azar
de
San
Jua
nC
iuda
d R
eal
Rec
reat
ivos
Oci
omar
Lev
ante
, S.L
.U.
Ope
ratio
nal
50,0
0%50
,00%
Orla
ndo
Pla
y, S
.A.
Ctra
. De
Cas
tella
r, 29
8Te
rrass
aB
arce
lona
Rec
reat
ivos
Pan
aem
i, S
.L.U
.O
pera
tiona
l50
,00%
50,0
0%O
rland
o P
lay,
S.A
.c/
Ger
man
Ber
nace
r, 22
P.I.
Elc
heM
urci
aM
urci
aR
ecre
ativ
os P
ozue
lo, S
.L.
Ope
ratio
nal
50,0
0%50
,00%
Glo
bal A
mus
emen
t Par
tner
s C
orpo
ratio
n,
C/C
osta
nilla
del
Oliv
ar, 2
Poz
uelo
de
Ala
rcón
Mad
ridR
ecre
ativ
os R
ute ,
S.L
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Ope
ratio
nal
-50
,00%
Orla
ndo
Pla
y, S
.A.
Sie
rra T
elar
, s/n
P.I.
La
Juai
daV
iato
rA
lmer
íaR
ed d
e Ju
egos
y A
pues
tas
de M
adrid
, S.A
.B
ingo
s40
,00%
40,0
0%V
ario
sC
/Eva
risto
San
Mig
uel,
2M
adrid
Mad
ridR
esid
enci
al T
ibid
abo,
S.A
.B
ingo
s50
,00%
50,0
0%G
loba
l Bin
go C
orpo
ratio
n, S
.A.U
.M
allo
rca,
270
Bar
celo
naB
arce
lona
Res
tava
l, S
.A.
Ope
ratio
nal
-50
,00%
Cirs
a S
lot C
orpo
ratio
n, S
.L.U
.G
uada
lqui
vir,
84H
orno
de
Alc
edo
Val
enci
aR
oyal
bet,
S.R
.L.
Ope
ratio
nal
47,5
0%47
,50%
Roy
al G
ames
, S.R
.L.
Via
Ris
mon
do, 4
Pav
iaIta
lyR
oyal
Bet
, S.R
.L.
Ope
ratio
nal
-50
,00%
Roy
al G
ames
, S.R
.L.
Ro y
al G
ames
, S.R
.L.
Ope
ratio
nal
50,0
0%50
,00%
Cirs
a Ita
lia, S
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F-81
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- 7 -
F-82
<+
INDEPENDENT AUDIT REPORT
CIRSA GAMING CORPORATION GROUP Consolidated Financial Statements and Consolidated Management Report
for the year ended December 31, 2010
F-83
<+
Ernst & Young, S.L. Cortés, Pérez & CIA. Auditores, S.L.P. Edificio Sarriá Forum - Av. Sarrià, 102-106, Ático. 08017 Barcelona Passeig de Gràcia, 11 esc. A 2º 2ª. 08007 Barcelona Teléfono: 933 663 700 - Fax: 934 053 784 Teléfono: 93 270 24 14 - Fax: 93 2702 415 www.ey.com/es www.cyp.es Domicilio Social: Plaza Pablo Ruiz Picasso, 1. 28020 Madrid. Domicilio Social: Gutenberg, 3-13, 5º A. 08224 Terrassa Inscrita en el Registro Mercantil de Madrid al Tomo 12749 Inscrita en el Registro Mercantil de Barcelona, Tomo 25.321 Libro 0, Folio 215, Sección 8ª, Hoja M-23123, Inscripción 116. Folio 200, Hoja B.87184. Nº Insc. I.C.J.C.E 57 C.I.F. B78970506 N.I.F. B-08770802
Translation of a report and consolidated financial statements originally issued in Spanish. In the event of discrepancy, the Spanish-language version prevails
(See Note 30)
AUDIT REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders of Cirsa Gaming Corporation, S.A.
We have audited the consolidated financial statements of Cirsa Gaming Corporation, S.A. (hereinafter the Company) and its subsidiaries (the Group), which comprise the consolidated statement of financial position at December 31, 2010, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes thereto for the year then ended. As indicated in Note 2 to the accompanying consolidated financial statements, the directors are responsible for the preparation of the Group’s consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, and other provisions in the regulatory framework applicable to the Group. Our responsibility is to express an opinion on the aforementioned consolidated financial statements taken as a whole, based upon work performed in accordance with prevailing audit regulations in Spain, which require the examination, through the performance of selective tests, of the evidence supporting the consolidated financial statements, and the evaluation of whether their presentation, the accounting principles and criteria applied and the estimates made are in agreement with the applicable regulatory framework for financial information.
In our opinion, the accompanying 2010 consolidated financial statements give a true and fair view, in all material respects, of the consolidated equity and consolidated financial position of Cirsa Gaming Corporation, S.A. and subsidiaries at December 31, 2010, and the consolidated results of operations and consolidated cash flow for the year then ended, in conformity with IFRS, as adopted by the EU, and other applicable provisions in the regulatory framework for financial information.
F-84
<+
- 2 -
The accompanying 2010 consolidated management report contains such explanations as the directors of the Company consider appropriate concerning the situation of the Group, the evolution of its business and other matters; however, it is not an integral part of the consolidated financial statements. We have checked that the accounting information included in the aforementioned consolidated management report agrees with the 2010 consolidated financial statements. Our work as auditors is limited to verifying the consolidated management report in accordance with the scope mentioned in this paragraph, and does not include the review of information other than that obtained from the accounting records of the Group companies.
ERNST & YOUNG, S.L. CORTÉS, PÉREZ & CIA. AUDITORES, S.L.P. (Signature on the original in Spanish) (Signature on the original in Spanish) ______________________________ ___________________________
Joan J. Torrebadella Jaume Cetrà Oliva April 1, 2011
F-85
Cirsa Gaming Corporation Group
Consolidated Financial Statements for the year ended December 31, 2010 in conformity with the international financial reporting standards adopted by the
European Union (IFRS-EU) and Consolidated Management Report
F-86
CONTENTS
Consolidated Financial Statements
� Consolidated statement of financial position at December 31, 2010 and 2009
� Consolidated statement of comprehensive income for the years ended December 31, 2010 and 2009
� Consolidated statement of changes in equity for the years ended December 31, 2010 and 2009
� Consolidated statement of cash flows for the years ended December 31, 2010 and 2009
� Notes to the consolidated financial statements for the year ended December 31, 2010
Consolidated Management Report
Appendix Consolidation perimeter at December 31, 2010 and 2009
F-87
- 1 -
Cirsa Gaming Corporation Group Consolidated statement of financial position at December 31 ASSETS (Thousands of euros) Notes 2010 2009 Non-current assets 1,050,018 981,576 Goodwill 5 241,070 250,625 Other intangible assets 6 127,662 107,352 Property, plant and equipment 7 466,808 407,165 Financial assets 8 133,031 146,255 Deferred tax assets 18.4 81,447 70,179 Current Assets 299,102 257,103 Inventories 11 13,568 25,255 Trade and other receivables 8 162,621 134,626 Other financial assets 8 49,606 37,823 Other current assets 8,147 9,088 Cash and cash equivalents 12 65,160 50,311 Total assets 1,349,120 1,238,679
EQUITY AND LIABILITIES (Thousands of euros) Notes 2010 2009 Equity 84,979 90,847 Issued capital 13.1 24,577 24,577 Share premium 9,500 9,500 Treasury shares 13.2 (184) (184) Retained earnings 13.3 97,976 130,492 Translation differences (98,304) (86,949) Profit (loss) for the year attributable to equity holders of the parent (19,045) (4,970) Non-controlling interests 13.4 70,459 18,381 Non-current liabilities 843,646 811,411 Bonds 14 602,431 495,808 Bank borrowings 15 126,457 172,056 Other creditors 16 64,474 104,768 Provisions 17 17,007 10,723 Deferred tax liabilities 18.4 33,277 28,056 Current liabilities 420,495 336,421 Bonds 14 9,785 8,672 Bank borrowings 15 79,630 56,531 Suppliers 104,952 85,151 Other creditors 16 197,007 162,516 Current income tax payable 18.2 29,121 23,551 Total equity and liabilities 1,349,120 1,238,679
F-88
- 2 -
Cirsa Gaming Corporation Group Consolidated statement of comprehensive income for the years ended December 31
(Thousands of euros) Notes 2010 2009 Gaming income 1,607,111 1,512,847 Other operating income 167,092 135,491 Total operating revenues 1,774,203 1,648,338 Bingo prizes (310,066) (335,592) Variable rent (219,673) (212,944) Net operating revenues 3.1 1,244,464 1,099,802 Consumptions (87,579) (89,047) Personnel 20.1 (228,572) (203,088) External supplies and services 20.2 (253,429) (215,556) Gaming taxes (414,863) (383,506) Depreciation, amortization and impairment 5, 6 and 7 (140,418) (97,543) Change in trade provisions (4,556) (3,931) Finance income 11,088 10,353 Finance costs (92,316) (72,858) Change in financial provisions (1,685) (313) Share of the associates’ profit 8.1 238 301 Foreign exchange results 20.3 (477) (142) Results on sale/disposals of non-current assets (9,390) (16,279) Profit before income tax 22,505 28,193 Income tax expense 18.2 (33,097) (31,292) Net profit (loss) from continuing activities (10,592) (3,099) Other comprehensive income (loss) Translation differences (12,775) (12,918) Other comprehensive income (loss) for the year (12,775) (12,918) Total comprehensive income (loss) for the year (23,367) (16,017) Net profit (loss) attributable to:
Equity holders of the parent (19,045) (4,970) Non-controlling interests 13.4 8,453 1,871 (10,592) (3,099)
Total comprehensive income (loss) attributable to: Equity holders of the parent (30,400) (17,888) Non-controlling interests 13.4 7,033 1,871 (23,367) (16,017)
F-89
- 3 -
Cirsa Gaming Corporation Group Consolidated statement of changes in equity for the years ended December 31
(Thousands of euros)
Issued capital
(Note 13.1) Share
premium
Treasury shares
(Note13.2)
Retained earnings
(Note 13.3) Translation differences
Non-controlling interests
(Note 13.4)
Total
At December 31, 2008 24,577 9,500 (184) 130,492 (92,649) 19,978 91,714 Net profit for the year 2009 - - - (4,970) - 1,871 (3,099) Other comprehensive income (loss) for the year 2009 - - - - (12,918) - (12,918) Total comprehensive income (loss) for the year 2009 - - - (4,970) (12,918) 1,871 (16,017) Hyperinflation restatement (Note 2.1) - - - - 18,618 - 18,618 Other changes: � Changes in percentage of
ownership - - - - - 4,058 4,058 � Dividends paid - - - - - (7,526) (7,526) At December 31, 2009 24,577 9,500 (184) 125,522 (86,949) 18,381 90,847 Net profit for the year 2010 - - - (19,045) - 8,453 (10,592) Other comprehensive income (loss) for the year 2010 - - - - (11,355) (1,420) (12,775) Total comprehensive income (loss) for the year 2010 (19,045) (11,355) 7,033 (23,367) Other changes: � Changes in percentage of
Cirsa Gaming Corporation Group Consolidated statement of cash flows for the years ended December 31
(Thousands of euros) Notes 2010 2009 Cash-flows from operating activities Profit before tax 22,505 28,193 Adjustments to profit:
Changes in operating provisions 4,556 3,931 Depreciation and amortization of non-current assets 5, 6 and 7 140,418 97,543 Gains (losses) from sales and disposals of non-current assets 9,390 16,279 Finance income and costs 82,675 62,818 Exchange gains (losses) 20.3 477 142 Other income and expenses 1,000 2,394
Change in: Inventories 3,700 (2,700) Trade and other receivables 2,668 5,200 Suppliers and other payables 4,387 12,300 Gaming taxes payable (3,419) (500) Other operating assets and liabilities (15,240) 7,700
Income tax paid (26,697) (22,300) Net cash-flows from operating activities 226,420 211,000 Cash-flows from (used in) investing activities Purchase of property, plant and equipment (105,368) (120,200) Purchase of intangibles (35,380) (47,400) Proceeds from disposal of property, plant and equipment 1,101 3,400 Acquisition of shares in companies, net of cash acquired 4 (30,800) (10,800) Current account with Nortia Business Corporation, S. L. – Outflows (74,722) (25,900) Current account with Nortia Business Corporation, S. L. – Inflows 74,722 25,900 Other financial assets (14,638) (10,900) Interest received and cash revenues from financial assets 6,760 6,600 Net cash-flows used in investing activities (178,325) (179,300) Cash-flows from (used in) financing activities Proceeds from bank borrowings 2,071,907 1,609,800 Repayment of bank borrowings (2,097,969) (1,580,400) Repayment of bonds (278,000) (400) Issue of bonds 14 391,600 - Acquisition of own bonds 14 (10,000) - Finance leases (12,135) (6,000) Interest paid (88,787) (67,800) Other (9,604) (3,200) Net cash-flows from (used in) financing activities (32,988) (48,000)
Net variation in cash and cash equivalents 15,107 (16,300) Net foreign exchange difference on cash balances (258) 2,659 Cash and cash equivalents at January 1 50,311 63,952 Cash and cash equivalents at December 31 12 65,160 50,311
F-91
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 1 -
1. DESCRIPTION OF THE GROUP 1.1 Group activity Cirsa Gaming Corporation, S. A. (hereinafter “the Company”) and its controlled companies (hereinafter “the Group”) consist of a set of companies operating in the gaming and leisure sector, carrying out the following activities:
• Designing and manufacturing slot machines, which are sold to Group companies and third parties, and development of interactive gaming systems
• Operating, both in Spain and abroad, slot machines, bingo halls, casinos and lotteries
1.2 Composition and structure of the Group The Company, domiciled in Terrassa (Barcelona) at Carretera Castellar, 298, belongs to a group, of which Nortia Business Corporation, S.L., also domiciled in Terrassa (Barcelona), is the parent company. The companies invested by the Company at December 31, 2010 and 2009 are detailed in the Appendix I, grouped in the following categories: • The subsidiaries are companies where most of the voting rights are controlled either directly or
indirectly by the Company so that it can manage the financial and operating policies in order to obtain profit from the investment.
• The joint ventures are companies ruled by a contractual arrangement between the partners
whereby they establish joint control on the business, which requires the unanimous consent of the venturers regarding the operating decisions.
• The affiliated companies are enterprises not included in the previous two categories and in which
there is an ownership interest on a long-term basis that favors their activity, but with limited influence over their management and control.
(NOTE: The column percentage of ownership in the Appendix is obtained by multiplying the different successive percentages along the corresponding chain of control, thereby reflecting the final ownership at the Company’s level.)
F-92
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 2 -
1.3 Variations in the consolidation perimeter During 2010 and 2009, the Group’s legal structure has experienced certain changes, as described below: 2010
• Acquisition of companies
(Thousands of euros)
Total assets included in the consolidated
statement of financial position at
December 31, 2010
Operating revenues included in the 2010
consolidated statement of
comprehensive income Accord Investment, S.A. 8,469 33,007 Universal de Casinos, S.A. 32,707 35,015 Edmo, S.R.L. 5,631 13 Hispania Investment, S.A. 626 681 47,433 68,716 Accord Investment, S.A. has ownership interests in several joint ventures (All Games, S.R.L., Andy Games, S.R.L., Giochigenova, S.R.L., Intensa Giochi, S.R.L., Royal Games, S.R.L., Royalbet, S.R.L., Royal Bet, S.R.L., SGR, S.R.L., Happy Games, S.R.L. and Fly Games, S.R.L.). Note 4 includes information on business combinations of the year. Edmo, S.R.L. is the mere owner of a real estate property, so its acquisition represents an indirect acquisition of assets, and as such is recognized in these consolidated financial statements, instead of being recognized as a business combination. • Creation of companies The Group has not created any new companies in 2010.
• Sale of companies
(Thousands of euros)
Total assets included in the consolidated
statement of financial position at
December 31, 2009
Operating revenues included in the 2009
consolidated statement of
comprehensive income Full Games, S.R.L. 166 1,266 Restaurante Jai Alai de Acapulco, S.A. 31 - Valenciana de Productos Eléctricos, S.L. 409 - 606 1,266
F-93
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 3 -
• Changes in percentage of ownership Consolidation method Percentage
At December 31,
2010 At December
31, 2009 At December
31, 2010 At December
31, 2009 Complejo Hotelero Monte Picayo, S.A. Full Proportional 100.00% 50.00% Jesalí, S.A. Full Proportional 100.00% 50.00% Promociones e Inversiones de Guerrero, S.A. Full Full 100.00% 96.00% Winner Group, S.A. Full Full 50.01% 75.00% Bumex Land, S.A. Proportional Full 50.00% 60.00% Inversiones Interactivas, S.A. Full Proportional 70.00% 70.00% Integración Inmobiliaria World de México, S.A. Full Full 100.00% 96.00% Global Gaming, S.A. Full Full 100.00% 70.00% Non-controlling interests arisen in transactions that have led to a change from proportional to full consolidation method are described in Note 4. The changes in percentages of ownership that have not resulted in a change in the consolidation method are as follows: (Thousands of euros)
Changes in non-controlling interests
Changes in accumulated results
Promociones e Inversiones de Guerrero, S.A. 5,467 (5,467) Winner Group, S.A. 27,293 (22,082) Other 111 - 32,871 (27,549) • Other
(a) Dissolution and liquidation of dormant companies:
Magic Coin, S.A. Trebisa, S.A.
Leg Portugal – Máquinas de Diversao, LDA Marrebi, S.A. Remata, S.A. Servi-5, S.A. Astoria Juegos, S.A. Cirsa Casino, S.A. Casino Management, S.A. Cirsa Finance Luxembourg, S.A. CIC, S.L. – Troyjocs, S.L. UTE (b) Dissolution of companies due to merger within the Group:
Inversiones Larimar, S.A. Padova Giochi, S.R.L. Juan Carlos Espinilla, S.L.
Prodigy Investment Corporation Global Britton 07, S.L.
Lucky Games, S.A.
F-94
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 4 -
2009 • Acquisition of companies (Thousands of euros)
Total assets included in
the consolidated statement of financial
position at December 31, 2009
Operating revenues included in the 2009 consolidated
statement of comprehensive income
Marchamatic Indalo, S.L. 934 52 New Laomar, S.L. 2,123 214 Recreativos Ociomar Levante, S.L. 151 3,416 Automaticos Laomar, S.L. 165 8 Metronia Panama, S.A. 58 20 Mediterranea de Explotaciones y de Juego, S.A. 1 - Metronia, CR, S.A. 351 240 Vasca de Explotaciones y de Juego, S.L. 316 118 Extremeña de Explotaciones y de Juego, S.L. 73 8 Madrileña Explotaciones Recreativas y de Juego, S.A. 2,751 222 6,923 4,298
• Creation of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2009
Operating revenues included in the 2009 consolidated
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 5 -
• Changes in percentage of ownership Consolidation method Percentage
At December
31, 2009 At December
31, 2008 At December
31, 2009 At December
31, 2008 Gaming and Services de Panamá, S.A. Full Full 100.00% 70.90% Comput Bingo, S.A. Proportional Proportional 70.00% 50.00% Inversiones Larimar, S.A Full Full 100.00% 98.10% Cafetería Miami, S.A. Full Full 100.00% 51.50% Padova Giochi, S.R.L Full Proportional 100.00% 50.00% Bingo Amico, S.R.L. Proportional Equity 50.00% 25.00% Casino La Toja, S.A. Proportional Full 50.00% 100.0% Gironina de Bingos, S.L. Equity Equity 20.60% 25.00% Orlando Play, S.A. Proportional Full 50.00% 75.00% Flamingo Euromatic-100, S.L Proportional Full 50.00% 75.00% Golden Play, S.L. Proportional Full 50.00% 75.00% Compraventa Maquinas Recreativas Moran , S.L.
Proportional
Full
50.00%
75.00%
Recreativos Rute, S.L. Proportional Full 50.00% 75.00% Goldplay, S.A. Proportional Full 50.00% 75.00% Recreativos Panaemi, S.L. Proportional Full 50.00% 75.00% Mendoza Central Entretenimientos, S.A. Full Full 51.00% 100.0% Promociones e Inversiones de Guerrero, S.A. Integración Inmobiliaria World de Mexico, S.A. Lucky Games, S.A.
Full Full Full
Full Full Full
96.00% 96.00% 100.00%
51.00% 51.00% 70.90%
• Other
(a) Dissolution and liquidation of dormant companies:
Casino Las Nubes, S.A. Italian Gaming Service, S.R.L.
Unidesa Italia, SRL Entretenimiento y Negocios LTDA Flamingo Loga, S.L. (b) Dissolution of companies due to merger within the Group:
Ulprifutur, S.L. Zhenka, S.L. Gran Casino de Lima SAC
Myes Factory 2004, S.L.
F-96
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2. BASIS OF PRESENTATION AND ACCOUNTING STANDARDS 2.1 Basis of presentation The 2010 consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union published by the International Accounting Standards Board (IASB) and further interpretations. The Company belongs to a group, whose parent is Nortia Business Corporation, S.L. (Nortia Group), domiciled in Terrassa (Spain). The Company meets the criteria for exemption from preparing consolidated financial statements under article 43 of the Commercial Code. Consequently, these consolidated financial statements are considered voluntary. The consolidated financial statements of Nortia Group and the consolidated management report for the year ended December 31, 2009 were prepared on March 31, 2010 and filed with the Barcelona Mercantile Registry together with the corresponding audit report. The consolidated financial statements and consolidated management report for the year ended December 31, 2010 will be prepared in the approved manner and filed, together with the audit report, with the Barcelona Mercantile Registry according to the legal deadlines. The financial statements of the companies composing the Group for the year ended December 31, 2010 have not yet been submitted for approval by the shareholders in general meeting. Nevertheless, the Board of Directors of the Company expects that they will be approved without modification and, therefore, will not have any impact on the present consolidated financial statements. The accounting policies applied in the preparation of the accompanying consolidated financial statements comply with the IFRS prevailing at the date of their preparation. For certain cases, the IFRS-EU provide alternative applications. The options applied by the Group are described in the accounting policies listed in the accompanying notes. For comparative purposes, the accompanying consolidated financial statements, which have been prepared at historical cost, include the figures of 2010 in addition to those of 2009 for each item of the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows, and the consolidated notes thereto, except for the information on late payment of suppliers in commercial transactions.
Information on late payment to suppliers in commercial transactions
This is the first year in which the Resolution of December 29, 2010, passed by the Institute of Accounting and Auditors of Accounts ("Instituto de Contabilidad y Auditoría de Cuentas" in Spanish), is applicable to the information concerning late payment to suppliers in commercial transactions, to be included in the Notes to the financial statements. By virtue of the stipulations in Transitional Provision Two for first-time application, the Company only provides information related to the overdue amounts payable to suppliers which at year end exceed the legal payment deadline. Further, comparative information is not presented with respect to this new obligation, and the financial statements are considered first-time financial statements exclusively in terms of uniformity and comparability. Classification of Venezuela as a hyperinflationary economy Throughout 2009 and in the first days of 2010, a number of factors arose in the Venezuelan economy that led the Group to reconsider the treatment it followed with respect to the translation of the financial statements of investees, as well as the recovery of its financial investments in that country. Within these factors it was worth highlighting the level of inflation reached in 2009 and the cumulative inflation over the last three years; the restrictions to the official foreign exchange market and, finally, the devaluation of the Bolivar fuerte by decision of the Government on January 8, 2010.
F-97
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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As a result, in accordance with the applicable standard, Venezuela had to be considered as a hyperinflationary economy in 2009. The main implications of this were as follows:
� Adjustment of the historical cost of non-monetary assets and liabilities and the various items of equity of these companies from their date of acquisition or inclusion in the consolidated statement of financial position to the end of the year to reflect the changes in purchasing power of the currency caused by the inflation. The cumulative impact of the accounting restatement to adjust for the effects of hyperinflation for years prior to 2009 was reflected in the translation differences at the beginning of the 2009 financial year.
� Adjustment of the consolidated statement of comprehensive income to reflect the financial loss caused by the impact of inflation in the year on net monetary assets (loss of purchasing power).
� The various components of the consolidated statement of comprehensive income and statement of cash flows were adjusted according to the inflation index since their generation, with a balancing entry in financial results.
� All components of the financial statements of the Venezuelan companies have been translated at the closing exchange rate, which at December 31, 2010 was to 5.75 Bolivares fuertes per euro (3.10 Bolivares fuertes per euro at December 31, 2009).
The main effects on the Group’s consolidated financial statements for 2009 derived from the items mentioned above were as follows: (Thousands of euros) 2009 Revenue 4,107 EBITDA 1,914 Profit (loss) in the net monetary position* (4,857) Net income (5,248) Hyperinflation restatement 18,618 Net impact on equity 13,370
*Loss in the net monetary position was included in the financial expense of the consolidated statement of comprehensive income. At December 31, 2010 the Venezuelan economy continues to be considered hyperinflationary in terms of NIIF application, and the main impacts for 2010 are as follows: (Thousands of euros) 2010 Revenue 3,774 EBITDA 1,227 Profit (loss) in the net monetary position* (3,629) Net income (4,725) *Loss in the net monetary position is included in the financial expense of the consolidated statement of comprehensive income. 2.2 Estimates and judgments The preparation of the consolidated financial statements requires the management of the Group to exercise judgment, to make estimates and to make assumptions which affect the application of the accounting policies and the recorded amounts of assets, liabilities, revenues and expenses. The estimates and assumptions taken into account have been based upon historical experience and other factors which were considered to be reasonable in the light of the circumstances. Consequently, the actual results could differ from those assumptions. The estimates and assumptions are reviewed periodically, such that any changes made in accounting estimates are posted in the period in which they are reviewed, in the event that such review only affects that period, or in the period of the review and future periods if the revision affects both. The key estimates and judgments are as follows:
F-98
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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• Impairment of assets The Group assesses for impairment at year end for all non-financial assets which carrying amount could be unrecoverable. Goodwill and intangible assets with an indefinite useful life are tested for impairment annually, or when there is evidence of impairment. In 2010 the Group has recognized goodwill impairment losses amounting to 19.3 million euros. In 2009 the Group did not recognized any significant impairment allowance for the non-financial assets (Note 5).
• Non-current assets with finite useful life The Group reviews periodically useful lives of non-current assets, adjusting prospectively amortization methods where applicable.
• Recoverability of deferred tax assets When the Group or a group company recognizes deferred tax assets, the estimated taxable profits that will be generated in future years are reviewed at year end in order to assess their recoverability, and any impairment loss is recognized accordingly. At December 31, 2010 the Group has recognized deferred tax assets amounting to 81,447 thousand euros (2009: 70,179 thousand euros), as described in Note 18.4.
• Provisions for taxes and other risks Provisions are recognized for taxes and risks that will probably arise based on related studies. At December 31, 2010 the Group has recognized provisions for taxes and other risks amounting to 17,007 thousand euros (2009: 10,723 thousand euros), as described in Note 17.
• Fair value of financial instruments When accounting regulations applicable to the Group require the measurement of financial assets and liabilities at fair value, this is determined based on generally accepted valuation methods when no objective market price exists. A third-party report is requested when the complexity of the issue requires it.
• Business combinations and goodwill The Group assesses for each business combination, the fair value of assets, liabilities and acquired contingent liabilities, allocating the cost of the business combination to the identified elements. Likewise, goodwill arising from the acquisition is assigned to its corresponding cash-generating unit, based on expected synergies, for subsequent impairment tests. 2.3 Changes in accounting policies and disclosure of information effective in 2010 The accounting policies applied in the preparation of the consolidated financial statements for the year ended December 31, 2010 are the same as those used in the prior year, except for the adoption, on January 1, 2010, of the following standards, amendments and interpretations published by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee, and adopted by the European Union for its application in its member states. IFRS 3 (2008), Business combinations The revised version of IFRS 3 adds significant changes to the recognition of business combinations. The main impacts are as follows:
• Allowing an alternative for the measurement of non-controlling interests, either at their fair value or at their share in the carrying amount of the identifiable net assets acquired. This measurement alternative is available for each separate transaction;
F-99
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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• Modifying the recognition and measurement of contingent payments related to business combinations. Under the revised standard, the contingent price is measured at fair value on acquisition date and subsequent adjustments only have an impact on goodwill as long as they derive from new information obtained after the acquisition date and within the period of ‘provisional accounting’ (12 months maximum from acquisition date). Any other subsequent adjustment is recognized in the income statement;
• Demanding that costs attributable to acquisition be recognized separately from the business combination, which generally means that these costs are recognized in the statement of comprehensive income as they are incurred, instead of being recognized as part of the acquisition cost, as established by the former standard;
• In business combinations carried out in stages, demanding that the share percentage be measured prior to its fair value at business combination date, recognizing any gains or losses resulting from this remeasurement in the statement of comprehensive income;
• Demanding that changes in tax assets acquired in business combinations prior to 1 January 2010 be recognized as adjustments to the statement of comprehensive income.
Its adoption has had an impact on the recognition of business combinations occurred in the period (Note 4). Amendment to IAS 27, Separate and consolidated financial statements Amendments included in IAS 27 establish that changes in the parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for as transactions with equity holders. Therefore, these transactions will not generate goodwill or gains or losses. Additionally, in accordance with the amendments to IAS 27, the loss of control entails that any residual interest held by the company be adjusted at fair value at the date of loss of control, recognizing any resulting gains or losses from said remeasurement in the statement of comprehensive income. At December 31, 2010 the application of this amendment has had no significant impact on the Group’s financial position and results, except for the effect described in Note 1.3. Other standards and interpretations applicable as of January 1, 2010 The adoption of the following standards, interpretations and amendments has had no impact on the Group financial position and results.
• Amendment to IFRS 2 ‘Group cash-settled share-based payment’
• Amendments to IAS 39 ‘Financial instruments: Recognition and measurement – Eligible Hedged Items’
• IFRIC 12 ‘Service Concession Arrangements’
• IFRIC 15 ‘Agreements for the Construction of Real Estate’
• IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’
• IFRIC 17 ‘Distributions of Non-cash Assets to Owners’
• IFRIC 18 ‘Transfers of Assets from Customers’
• Changes in IFRS 5 ‘Non-current assets held for sale and discontinued operations’ included in improvements in IFRSs issued in May 2008.
• Improvements in IFRSs issued in April 2009.
F-100
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.4 New standards and interpretations not in force at December 31, 2010 At the date of preparation of these consolidated financial statements, the following standards, amendments and interpretations had been published, but were not yet obligatory.
Standards and amendments to standards: Obligatory application:
years beginning on or after:
IFRS 9 Financial Instruments 1 January 2013 Revision of IAS 24 revised Related Party Disclosures 1 January 2011 Amendments to IAS 32 Classification of Rights Issues 1 February 2010 Improvements to IFRSs (May 2010) 1 January 2011 (*)
Amendment to IFRS 7 Disclosures – Transfers of financial assets 1 July 2011
Amendment to IAS 12 Deferred tax– Recovery of underlying assets 1 January 2012
(*) The amendments to IFRS 3 (2008) regarding the measurement of non-controlling interests and share-based payment plans, as well as amendments to IAS 27 (2008) and amendment to IFRS 3 (2008) regarding contingent payments arisen from business combinations with acquisition date prior to the effective date of the revised standards, come into effect for annual periods beginning on or after 1 July 2010.
Interpretations
Obligatory application: years beginning
on or after: IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 July 2010 Amendments to IFRIC 14 Prepayments of a Minimum Funding Requirement 1 January 2011
The Group has not adopted any standard, interpretation or amendment in advance, issued but not yet in force. The Group is currently analyzing the impact resulting from the application of these standards, amendments and interpretations. Based on the analyses made to date, the Group estimates that their application will have no significant impact on the consolidated financial statements in the period of initial application. Nevertheless, changes introduced by IFRS 9 will affect financial instruments and future transactions with them occurring as of January 1, 2013. 2.5 Consolidation methodology The consolidation methodology is described in the following sections: Consolidation methods The methods applied in the consolidation process are as follows:
• Full consolidation method for subsidiaries • Proportional consolidation method for multigroup companies • Equity method for affiliated companies Harmonization The financial year of the companies within the consolidation perimeter ends on December 31. For consolidation purposes the corresponding 2010 financial statements of each company have been used. The accounting principles applied by the companies comply with Group policies and, accordingly, no harmonization adjustments were necessary.
F-101
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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Elimination of intergroup transactions The intercompany balances arising from financial operations, rental agreements, payment of dividends, financial assets and liabilities, purchase and sale of inventories and non-current assets and rendering of services have been eliminated. In regard with purchase and sale transactions, the unrealized margin on assets, as well as depreciation, has been adjusted in order to show the assets at their original cost to the Group. Translation of financial statements in foreign currency The financial statements of foreign companies have been translated into euros prior to their consolidation following the year-end rate method, except for the financial statements of Venezuelan companies as stated in Note 2.1. Accordingly, assets and liabilities are translated at the spot rate prevailing at December 31, capital and reserves at the historical rates, and revenues and expenses at the averages rate for the year. Differences arisen from this process have been recorded directly under Translation differences in net equity. 2.6 Business combinations When Group gains control over one constituted business, or directly over a business’ net assets, the consideration transferred is assigned to assets, liabilities and contingent liabilities, measured at fair value. The difference between the sum of fair values and the sum of the consideration transferred plus the amount of any non-controlling interest in the acquiree at acquisition date is recognized as goodwill where it is positive or as income in the consolidated statement of comprehensive income where the difference is negative. The consideration transferred in a business combination is measured at fair value. This is calculated as the sum of the acquisition fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree, and the equity interests issued by the acquirer. The costs related to the acquisition, such as finder’s fees, advice, legal, accounting valuation and other professional or consulting fees, are recognized as expenses in the years when they are incurred and the services are provided. 2.7 Intangible assets Intangible assets are initially measured at acquisition cost less accumulated amortization and any impairment loss. Goodwill is not amortized for having indefinite useful life. Instead, it is tested for impairment at least annually as well as non-amortized intangible assets. Likewise, the net carrying amount of intangible assets having finite useful life is tested for impairment when there is evidence or changes of not recovering the carrying amount, similar to the criteria established for property, plant and equipment. Research expenses are charged to expenses when incurred, while development costs related to an individual project are capitalized when the Group can demonstrate the technical feasibility and profitability, the availability of financing resources and incurred costs can be measured reliably. Development expenses to be capitalized, including the cost of materials, personnel expenses directly attributable and a fair proportion of overheads, are amortized using the reducing balance amortized method (50% the first year) over the period for which they expect to obtain profits or income from such project, which generally comprises three years. Amounts paid to the owners of the sites where the slot machines are located on an exclusivity basis are capitalized as installation rights. They are amortized on a straight-line basis over the contract term. Administrative concessions are amortized on a straight-line basis, according to the concession term, as well as transfer rights of leased premise Software is amortized on a straight-line basis over three years.
F-102
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.8 Property, plant and equipment Property, plant and equipment are measured at acquisition cost less accumulated depreciation and any recognized impairment loss. The Group assesses whether there is an indication that the net carrying amount of property, plant and equipment may be impaired. If any indication exists, assets or cash-generating units are recorded at their recoverable amount, which is the higher of their fair value less cost to sell and value in use. To assess value in use, expected future cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. For those assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets, the recoverable amount is determined for the cash-generating units to which the asset belongs. Impairment losses are recorded as expense in the consolidated statement of comprehensive income. Expenses for repairs which do not prolong the useful life of the assets, as well as maintenance expenses, are taken to the consolidated statement of comprehensive income in the year incurred. Expenses incurred for expansion or improvements which increase the productivity or prolong the useful life of the asset are capitalized. Future expenses for restoring and retirement are recognized, at present value, as a cost component, with a liability provision as counterpart. Depreciation charges are calculated over the estimated useful lives of the assets. Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful life. The declining balance depreciation is used alternatively for some assets, basically slot machines, since it better follows the actual pattern of income related to these assets.
Method Rate Commercial buildings (new/used) and plant Straight line 2-4% Riverboats Straight line 6,6% Production installations (new/used) Straight line 8-16% Other installations Straight line 8-12% Production machinery Straight line 10% Other production equipment Straight line 20% New slot machines (“A” and “B” / “V” and “C”) Declining/Straight line 20% Used slot machines Straight line 40% Furniture (new/used) Straight line 10-20% Vehicles (new/used) Declining/Straight line 10-32% Tools and furniture (new/used) Straight line 30-60% EDP equipment (new/used) Declining/Straight line 25-50% Molds and dices Straight line 25% Other PP&E items Straight line 16%
The finite useful life of exploiting slot machines is necessarily subject to exogenous factors (mainly market and competence) of difficult forecast. In the event that such equipment completes its useful life before the base period used for depreciation, the net balance of the related good at the removal date is charged as depreciation for the year, given its recurrent and typical features, as well as its corrective nature of systematic depreciation performed on related goods. 2.9 Investments in associates Investments are accounted for under the equity method, i.e. they are accounted initially at cost and its carrying amount is increased or decreased in order to recognize the part of the result of the invested company attributed to the Group from the acquisition date. Part of the profit (loss) for the year of the invested company is recorded in the Group consolidated statement of comprehensive income. Dividends received reduce the amount of the investment. Changes in the invested company’s equity different than those generated by income of the period are directly recorded as changes in the Group’s net equity.
F-103
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.10 Financial assets Financial assets are initially recorded at fair value. For investments not measured at fair value with changes in results, directly attributable transaction costs are added. The Group establishes the classification of financial assets at the initial recognition, and, when appropriate and allowed, the classification is assessed again at each year end. Available-for-sale financial assets Available-for-sale financial assets are non-derivative instruments having neither maturity date (or not expected to be held until maturity), nor nature of trading portfolio, nor derived from trading activities or Group loans. Upon initial recognition, where possible, they are measured at fair value, recognizing changes in fair value directly within a separate caption in equity until the investment is derecognized or impaired, at which time the accumulated profit or loss previously recorded in equity is taken to the consolidated statement of comprehensive income. In 2010 and 2009 the Group available-for-sale investments have been measured at acquisition cost, since they cannot be measured reliably at fair value. Loans and receivables The Group recognizes in this category trade and non-trade receivables, which include financial assets with fixed or determinable payments not quoted on active markets and for which the Group expects to recover the full initial investment, except, where applicable, in cases of impairment. Following initial recognition, these financial assets are measured at amortized cost. Nevertheless, non-trade receivables which mature within less than one year with no contractual interest rate, as well as prepayments and loans to personnel, the amount of which is expected in the short term, are carried at nominal value both at initial and subsequent measurement, when the effect of not discounting cash flows is not significant. 2.11 Cancelation of financial assets and liabilities
Financial assets (or, when applicable, part of a financial asset or part of a group of similar financial assets) are derecognized when:
− Rights to related cash flows have expired; − The Group has retained the right to receive related cash flows, but has assumed the liability of
fully paying them within the established terms to a third party under a transfer agreement; − The Group has transferred the rights to receive related cash flows and (a) has substantially
transferred the risks and rewards incidental to the ownership of the financial asset, or (b) has not transferred or retained the asset’s risks and rewards, but has transferred the control over the asset.
Financial liabilities are derecognized when the related liability is settled, cancelled or expired. When a financial liability is replaced for other from the same borrower but with substantially different terms, or the conditions of the existing liability are substantially modified, such change or modification is recorded as a disposal of the original liability and an addition of a new liability. Difference of related carrying amounts is recognized in the consolidated statement of comprehensive income.
F-104
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.12 Inventories Inventories are accounted for at the lower of the acquisition cost and the recoverable amount. The recoverable amount of raw materials is the replacement cost. Nevertheless, no provision is set aside for raw materials and other consumables used in production, if the finished products in which they are incorporated are sold above cost. The recoverable value of finished products corresponds to the estimated sales price less related selling expenses. The cost value of finished products includes materials measured at the weighted average acquisition price, third-party work, labor and production overhead. 2.13 Cash and cash equivalents This heading includes cash, current accounts, bank deposits and other financial investments maturing within less than three months from the acquisition date, provided that risks of the substantial alteration of their value are not significant. In terms of the consolidated statement of cash flows, cash and cash equivalents include the abovementioned concepts, net of bank overdrafts, if applicable. 2.14 Impairment of assets Non-financial assets The Group assesses at each year end whether there is an indication that a non-current asset may be impaired. If any indication exists, and when an annual impairment test is required, the Group estimates the asset’s recoverable amount. The recoverable amount is the higher of the cash-generating unit (CGU) fair value less cost to sell and value in use, and it is established for each separate asset, unless for assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and its carrying amount is reduced to the recoverable amount. To assess value in use, expected cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. Impairment losses from continuing activities are recognized in the consolidated statement of comprehensive income. The Group assesses at year end indicators of impairment losses previously recorded in order to verify whether they have disappeared or decreased. If there are indicators, the Group estimates a new recoverable amount. A previously recognized impairment loss is reversed only if the circumstances giving rise to it have disappeared, since the last loss for depreciation was recognized. In this regard, the asset’s carrying amount increases to their recoverable amount. The reversal is limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset. The reversal is recognized in the consolidated statement of comprehensive income. Upon such reversal, the depreciation expense is adjusted in the following periods to amortize the asset’s revised book value, net of its residual value, systematically over the asset’s useful life. Financial assets The Group assesses at year end if financial assets or group of financial assets are impaired. To assess the impairment of certain assets, the following criteria are applied:
F-105
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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• Assets measured at amortized cost If there is objective evidence that there is an impairment loss of loans and other receivables recorded at amortized cost, the loss is measured as the difference between the net carrying amount and the present value of estimated cash flows, discounted at the current market rate upon initial recognition. The net carrying amount is reduced by an allowance, and the loss is recorded in the consolidated statement of comprehensive income. Impairment loss is reversed only if the circumstances giving rise to it have ceased to exist. Such reversal is limited to the carrying amount of the financial asset that would have been recognized on the reversal date had no impairment loss been recognized. In regard with trade and other receivables, when there is objective evidence of not collecting them, an adjustment is made based on identified bad debts risk. • Available-for-sale financial assets If a financial asset available-for-sale is impaired, the difference between its cost (net of any repayment) and present fair value, less any previous impairment loss recognized in equity are taken to the consolidated statement of comprehensive income. Reversals related to equity instruments classified as available-for-sale are not recognized in the consolidated statement of comprehensive income, but the associated increase in value is directly recorded in equity. 2.15 Treasury shares Treasury shares are recorded as a direct decline in the Group’s equity. They are measured at cost value, without recognizing any impairment loss. No gain or loss is recognized in the consolidated statement of comprehensive income on the purchase or sale of the Group’s own equity instruments. Any difference between the carrying amount and the consideration is recognized in equity. 2.16 Provisions Provisions are recognized when: − the Group has a present obligation either legal, contractual or constructive as a result of past
events; − it is probable that an outflow of resources will be required to settle the obligation; and − the amount of the obligation can be reliably measured.
When the effect of the cash temporary value is significant, the provision is estimated as the present value of the future cash flows required to settle the obligation. The discount rate applied in the assessment of the obligation’s present value only corresponds to the temporary value of money and does not include the risks related to the estimated future cash flows related to the provision. The increase of the provision derived from the aforementioned discount is recorded as a financial expense. 2.17 Interest yield loans and credits Loans and credits are initially measured at cost value, which is the fair value of the contribution received, net of issuance costs related to the debt. Upon initial recognition, interest yield loans and credits are recognized at amortized cost using the effective interest rate method, including any issuance cost and discount or settlement premium.
F-106
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.18 Translation of balances in foreign currency Transactions in foreign currency are translated at the spot rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated at the spot rate prevailing at the closing date. Unrealized exchange gains or losses are recognized in the consolidated statement of comprehensive income. As an exception, exchange gains or losses arising from intergroup monetary assets and liabilities that reflect investments in foreign subsidiaries are recorded in Translation differences in equity, with no impact on the consolidated statement of comprehensive income. 2.19 Leases Leases are considered to be financial leases when all risks and rewards incidental to ownership of the leased item are substantially transferred to the Group. Assets acquired under financial lease arrangements are recognized as property, plant and equipment at the beginning of the lease term in the consolidated statement of financial position, recording an asset equivalent to the fair value of the leased item or, if lower, the present value at the commencement of the lease of the minimum lease payments. A financial liability is recorded for the same amount. Lease payments are apportioned between finance charges and reduction of the lease liability, in order to maintain a constant interest rate of the outstanding debt. The finance charges are recorded directly in the consolidated statement of comprehensive income. These assets are depreciated, impaired, and derecognized using the same criteria applied to assets of a similar nature. Leases are considered to be operating leases when all risks and rewards incidental to ownership of the leased item are substantially maintained by the lessor. Operating lease payments are recognized as expense in the consolidated statement of comprehensive income when accrued over the lease term. 2.20 Revenues Revenues are recognized when it is probable that the economic benefits from the transaction will flow to the Group and the amount of income and costs incurred or to be incurred can be reliably measured. Revenues from exploiting slot machines are measured at the collected amount. The percentage of the amount collected from slot machines attributable to the owner of the premises where the machine is located is included as operating expense under Variable rent. Revenue from bingo cards are recognized for the total amount of sold cards, based on their face value, while recognizing the prizes granted to players as operating expense. The card cost is recorded in Consumptions, and the gambling tax rate over purchased bingo cards is included under Gaming taxes. Revenue from casinos is recorded for the net amount from the game (“win”), i.e. discounting prizes removed by gamblers. Revenue from sale of finished products is measured when risks and significant benefits incidental to the ownership of the assets have been transferred to the buyer and the outcome can be estimated reliably, circumstance that generally arises with the effective goods delivery. Interest income is recorded based on the time passed, including the asset’s effective yield. 2.21 Restructuring expenses Expenses incurred in restructuring processes, mainly indemnities to personnel, are recognized when a formal and detailed plan exists to perform such process by identifying the main parameters (i.e. main locations, functions and approximate number of affected employees, estimated payments and the implementation schedule) and creating a real and valid expectation among affected employees in regard with the process.
F-107
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
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2.22 Income tax Deferred income tax is recognized on all temporary differences at the closing date between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax liabilities are recognized for all temporary differences, except for taxable temporary differences arisen from an acquired goodwill, which amortization is not tax deductible and those arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Likewise, a deferred tax liability is recognized for all taxable temporary differences from investments in subsidiaries, associates or jointly controlled companies, except when the following conditions are met: (a) when the Group is able to manage the reversal date of the temporary difference and (b) to the extent that the temporary difference will not be reversed in the future. In this regard, when the results are generated in subsidiaries in countries where there is not an agreement to avoid double taxation and the Group’s policy is the repatriation of dividends, the Group records a deferred tax related to the effective amount that would be filed when profits are repatriated. Deferred tax assets are recognized for all deductible temporary differences, tax credits and unused tax loss carryforwards, to the extent that it is probable that future taxable profit will be available against which these assets may be utilized, except for deductible temporary differences arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Furthermore, only a deferred tax asset is recognized for all deductible temporary differences from investments in subsidiaries, associates or jointly controlled companies when the following conditions met: (a) to the extent that the temporary difference will be reversed in the future, and (b) to the extent that it is probable that future taxable profit will be available against which these temporary differences may be utilized. The recovery of deferred tax assets is reviewed at year end, reducing the amount in assets to the extent that it is probable that future taxable benefits will not be available and consequently these assets could not be utilized. Deferred taxes are measured based on the tax legislation and charge rates enacted or to be enacted, at the date of consolidated statement of financial position. Deferred tax assets and liabilities are not discounted and are classified as non-current assets or non-current liabilities, respectively. 2.23 Contingencies When unfavorable outcome of a situation that leads to a potential loss is likely to occur (i.e. more than 50% of possibilities), the Group establishes a provision which is recorded based on the best estimate of present value of expected future disbursement. On the other hand, if expectations of favorable resolution are more likely, no provision is recorded, which is reported in the notes of existing risks, unless the possibility of a negative outcome is clearly considered remote. 2.24 Classification of current and non-current assets and liabilities Assets and liabilities are classified in the consolidated statement of financial position as current and non-current according to their maturity date. Current assets mature within one year from the closing date, and non-current assets mature in more than such period.
F-108
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2010
- 18 -
3. SEGMENT INFORMATION The Group’s activities are organized and managed separately based on the nature of the provided services and products. Each segment represents a strategic business unit, which provides several services and offers product to different markets. The related operating results are assessed regularly by the Group’s highest management body in order to decide which resources should be allocated to the segment and to assess its yield. The Group has classified as operating segment the identified Group component in charge of supplying a single product or service, or a group of them, which is subject to risks and returns of different nature to those related to other segments within the Group. The main factors considered in identifying the segments have been the nature of products and services, the nature of the production process and the type of customer. Assets, liabilities, income and expenses by segments include those directly and reasonably assignable. The captions not assigned by the Group correspond to deferred tax assets and liabilities accounts. The transfer prices between segments are calculated based on the actual costs incurred, which have been increased by a fair trading margin. 3.1 Operating segments The distribution of detailed operating segments meets the information usually managed by the Management. Segments, as defined by the Group, are as follows: Slots: Owns and operates slot machines in bars, cafes, restaurants and recreation rooms in Spain and Italy. Also provides interconnected machines in Italy. B2B: Designs, manufactures and distributes slot machines and game kits for the Spanish and international market. The division sells directly or through distributors to other divisions of the Group, mainly slot division, and third parties. Bingos: Operation of bingo halls mainly in Spain and to a lesser extent, in Italy and Mexico. These rooms operate through the sale of bingo cards to customers, and to a lesser extent through the operation of slot machines and restoration services. Casinos: The Group operates with two types of casinos, traditional casinos which include table games and casino slot machines, and electronic casinos which only operate with casino slot machines. Other segments: Segments that as a whole represent less than 10% of total external and internal revenue, less than 10% of the combined result of all segments with added benefits and less than 10% of total assets, have been considered as irrelevant and no specific information has been provided, grouped under this generic title. The following chart shows information on revenue and results, information about assets and liabilities, and other information related to the different operating segments as for December 31, 2010 and 2009.
F-109
- 19
-
2010
(T
hous
ands
of e
uros
)
Slot
s
B2B
Cas
inos
Bin
go
Elim
inat
ions
and
ot
her
To
tal
A
sset
s by
seg
men
t
N
on-c
urre
nt a
sset
s as
sign
ed
290,
688
65,5
36
590,
469
218,
206
(196
,327
) 96
8,57
2 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
- -
- 81
,447
81
,447
C
urre
nt a
sset
s as
sign
ed
99,9
13
78,8
17
206,
703
44,2
87
(130
,619
) 29
9,10
1 To
tal a
sset
s 39
0,60
1 14
4,35
3 79
7,17
2 26
2,49
3 (2
45,4
99)
1,34
9,12
0
Liab
ilitie
s by
seg
men
t
Li
abili
ties
assi
gned
(2
54,4
27)
(117
,814
) (6
51,3
11)
(193
,000
) (1
4,31
3)
(1,2
30,8
65)
Liab
ilitie
s no
t ass
igne
d -
- -
- (3
3,27
6)
(33,
276)
To
tal l
iabi
litie
s (2
54,4
27)
(117
,814
) (6
51,3
11)
(193
,000
) (4
7,58
7)
(1,2
64,1
41)
R
even
ue
Sal
es to
ext
erna
l cus
tom
ers
432,
497
58,1
96
460,
252
288,
150
5,36
9 1,
244,
464
Inte
rgro
up s
ales
1,
953
33,3
59
1,00
1 1,
458
(37,
771)
-
Tota
l ope
ratin
g re
venu
e 43
4,45
0 91
,555
46
1,25
3 28
9,60
8 (3
2,40
2)
1,24
4,46
4
Prof
it fo
r the
yea
r
E
BIT
DA
(*)
88,3
67
16,4
14
142,
188
30,8
97
(17,
844)
26
0,02
2 Fi
nanc
e in
com
e 4,
050
5,36
5 14
,881
90
6 (1
4,11
4)
11,0
88
Fina
nce
cost
s (9
,488
) (7
,096
) (4
2,00
5)
(13,
463)
(2
0,26
4)
(92,
316)
P
rofit
bef
ore
inco
me
tax
25,4
79
9,56
7 50
,013
(1
7,98
7)
(44,
567)
22
,505
In
com
e ta
x ex
pens
e (9
,934
) (3
,191
) (3
0,97
9)
349
10,6
58
(33,
097)
N
et p
rofit
from
con
tinui
ng o
pera
tions
15
,545
6,
376
19,0
34
(17,
638)
(3
3,90
9)
(10,
592)
Non
-mon
etar
y ex
pens
es
Dep
reci
atio
n, a
mor
tizat
ion
and
impa
irmen
t (4
5,81
7)
(3,2
65)
(60,
510)
(3
6,77
1)
5,94
5 (1
40,4
18)
Cha
nges
in tr
ade
prov
isio
ns
(3,8
40)
(109
) (5
91)
(7)
(9)
(4,5
56)
O
ther
sig
nific
ant e
xpen
ses
Per
sonn
el
(45,
620)
(1
8,95
3)
(98,
465)
(4
9,88
8)
(15,
646)
(2
28,5
72)
Ext
erna
l sup
plie
s an
d se
rvic
es
(56,
418)
(1
7,21
7)
(127
,342
) (7
0,06
3)
17,6
11
(253
,429
) G
amin
g ta
xes
(211
,472
) (7
79)
(82,
502)
(1
20,0
86)
(24)
(4
14,8
63)
O
ther
info
rmat
ion
by s
egm
ents
In
vest
men
t in
non-
curr
ent a
sset
s 48
,370
2,
364
67,9
72
21,9
05
137
140,
748
Inve
stm
ents
in a
ssoc
iate
s 57
8 52
5 70
2 81
94
4 2,
830
(*
) For
fina
ncia
l inf
orm
atio
n pu
rpos
es, E
BIT
DA
is d
efin
ed a
s pr
ofit
(loss
) bef
ore
inco
me
tax,
fina
ncia
l res
ult,
gain
s (lo
sses
) fro
m in
vest
men
ts in
ass
ocia
tes,
gai
ns (l
osse
s)
from
dis
posa
l/writ
e-of
f of n
on-c
urre
nt a
sset
s, c
hang
e in
ope
ratin
g pr
ovis
ions
, and
impa
irmen
t cha
rges
, dep
reci
atio
n an
d am
ortiz
atio
n.
F-110
Cirs
a G
amin
g C
orpo
ratio
n G
roup
N
otes
to th
e co
nsol
idat
ed fi
nanc
ial s
tate
men
ts fo
r the
yea
r end
ed D
ecem
ber 3
1, 2
010
- 20
-
2009
(T
hous
ands
of e
uros
)
Slot
s
B2B
Cas
inos
Bin
go
Elim
inat
ions
and
ot
her
To
tal
A
sset
s by
seg
men
t
N
on-c
urre
nt a
sset
s as
sign
ed
305,
150
89,7
16
597,
448
218,
930
(299
,847
) 91
1,39
7 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
- -
- 70
,179
70
,179
C
urre
nt a
sset
s as
sign
ed
87,1
05
41,1
30
163,
338
31,6
61
(66,
131)
25
7,10
3 To
tal a
sset
s 39
2,25
5 13
0,84
6 76
0,78
6 25
0,59
1 (2
95,7
99)
1,23
8,67
9
Liab
ilitie
s by
seg
men
t
Li
abili
ties
assi
gned
(2
46,2
06)
(129
,594
) (6
09,8
71)
(188
,003
) 53
,898
(1
,119
,776
) Li
abili
ties
not a
ssig
ned
- -
- -
(28,
056)
(2
8,05
6)
Tota
l lia
bilit
ies
(246
,206
) (1
29,5
94)
(609
,871
) (1
88,0
03)
25,8
42
(1,1
47,8
32)
R
even
ue
Rev
enue
from
ext
erna
l cus
tom
ers
413,
220
68,9
63
349,
814
267,
805
- 1,
099,
802
Inte
rgro
up re
venu
e 2,
875
40,9
55
514
1,56
0 (4
5,90
4)
- To
tal n
et r
even
ue fr
om p
rizes
41
6,09
5 10
9,91
8 35
0,32
8 26
9,36
5 (4
5,90
4)
1,09
9,80
2
Prof
it fo
r the
yea
r
E
BIT
DA
89
,421
16
,738
11
5,23
6 9,
498
(22,
288)
20
8,60
5 Fi
nanc
e in
com
e 4,
508
4,34
6 12
,126
1,
519
(12,
146)
10
,353
Fi
nanc
e co
sts
(11,
003)
(9
,369
) (4
1,47
4)
(12,
373)
1,
361
(72,
858)
P
rofit
bef
ore
inco
me
tax
19,6
29
7,14
3 44
,058
(1
4,76
9)
(27,
868)
28
,193
In
com
e ta
x ex
pens
e (7
,069
) (9
78)
(28,
816)
(8
18)
6,38
9 (3
1,29
2)
Net
pro
fit fr
om c
ontin
uing
ope
ratio
ns
12,5
59
6,16
4 15
,242
(1
5,58
7)
(21,
477)
(3
,099
)
Non
-mon
etar
y ex
pens
es
Dep
reci
atio
n, a
mor
tizat
ion
and
impa
irmen
t (5
0,06
5)
(4,9
17)
(36,
529)
(1
1,62
7)
5,59
5 (9
7,54
3)
Cha
nge
in o
pera
ting
prov
isio
ns
(2,9
84)
143
(1,0
90)
- -
(3,9
31)
O
ther
sig
nific
ant e
xpen
ses
Per
sonn
el
(44,
732)
(1
8,79
0)
(79,
293)
(4
7,29
8)
(12,
975)
(2
03,0
88)
Ext
erna
l sup
plie
s an
d se
rvic
es
(54,
137)
(1
9,33
2)
(91,
779)
(6
5,60
9)
15,3
01
(215
,556
) G
amin
g ta
xes
(195
,081
) (8
08)
(53,
094)
(1
34,4
31)
(92)
(3
83,5
06)
O
ther
info
rmat
ion
by s
egm
ents
In
vest
men
t in
non-
curr
ent a
sset
s 82
,437
5,
938
73,2
47
16,4
69
253
178,
344
Inve
stm
ents
in a
ssoc
iate
s 94
8 45
2 70
2 81
94
4 3,
127
(*
) For
fina
ncia
l inf
orm
atio
n pu
rpos
es, E
BIT
DA
is d
efin
ed a
s pr
ofit
(loss
) bef
ore
inco
me
tax,
fina
ncia
l res
ult,
gain
s (lo
sses
) fro
m in
vest
men
ts in
ass
ocia
tes,
gai
ns (l
osse
s)
from
dis
posa
l/writ
e-of
f of n
on-c
urre
nt a
sset
s, c
hang
e in
ope
ratin
g pr
ovis
ions
, and
impa
irmen
t cha
rges
, dep
reci
atio
n an
d am
ortiz
atio
n.
F-111
- 21 -
3.2 Geographic segments In the presentation of information by geographic segments, sales are based on the destination country and the assets on their location. The following chart shows this information as for December 31, 2010 and 2009. 2010
4. BUSINESS COMBINATIONS AND ACQUISITIONS OF PARTICIPATING COMPANIES 4.1 2010 The breakdown of the companies in which the Company has gained unilateral and exclusive control in 2010 (some of which were already invested in in prior years) is summarized as follows: (Thousands of euros)
Name and description of companies and business Acquisition date
% of voting rights
Acquisition price
Fair value of acquired net
assets
Non-controlling interests arisen in the business
combination
Goodwill arising on acquisition
Accord Investment, S.A. March 2010 100.0% 3,900 3,900 - -
Universal de Casinos, S.A. May 2010 50.01% 17,700 35,392 17,692 -
Jesalí, S.A. / Complejo Hotelero Monte Picayo, S.A. (*) April 2010 100.0% 2,980 2,980 - -
Inversiones Interactivas, S.A. January 2010 70.0% - 3,178 3,178 -
Hispania Investments, S.A. November 2010 100.0% 3,121 708 - 2,413
27,701 46,158 20,870 2,413 (*) In 2010, Cirsa acquired 50% of Jesali, S.A. shares (obtaining 100% of its shares, since it already held the other 50%). In turn, Jesalí, S.A., owned 100% of Complejo Hotelero Monte Picayo, S.A. shares.
F-112
- 22 -
The Group has chosen to measure non-controlling interests arisen in these business combinations according to its percentage of ownership applied on the fair value of acquired net assets at the date of gaining control over the company, instead of measuring them at the fair value of its minority financial investment. The figure in column Acquisition price is lower than the amount for that concept shown in the consolidated statement of changes in equity, since deferred payments regarding business combinations from prior years have been settled in 2010. The value of identifiable assets and liabilities at the date of gaining control over prior acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition
Previous carrying
value Property, plant and equipment 37,803 33,927 Goodwill 2,413 - Intangible assets 14,159 3,540 Financial investments 10,421 10,421 Other non-current assets 77 77 Current assets 28,527 28,547 Liabilities (including generated deferred taxes) (44,829) (40,480) 48,571 36,032
If acquisitions had occurred at the beginning of the year, consolidated operating revenue and consolidated profit for the year 2010 would have increased by 25,700 thousand and 410 thousand euros, respectively. Additionally, the Group’s gains (losses) contributed by these companies since the acquisition date amount to 3,518 thousand euros. 4.2 2009 The breakdown of acquisitions of participating companies in 2009 is as follows:
(Thousands of
euros) Name of the companies and business
Acquisition date
% of voting rights
Acquisition price
Fair value of acquired net
assets
Goodwill arising on acquisition
Marchamatic Indalo, S.L. October 2009 50% 48 48 - New Laomar, S.L. October 2009 50% 1,675 1,675 - Recreativos Ociomar Levante, S.L. March 2009 50% 5,939 5,939 - Automaticos Laomar, S.L. October 2009 50% 158 158 - Metronia Panama, S.A. January 2009 50% - - - Mediterranea de Explotaciones y
de Juego, S.A. October 2009 50% 3 3 - Metronia, CR, S.A. Sept. 2009 50% - - - Vasca de Explotaciones y de
Juego, S.L. Sept. 2009 50% 2 2 - Extremeña de Explotaciones y de
Recreativas y de Juego, S.A. October 2009 50% 412 412 - Bingo Amico, S.R.L. June 2009 25% 500 500 - 8,830 8,830
F-113
- 23 -
The value of recognized assets and liabilities at acquisition date from these acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition
Previous carrying
value Property, plant and equipment 4,657 4,657 Intangible assets (net of tax effect) 6,199 2,142 Financial investments 114 114 Current assets 2,367 2,367 Liabilities (4,507) (4,507) 8,830 4,773
If acquisitions had occurred at the beginning of the year, operating revenue and net profit for the year 2009 would have increased by 2,002 thousand and 262 thousand euros respectively. On the other hand, the Group gains (losses) contributed by these companies since the acquisition date amount to 464 thousand euros. 5. GOODWILL The breakdown of goodwill by operating segments is as follows:
(Thousands of euros) 2010 2009 Bingo 88,134 106,834 Slots 74,142 74,142 Casinos 75,316 68,584 Other 3,478 1,065 241,070 250,625
The balance of goodwill at December 31, 2010 and 2009 is shown net of impairment loss allowances, amounting to 36,301 thousand and 17,001 thousand euros, respectively. In 2010 an impairment loss on goodwill amounting to 19,300 thousand euros has been recognized basically as a result of the lower expectations in generating cash flows from certain acquired bingo halls in Madrid. In 2009 no impairment loss on goodwill was recognized. The evolution of the goodwill amount recorded in books, net of impairment loss, is as follows:
(Thousands of euros) 2010 2009 Balance at January 1 250,625 270,045
Goodwill recognized in the year (Note 4) 2,413 - Impairment losses (19,300) - Disposals from sales of investments - (17,047) Net exchange differences arising during the period 7,332 (2,373)
Balance at December 31 241,070 250,625
Disposals from sales of investments in 2009 are due to the sale of 25% of investments in shares of Orlando Play, S.A. and subsidiaries. Thus, in 2008 that company was accounted for under the full consolidation method, while in 2009 it was consolidated under the proportional method. Note 9 includes several elements related to the study on the possible impairment of Group’s assets.
F-114
- 24 -
6. OTHER INTANGIBLE ASSETS 6.1 Movements 2010 (Thousands of euros)
January 1, 2010
Additions
Disposals
Transfers
Translation differences and other
December 31, 2010
COST Development costs and patents 44,391 1,800 (1,737) - - 44,454 Administrative concessions 24,001 1,282 - 24,472 1,083 50,838 Installation rights 113,963 20,957 (12,969) - - 121,951 Transfer rights 939 2,458 - - 15 3,412 Software 15,763 1,466 (113) - 307 17,423 Prepayments and other 37,728 19,278 - (24,472) 1,225 33,759 236,785 47,241 (14,819) - 2,630 271,837 AMORTIZATION Development costs and patents (37,089) (2,119) - - - (39,208) Administrative concessions (12,446) (2,795) - - (1,698) (16,939) Installation rights (59,392) (17,007) 9,453 - (2) (66,948) Transfer rights (610) (61) - - - (671) Software (12,931) (2,753) 110 - 393 (15,181) (122,468) (24,735) 9,563 - (1,307) (138,947) Impairment loss (6,965) - 1,737 - - (5,228) Net carrying amount 107,352 22,506 (3,519) - 1,323 127,662 2009
(Thousands of euros)
January 1, 2009
Additions
Disposals
Transfers
Translation differences and other
December 31, 2009
COST Development costs and patents 40,475 2,445 - 1,700 (229) 44,391 Administrative concessions 23,105 809 (121) - 208 24,001 Installation rights 97,038 26,137 (9,398) - 186 113,963 Transfer rights 839 112 (12) - - 939 Software 14,699 934 (147) - 277 15,763 Prepayments and other 5,350 34,474 - (1,700) (396) 37,728 181,506 64,911 (9,678) - 46 236,785 AMORTIZATION Development costs and patents (34,940) (2,378) - - 229 (37,089) Administrative concessions (11,665) (1,213) 120 - 312 (12,446) Installation rights (43,479) (24,170) 8,295 - (38) (59,392) Transfer rights (674) (47) - - 111 (610) Software (11,646) (1,287) 146 - (144) (12,931) (102,404) (29,095) 8,561 - 470 (122,468) Impairment loss (6,962) (3) - - - (6,965) Net carrying amount 72,140 35,813 (1,117) - 516 107,352 Additions in 2010 include the effects of business combinations (Note 4), which amounted to a gross value of 15,005 thousand euros and an accumulated depreciation of 846 thousand euros (2009: 6,199 thousand euros of net carrying amount in 2009). These amounts are almost entirely related to installation rights.
F-115
- 25 -
In 2010 additions under Prepayments and other correspond to the payment of the second installment of the concession of 2,583 licenses for video lottery machines in Italy amounting to 19.3 million euros. The total cost of the concession is 38.7 million euros and it has been settled in two installments: October 2009 and November 2010. In 2010 transfers under the caption Prepayments and other (Note 6.3) correspond to the following:
• Licenses acquired in 2009 to operate slot machines in Panama amounting to 13.6 million euros. These licenses are effective as of March 10, 2010 and therefore they have been transferred in 2010 to the caption Administrative concessions.
• Licenses of video lottery machines of Cirsa Italia SpA in operation at December 31, 2010 and therefore they have also been transferred to Administrative concessions for an amount of 10.8 million euros.
In 2009 additions recognized under Prepayment and other correspond to the payment of the first installment of the concession of video lottery terminals in Italy amounting to 19.4 million euros and to the acquisition of licenses to operate in Panama amounting to 13.6 million.
6.2 Development costs and patents They correspond mainly to the following: • Industrial companies: Creation of new models of slot machines and technological innovations for
them. Net value as of December 31, 2010 and 2009 is 2,480 and 4,054 thousand euros, respectively.
• Lottery and interactive products companies: Development of software applications for on-line
games. Net value as of December 31, 2010 and 2009 is 3,891 and 2,680 thousand euros, respectively.
The internal cost of developing new models of slot machines and software for on-line games by the B2B division of the Group are capitalized as an increase in the value of developments costs and patents. The total amount of works performed by the Group for the intangible assets in 2010 and 2009 amounted to 1,003 and 871 thousand euros, respectively. Research and development expenses recognized as expenses in 2010 amounted to 709 thousand euros (2009: 472 thousand euros). 6.3 Administrative concessions The gross balance of official licenses to operate as of December 31, 2010 mainly corresponds to:
• An official contract to operate slot machines in Panama amounting to 28,967 thousand euros (14,373 thousand euros at December 31, 2009). The variation over the prior year corresponds to new licenses acquired in 2010 amounting to 13.6 million euros (Note 6.1). The net value of this concession at December 31, 2010 amounts to 17,826 thousand euros (5,950 thousand euros at December 31, 2009).
• Ownership interest in an Argentinean company that operates a lottery employing disabled
people amounting to 2,054 thousand euros at December 31, 2010 (2,047 thousand euros at December 31, 2009). The net value of these concessions at December 31, 2010 and 2009 is zero.
• Licenses of video lottery machines acquired by Cirsa Italia S.p.A. for an amount of 10.8 million
euros (Note 6.1). The net value of this concession at December 31, 2010 is 10.7 million euros.
F-116
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6.4 Installation rights Installation rights correspond to the amounts paid in exchange for the exclusive use of the premises in which slot machines are located. 6.5 Impairment loss The balance of impairment loss basically covers the net value of certain administrative concessions in Argentina (2,054 and 2,047 thousand euros at December 31, 2010 and 2009, respectively), and investments in research and development projects based on implementing new technologies in the gaming industry (1,745 thousand euros at December 31, 2010 and 2009). Disposals of the year correspond to the investment in a website in Argentina in prior years. Note 9 includes several elements in relation to a test of the potential impairment of the Group's assets. 6.6 Other information At December 31, 2010, the net value of intangible assets in foreign companies amounted to 64,315 thousand euros (2009: 44,848 thousand euros). 7. PROPERTY, PLANT AND EQUIPMENT 7.1 Movements 2010
Additions correspond to the effect of the business combinations (Note 4), amounting in total to a gross value of 84,461 thousand euros of costs and 46,658 thousand euros of accumulated depreciation. These items basically correspond to Land and Buildings and Machinery, representing 32% and 58%, respectively, of total net value of the additions derived from business combinations. Disposals show sales of assets and other disposals, mainly due to the substitution of slot machines, which amounted to a loss of 4,531 thousand euros in 2010. 2009 (Thousands of euros)
Additions correspond to the effect of the business combinations (Note 4), amounting to a gross value of 5,536 thousand euros of costs and 879 thousand euros of accumulated depreciation. Additions of Land and Buildings and Assets in progress mainly correspond to the construction of the complex (casino, hotel and convention centre) in Rosario (Argentina). The complex started its operations as of October 15, 2009. Disposals balance shows sales of assets and other disposals, mainly due to the substitution of slot machines, which amounted to a loss of 4,206 thousand euros in 2009. 7.2 Work performed by the Group for property, plant and equipment The cost value of the slot machines manufactured by Group companies and sold to slot machine operators of the Group, are recognized as property, plant and equipment by crediting the corresponding expenses in the consolidated statement of comprehensive income. The amount of work performed by the Group for property, plant and equipment in 2010 and 2009 amounted to 16,840 and 31,306 thousand euros, respectively.
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7.3 Mortgaged assets Several property, plant and equipment items, which net value as of December 31, 2010 and 2009 was 89,189 and 87,949 thousand euros, respectively, were used as guaranty for mortgage loan debts. 7.4 Availability of assets All assets are unrestricted, except for those acquired through financial lease contracts which net book value amounted to 30,361 thousand euros at December 31, 2010 (21,875 thousand euros at December 31, 2009). 7.5 Property, plant and equipment located abroad The net value of property, plant and equipment located abroad was 326,040 thousand euros at December 31, 2010 (2009: 263.456 thousand euros). 7.6 Investment commitments At December 31, 2010 investment commitments amounted to 13,000 thousand euros and mainly correspond to future investments in video lottery machines in Italy amounting to 10 million euros and to the extension of bingo halls in Mexico amounting to 3 million euros. At December 31, 2009 investment commitments amounted to 45,000 thousand euros and corresponded mainly to future investments in video lottery machines in Italy. 8. FINANCIAL ASSETS This caption is composed by the following balances:
2010 2009
(Thousands of euros) Non-
current Current Total Non-
current Current Total Investments in associates Investments accounted for under
equity method 2,830 - 2,830
3,127 - 3,127 Available-for-sale financial assets Equity instruments measured at cost 3,018 - 3,018 3,018 - 3,018 Loans and receivables Nortia Business Corporation, S.L. 64,702 - 64,702 61,930 - 61,930 Loans to jointly-controlled business
and associates 11,465 11,733 23,198
34,026 11,555 45,581 Loans to third parties 40,728 - 40,728 36,471 - 36,471 Public administrations 1,154 - 1,154 1,154 - 1,154 Deposits and guarantees 11,378 21,971 33,349 7,804 18,625 26,429 Fixed-income securities and deposits - 4,158 4,158 - 6,772 6,772 Trade and other receivables - 190,775 190,775 - 163,626 163,626 Other 1,938 11,744 13,682 1,427 1,211 2,638 137,213 240,381 377,594 148,957 201,789 350,746 Impairment loss (4,182) (28,154) (32,336) (2,702) (29,340) (32,042) 133,031 212,227 345,258 146,255 172,449 318,704
Current portion of Nortia Business Corporation, S.L., and of Loans to third parties and Receivables from Public administrations is included in the caption Trade and other receivables.
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The Group estimates that fair value of these assets do not differ significantly from the recorded amounts. The accumulated balance of impairment loss of non-current financial assets mainly corresponds to loans to third parties, while impairment loss of current financial assets corresponds to trade and other receivables (28,154 and 29,340 thousand euros at December 31, 2010 and 2009, respectively). 8.1 Investments in associates This caption includes the following investments: 2010
(Thousands of euros) Book value Assets Liabilities Operating revenues
The variation for the year of the caption Investments in associates is as follows:
(Thousands of euros) 2010 2009 Balance at January 1 3,127 3,804 Investment in associate’s profit 243 418 Investment in associate’s losses (5) (117) Changes in the consolidation method - (978) Sale of investment (535) - Balance at December 31 2,830 3,127
Transactions in 2010 and 2009 between companies mentioned above and other companies consolidated through the full and proportional consolidation method are irrelevant.
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8.2 Loans and receivables Nortia Business Corporation, S.L. The non-current debtor balance of Nortia Business Corporation, S.L. includes the following entries:
(Thousands of euros) 2010 2009
Loan maturing in 2015, at 8.75% interest rate 42,754 42,754 Long-term promissory notes from the sale of real state, discounted at 5% interest rate 1,706 4,017 Accrued interests 20,242 15,159
64,702 61,930
Credits to jointly-controlled business and associates This caption is broken down as follows:
(Thousands of euros) 2010 2009 Loans granted to a joint venture domiciled in Argentina. These loans are expressed in US dollars and accrue interest at an annual rate of Libor (six months) plus 2% and mature between 2012 and 2013. (*) 9,687 25,160 Current accounts with jointly-controlled business and associates (*) 11,733 11,555 Other (*) 1,778 8,866 23,198 45,581
(*) The above amounts are the remaining balances after the eliminations derived from the proportional consolidation process. The maturity date of these assets is as follows:
(Thousands of euros) 2010 2009 Within one year 11,733 11,555 Between one and two years 5,287 2,217 Between two and three years 5,287 2,217 Between three and four years 444 8,507 Between four and five years 447 8,507 More than five years - 12,578 23,198 45,581
The average interest rate of these assets in 2010 and 2009 was at 6.3% and 6.8%, respectively.
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Loans to third parties The breakdown of non-current loans to third parties is as follows:
(Thousands of euros) 2010 2009 Mortgage loan in Venezuelan currency granted to Inversiones Pueblamar, CA for the deferred collection of the sale of a building in 2002 to the owner company of a hotel in Isla Margarita, Venezuela, where a casino operated by the Group is located. No explicit interests are accrued; therefore a discount rate of 9.27% has been applied. 2,775 5,148 Mortgage loan in US dollars to a company that owns a hotel in Dominican Republic where a casino operated by the Group is located. It earns an annual interest of 7.25%. 1,404 1,385 Loan to the minority shareholder of a Spanish operating company of the Group. This loan accrues a variable interest rate that will be reviewed annually (2010: 1.48%, 2009: 2.54%) 11,092 7,691 Non-trade loan to minority shareholders with annual variable maturity dates until 2014. It does not yield any explicit interest and therefore a 5% discount rate has been applied. 4,784 4,020 Loans to the minority shareholder of a Colombian company. They earn an interest rate of 4.5% and mature in 2012. 3,525 - Other 17,148 18,227 40,728 36,471
In October 2010 the Bolivarian Republic of Venezuela acquired by compulsory purchase the hotel Margarita Hilton & Suites owned by Inversiones Pueblamar, CA, where Cirsa Caribe, C.A. operates. These assets will be transferred to the Venezuelan Tourism company VENETUR, S.A. The Group is currently negotiating the cost and lease terms of the casino premises with the Venezuelan public authorities. The Company’s Directors do not consider that as a result of the negotiation, the casino activities will cease and have an impact on the Group consolidated financial statements. In addition, there is no uncertainty in regard with the solvency of Inversiones Pueblamar, CA; and thus, the recovery of the granted loan of 2,8 million euros is considered reasonably beyond doubt. The breakdown of maturity dates for non-current loans to third parties is as follows:
(Thousands of euros) 2010 2009 Between one and two years 24,133 6,963 Between two and three years 4,422 7,746 Between three and four years 3,842 7,798 Between four and five years 2,325 7,854 More than five years 6,006 4,348 Not determined - 1,762 40,728 36,471
Trade and other receivables This caption is broken down as follows:
(Thousands of euros) 2010 2009 Trade receivables 45,935 59,383 Impairment losses (28,154) (29,340) Receivables from jointly-controlled business and associates 10,483 8,906 Other related parties 5,676 9,719 Receivables from Public administrations 33,661 25,924 Other receivables 93,371 58,289 Nortia Business Corporation, S.L. – Promissory notes from sale of assets 1,649 1,405 162,621 134,286
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Receivables from Public administrations mainly correspond to VAT and other tax receivables. The balance of trade and other receivables is shown net of impairment loss. The movements in the impairment loss allowance are as follows.
(Thousands of euros) 2010 2009 Balance at January 1 29,340 36,852 Allowance 5,935 6,423 Write-off of bad debts (7,121) (13,935) Balance at December 31 28,154 29,340
The Group has established credit periods between 90 and 150 days, while the average collection period is approximately of 120 days at December 31, 2010 (120 days at December 31, 2009). 8.3 Available-for-sale financial assets The caption of available-for-sale financial assets includes the participation of 8.4% in a real estate company of the Nortia Business Corporation Group, with a cost of 3,018 thousand euros. This asset is measured at cost, as they cannot be determined with reasonable accuracy at fair value. In any case, the Group estimates that under no circumstances these investments could be impaired. 9. IMPAIRMENT TEST 9.1 Goodwill Cash-generating units Goodwill acquired through business combinations and intangible assets with indefinite useful lives has been attributed to cash-generating units for impairment test. The breakdown of cash-generating units is as follows: • Industrial companies, as a whole • Each regional branch of slot machines • Each group of bingos jointly acquired • Each casino managed individually • Each differentiated interactive activities Key assumptions • Budgeted gross margins - to determine the value assigned to the budgeted gross margins, the
average gross margin achieved in the year immediately preceding the year budgeted is used, increased by the expected efficiency improvements. The period used in these projections is 5 years. From the fifth year the figures are extrapolated using a growth rate similar to expected inflation.
• Increase in costs - to determine the value assigned to the increase in costs, the price index
expected during the year for each country where the Group operates is used. The values assigned to key assumptions are consistent with respect to external sources of information.
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• The discount rate applied to projected cash flows is determined by the specific risk of each cash-generating unit, taking into account the type of activity and country where it is located. The following chart shows the discount rates used based on business and geographic area:
Country Activity Discount rate (before tax)
Spain Game 9.72% Spain Industrial 9.72% Spain Interactive 9.72% Italy Game 9.66% Latin America Game 11.47%
In 2009 discount rates applied ranged between 7.17% and 9.02% Test results As a consequence of the tests performed, impairment loss has been recognized in 2010 amounting to 19,300 thousand euros, basically for the reduction in the estimate of future cash flows of certain bingo halls in Madrid. In 2009 no impairment loss was recognized. 9.2 Other assets Impairment indicators used by the Group to determine the need of an impairment test on other non-current assets, amongst others, are as follows: • Significant drop of the result over the same period in the prior year, and/or over the budget. • Legislative changes in progress or planned, which could lead to negative effects. • Change of strategy or internal expectations regarding a particular business or country. • Position of competitors and their launches of new products. • Slowdown of income or difficulties in selling at expected prices. • Change in habits and attitudes of users, and other elements specific to each division. As a result of the tests performed, impairment loss amounting to 700 thousand euros has been recognized related to the installations of a dormant company. In 2009 no impairment loss was recognized. 10. INTERESTS IN JOINTLY CONTROLLED COMPANIES Jointly controlled companies have been incorporated in the consolidated financial statements through the proportional method. The information on the related companies is detailed in Appendix. Other relevant information related to these companies is detailed in the following chart:
Data affected by % of
equity interest (Thousands of euros) 2010 2009 Non-current assets 164,623 162,853 Current assets 121,206 71,720 Non-current liabilities (94,069) (116,989) Current liabilities (49,871) (43,317) Revenues 348,978 284,884 Expenses (310,378) (254,729) Net profit for the year 38,600 30,155
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11. INVENTORIES The breakdown of inventories by category, net of impairment, is as follows:
(Thousands of euros) 2010 2009 Raw and auxiliary materials 4,039 5,330 Spare parts and other 7,154 14,625 Finished products 446 2,379 Work in progress 711 2,377 Prepayments to suppliers 1,218 544 13,568 25,255
Inventories correspond mainly to the manufacture and trade of slot machines carried out by Group companies. The balance of inventories is shown net of impairment loss. The movements in impairment loss allowance are as follows:
(Thousands of euros) 2010 2009 Balance at January 1 3,213 4,522 Additions 613 1,884 Write-off (1,030) (3,193) Balance at December 31 2,796 3,213
The write-off in 2010 and 2009 corresponds to the destruction of several inventories from the industrial division. 12. CASH AND CASH EQUIVALENTS For consolidated cash-flow statement purposes, cash and cash equivalents include the following items:
(Thousands of euros) 2010 2009 Cash 13,132 8,983 Current accounts 48,562 41,197 Deposits 3,466 131 65,160 50,311
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13. EQUITY 13.1 Share capital At December 31, 2010 and 2009 the Company’s share capital consisted of 122,887,121 shares with a par value of 0.20 euros each. All shares bear the same political and economic rights. The breakdown of the Company’s shareholders and their equity interest at December 31 is as follows:
2010 2009 Nortia Business Corporation, S.L., company belonging to:
Mr. Manuel Lao Hernández and his family 52.43% 52.43% Mr. Manuel Lao Hernández 46.65% 46.65%
Treasury shares 0.92% 0.92% 100.00% 100.00%
Part of the Company’s shares (31.04% at December 31, 2010 and 2009) and shares of several subsidiaries are pledged in favor of Institut Català de Finances as a guarantee for a loan granted to Nortia Business Corporation S.L., main shareholder of the Company. 13.2 Treasury shares At December 31, 2010 and 2009, the Company has 1,131,421 treasury shares at an average cost of 0.1626 each, which are shown reducing the Group’s net equity. 13.3 Retained earnings The balance of this caption includes two reserves of the Company, which are non-distributable. Legal reserve In accordance with the Spanish Capital Companies Law, companies obtaining profit will assign 10% of profit to the legal reserve, until its balance is equivalent to at least 20% of share capital. As long as it does not exceed this limit, the legal reserve can only be used to offset losses if no other reserves are available. This reserve can also be used to increase capital by the amount exceeding 10% of the new capital after the increase. At December 31, 2010 and 2009 the Company’s legal reserve amounted to 4,915 thousand euros. Additionally, the Group subsidiaries have provided the reserves at the amount required by the Spanish prevailing legislation. Treasury shares reserve As indicated in Note 13.2 above, the Group acquired treasury shares. In accordance with prevailing mercantile legislation, the Group has provided the corresponding non-distributable reserve by the amount of treasury shares, maintained until sold or amortized.
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13.4 Non-controlling interests The balances related to non-controlling interests are as follows:
Amount in statement of
financial position Participation in results (Thousands of euros) 2010 2009 2010 2009 Division Casinos 64,877 13,248 8,004 1,407 Slots 5,582 5,133 449 464 70,459 18,381 8,453 1,871
The inter-annual variation of balances in the consolidated statement of financial position is as follows:
(Thousands of euros) 2010 2009 Balance at January 1 18,381 19,978 Net loss (profit) for the year attributable to non-controlling interest 8,453 1,871 Translation differences (1,420) - Disposals or additional acquisition up to total amount of shares 5,579 2,992 Additions for acquisition of companies or changes in consolidation methods (from proportional
to full) 48,162 1,066 Dividend payments (8,696) (7,526) Balance at December 31 70,459 18,381
14. BONDS This caption basically refers to the following: • The issue of bonds in 2010 by a subsidiary located in Luxembourg amounting to 400 million
euros, below par, at a 97.89% price. These bonds are listed on the Luxembourg Stock Exchange, accruing an annual interest of 8.75% paid each six months and maturing in 2018.
• The issue of bonds by a subsidiary located in Luxembourg amounting to 230 million euros,
including an initial portion of 130 million euros issued in 2005 and a second one of 100 million euros issued in 2006 as an extension of the former at a 102.25% price (with a premium of 2.25%). These bonds, which are listed on the Luxembourg Stock Exchange, accrue an annual interest of 7.875%, which is paid each six months, and mature in 2012. At December 31, 2010, certain bonds related to this issue and whose nominal value amounts to 10 million euros are not recognized in the Group’s liabilities, since they have been acquired by the Company during the year. Additionally, this issue has been settled in advance in January 2011, as explained in Note 29.
Contracts subscribed in relation to the bonds issued by the subsidiaries in Luxembourg regulate certain obligations and commitments by the Group, which include, among others, the supply of periodic information, the maintenance of titles of ownership in subsidiaries, the restriction on disposal of significant assets, the compliance with certain debt ratios, the limitation on payment of dividends, the limitation on starting-up new businesses, and the restriction on the Group granting guarantees and endorsements to third parties. The Company’s Directors consider that all contractual obligations have been met. The shares of several Group companies have been assigned as security for these liabilities. In May 2010 an issue of bonds amounting to 270 million euros has been cancelled. These bonds accrued an annual interest rate of 8.75% and matured in 2014. The repurchase of these bonds has generated expenses amounting to 12,469 thousand euros.
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15. BANK BORROWINGS
2010 2009
(Thousands of euros) Non-
current Current Total Non-
current Current Total Mortgage and pledge loans 28,699 22,672 51,371 72,012 6,557 78,569 Other loans 77,921 34,817 112,738 81,650 15,983 97,633 Financial lease agreements 19,837 11,900 31,737 18,394 9,759 28,153 Credit and discount lines - 10,241 10,241 - 24,232 24,232 126,457 79,630 206,087 172,056 56,531 228,587
Average interest rates accrued by these borrowings are as follows:
The annual maturity date of these liabilities is as follows:
(Thousands of euros) 2010 2009 Within one year 79,630 56,531 Between one and two years 37,388 61,894 Between two and three years 28,284 56,094 Between three and four years 17,166 20,693 Between four and five years 13,693 9,065 More than five years 29,926 24,310 206,087 228,587
Part of these liabilities, equal to 47,781 and 55,573 thousand euros at December 31, 2010 and 2009, respectively, is denominated in U.S. dollars. At December 31, 2010, shares of several subsidiaries are pledged in favor of Deutsche Bank London AG as a security for the loan of 30 million euros received from that entity in 2010. At December 31, 2010 the drawn amount of this loan amounts to 20 million euros. At December 31, 2009 these shares were pledged in favor of Deutsche Bank London AG as a security for a loan of 30 million euros that was settled with part of the cash generated in the issue of bonds made in 2010 amounting to 400 million euros (Note 14). At December 31, 2010 the amount of credit and discount lines not used is 22,415 and 7,580 thousand euros, respectively. These figures amounted to 15,064 and 5,836 thousand euros, respectively, at year end of 2009. Finally, at December 31, 2010 and 2009 the guarantees given by credit institutions and insurance companies to the Group, in connection with official gaming concessions and licenses were 83,277 and 79,476 thousand euros, respectively
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16. OTHER CREDITORS The breakdown of this caption is as follows:
2010 2009
(Thousands of euros) Non-
current Current Total Non-
current Current Total Public administrations 2,510 86,620 89,130 3,872 79,315 83,187 Bills payable 1,881 6,995 8,876 7,278 11,475 18,753 Sundry creditors 60,083 103,392 163,475 93,618 71,726 165,344 64,474 197,007 261,481 104,768 162,516 267,284
In 2010 non-current part of liabilities with Public administrations refers mainly to deferral on gaming taxes granted by the corresponding authorities, which accrues an annual interest rate of 5% (2009: 7%). The current portion corresponds to gaming taxes with a short-term maturity (2010: 65,794 thousand euros, 2009: 64,600 thousand euros), and tax return of personal income tax, VAT, social security contributions and similar concepts pending to be filed. Bills payable correspond mainly to debts arising from the acquisition of companies with deferred payment, discounted at market interest rate. Sundry creditors mainly correspond to debts from acquisition of assets, acquisition of licenses in Panama, which will be settled in two maturity dates at December 31, 2011 and 2012 amounting to 4 million USD each. It also corresponds to a loan received in 2008 from International Game Technology (IGT) for an amount used by the Group at December 31, 2010 of 32,615 thousand euros (43,579 US dollars) and 36,039 thousand euros (51,918 US dollars) at December 31, 2009, including principal and interest. The loan was obtained to finance the investment being made by Casino de Rosario, S.A. (joint venture). It has a right of mortgage on the company’s building, accrues an annual interest rate of Libor plus 5.75% and will be cancelled in 48 equal monthly consecutive amounts from September 2010. 17. PROVISIONS The breakdown of this caption is as follows:
(Thousands of euros) 2010 2009 Obligations in relation to employees 9,583 8,255 Tax assessments appealed by the Group 1,430 445 Other 5,994 2,023 Balance at December 31 17,007 10,723
At December 31, 2010 the caption “Others” is mainly composed of provisions for risks, fines and labor trials. The inter-annual variation of the balance is as follows:
(Thousands of euros) 2010 2009 Balance at January 1 10,723 9,032 Allowances 6,196 2,427 Applications (977) (736) Addition of companies 1,065 - Balance at December 31 17,007 10,723
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18. TAXES 18.1 Tax Group The Parent Company together with 80 Spanish companies, which comply with tax legislation requirements, file their tax returns on a consolidated basis. Additionally, 10 Spanish subsidiaries, controlled by the subsidiary Orlando Play, S.A., are part of another consolidated tax group. Other Group companies file income tax returns individually in accordance with applicable tax legislation. 18.2 Accrued and payable income tax The income tax expense, which has been fully recognized in the consolidated statement of comprehensive income, is broken down as follows:
(Thousands of euros) 2010 2009 Current 33,289 30,826 Deferred for (increase) decrease of taxable bases of the tax groups (9,057) (4,029) Deferred for (increase) decrease of taxable bases of other Group companies 196 (2,978) Deferred for (increase) decrease of deductions of the tax groups pending to apply 652 (757) Deferred for temporary differences 8,017 8,230 33,097 31,292
The breakdown of current income tax payable is as follows:
(Thousands of euros) 2010 2009 Current income tax 33,289 30,826 Withholdings and payments on account (4,168) (7,275) 29,121 23,551
18.3 Analysis of income tax expense
(Thousands of euros) 2010 2009 Profit before tax 22,505 28,193 Tax rate prevailing in Spain 30.0% 30.0% Theoretical income tax expense 6,752 8,458 Adjustments – Effect of: Different tax rates prevailing in other countries 2,760 7,347 Countries with no income taxation and/or offset of losses 974 (1,061) Impairment losses for exclusive consolidation purposes 6,000 - Credits for tax loss carryforwards not capitalized 5,246 6,427 Translation losses deductible for tax purposes 1,596 (583) Losses from sales of shares for tax purposes - 494 Losses in net monetary position (Venezuelan hyperinflation) 1,088 1,457 Non-deductible expenses and other 8,681 8,753 33,097 31,292
At December 31, 2010 and 2009 the effect of adjustments of different tax rates mainly corresponds to the application of higher taxes in Argentina and Venezuela.
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At December 31, 2010 and 2009 non-deductible expenses mainly consist of financial investment impairment allowances carried out by subsidiaries in Argentina and Panama, as well as taxes on gambling activities and exchange differences in Venezuela. The impact of assets impairment merely for consolidation purposes basically relates to the prevailing tax rate applicable to goodwill impairment in Spain amounting to 19.3 million euros (Note 5). 18.4 Deferred tax assets and liabilities
(Thousands of euros) 2010 2009 Assets Tax loss carryforwards from the tax groups 38,675 34,160 Tax loss carryforwards from other group companies 5,306 6,699 Deductions pending application from the tax groups 2,838 3,490 Deductible temporary differences: --- Impaired receivables 6,415 6,710 --- Impaired securities portfolio 9,593 4,895 --- Goodwill impaired in individual books 2,036 1,997 --- Intragroup margin write-off 5,726 - --- Other 10,858 12,228 81,447 70,179 Liabilities Taxable temporary differences: --- Financial leases - (2,915) --- Reinvestment of income from sale of non-current assets (1,335) (1,333) --- Initial statement of non-current assets at fair value (7,202) (7,808) --- Provision for maximum gaming prizes (8,474) (8,479) --- Difference between tax depreciation and accounting depreciation (6,402) (4,571) --- Non-accounting tax impairment, (6,472) - --- Margin write-offs (1,703) - --- Other (1,689) (2,950) (33,277) (28,056)
The Group estimated the taxable profits which it expects to obtain over the next ten fiscal years (period for which it considers the estimates to be reliable) based on budgeted projections. It also analyzed the reversal period of taxable temporary differences, identifying those that reverse in the years in which unused tax loss carryforwards may be used. Based on this analysis, the Group has recorded deferred tax assets for unused tax loss carryforwards as well as deductions pending application and deductible temporary differences for which it is considered probable that sufficient taxable profit will be generated in the future against which they can be utilized.
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The breakdown of unused tax losses carryforwards at December 31, 2010 for the tax group whose parent company is the Company and for the tax group whose parent is the subsidiary Orlando Play is as follows:
160,321 1,663 (*) Tax group whose parent is a company representing a joint venture consolidated through the proportional consolidation method. Therefore, tax assets included in this table are affected by the 50% of ownership held. Tax group whose parent is the Company At December 31, 2010 and 2009 the Group has recognized deferred tax assets amounting to 38,540 and 34,160 thousand euros, respectively, relating to unused tax losses of the tax group amounting to 128,468 and 113,866 thousand euros. No deferred tax assets were recorded for the rest of unused tax losses carryforwards that at December 31, 2010 amounted to 9,557 thousand euros (2009: 4,945 thousand euros), since their future application is uncertain. In addition to tax losses carryforwards, the tax group whose parent is the Company holds additional tax credits amounting to 47,914 thousand euros at December 31, 2010 (2009: 43,668 thousand euros), for unused tax deductions. The abovementioned total amounts include 45,076 thousand euros at December 31, 2010 (2009: 40,178 thousand euros) from unused deductions that were not capitalized for not having met the terms to be used.
(Thousands of euros)
Last year for utilization Unused deductions at December 31, 2010
Tax group whose parent is Orlando Play, S.A. In 2010 the tax group whose parent is Orlando Play, S.A. was constituted. Since the Group owns 50% of Orland Play, S.A. shares, tax assets contributed by the Group are affected by this percentage of ownership. At December 31, 2010 the Group has recognized deferred tax assets amounting to 135 thousand euros, related to unused tax loss carryforwards of this tax group amounting to 450 thousand euros (amount affected by the percentage of ownership). For the rest of unused tax loss carryforwards no deferred tax assets have been recognized, which at December 31, 2010 amounted to 364 thousand euros (amount affected by percentage of ownership). 18.5 Other tax information Under prevailing tax regulations, tax returns may not be considered final until they have either been inspected by tax authorities or until the inspection period has expired. At December 31, 2010 Spanish companies (which mostly file taxes under a consolidated tax group) are open to inspection of all taxes to which they are liable for the last four years. In general, the prescription periods for countries where the Group has significant presence are between four and five years after the end of the statutory period for filing tax returns. The Group considers that, in the event of a tax inspection, no significant tax contingencies having effect on consolidated financial statements would arise 19. LEASES 19.1 Operating leases The Group has a lease on several buildings. These leases are for an average term between three and five years, with no renewal clauses. The future minimum payments under non-cancellable operating leases at December 31 are as follows:
(Thousands of euros) 2010 2009 Within one year 61,792 51,860 Between one and five years 254,583 226,282 More than 5 years 68,547 61,286 348,922 339,428
19.2 Finance leases The Group has financed several acquisitions of property, plant and equipment (mainly slot machines) through financial lease agreements. The future minimum payments under financial leases and their present value are as follows:
2010 2009
(Thousands of euros) Minimum payments
Present value of
payments
Minimum payments
Present value of
payments
Within one year 14,854 11,900 12,458 9,759 Between one and five years 30,527 19,837 29,569 18,393 45,381 31,737 42,027 28,152
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Acquisition of property, plant and equipment through financial lease agreements, not recorded as cash flows in investing activities in the consolidated cash flow statements, amounted to 10,024 thousand euros in 2010 and 3,458 thousand euros in 2009. 20. INCOME AND EXPENSES 20.1 Personnel (Thousands of euros) 2010 2009 Wages and salaries 172,093 150,985 Social security 39,507 37,086 Indemnities 5,482 4,797 Other personnel expenses 11,490 10,220 228,572 203,088
Remunerations pending payment at year end of 2010 and 2009 (16,272 and 13,365 thousand euros, respectively) are recognized in the caption Other creditors. The breakdown of headcount by professional category and gender is as follows:
2010 2009 Men Women Total Men Women Total Directors 325 86 411 258 39 297 Technicians, production and sales staff 6,344 4,547 10,891 5,414 3,624 9,038 Administrative personnel 671 663 1,334 636 557 1,193 7,340 5,296 12,636 6,308 4,220 10,528
20.2 External supplies and services
(Thousands of euros) 2010 2009 Rent and royalties 62,511 56,159 Advertising, promotion and public relations 40,144 31,834 Professional services 22,720 25,545 Sundry services 25,816 21,819 Supplies 25,058 18,889 Travel expenses 13,465 12,783 Repair and maintenance 19,711 11,970 Security 9,343 8,156 Postal services, communications and telephone 8,682 7,587 Insurance premiums 10,828 8,133 Cleaning services 6,846 6,478 Bank services and similar 4,843 3,511 Transportation 2,753 2,220 Research and development expenses 709 472 253,429 215,556
20.3 Foreign exchange results
(Thousands of euros) 2010 2009 Income 8,111 2,779 Expenses (8,588) (2,921) (477) (142)
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Net exchange differences from translation of financial balances in foreign currency between Group companies, are recognized in Translation differences, as a component that decreases the shareholders’ equity at December 31, 2010 by an amount of 10,641 thousand euros (2009: 1,943 thousand euros), since they are considered as exchange differences arising from monetary components of a net investment in a foreign business. 21. RELATED PARTIES The Group conducts several trade and financial transactions with its main shareholder Nortia Business Corporation, S.L., and its subsidiaries, which are broken down as follows:
(Thousands of euros) 2010 2009 Sale of slot machines 9,418 9,114 Revenues for rendering of services 2,012 3,914 Operating expenses (12,402) (14,721) Interest income 4,564 4,000 Interest expenses (19) (21)
Transactions with related entities correspond to normal trading activity and are carried out at market prices in a manner similar to transactions with unrelated parties. Accounts receivable derived from these transactions at year end are described in Note 8. Accounts payable, arising from commercial transactions, amount to 2,578 and 1,101 thousand euros at December 31, 2010 and 2009, respectively, and are recognized under Trade payables. 22. CONTINGENCIES Venezuela Tax authorities raised assessments against a subsidiary (in which the Group has a percentage of ownership of 70%) that operates a casino in Isla Margarita (Venezuela), relating to the supposed non-compliance with an obligation to withhold taxes on gaming prizes as established by a generic tax regulation in that country that does not specifically contemplate the activities of casinos. The related amount, for the year 1998 to 2003, is over 7.4 million euros. This amount was raised by the tax authorities through a global estimation process that did not consider the features of a casino that make it almost impossible to make withholding on prizes. The assessment was appealed against, arguing both the non-applicability of this obligation to a casino and the existence of severe legal deficiencies in the assessment itself. Based on advice of legal counsel, the Group considers that its position will prevail and, therefore, no provision is included in the consolidated financial statements. Tax law for the activities of games on chance published in June 2007 by the Venezuelan tax authorities establishes an additional tax to that paid by a Group company (in which the Group has a 67.5% percentage of ownership) related to the operation of machines, which for 2007 amounted to approximately 1.8 million euros. The Group, in accordance with its legal advisors, estimates a sentence in favor of its interests of appeals; accordingly no provision has been recorded in this regard.
F-135
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Argentina In October 1999, an Argentinean company of the Group opened a floating casino in waters of the Río de la Plata on the basis of an official license granted by the Federal Authorities. The Government of the Autonomous City of Buenos Aires challenged the competence of the Federal Authorities (“Lotería Nacional, SE”) in gaming matters. In particular, it claimed that gaming activities fell under its jurisdiction in the City of Buenos Aires, and hence raised objections against the license granted to the subsidiary Casino Buenos Aires, S.A. (CBA). These circumstances led to a co-participation agreement for gaming matters being signed between the Federal Authorities (LNSE) and the Government of the Autonomous City of Buenos Aires. Conveniently, this agreement was ratified by Decree 1155/2003 of PEN, dated December 1, 2003 (B,O, 02/12/2003) and Law 1,182 of the Legislation of the Government of the Autonomous City of Buenos Aires, dated November 13, 2003 (BOCBA 01/12/2003). Consequently, given the current situation, the Group’s Directors and their legal advisors consider that the rights conveniently agreed upon with LNSE are consolidated. 23. INFORMATION ON ENVIRONMENTAL ISSUES Given the activities and features of the Group, neither capital expenditures nor expenses took place in connection with the prevention, reduction or damage repair of environmental matters 24. AUDIT FEES Fees and expenses referred to the audit of the 2010 financial statements of the Group’s companies rendered by the primary auditors and other firms belonging to the auditor’s international network amounted to 1,485 thousand euros in 2010 and 1,386 thousand euros in 2009. In addition, fees and expenses paid during the year corresponding to other services rendered by the primary auditors or other firms within their international network amounted to 94 thousand euros in 2010 and 345 thousand euros in 2009. 25. DIRECTORS AND SENIOR EXECUTIVES The breakdown of the remuneration earned by members of the Company’s Board of Directors and senior executives is as follows:
(Thousands of euros) 2010 2009 Directors
Salaries 1,500 1,150 Senior executives
Salaries 4,800 4,400
6,300 5,550 At December 31, 2010 there are current accounts receivable with the Company’s Directors amounting to 735 thousand euros (698 thousand euros in 2009). These accounts accrue an annual interest of 4.25%. The Group companies have no pension plans, life insurance policies or dismissal indemnities for former or current members of the Board of Directors and senior executives of the Company.
F-136
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Pursuant to articles 229 and 230 of the Spanish Capital Companies Law, the Directors have informed the Parent Company that there are no situations representing a conflict for the Group and that they hold the following equity investments and/or carry out duties in companies whose activity is identical, similar or complementary to the activity which comprises the Group’s corporate purpose:
26. OBJECTIVES AND POLICIES OF FINANCIAL RISK MANAGEMENT The Group is exposed to credit risk, interest risk, exchange risk and liquidity risk during the normal development of its activities. The Group's principal financial instruments include bonds, bank loans, credit and discount lines, financing obtained through the deferral of gaming taxes, financial leases, deferred payments for purchase of business, cash and current deposits. The Group's policy establishes that no trading in derivatives (exchange rates insurance) to manage exchange rate risks arising from certain fund sources in U.S. dollars will be undertaken. The Group neither uses financial derivatives to cover fluctuations in interest rates. 26.1 Credit risk Most of the operations carried out by the Group are in cash. For receivables from other activities, the Group has established a credit policy and risk exposure in collection is managed in the ordinary course of business. Credit assessments are carried out for all customers who require a limit higher than 60 thousand euros. Guarantees on loans and the credit risk exposure are shown in Note 8. Receivables that are past due more than six months are impaired or renegotiated, to the extent that there are sufficient guarantees of collection. In this regard, in 2008 Cirsa Caribe, C.A. renegotiated its debt with Inversiones Pueblamar C.A. (Note 8.2), and agreed to pay it over a term of ten years since March 31, 2008.
F-137
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26.2 Interest rate risk External finance is mainly based on the issuance of corporate bonds at fixed interest rate. Bank borrowings (credit policies, trading discounts, financial lease agreements) as well as deferred payments with public administrations and other long-term non-trade debts have a variable interest rate that is reviewed annually. Previous Notes show interest rates of debt instruments. The breakdown of liabilities that accrue interests at 2010 and 2009 year end is as follows:
At December 31, 2010 and 2009 financial liabilities at a fixed interest rate represented 68% and 61%, respectively, of total liabilities. In this regard, the Group’s sensitivity to fluctuations in interest rates is low: a variation of 100 basic points in floating rates would lead to a change in the result amounting to 2,860 thousand euros in 2010 and 3,261 thousand euros in 2009. The Group estimates that fair value of the financial liabilities’ instruments does not differ significantly from the accounted amounts. The breakdown of assets that accrue interests at 2010 and 2009 year end is as follows:
2010 2009
(Thousands of euros) Fixed
interest rate Floating
interest rate Fixed
interest rate Floating
interest rate
Nortia Business Corporation, S.L. 64,702 - 61,930 - Loans to jointly-controlled business and associates 11,733 11,465 11,555 34,026 Loans to third parties 8,963 31,765 10,553 25,918 Deposits and guarantees 33,349 - 26,429 - Fixed-income securities and deposits 4,158 - 6,772 - Trade and other receivables 1,649 - 1,405 - 124,554 43,230 118,644 59,944
The Group estimates that fair value of the assets’ financial instruments does not differ significantly from the net book value. 26.3 Foreign currency risk The Group is exposed to foreign currency risk in businesses located in Latin America, mainly in Argentina, which affect significantly revenues and expenses, Group results and the value of certain assets and liabilities in currencies other than the euro. It is also affected to a lesser extent by granted and received loans. Currencies that basically generate exchange risks are the Argentinean peso and the US dollar. In order to reduce risks, the Group conducts policies aimed to keep balanced collection and payments in cash of assets and liabilities in foreign currency.
F-138
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The following study on sensitivity shows the foreign currency risk: • Sensitivity of the profit for the year before tax against fluctuations of the exchange rate US
These variations correspond basically to the impact on operating magnitudes, and not on financial figures, since approximately 90% of Group financial liabilities, in both years, are paid in euros. 26.4 Liquidity risk The exposure to unfavorable situations of debt markets can make difficult or prevent from hedging the financial needs required for the appropriate development of Group activities. To manage liquidity risk, the Group applies different measures:
• Diversification of financing sources through the access to different markets and geographical areas. In this regard, the Group has an additional borrowing capacity (see data in Note 15).
• Credit facilities committed for the sufficient amount and flexibility. Accordingly, the Group has available cash and cash equivalents amounting to 65 million euros at December 31, 2010 (2009: 50 million euros), to meet unexpected payments.
• The length and repayment schedule for financing through debt is established based on the
financed needs. In this regard, the Group’s liquidity police ensure to meet its payment obligations without requiring the access to funds in costly terms. Additionally, it is noteworthy that both at Group and individual business level, the Group performs projections regularly on the generation and expected cash needs, in order to determine and monitor the Group’s liquidity position. The relevant information on the maturity dates of financial liabilities based on contractual terms is broken down in Notes 14, 15 and 16.
F-139
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27. CAPITAL MANAGEMENT POLICY The main objectives of the Group's capital management are to ensure financial stability in the short and long term, appropriate return rates, increased business value and ensure proper and adequate financing of investments and projects to be conducted in a framework of controlled expansion. The Group's strategy, both in 2010 and 2009, is to enhance the more profitable business and to act decisively on the deficit operations, to significantly improve the results and net cash flows. Control of investments and costs restraint have been also established as a priority action, with satisfactory results. As stated in Note 14, the contracts entered into in relation to corporate bonds issued include limitations on the payment of dividends. The Company does not intend to distribute dividends in the short to medium term given that the Group policy is not to distribute dividends. 28. INFORMATION ON LATE PAYMENT TO SUPPLIERS
With respect to Law 15/2010 of July 5, modifying Law 3/2004 of December 29, which establishes measures to be taken in combating arrears in commercial transactions, at December 31, 2010 the overdue balances payable to suppliers which exceed the legal payment deadline amount to 408 thousand euros.
29. EVENTS AFTER THE BALANCE SHEET DATE On January 11, 2011 a group company domiciled in Luxembourg issued bonds for an amount of 280 million euros, with a premium of 0.5%, as an extension of the issue made in 2010 (Note 14). These bonds, which are listed on the Luxembourg Stock Exchange, earn an annual interest rate of 8.75% to be paid half-yearly, and mature in 2018. Part of the funds obtained in this issue have been used to cancel bonds whose nominal value amounted to 230 million euros and which matured in 2012 (Note 14), generating recognized expenses amounting to 21,416 thousand euros in 2011. 30. ADDITIONAL NOTE FOR ENGLISH TRANSLATION These consolidated financial statements were originally prepared in Spanish. In the event of discrepancy, the Spanish-language version prevails. These financial statements are presented on the basis of International Reporting Standards adopted by the European Union which for the purposes of the Group are not different from those issued by the International Accounting Standards Board (IASB). Consequently, certain accounting practices applied by the Group do not conform with generally accepted principles in other countries. March 31, 2011
F-140
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Grupo Cirsa Gaming Corporation
Consolidated Management Report
Year ended December 31, 2010 In 2010, despite the complex economic situation, the Group’s revenues from prizes have increased by 144,662 thousand euros (13.2%) mainly due to the good performance shown by the International Casino Division and the Bingo halls Division (Mexico). This year’s EBITDA was 260,022 thousand euros, over 208,605 thousand euros last year, which represents a 24.7% increase (+51,417 thousand euros) mainly due to the improvement in the way the Group has managed its business, focusing on achieving profitable growth and consolidating its already existing business activities. In particular, we highlight the performance of the activities in Latin America. In order to maintain the Group’s position of leadership at a domestic level, as well as tackling and competing in international markets and offer a larger range of products in traditional sectors and in those related to new technologies, the Group has continued, as in previous years, to invest significant level of resources in Research and Development. This year the total amount allocated for projects carried out by the Group’s Research and Development department amounted to 1,800 thousand euros. The Group’s strategy for the future is focused on continuing to consolidate and make its already existing business activities profitable, applying its policy of efficiency and productivity programs, combined with selectively chosen investments, analyzed and conducted strictly. On May 28, 2004, the Company acquired 2.47% of its own shares at an acquisition cost of 31,007 thousand euros. On July 13, 2007, the Company transferred 1.55% of its treasury stock to Nortia Business Corporation, S.L. as a consideration for the acquisition of a group of slot machine operators. The remaining shares (0.92%) are being held in the treasury stock portfolio. The Group has no derivatives and no financial instruments in the financial statements that would be significant for measuring assets, liabilities, financial situation or results. March 31, 2011
F-141
Ann
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Luxe
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Cirs
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xem
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truct
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Cirs
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amin
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lar,
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l Gam
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utm
aust
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ueva
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i i M
arga
ll, 2
01Te
rrass
aB
arce
lona
- 1 -
F-142
Ann
ex I
List
of s
ubsi
diar
ies
Per
cent
a ge
Per
cent
age
of o
wne
rshi
pof
ow
ners
hip
Inve
stee
Act
ivity
2010
2009
Inve
stm
ent h
olde
rB
usin
ess
addr
ess
City
Pro
vinc
e / C
ount
ry
Com
plej
o H
otel
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te P
icay
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os10
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bal C
asin
o Te
chno
logy
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pora
tion,
S
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ompl
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onte
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l Gam
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achi
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ime
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ratio
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Cirs
a S
lot C
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ratio
n, S
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rmin
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ano,
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ridM
adrid
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pres
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xplo
tado
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el J
uego
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go, S
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Bin
gos
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Inte
rnat
iona
l Bin
go T
echn
olog
y, S
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. y
Bin
gos
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nido
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guila
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adrid
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rid
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jueg
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gos
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Glo
bal B
ingo
Cor
pora
tion,
S.A
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Glo
bal
Bin
go M
adrid
, S.A
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Ferro
carri
l, 38
Mad
ridM
adrid
Gam
ing
& S
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ces
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anam
á, S
.A.
Cas
inos
100,
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Cirs
a In
tern
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nal G
amin
g C
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ratio
n,
Cal
le 5
0 y
73 E
ste
San
Fra
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amin
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Inte
rnat
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l Gam
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pora
tion,
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v. G
rau,
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ma
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tera
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e C
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gos
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tern
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nal G
amin
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loba
l Gam
e M
achi
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tión
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tern
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ta. C
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inos
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Cirs
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tera
ctiv
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n, S
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/de
la R
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rta 8
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ridS
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Gam
ing
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pora
tion,
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tra. C
aste
llar,
298
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l Bin
go C
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t, 10
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arce
lona
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loba
l Bin
go M
adrid
, S.A
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Bin
gos
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00%
100,
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Cirs
a G
amin
g C
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ratio
n, S
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Cap
itán
Hay
a, 3
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cha
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ridM
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bal B
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rs, S
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tion,
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pera
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play
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/Fer
min
a S
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ano,
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ridM
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bal C
asin
o Te
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pora
tion,
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Cas
inos
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amin
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Ctra
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tella
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gos
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Glo
bal B
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Cor
pora
tion,
S.A
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bal
Cap
itán
Hay
a, 9
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ridM
adrid
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bal G
ame
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pora
tion,
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Ope
ratio
nal
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lot C
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bal G
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t Cor
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amin
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os10
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ner G
roup
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alle
38
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t, S
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pora
tion,
S.A
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tra. d
e C
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298
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ssa
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celo
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bar 9
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gos
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00%
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bal B
ingo
Cor
pora
tion,
S.A
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M
adril
eña
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cios
par
a el
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go,
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carri
l, 38
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ridM
adrid
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it y G
ames
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a.C
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Inte
rnat
iona
l Gam
ing
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S
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vda.
19 d
e N
ovie
mbr
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anta
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de
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otá
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a
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grac
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obili
aria
Wor
ld d
e M
exic
o, S
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De
C.V
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ingo
s10
0,00
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Pro
moc
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s e
Inve
rsio
nes
de G
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ro,
S.A
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osqu
e de
ciru
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, 186
Mex
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City
Mex
ico
Inte
rnat
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l Bin
go T
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olog
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0,00
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loba
l Bin
go C
orpo
ratio
n, S
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Pi i
Mar
gall,
201
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ssa
Bar
celo
naIn
tern
atio
nal G
amin
g M
anuf
actu
ring,
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100,
00%
100,
00%
Cirs
a C
asin
o C
orpo
ratio
n, S
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onse
ll de
Cen
t, 10
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8B
arce
lona
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celo
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tesa
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chi,
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pera
tiona
l50
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oyal
Gam
es, S
.R.L
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ia C
asat
i Fel
ice,
32
Mila
nIta
lyIn
vers
ione
s In
tera
ctiv
as, S
.A.
Cas
inos
70,0
0%70
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Orb
is D
evel
opm
ent,
S.A
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Av.
Oba
rrio,
57
Pan
ama
City
Pan
ama
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rsio
nes
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ar, S
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asin
os-
100,
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Gam
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& S
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ces,
S.A
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v. L
a M
arin
a, 1
725
- 172
9S
an M
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Inve
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nes
Rec
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te, C
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Cas
inos
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0%67
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a In
tern
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nal G
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ratio
n,
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Cal
le 7
7, E
dif.
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goM
arac
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vest
men
t & S
ecur
ities
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tern
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nal G
amin
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le 5
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ste
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ompl
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o M
onte
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ayo,
S.A
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Com
plej
o H
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te P
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cia
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a, S
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Cirs
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n, S
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Avd
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pera
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loba
l Gam
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achi
ne C
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ratio
n, S
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v. V
eláz
quez
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Mál
aga
Mál
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gos,
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gos
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Inte
rnat
iona
l Bin
go T
echn
olog
y, S
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nten
za, 9
6 ba
jos
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celo
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ratio
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sta
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inga
mes
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Gra
n P
asse
ig d
e R
onda
, 87
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daLl
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ibe,
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00%
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Lin
k, S
.A.U
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t, 10
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loba
l Bin
go C
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ratio
n, S
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23
Mad
ridM
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y G
ames
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inos
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0,00
%G
amin
g &
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vice
s de
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amá,
S.A
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alle
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an F
ranc
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Pan
ama
City
Pan
ama
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roju
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gos
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Inte
rnat
iona
l Bin
go T
echn
olog
y, S
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ioni
sio
Gua
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la, 3
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lbac
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acet
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go, S
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loba
l Bin
go C
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ratio
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apitá
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aya,
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n, S
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and
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vice
s, S
.A.
Av.
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n A
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et, 1
513
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roP
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rebi
, S.A
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ingo
s-
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bal B
ingo
Cor
pora
tion,
S.A
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M
adril
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ervi
cios
par
a el
Bin
go,
S.L
.U.
Irlan
da, 2
Mad
ridM
adrid
- 2 -
F-143
Ann
ex I
List
of s
ubsi
diar
ies
Per
cent
a ge
Per
cent
age
of o
wne
rshi
pof
ow
ners
hip
Inve
stee
Act
ivity
2010
2009
Inve
stm
ent h
olde
rB
usin
ess
addr
ess
City
Pro
vinc
e / C
ount
ry
Men
doza
Cen
tral E
ntre
teni
mie
ntos
, S.A
.C
asin
os51
,00%
51,0
0%C
irsa
Inte
rnat
iona
l Gam
ing
Cor
pora
tion,
S
.A.U
.9
de J
ulio
nº m
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Gal
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Cor
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Rom
aIta
ly
- 5 -
F-146
Ann
ex I
List
of m
ultig
roup
com
pani
esP
erce
ntag
eP
erce
ntag
eof
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of o
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C/A
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9M
adrid
Mad
rid
- 6 -
F-147
Ann
ex I
List
of a
ssoc
iate
sP
erce
ntag
eP
erce
ntag
eof
ow
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- 7 -
F-148
<+
AUDIT REPORT
CIRSA GAMING CORPORATION GROUP
Consolidated Financial Statements and Consolidated Management Report for the year ended December 31, 2009
F-149
<+
Ernst & Young, S.L. Cortés, Pérez & CIA. Auditores, S.L.P. Edificio Sarriá Forum - Av. Sarrià, 102-106, Ático. 08017 Barcelona Passeig de Gràcia, 11 esc. A 2º 2ª. 08007 Barcelona Teléfono: 933 663 700 - Fax: 934 053 784 Teléfono: 93 270 24 14 - Fax: 93 2702 415 www.ey.com/es www.cyp.es Domicilio Social: Plaza Pablo Ruiz Picasso, 1. 28020 Madrid. Domicilio Social: Gutenberg, 3-13, 5º A. 08224 Terrassa Inscrita en el Registro Mercantil de Madrid al Tomo 12749 Inscrita en el Registro Mercantil de Barcelona, Tomo 25.321 Libro 0, Folio 215, Sección 8ª, Hoja M-23123, Inscripción 116. Folio 200, Hoja B.87184. Nº Insc. I.C.J.C.E 57 C.I.F. B78970506 N.I.F. B-08770802
Translation of a report and consolidated financial statements originally issued in Spanish. In the event of discrepancy, the Spanish-language version prevails (See Note 28)
AUDIT REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders of Cirsa Gaming Corporation, S.A.
1. We have audited the consolidated financial statements of Cirsa Gaming Corporation, S.A. (the Company) and its participating companies (the Group), which comprise the consolidated statement of financial position at December 31, 2009, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows, and the notes thereto for the year then ended, the preparation of which is the responsibility of the Company’s directors. Our responsibility is to express an opinion on the aforementioned consolidated financial statements taken as a whole, based upon work performed in accordance with auditing standards generally accepted in Spain, which require the examination, through the performance of selective tests, of the evidence supporting the consolidated financial statements, and the evaluation of their presentation, of the accounting principles applied, and of the estimates made.
2. In accordance with Spanish mercantile law, for comparative purposes the Company's directors have included for each of the headings presented in the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes thereto, in addition to the figures of 2009, those of the prior year. Our opinion refers only to the consolidated financial statements for 2009. On March 31, 2009 we issued our audit report on the 2008 consolidated financial statements, in which we expressed an unqualified opinion.
3. In our opinion, the accompanying 2009 consolidated financial statements give a true and fair view, in all material respects, of the consolidated equity and the consolidated financial position of Cirsa Gaming Corporation, S.A. and its participating companies at December 31, 2009 and the consolidated results of its operations, changes in consolidated equity and consolidated cash flows for the year then ended and contain the required information necessary for their adequate interpretation and understanding, in conformity with the International Financial Reporting Standards adopted by the European Union which are consistent with those applied in the previous year.
F-150
<+
- 2 - 4. The accompanying 2009 consolidated management report contains such explanations as the directors of Cirsa Gaming Corporation, S.A. consider appropriate concerning the situation of the Group, the evolution of its business and other matters; however, it is not an integral part of the consolidated financial statements. We have checked that the accounting information included in the aforementioned consolidated management report agrees with the consolidated financial statements for the year ended December 31, 2009. Our work as auditors is limited to verifying the consolidated management report in accordance with the scope mentioned in this paragraph, and does not include the review of information other than that obtained from the accounting records of the Group’s companies.
ERNST & YOUNG, S.L. CORTÉS, PÉREZ & CIA. AUDITORES, S.L.P. (Inscrita en el Registro Oficial de (Inscrita en el Registro Oficial de Auditores de Cuentas Nº S0530) Auditores de Cuentas Nº S0511) (Signature on the original in Spanish) (Signature on the original in Spanish) _______________________________________ ___________________________
Juan C. Sagrera Villagrasa Jaume Cetrà Oliva April 1, 2010
F-151
Cirsa Gaming Corporation Group
Consolidated Financial Statements for the year ended December 31, 2009 in conformity with the international financial reporting standards adopted by the
European Union (IFRS-EU) and Consolidated Management Report
F-152
CONTENTS
Consolidated Financial Statements
� Consolidated statement of financial position at December 31, 2009 and 2008
� Consolidated statement of comprehensive income for the years ended December 31, 2009 and 2008
� Consolidated statement of changes in equity for the years ended December 31, 2009 and 2008
� Consolidated statement of cash flows for the years ended December 31, 2009 and 2008
� Notes to the consolidated financial statements for the year ended December 31, 2009
Consolidated Management Report
Appendix I - Consolidation perimeter at December 31, 2009 and 2008
F-153
- 1 -
Cirsa Gaming Corporation Group Consolidated statement of financial position at December 31 ASSETS (Thousands of euros) Notes 2009 2008 Non-current assets 981,576 884,701 Goodwill 5 250,625 270,045 Other intangible assets 6 107,352 72,140 Property, plant and equipment 7 407,165 338,336 Financial assets 8 146,255 136,433 Deferred tax assets 18.4 70,179 67,747 Current Assets 257,103 264,720 Inventories 11 25,255 21,235 Trade and other receivables 8 134,626 125,413 Other financial assets 8 37,823 46,020 Other current assets 9,088 8,100 Cash and cash equivalents 12 50,311 63,952 Total assets 1,238,679 1,149,421
EQUITY AND LIABILITIES (Thousands of euros) Notes 2009 2008 Equity 90,847 91,714 Issued capital 13.1 24,577 24,577 Share premium 9,500 9,500 Treasury shares 13.2 (184) (184) Retained earnings 13.3 130,492 106,990 Translation differences (86,949) (92,649) Profit (loss) for the year attributable to equity holders of the parent (4,970) 23,502 Non-controlling interests 13.4 18,381 19,978 Non-current liabilities 811,411 757,431 Bonds 14 495,808 493,632 Bank borrowings 15 172,056 130,090 Other creditors 16 104,768 99,519 Provisions 17 10,723 9,032 Deferred tax liabilities 18.4 28,056 25,158 Current liabilities 336,421 300,276 Bonds 14 8,672 9,220 Bank borrowings 15 56,531 62,102 Suppliers 85,151 75,828 Other creditors 16 162,516 134,604 Current income tax payable 18.2 23,551 18,522 Total equity and liabilities 1,238,679 1,149,421
F-154
- 2 -
Cirsa Gaming Corporation Group Consolidated statement of comprehensive income for the years ended December 31
(Thousands of euros) Notes 2009 2008 Gaming income 1,512,847 1,554,241 Other operating income 135,491 149,672 Total operating revenues 3 1,648,338 1,703,913 Bingo prizes (335,592) (382,761) Variable rent (212,944) (231,548) Net operating revenues 1,099,802 1,089,604 Consumptions (89,047) (108,979) Personnel 20.1 (203,088) (199,931) External supplies and services 20.2 (215,556) (210,889) Gaming taxes (383,506) (377,244) Depreciation, amortization and impairment 6 and 7 (97,543) (95,493) Change in trade provisions (3,931) (2,306) Finance income 10,353 10,373 Finance costs (72,858) (61,024) Change in financial provisions (313) 333 Share of the associates’ profit 8.1 301 209 Foreign exchange results 20.3 (142) (368) Results on sale/disposals of non-current assets (16,279) (10,865) Profit before income tax 28,193 33,420 Income tax expense 18.2 (31,292) (14,752) Net profit (loss) (3,099) 18,668 Other comprehensive income (loss) Translation differences (12,918) (19,482) Other comprehensive income (loss) for the year (12,918) (19,482) Total comprehensive income (loss) for the year (16,017) (814) Net profit (loss) attributable to:
Equity holders of the parent (4,970) 23,502 Non-controlling interests 13.4 1,871 (4,834) (3,099) 18,668
Total comprehensive income (loss) attributable to: Equity holders of the parent (17,888) 4,020 Non-controlling interests 1,871 (4,834) (16,017) (814)
F-155
- 3 -
Cirsa Gaming Corporation Group Consolidated statement of changes in equity for the years ended December 31
(Thousands of euros)
Issued capital
(Note 13.1) Share
premium
Treasury shares
(Note13.2)
Retained earnings
(Note 13.3) Translation differences
Non-controlling interests
(Note 13.4)
Total
At December 31, 2007 24,577 9,500 (184) 106,991 (73,167) 27,475 95,192 Other comprehensive income (loss) for the year 2008 - - - - (19,482) - (19,482) Net profit for the year 2008 - - - 23,502 - (4,834) 18,668
Total comprehensive income (loss) for the year 2008
-
-
-
23,502
(19,482)
(4,834)
(814)
Other changes:
� Changes in percentage of ownership
-
-
-
-
-
2,276
2,276 � Dividends paid - - - - - (4,939) (4,939) At December 31, 2008 24,577 9,500 (184) 130,492 (92,649) 19,978 91,714 Other comprehensive income (loss) for the year 2009 - - - - (12,918) - (12,918) Net profit for the year 2009 - - - (4,970) - 1,871 (3,099) Total comprehensive income (loss) for the year 2009 - - - (4,970) (12,918) 1,871 (16,017) Hyperinflation restatement - - - - 18,618 - 18,618 Other changes: � Changes in percentage of ownership - - - - - 4,058 4,058 � Dividends paid - - - - - (7,526) (7,526) At December 31, 2009 24,577 9,500 (184) 125,522 (86,949) 18,381 90,847
F-156
- 4 -
Cirsa Gaming Corporation Group Consolidated statement of cash flows for the years ended December 31
(Thousands of euros) Notes 2009 2008 Cash-flows from operating activities Profit before tax 28,193 33,420 Adjustments to profit:
Changes in trade provisions 3,931 2,300 Depreciation and amortization of non-current assets 6 and 7 97,543 95,493
Gains (losses) from sales and disposals of non-current assets 16,279 10,865 Finance income and costs 62,818 50,318 Exchange gains (losses) 20.3 142 368 Other income and expenses 2,394 5,707 Change in:
Inventories (2,700) 4,000 Trade and other receivables 5,200 (6,500) Suppliers and other payables 12,300 27,300 Gaming taxes (500) (2,900) Other operating assets and liabilities 7,700 (12,400)
Income tax paid (22,300) (16,700) Net cash-flows from operating activities 211,000 191,271 Cash-flows from (used in) investing activities Purchase of property, plant and equipment (120,200) (84,000) Purchase of intangibles (47,400) (30,400) Proceeds from disposal of property, plant and equipment 3,400 1,200 Acquisition of shares in companies, net of cash acquired (10,800) (6,800) Current account with Nortia Business Corporation, S. L. – Outflows (25,900) (48,800) Current account with Nortia Business Corporation, S. L. – Inflows 25,900 47,800 Other financial assets (10,900) (28,800) Interest received and cash revenues from financial assets 6,600 6,900 Net cash-flows used in investing activities (179,300) (142,900) Cash-flows from (used in) financing activities Proceeds from bank borrowings 1,609,800 1,704,700 Repayment of bank borrowings (1,580,400) (1,677,900) Repayment of bonds (400) (1,200) Finance leases (6,000) (8,900) Interest paid (67,800) (60,600) Other (3,200) 3,800 Net cash-flows from (used in) financing activities (48,000) (40,100)
Net variation in cash and cash equivalents (16,300) 8,271 Net foreign exchange difference on cash balances 2,659 (846) Cash and cash equivalents at January 1 63,952 56,527 Cash and cash equivalents at December 31 50,311 63,952
F-157
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 5 -
1. DESCRIPTION OF THE GROUP 1.1 Group activity Cirsa Gaming Corporation, S. A. (hereinafter “the Company”) and its participating companies (hereinafter “the Group”) consist of a set of companies operating in the gaming and leisure sector, carrying out the following activities:
• Designing and manufacturing slot machines, which are sold to Group companies and third parties, and development of interactive gaming systems
• Operating, both in Spain and abroad, slot machines, bingo halls, casinos and lotteries
1.2 Composition and structure of the Group Cirsa Gaming Corporation, S.A. is a Spanish limited company domiciled in Terrassa (Barcelona) at Crta. Castellar, 298. The Company belongs to a group, of which Nortia Business Corporation, S.L., also domiciled in Terrassa (Barcelona), is the parent company. The companies invested by Cirsa Gaming Corporation, S.A. at December 31, 2009 and 2008 are detailed in the Appendix I, grouped in the following categories: • The subsidiaries, which are companies where the majority of voting rights is controlled either
directly or indirectly by the Company. • The joint ventures are companies ruled by a contractual arrangement between the partners
whereby they establish joint control on the business, which requires the unanimous consent of the venturers regarding the operating decisions.
• The affiliated companies are enterprises not included in the previous two categories and in which
there is an ownership interest on a long-term basis that favors their activity, but with limited influence over their management and control.
(NOTE: The column percentage of ownership in the Appendix I is obtained by multiplying the different successive percentages along the corresponding chain of control, thereby reflecting the final ownership at the Company’s level.)
F-158
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 6 -
1.3 Variations in the consolidation perimeter During 2009 and 2008, the Group’s legal structure has experienced certain changes, as described below: 2009 • Acquisition of companies (Thousands of euros)
Total assets included in
the consolidated statement of financial
position at December 31, 2009
Operating revenues included in the 2009 consolidated
statement of comprehensive income
Marchamatic Indalo, S.L. 934 52 New Laomar, S.L. 2,123 214 Recreativos Ociomar Levante, S.L. 151 3,416 Automaticos Laomar, S.L. 165 8 Metronia Panama, S.A. 58 20 Mediterranea de Explotaciones y de Juego, S.A. 1 - Metronia, CR, S.A. 351 240 Vasca de Explotaciones y de Juego, S.L. 316 118 Extremeña de Explotaciones y de Juego, S.L. 73 8 Madrileña Explotaciones Recreativas y de Juego, S.A. 2,751 222 6,923 4,298
• Creation of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2009
Operating revenues included in the 2009 consolidated
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 7 -
• Changes in percentage of ownership Consolidation method Percentage
At December
31, 2009 At December
31, 2008 At December
31, 2009 At December
31, 2008 Gaming and Services de Panamá, S.A. Full Full 100.00% 70.90% Comput Bingo, S.A. Proportional Proportional 70.00% 50.00% Inversiones Larimar, S.A Full Full 100.00% 98.10% Cafetería Miami, S.A. Full Full 100.00% 51.50% Padova Giochi, S.R.L Full Proportional 100.00% 50.00% Bingo Amico, S.R.L. Proportional Equity 50.00% 25.00% Casino La Toja, S.A. Proportional Full 50.00% 100.0% Gironina de Bingos, S.L. Equity Equity 20.60% 25.00% Orlando Play, S.A. Proportional Full 50.00% 75.00% Flamingo Euromatic-100, S.L Proportional Full 50.00% 75.00% Golden Play, S.L. Proportional Full 50.00% 75.00% Compraventa Maquinas Recreativas Moran , S.L.
Proportional
Full
50.00%
75.00%
Recreativos Rute, S.L. Proportional Full 50.00% 75.00% Goldplay, S.A. Proportional Full 50.00% 75.00% Recreativos Panaemi, S.L. Proportional Full 50.00% 75.00% Mendoza Central Entretenimientos, S.A. Full Full 51.00% 100.0% Promociones e Inversiones de Guerrero, S.A. Integración Inmobiliaria World de Mexico, S.A. Lucky Games, S.A.
Full Full Full
Full Full Full
96.00% 96.00% 100.00%
51.00% 51.00% 70.90%
• Other
(a) Dissolution and liquidation of dormant companies:
Casino Las Nubes, S.A. Italian Gaming Service, S.R.L.
Unidesa Italia, SRL Entretenimiento y Negocios LTDA Flamingo Loga, S.L. (b) Dissolution of companies due to merger within the Group:
Ulprifutur, S.L. Zhenka, S.L. Gran Casino de Lima SAC
Myes Factory 2004, S.L.
F-160
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 8 -
2008 • Acquisition of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2008
Operating revenues included in the 2008 consolidated
statement of comprehensive income
Lucky Games, S.A. 11,547 9,408 Play to Win, S.L. 3,527 - Bingo Electrónico de México, S.L. 3,199 755 Sema Automatic, S.A. 2,321 768 Monazar Star, S.L. 840 638 KLC Negocios y Proyectos, S.A. 678 - Competiciones Deportivas, S.L. 575 58 Tirreno Games, SRL 500 851 Operadora de Explotaciones Recreativas y de
Total assets included in the consolidated statement of
financial position at December 31, 2008
Operating revenues included in the 2008 consolidated
statement of comprehensive income
Mendoza Central Entretenimientos, S.A. 2,160 - 2,160 -
• Sale of companies (Thousands of euros)
Total assets included in the consolidated statement of
financial position at December 31, 2007
Operating revenues included in the 2007 consolidated
statement of comprehensive income
Daycir de Negocios, S.L. 3,783 928 Promotora el Arco, S.A. 658 133 Cirsa Belgium, S.A. - - 4,441 1,061
• Changes in percentage of ownership Consolidation method Percentage
At December
31, 2008 At December
31, 2007 At December
31, 2008 At December
31, 2007 Gaming and Services de Panamá, S.A. Full Full 70.90% 79.00% Inversiones Larimar, S.L. Full Full 98.10% 97.00% Bumex Land, S.L. Full Full 60.00% 100.00% Entretenimiento y Negocios, Ltda. Full Full 75.00% 100.00% Inversiones Recreativas de Occidente, CA Full Proportional 67.50% 50.00% Tejebin, S.A. Proportional Proportional 47.50% 30.90%
F-161
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 9 -
• Other
(a) Dissolution and liquidation of dormant companies:
Unidesa USA, Inc. Of Mississippi Trianon Castle, Inc.
(b) Dissolution of companies due to merger within the Group: Europea de Investigaciones Electrónica, S.A. Monduzi, S.r.l. Sarda Games, S.r.l. Higarla, S.L.
2. BASIS OF PRESENTATION AND ACCOUNTING STANDARDS 2.1 Basis of presentation The 2009 consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards adopted by the European Union (hereinafter IFRS – EU) published by the International Accounting Standards Board (IASB) and further interpretations. The consolidated financial statements of the Group for the year ended December 31, 2009 have been prepared by the Directors of Cirsa Gaming Corporation, S.A. in their Board of Directors meeting held on March 31, 2009. The consolidated financial statements of the Group and the financial statements of the companies composing the Group for the year ended December 31, 2009 will be submitted for approval by the shareholders in general meeting. It is expected that they will be approved without modification. The accounting policies applied in the preparation of the accompanying consolidated financial statements comply with the IFRS prevailing at the date of their preparation. For certain cases, the IFRS-EU provide alternative applications. The options applied by the Group are described in the accounting policies listed in the accompanying notes (see Notes from 2.7 to 2.24). For comparative purposes, the accompanying consolidated financial statements, which have been prepared at historical cost, include the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows, and in the consolidated notes thereto, in addition to the figures of 2009, those of the prior year; except for the figures related to the consideration of Venezuela as hyperinflationary country, which is broken down below. Classification of Venezuela as a hyperinflationary economy Throughout 2009 and in the first days of 2010, a number of factors arose in the Venezuelan economy that led the Group to reconsider the treatment it follows with respect to the translation of the financial statements of investees, as well as the recovery of its financial investments in that country. Within these factors it is worth highlighting the level of inflation reached in 2009 and the cumulative inflation over the last three years; the restrictions to the official foreign exchange market and, finally, the devaluation of the Bolivar fuerte by decision of the Government on January 8, 2010.
F-162
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 10 -
As a result, in accordance with IFRS, Venezuela must be considered as a hyperinflationary economy in 2009. The main implications of this are as follows:
� The 2008 figures should not be restated.
� Adjustment of the historical cost of non-monetary assets and liabilities and the various items of equity of these companies from their date of acquisition or inclusion in the consolidated statement of financial position to the end of the year to reflect the changes in purchasing power of the currency caused by the inflation. The cumulative impact of the accounting restatement to adjust for the effects of hyperinflation for years prior to 2009 is reflected in the translation differences at the beginning of the 2009 financial year.
� Adjustment of the consolidated statement of comprehensive income to reflect the financial loss caused by the impact of inflation in the year on net monetary assets (loss of purchasing power).
� The various components of the consolidated statement of comprehensive income and statement of cash flows have been adjusted for the inflation index since their generation, with a balancing entry in financial results.
� All components of the financial statements of the Venezuelan companies have been translated at the closing exchange rate, which at December 31, 2009 was to 2.15 Bolivares fuertes per US dollar (3.10 Bolivares fuertes per euro).
The main effects on the Group’s consolidated financial statements for 2009 derived from the items mentioned above are as follows: (Thousands of euros) 2009 Revenue 4,107 EBITDA 1,914 Profit (loss) in the net monetary position* (4,857) Net income (5,248) Hyperinflation restatement 18,618 Net impact on equity 13,370
*Loss in the net monetary position is included in the financial expense of the consolidated statement of comprehensive income. 2.2 Estimates and judgments The preparation of the consolidated financial statements requires the management of the Group to exercise judgment, to make estimates and to make assumptions which affect the application of the accounting policies and the recorded amounts of assets, liabilities, revenues and expenses. The estimates and assumptions taken into account have been based upon historical experience and other factors which were considered to be reasonable in the light of the circumstances. Consequently, the actual results could differ from those assumptions. The estimates and assumptions are reviewed periodically, such that any changes made in accounting estimates are posted in the period in which they are reviewed, in the event that such review only affects that period, or in the period of the review and future periods if the revision affects both. The key estimates and judgments are as follows:
• Impairment of assets The Group assesses for impairment at year end for all non-financial assets which carrying amount could be unrecoverable. Goodwill and intangible assets with an indefinite useful life are tested for impairment annually, or when there is evidence of impairment. In 2009 the Group has not recognized any impairment allowance for the non-financial assets (2008: 16,000 euros) (Note 5).
F-163
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 11 -
• Non-current assets with finite useful life The Group reviews periodically useful lives of non-current assets, adjusting prospectively amortization methods where applicable.
• Recoverability of deferred tax assets When the Group or a group company recognizes deferred tax assets, the estimated taxable profits that will be generated in future years are reviewed at year end in order to assess their recoverability, and any impairment loss is recognized accordingly. At December 31, 2009 the Group has recognized deferred tax assets amounting to 70,179 thousand euros (2008: 67,747 thousand euros) (Note 18.4).
• Provisions for taxes and other risks Provisions are recognized for taxes and risks that will probably arise based on related studies. At December 31, 2009 the Group has recognized provisions for taxes and other risks amounting to 10,723 thousand euros (2008: 9,032 thousand euros) (Note 17).
• Fair value of financial instruments When IFRS-EU require the measurement of financial assets and liabilities at fair value, it is determined –when there is no objective market price– based on generally accepted valuation methods. A third-party report is requested when required due to the issue complexity.
• Business combinations and goodwill The Group assesses for each business combination, the fair value of assets, liabilities and acquired contingent liabilities, allocating the cost of the business combination to the identified elements. Likewise, goodwill arising from the acquisition is assigned to its corresponding cash-generating unit, based on expected synergies, for subsequent impairment tests. 2.3 Standards and interpretations approved by the European Union, applicable in 2009 The accounting policies effective as of December 31, 2009, which have or may have an impact on the Group in the current, former or subsequent period, are the same as those prevailing in 2008, except for the following standards and interpretations that have been issued or amended: � IFRS 8 “Operating segments”
The standard requires the breakdown of information on the Group’s operating segments and removes requirements to determine primary segments (business) and secondary (geographical). The standard implementation has no impact on the Group’s financial position and results. The Group has determined that operating segments are the same as abovementioned business segments under IAS 14 “Segment Reporting”. The accompanying notes do not contain any additional breakdown for each segment, including comparative data.
� IAS 1 “Presentation of financial statements (Revised)” The revised standard shows separately changes in equity attributable to the equity holders and to non-controlling interests. The statement of changes in equity only includes transactions with the equity holders, while changes of non-controlling interests are presented in a single line. In addition, the standards present a statement of comprehensive income that displays all recognized income and expenses in a statement or two related statements. The Group has chosen to present one statement.
F-164
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 12 -
� IAS 39 “Financial instruments: Recognition and measurement" and IFRS 7 “Financial instruments: Disclosures" - Reclassification of financial assets
This amendment establishes the effective date and transition measures of changes and classification of financial assets. Its implementation has not involved any impact on the Group financial position or results.
� Improvements to IFRS
In May 2008, the IASB issued its first annual improvements project, which purpose was to remove inconsistencies and clarify standards, including temporary provisions for each one. The amendments have no impact in the Group’s accounting policies, except for the following:
- IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”: Government loans at nil or low interest rates are not exempt from imputation of interest. The Group accounting treatment for these loans was in line with this amendment; hence, it has no impact in the Group’s financial position.
2.4 Standards and interpretations approved by the European Union, applicable in future years
The Group has applied all compulsory standards and interpretations that were approved by the European Union at December 31, 2009. In this regard, the Group has decided not to apply the following IFRS-EU and interpretations that are not compulsory:
Standards and Amendments to Standards Compulsory application:
years starting at IFRS 1 restructured First-time adoption of IFRS December 31, 2009 IFRS 3 revised Business combinations (revised) June 30, 2009 IAS 27 revised Consolidated and separate financial statements (revised) June 30, 2009 Amendments to IAS 32 Financial instruments: Presentation – Classification of rights issues. January 31, 2010 Amendments to IAS 39 Financial instruments: Recognition and measurement- Eligible hedged
items June 30, 2009
Interpretations Compulsory application:
years starting at IFRIC 12 Service concession arrangements March 29, 2009 IFRIC 15 Agreements for the construction of real estate December 31, 2009 IFRIC 16 Hedges of a net investment in a foreign operation June 30, 2009 IFRIC 17 Distributions of non-cash assets to owners October 31, 2009 IFRIC 18 Transfers of assets from customers October 31, 2009
The Group is currently analyzing the impact of the application of these standards, amendments and interpretations. The Group considers that at the present date no significant effects would arise over future consolidated financial statements from their application.
F-165
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 13 -
2.5 Consolidation methodology The consolidation methodology is described in the following sections: Consolidation methods The methods applied in the consolidation process are as follows:
• Full consolidation method for subsidiaries • Proportional consolidation method for multigroup companies • Equity method for affiliated companies Harmonization The financial year of the companies within the consolidation perimeter ends on December 31. For consolidation purposes the corresponding 2009 financial statements of each company have been used. The accounting principles applied by the companies comply with Group policies and, accordingly, no harmonization adjustments were necessary. Elimination of intergroup transactions The intercompany balances arising from financial operations, rental agreements, payment of dividends, financial assets and liabilities, purchase and sale of inventories and non-current assets and rendering of services have been eliminated. In regard with purchase and sale transactions, the unrealized margin on assets, as well as depreciation, has been adjusted in order to show the assets at their original cost to the Group. Translation of financial statements in foreign currency The financial statements of foreign companies have been translated into euros prior to their consolidation following the year-end rate method, except for the financial statements of Venezuelan companies as stated in Note 2.1. Accordingly, assets and liabilities are translated at the spot rate prevailing at December 31, capital and reserves at the historical rates, and revenues and expenses at the averages rate for the year. Differences arisen from this process have been recorded directly in Translation differences with no impact on the consolidated statement of comprehensive income. 2.6 Business combinations When Group gains control over one constituted business, the acquisition cost is assigned to assets, liabilities and contingent liabilities, measuring them at fair value. The difference between the cost of the business combination and the value of identifiable assets acquired is recognized as goodwill where is positive, or as income in the consolidated statement of comprehensive income where the difference is negative. The acquisition cost of a business combination is calculated as the addition of considerations granted to the seller, measured at fair value, plus costs of independent professionals involved in the transaction. In this regard, when the consideration is an amount to be settled with a deferred payment, the relating amount is discounted to present value applying a market interest rate.
F-166
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 14 -
2.7 Intangible assets Intangible assets are initially measured at acquisition cost less accumulated amortization and any impairment loss. Goodwill is not amortized for having indefinite useful life. Instead, it is tested for impairment at least annually as well as non-amortized intangible assets. Likewise, the net carrying amount of intangible assets having finite useful life is tested for impairment when there is evidence or changes of not recovering the carrying amount, similar to the criteria established for property, plant and equipment. Research expenses are charged to expenses when incurred, while development costs related to an individual project are capitalized when the Group can demonstrate the technical feasibility and profitability, the availability of financing resources and incurred costs can be measured reliably. Development expenses to be capitalized, including the cost of materials, personnel expenses directly attributable and a fair proportion of overheads, are amortized using the reducing balance amortized method (50% the first year) over the period for which they expect to obtain profits or income from such project, which generally comprises three years. Amounts paid to the owners of the sites where the slot machines are located on an exclusivity basis are capitalized in this caption, as installation rights. They are amortized on a straight-line basis over the contract term. Administrative concessions are amortized on a straight-line basis, according to the concession term, as well as transfer rights of leased premise Software is amortized on a straight-line basis over three years. 2.8 Property, plant and equipment Property, plant and equipment are measured at acquisition cost less accumulated depreciation and any recognized impairment loss. The Group assesses whether there is an indication that the net carrying amount of property, plant and equipment may be impaired. If any indication exists, assets or cash-generating units are recorded at their recoverable amount, which is the higher of their fair value less cost to sell and value in use. To assess value in use, expected future cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. For those assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets, the recoverable amount is determined for the cash-generating units to which the asset belongs. Impairment losses are recorded as expense in the consolidated statement of comprehensive income. Expenses for repairs which do not prolong the useful life of the assets, as well as maintenance expenses, are taken to the consolidated statement of comprehensive income in the year incurred. Expenses incurred for expansion or improvements which increase the productivity or prolong the useful life of the asset are capitalized. Future expenses for restoring and retirement are recognized, at present value, as a cost component, with a liability provision as counterpart.
F-167
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 15 -
Depreciation charges are calculated over the estimated useful lives of the assets. Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful life. The declining balance depreciation is used alternatively for some assets, basically slot machines, since it better follows the actual pattern of income related to these assets.
Method Rate Commercial buildings (new/used) and plant Straight line 2-4% Riverboats Straight line 6,6% Production installations (new/used) Straight line 8-16% Other installations Straight line 8-12% Production machinery Straight line 10% Other production equipment Straight line 20% New slot machines (“A” and “B” / “V” and “C”) Declining/Straight line 20% Used slot machines Straight line 40% Furniture (new/used) Straight line 10-20% Vehicles (new/used) Declining/Straight line 10-32% Tools and furniture (new/used) Straight line 30-60% EDP equipment (new/used) Declining/Straight line 25-50% Molds and dices Straight line 25% Other PP&E items Straight line 16%
The finite useful life of exploiting slot machines is necessarily subject to exogenous factors (mainly market and competence) of difficult forecast. In the event that such equipment completes its useful life before the base period used for depreciation, the net balance of the related good at the removal date is charged as depreciation for the year, given its recurrent and typical features, as well as its corrective nature of systematic depreciation performed on related goods. 2.9 Investments in associates Investments are accounted for under the equity method, i.e. they are accounted initially at cost and its carrying amount is increased or decreased in order to recognize the part of the result of the invested company attributed to the Group from the acquisition date. Part of the profit (loss) for the year of the invested company is recorded in the Group consolidated statement of comprehensive income. Dividends received reduce the amount of the investment. Changes in the invested company’s equity different than those generated by income of the period are directly recorded as changes in the Group’s net equity. 2.10 Financial assets Financial assets are initially recorded at fair value plus directly attributable transaction costs. The Group establishes the classification of financial assets at the initial recognition, and, when appropriate, the classification is assessed again at year end. Available-for-sale investments Available-for-sale financial assets are non-derivative instruments having neither maturity date (or not expected to be held until maturity), nor nature of trading portfolio, nor derived from trading activities or Group loans. Upon initial recognition, they are measured at fair value, recognizing changes in fair value directly within a separate caption in equity until the investment is derecognized or impaired, at which time the accumulated profit or loss previously recorded in equity is taken to the consolidated statement of comprehensive income. The Group available-for-sale financial assets are measured at acquisition cost, since they cannot be measured reliably at fair value.
F-168
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 16 -
Loans and receivables The Group recognizes in this category trade and non-trade receivables, which include financial assets with fixed or determinable payments not quoted on active markets and for which the Group expects to recover the full initial investment, except, where applicable, in cases of impairment. Following initial recognition, these financial assets are measured at amortized cost. Nevertheless, non-trade receivables which mature within less than one year with no contractual interest rate, as well as advances and loans to personnel, the amount of which is expected in the short term, are carried at nominal value both at initial and subsequent measurement, when the effect of not discounting cash flows is not significant. 2.11 Cancelation of financial assets and liabilities
Financial assets (or, when applicable, part of a financial asset or part of a group of similar financial assets) are derecognized when:
− Rights to related cash flows have expired; − The Group has retained the right to receive related cash flows, but has assumed the liability of
fully paying them within the established terms to a third party under a transfer agreement; − The Group has transferred the rights to receive related cash flows and (a) has substantially
transferred the risks and rewards incidental to the ownership of the financial asset, or (b) has not transferred or retained the asset’s risks and rewards, but has transferred the control over the asset.
Financial liabilities are derecognized when the related liability is settled, cancelled or expired. When a financial liability is replaced for other from the same borrower but with substantially different terms, or the conditions of the existing liability are substantially modified, such change or modification is recorded as a disposal of the original liability and an addition of a new liability. Difference of related carrying amounts is recognized in the consolidated statement of comprehensive income. 2.12 Inventories Inventories are accounted for at the lower of the acquisition cost and the recoverable amount. The recoverable amount of raw materials is the replacement cost. Nevertheless, no provision is set aside for raw materials and other consumables used in production, if the finished products in which they are incorporated are sold above cost. The recoverable value of finished products corresponds to the estimated sales price less related selling expenses. The cost value of finished products includes materials measured at the weighted average acquisition price, third-party work, labor and production overhead. 2.13 Cash and cash equivalents This heading includes cash, current accounts, bank deposits and other financial investments maturing within less than three months from the acquisition date, provided that risks of the substantial alteration of their value are not significant. In terms of the consolidated statement of cash flows, cash and cash equivalents include the abovementioned concepts, net of bank overdrafts, if applicable.
F-169
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 17 -
2.14 Impairment of assets Non-financial assets The Group assesses at each year end whether there is an indication that a non-current asset may be impaired. If any indication exists, and when an annual impairment test is required, the Group estimates the asset’s recoverable amount. The recoverable amount is the higher of the cash-generating unit (CGU) fair value less cost to sell and value in use, and it is established for each separate asset, unless for assets that do not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and its carrying amount is reduced to the recoverable amount. To assess value in use, expected cash flows are discounted to their present value using risk free market rates, adjusted by the risks specific to the asset. Impairment losses from continuing activities are recognized in the consolidated statement of comprehensive income based on the nature of the impaired asset. The Group assesses at year end indicators of impairment losses previously recorded in order to verify whether they have disappeared or decreased. If there are indicators, the Group estimates a new recoverable amount. A previously recognized impairment loss is reversed only if the circumstances giving rise to it have disappeared, since the last loss for depreciation was recognized. In this regard, the asset’s carrying amount increases to their recoverable amount. The reversal is limited to the carrying amount that would have been determined had no impairment loss been recognized for the asset. The reversal is recognized in the consolidated statement of comprehensive income. Upon such reversal, the depreciation expense is adjusted in the following periods to amortize the asset’s revised book value, net of its residual value, systematically over the asset’s useful life. Financial assets The Group assesses at year end if financial assets or group of financial assets are impaired. To assess the impairment of certain assets, the following criteria are applied: • Assets measured at amortized cost If there is objective evidence that there is an impairment loss of loans and other receivables recorded at amortized cost, the loss is measured as the difference between the net carrying amount and the present value of estimated cash flows, discounted at the current market rate upon initial recognition. The net carrying amount is reduced by an allowance, and the loss is recorded in the consolidated statement of comprehensive income. Impairment loss is reversed only if the circumstances giving rise to it have ceased to exist. Such reversal is limited to the carrying amount of the financial asset that would have been recognized on the reversal date had no impairment loss been recognized. In regard with trade and other receivables, when there is objective evidence of not collecting them, an allowance is made based on identified bad debts risk. • Available-for-sale financial assets If a financial asset available-for-sale is impaired, the difference between its cost (net of any repayment) and present fair value, less any previous impairment loss recognized in equity are taken to the consolidated statement of comprehensive income. Reversals related to equity instruments classified as available-for-sale are not recognized in the consolidated statement of comprehensive income, but the associated increase in value is directly recorded in equity.
F-170
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 18 -
2.15 Treasury shares Treasury shares are recorded as a direct decline in the Group’s equity. They are measured at cost value, without recognizing any impairment loss. No gain or loss is recognized in the consolidated statement of comprehensive income on the purchase or sale of the Group’s own equity instruments. Any difference between the carrying amount and the consideration is recognized in equity. 2.16 Provisions Provisions are recognized when: − the Group has a present obligation either legal, contractual or constructive as a result of past
events; − it is probable that an outflow of resources will be required to settle the obligation; and − the amount of the obligation can be reliably measured.
When the effect of the cash temporary value is significant, the provision is estimated as the present value of the future cash flows required to settle the obligation. The discount rate applied in the assessment of the obligation’s present value only corresponds to the temporary value of money and does not include the risks related to the estimated future cash flows related to the provision. The increase of the provision derived from the aforementioned discount is recorded as a financial expense. 2.17 Interest yield loans and credits Loans and credits are initially measured at cost value, which is the fair value of the contribution received, net of issuance costs related to the debt. Upon initial recognition, interest yield loans and credits are recognized at amortized cost using the effective interest rate method, including any issuance cost and discount or settlement premium. 2.18 Translation of balances in foreign currency Transactions in foreign currency are translated at the spot rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated at the spot rate prevailing at the closing date. Unrealized exchange gains or losses are recognized in the consolidated statement of comprehensive income. As an exception, exchange gains or losses arising from intergroup monetary assets and liabilities that reflect investments in foreign subsidiaries are recorded in Translation differences in equity, with no impact on the consolidated statement of comprehensive income. 2.19 Leases Leases are considered to be financial leases when all risks and rewards incidental to ownership of the leased item are substantially transferred to the Group. Assets acquired under financial lease arrangements are recognized as property, plant and equipment at the beginning of the lease term in the consolidated statement of financial position, recording an asset equivalent to the fair value of the leased item or, if lower, the present value at the commencement of the lease of the minimum lease payments. A financial liability is recorded for the same amount. Lease payments are apportioned between finance charges and reduction of the lease liability, in order to maintain a constant interest rate of the outstanding debt. The finance charges are recorded directly in the consolidated statement of comprehensive income. These assets are depreciated, impaired, and derecognized using the same criteria applied to assets of a similar nature.
F-171
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 19 -
Leases are considered to be operating leases when all risks and rewards incidental to ownership of the leased item are substantially maintained by the lessor. Operating lease payments are recognized as expense in the consolidated statement of comprehensive income when accrued over the lease term. 2.20 Revenues Revenues are recognized when it is probable that the economic benefits from the transaction will flow to the Group and the amount of income and costs incurred or to be incurred can be reliably measured. Revenues from exploiting slot machines are measured at the collected amount. The percentage of the amount collected from slot machines attributable to the owner of the premises where the machine is located is included as operating expense in the heading Variable rent. Revenue from bingo cards are recognized for the total amount of sold cards, based on their face value, while recognizing the prizes granted to players as operating expense. The card cost is recorded in Consumptions, and the gambling tax rate over purchased bingo cards is included under the caption Gaming taxes. Revenue from casinos is recorded for the net amount from the game (“win”), i.e. discounting prizes removed by gamblers. Revenue from sale of finished products is measured when risks and significant benefits incidental to the ownership of the assets have been transferred to the buyer and the outcome can be estimated reliably, circumstance that generally arises with the effective goods delivery. Interest income is recorded based on the time passed, including the asset’s effective yield. 2.21 Restructuring expenses Expenses incurred in restructuring processes, mainly indemnities to personnel, are recognized when a formal and detailed plan exists to perform such process by identifying the main parameters (i.e. main locations, functions and approximate number of affected employees, estimated payments and the implementation schedule) and creating a real and valid expectation among affected employees in regard with the process. 2.22 Income tax Deferred income tax is recognized on all temporary differences at the closing date between the tax bases of assets and liabilities and their carrying amounts. Deferred tax liabilities are recognized for all temporary differences, except for taxable temporary differences arisen from an acquired goodwill, which amortization is not tax deductible and those arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Likewise, a deferred tax liability is recognized for all taxable temporary differences from investments in subsidiaries, associates or jointly controlled companies, except when the following conditions are met: (a) when the Group is able to manage the reversal date of the temporary difference and (b) to the extent that the temporary difference will not be reversed in the future. In this regard, when the results are generated in subsidiaries in countries where there is not an agreement to avoid double taxation and the Group’s policy is the repatriation of dividends, the Group records a deferred tax related to the effective amount that would be filed when profits are repatriated.
F-172
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 20 -
Deferred tax assets are recognized for all deductible temporary differences, tax credits and unused tax loss carry forwards, to the extent that it is probable that future taxable profit will be available against which these assets may be utilized, except for deductible temporary differences arisen upon the initial recognition of an asset or liability in a transaction, other than a business combination, and that at the transaction date did not affect the accounting or the tax result. Furthermore, only a deferred tax asset is recognized for all deductible temporary differences from investments in subsidiaries, associates or jointly controlled companies when the following conditions met: (a) to the extent that the temporary difference will be reversed in the future, and (b) to the extent that it is probable that future taxable profit will be available against which these temporary differences may be utilized. The recovery of deferred tax assets is reviewed at year end, reducing the amount in assets to the extent that it is probable that future taxable benefits will not be available and consequently these assets could not be utilized. Deferred taxes are measured based on the tax legislation and charge rates enacted or to be enacted, at the date of consolidated statement of financial position. Deferred tax assets and liabilities are not discounted and are classified as non-current assets or non-current liabilities, respectively. 2.23 Contingencies When unfavorable outcome of a situation that leads to a potential loss is likely to occur (i.e. more than 50% of possibilities), the Group establishes a provision which is recorded based on the best estimate of present value of expected future disbursement. On the other hand, if expectations of favorable resolution are more likely, no provision is recorded, which is reported in the notes of existing risks, unless the possibility of a negative outcome is clearly considered remote. 2.24 Classification of current and non-current assets and liabilities Assets and liabilities are classified in the consolidated statement of financial position as current and non-current according to their maturity date. Current assets mature within one year from the closing date, and non-current assets mature in more than such period. 3. SEGMENT INFORMATION The Group’s activities are organized and managed separately based on the nature of the provided services and products. Each segment represents a strategic business unit, which provides several services and offers product to different markets. The related operating results are assessed regularly by the Group’s highest management body in order to decide which resources should be allocated to the segment and to assess its yield. The Group has classified as operating segment the identified Group component in charge of supplying a single product or service, or a group of them, which is subject to risks and returns of different nature to those related to other segments within the Group. The main factors considered in identifying the segments have been the nature of products and services, the nature of the production process and the type of customer. Assets, liabilities, income and expenses by segments include those directly and reasonably assignable. The main captions not assigned by the Group correspond to accounts with public administrations.
F-173
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 21 -
The transfer prices between segments are calculated based on the actual costs incurred, which have been increased by a fair trading margin. 3.1 Operating segments The distribution of detailed operating segments meets the information usually managed by the Management. Segments, as defined by the Group, are as follows: Slots: Owns and operates slot machines in bars, cafes, restaurants and recreation rooms in Spain and Italy. Also provides interconnected machines in Italy. B2B: Designs, manufactures and distributes slot machines and game kits for the Spanish and international market. The division sells directly or through distributors to other divisions of the Group, mainly slot division, and third parties. Bingos: Operation of bingo halls mainly in Spain and to a lesser extent, in Italy and Mexico. These rooms operate through the sale of bingo cards to customers, and to a lesser extent through the operation of slot machines and restoration services. Casinos: The Group operates with two types of casinos, traditional casinos which include table games and casino slot machines, and electronic casinos which only operate with casino slot machines. Other segments: Segments that as a whole represent less than 10% of total external and internal revenue, less than 10% of the combined result of all segments with added benefits and less than 10% of total assets, have been considered as irrelevant and no specific information has been provided, grouped under this generic title. The following chart shows information on revenue and results, information about assets and liabilities, and other information related to the different operating segments as for December 31, 2009 and 2008.
F-174
Cirs
a G
amin
g C
orpo
ratio
n G
roup
N
otes
to th
e co
nsol
idat
ed fi
nanc
ial s
tate
men
ts fo
r the
yea
r end
ed D
ecem
ber 3
1, 2
009
- 22
-
2009
(T
hous
ands
of e
uros
)
Slot
s
B2B
Cas
inos
Bin
go
Elim
inat
ions
an
d ot
her
To
tal
A
sset
s by
seg
men
t
N
on-c
urre
nt a
sset
s as
sign
ed
305,
150
89,7
16
597,
448
218,
930
(299
,847
) 91
1,39
7 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
- -
- 70
,179
70
,179
C
urre
nt a
sset
s as
sign
ed
87,1
05
41,1
30
163,
338
31,6
61
(66,
131)
25
7,10
3 To
tal a
sset
s 39
2,25
5 13
0,84
6 76
0,78
6 25
0,59
1 (2
95,7
99)
1,23
8,67
9
Liab
ilitie
s by
seg
men
t
Li
abilit
ies
assi
gned
(2
46,2
06)
(129
,594
) (6
09,8
71)
(188
,003
) 53
,898
(1
,119
,776
) Li
abilit
ies
not a
ssig
ned
- -
- -
(28,
056)
(2
8,05
6)
Tota
l lia
bilit
ies
(246
,206
) (1
29,5
94)
(609
,871
) (1
88,0
03)
25,8
42
(1,1
47,8
32)
R
even
ue
Sal
es to
ext
erna
l cus
tom
ers
618,
218
68,9
63
354,
016
607,
141
- 1,
648,
338
Inte
rgro
up s
ales
2,
875
40,9
55
514
1,56
0 (4
5,90
4)
- To
tal o
pera
ting
reve
nue
621,
093
109,
918
354,
530
608,
701
(45,
904)
1,
648,
338
Pr
ofit
for t
he y
ear
Ebi
tda
(*)
89,4
21
16,7
38
115,
236
9,49
8 (2
2,28
8)
208,
605
Fina
nce
inco
me
4,50
8 4,
346
12,1
26
1,51
9 (1
2,14
6)
10,3
53
Fina
nce
cost
s (1
1,00
3)
(9,3
69)
(41,
474)
(1
2,37
3)
1,36
1 (7
2,85
8)
Pro
fit b
efor
e in
com
e ta
x 19
,629
7,
143
44,0
58
(14,
769)
(2
7,86
8)
28,1
93
Inco
me
tax
expe
nse
(7,0
69)
(978
) (2
8,81
6)
(818
) 6,
389
(31,
292)
N
et p
rofit
from
con
tinui
ng o
pera
tions
12
,559
6,
164
15,2
42
(15,
587)
(2
1,47
7)
(3,0
99)
N
on-m
onet
ary
expe
nses
D
epre
ciat
ion,
am
ortiz
atio
n an
d im
pairm
ent
(50,
065)
(4
,917
) (3
6,52
9)
(11,
627)
5,
595
(97,
543)
C
hang
es in
trad
e pr
ovis
ions
(2
,984
) 14
3 (1
,090
) -
- (3
,931
)
Oth
er s
igni
fican
t exp
ense
s
P
erso
nnel
(4
4,73
2)
(18,
790)
(7
9,29
3)
(47,
298)
(1
2,97
5)
(203
,088
) E
xter
nal s
uppl
ies
and
serv
ices
(5
4,13
7)
(19,
332)
(9
1,77
9)
(65,
609)
15
,301
(2
15,5
56)
Gam
ing
taxe
s (1
95,0
81)
(808
) (5
3,09
4)
(134
,431
) (9
2)
(383
,506
)
Oth
er in
form
atio
n by
seg
men
ts
Inve
stm
ent i
n no
n-cu
rren
t ass
ets
82,4
37
5,93
8 73
,247
16
,469
25
3 17
8,34
4 In
vest
men
ts in
ass
ocia
tes
948
452
702
81
944
3,12
7
(*) F
or fi
nanc
ial i
nfor
mat
ion
purp
oses
, EB
ITD
A is
def
ined
as
prof
it (lo
ss) b
efor
e in
com
e ta
x, fi
nanc
ial r
esul
t, ga
ins
(loss
es) f
rom
inve
stm
ents
in a
ssoc
iate
s, g
ains
(los
ses)
fro
m d
ispo
sal/w
rite-
off o
f non
-cur
rent
ass
ets,
cha
nge
in o
pera
ting
prov
isio
ns, a
nd im
pairm
ent c
harg
es, d
epre
ciat
ion
and
amor
tizat
ion.
F-175
Cirs
a G
amin
g C
orpo
ratio
n G
roup
N
otes
to th
e co
nsol
idat
ed fi
nanc
ial s
tate
men
ts fo
r the
yea
r end
ed D
ecem
ber 3
1, 2
009
- 23
-
2008
(T
hous
ands
of e
uros
)
Slot
s
B2B
Cas
inos
Bin
go
Elim
inat
ions
an
d ot
her
To
tal
A
sset
s by
seg
men
t
N
on-c
urre
nt a
sset
s as
sign
ed
271,
635
69,0
30
487,
301
202,
062
(203
,063
) 82
6,96
5 N
on-c
urre
nt a
sset
s no
t ass
igne
d -
-
-
-
67
,747
67
,747
C
urre
nt a
sset
s as
sign
ed
151,
130
108,
838
210,
579
24,5
14
(240
,352
) 25
4,70
9 To
tal a
sset
s 42
2,76
5 17
7,86
8 69
7,88
0 22
6,57
6 (3
75,6
68)
1,14
9,42
1
Liab
ilitie
s by
seg
men
t
Li
abilit
ies
assi
gned
(2
71,9
60)
(188
,870
) (5
49,8
40)
(175
,589
) 15
3,71
1 (1
,032
,548
) Li
abilit
ies
not a
ssig
ned
-
-
-
-
(25,
158)
(2
5,15
8)
Tota
l lia
bilit
ies
(271
,960
) (1
88,8
70)
(549
,840
) (1
75,5
89)
128,
553
(1,0
57,7
06)
R
even
ue
Sal
es to
ext
erna
l cus
tom
ers
636,
882
86,8
09
302,
053
666,
906
11,2
63
1,70
3,91
3 In
terg
roup
sal
es
2,88
4 44
,339
1,
182
1,45
2 (4
9,85
7)
-
Tota
l ope
ratin
g re
venu
e 63
9,76
6 13
1,14
8 30
3,23
5 66
8,35
8 (3
8,59
4)
1,70
3,91
3
Prof
it fo
r the
yea
r
E
bitd
a 97
,013
17
,802
86
,765
9,
991
(19,
009)
19
2,56
2 Fi
nanc
e in
com
e 5,
030
5,53
6 12
,695
1,
942
(14,
830)
10
,373
Fi
nanc
e co
sts
(11,
712)
(1
0,09
1)
(27,
228)
(8
,756
) (3
,237
) (6
1,02
4)
Pro
fit b
efor
e in
com
e ta
x 33
,259
7,
070
44,2
84
(23,
236)
(2
7,95
7)
33,4
20
Inco
me
tax
expe
nse
(3,0
73)
3,23
3 (2
0,79
2)
(908
) 6,
788
(14,
752)
N
et p
rofit
from
con
tinui
ng o
pera
tions
30
,187
10
,303
23
,492
(2
4,14
3)
(21,
171)
18
,668
Non
-mon
etar
y ex
pens
es
Dep
reci
atio
n, a
mor
tizat
ion
and
impa
irmen
t (4
7,28
9)
(5,8
16)
(26,
098)
(2
5,58
9)
9,29
9 (9
5,49
3)
Cha
nge
in o
pera
ting
prov
isio
ns
(1,4
42)
(609
) (2
06)
(63)
14
(2
,306
)
Oth
er s
igni
fican
t exp
ense
s
P
erso
nnel
(4
5,36
3)
(19,
154)
(7
1,53
4)
(50,
658)
(1
3,22
2)
(199
,931
) E
xter
nal s
uppl
ies
and
serv
ices
(5
8,46
8)
(22,
707)
(8
4,83
5)
(59,
290)
14
,411
(2
10,8
89)
Gam
ing
taxe
s (1
78,2
60)
(714
) (4
6,69
5)
(151
,504
) (7
1)
(377
,244
)
Oth
er in
form
atio
n by
seg
men
ts
Inve
stm
ent i
n no
n-cu
rren
t ass
ets
72,1
97
5,53
8 90
,637
10
,439
-
17
8,81
1 In
vest
men
ts in
ass
ocia
tes
726
532
625
977
944
3,80
4
(*) F
or fi
nanc
ial i
nfor
mat
ion
purp
oses
, EB
ITD
A is
def
ined
as
prof
it (lo
ss) b
efor
e in
com
e ta
x, fi
nanc
ial r
esul
t, ga
ins
(loss
es) f
rom
inve
stm
ents
in a
ssoc
iate
s, g
ains
(los
ses)
fro
m d
ispo
sal/w
rite-
off o
f non
-cur
rent
ass
ets,
cha
nge
in o
pera
ting
prov
isio
ns, a
nd im
pairm
ent c
harg
es, d
epre
ciat
ion
and
amor
tizat
ion.
F-176
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 24 -
3.2 Geographic segments In the presentation of information by geographic segments, sales are based on the destination country and the assets on their location. The following chart shows this information as for December 31, 2009 and 2008. 2009
(Thousands of euros)
Sales to external
customers
Sales Inter-
segment
Total revenue by
segment
Assets by
segment
Investment in non-current
assets Spain 1,036,145 43,152 1,083,058 701,585 53,248 Latin America 365,899 712 366,611 743,058 91,337 Other countries 246,294 2,040 248,334 114,244 33,759 Eliminations and others - (45,904) (49,665) (320,208) - 1,648,338 - 1,648,338 1,238,679 178,344
2008
(Thousands of euros)
Sales to external
customers
Sales Inter-
segment
Total revenue by
segment
Assets by
segment
Investment in non-current
assets Spain 1,187,925 52,485 1,240,410 757,102 74,224 Latin America 291,190 414 291,604 625,244 88,596 Other countries 215,656 2,009 217,665 142,744 15,991 Eliminations and others 9,142 (54,908) (45,766) (375,669) - 1,703,913 - 1,703,913 1,149,421 178,811
3. BUSINESS COMBINATIONS AND ACQUISITIONS OF PARTICIPATING COMPANIES 2009 The breakdown of acquisitions of participating companies in 2009 is as follows:
(Thousands of
euros) Name of the companies and business
Acquisition date
% of voting rights
Acquisition price
Fair value of acquired net assets
Goodwill arising on acquisition
Marchamatic Indalo, S.L. October 2009 50% 48 48 - New Laomar, S.L. October 2009 50% 1,675 1,675 - Recreativos Ociomar Levante, S.L. March 2009 50% 5,939 5,939 - Automaticos Laomar, S.L. October 2009 50% 158 158 - Metronia Panama, S.A. January 2009 50% - - - Mediterranea de Explotaciones y de
Juego, S.A. October 2009 50% 3 3 - Metronia, CR, S.A. Sept. 2009 50% - - - Vasca de Explotaciones y de Juego,
S.L. Sept. 2009 50% 2 2 - Extremeña de Explotaciones y de
y de Juego, S.A. October 2009 50% 412 412 - Bingo Amico, S.R.L. June 2009 25% 500 500 - 8,830 8,830
F-177
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 25 -
The value of recognized assets and liabilities at acquisition date from these acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition
Previous carrying
value Property, plant and equipment 4,657 4,657 Intangible assets (net of tax effect) 6,199 2,142 Financial investments 114 114 Current assets 2,367 2,367 Liabilities (4,507) (4,507) 8,830 4,773
If the acquisition date of the acquisitions had occurred at the beginning of the year, operating revenue and net profit for the year 2009 would have increased by 2,002 thousand and 262 thousand euros respectively. On the other hand, the Group gains (losses) contributed by these companies since the acquisition date amount to 464 thousand euros. 2008 The breakdown of business combinations and acquisitions of participating companies in 2008 is as follows:
(Thousands of
euros) Name of the companies and
business Acquisition
date % of voting
rights Acquisition
price Fair value of
acquired net assets
Goodwill arising on acquisition
Sema Automatic, S.A. April 2008 100,0% 2.603 1,046 1,557 Monazar Star, S.L. April 2008 100,0% 1.905 (339) 2,244 Vendimatic Cinco Hela, S.L. July 2008 100,0% 287 15 272 KLC Negocios y Proyectos, S.A. April 2008 70,0% 236 217 19 Baquei Inversiones, S.L. April 2008 100,0% 231 (153) 384 Tirreno Games, SRL Sept. 2008 50,0% 50 78 (28) Play to Win, S.L., Bingo Electrónico
de México, S.L. y Operadora de Explotaciones Recreativas y de Juego, S.L. May 2008 50,0% 50 (155) 205
Occidente, CA April 2008 17,5% - (1,054) 1,054 Other companies 4,176 1,127 9,484 8,660
The value of recognized assets and liabilities at acquisition date from these acquisitions were as follows:
(Thousands of euros)
Fair value recognized on
acquisition
Previous carrying
value Property, plant and equipment 8,721 8,721 Intangible assets 15 15 Financial investments 4,713 4,713 Current assets 10,252 10,252 Liabilities (14,217) (14,217) 9,484 9,484
F-178
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 26 -
If the acquisition date of the acquisitions had occurred at the beginning of the year, operating revenue and net profit for the year 2008 would have increased by 3,935 thousand and 373 thousand euros respectively. On the other hand, the Group gains (losses) contributed by these companies since the acquisition date amount to 625 thousand euros. The breakdown of cash-flows used on acquisitions in 2009 and 2008 is as follows:
(Thousands of euros) 2009 2008 Cash paid on acquisition 11,334 7,200 Cash and cash equivalents acquired with the subsidiaries (534) (400) Net cash outflow 10,800 6,800
4. GOODWILL The breakdown of goodwill by operating segments is as follows:
(Thousands of euros) 2009 2008 Bingo 106,834 106,799 Slots 74,142 96,007 Casinos 68,584 66,535 Other 1,065 704 250,625 270,045
The balance of goodwill at December 31, 2009 and 2008 is shown net of impairment loss allowances amounting to 17,001 thousand euros. Impairment loss on goodwill is as a result of the lower expectations in generating cash flows from certain acquired bingo halls in 2004 both in Madrid and Italy. The Group recognized these impairment losses amounting to 1,001 thousand euros in 2007 and 16,000 thousand euros in 2008. The evolution of the goodwill amount recorded in books, net of impairment loss, is as follows:
(Thousands of euros) 2009 2008 Balance at January 1 270,045 280,259
Goodwill recognized in the year - 8,660 Impairment losses - (16,000) Disposals from sales of investments (17,047) - Net exchange differences arising during the period (2,373) (2,874)
Balance at December 31 250,625 270,045
Disposals from sales of investments in 2009 are due to the sale of 25% of investments in shares of Orlando Play, S.A. and subsidiaries. Thus, in 2008 that company was accounted for under the full consolidation method, while in 2009 it was consolidated under the proportional method. Note 9 includes several elements related to study on the possible impairment of Group’s assets.
F-179
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 27 -
6. OTHER INTANGIBLE ASSETS 6.1 Movements 2009 (Thousands of euros)
January 1, 2009
Additions
Disposals
Transfers
Translation differences and other
December 31, 2009
COST Development costs and patents 40,475 2,445 - 1,700 (229) 44,391 Administrative concessions 23,105 809 (121) - 208 24,001 Installation rights 97,038 26,137 (9,398) - 186 113,963 Transfer rights 839 112 (12) - - 939 Software 14,699 934 (147) - 277 15,763 Prepayments and other 5,350 34,474 - (1,700) (396) 37,728 181,506 64,911 (9,678) - 46 236,785 AMORTIZATION Development costs and patents (34,940) (2,378) - - 229 (37,089) Administrative concessions (11,665) (1,213) 120 - 312 (12,446) Installation rights (43,479) (24,170) 8,295 - (38) (59,392) Transfer rights (674) (47) - - 111 (610) Software (11,646) (1,287) 146 - (144) (12,931) (102,404) (29,095) 8,561 - 470 (122,468) Impairment loss (6,962) (3) - - - (6,965) Net carrying amount 72,140 35,813 (1,117) - 516 107,352 2008
(Thousands of euros)
January 1, 2008
Additions
Disposals
Transfers
Translation differences and other
December 31, 2008
COST Development costs and patents 40,699 331 - - (555) 40,475 Administrative concessions 25,619 186 - - (2,700) 23,105 Installation rights 79,419 30,471 (12,507) - (345) 97,038 Transfer rights 1,274 9 (444) - - 839 Software 13,589 1,321 (35) - (176) 14,699 Prepayments and other 2,944 2,406 - - - 5,350 163,544 34,724 (12,986) (3,776) 181,506 AMORTIZATION Development costs and patents (30,895) (4,404) - - 359 (34,940) Administrative concessions (11,357) (1,510) - - 1,202 (11,665) Installation rights (29,899) (16,152) 2,503 - 69 (43,479) Transfer rights (956) (162) 444 - - (674) Software (9,502) (2,317) 30 - 143 (11,646) (82,609) (24,545) 2,977 - 1,773 (102,404) Impairment loss (7,368) (695) 1,101 - - (6,962) Net carrying amount 73,567 9,484 (8,908) - (2,003) 72,140 Additions in 2009 include the effects of business combinations (Note 4), which amounted to a gross value of 7,152 thousand euros and an accumulated amortization of 953 thousand euros (2008: 15 thousand euros of net carrying amount in 2008).
F-180
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 28 -
On the other hand, additions of prepayments and other intangible assets mainly correspond to the following:
• Concession of licenses to operate slot machines in Panama amounting to 18 million USD (12.5 million euros), of which 6 million USD have been paid in 2009. These licenses will be effective as of March 10, 2010.
• Concession of 2,583 licenses of video lottery terminals in Italy to Cirsa Italia S.p.A. amounting to 38.7 million euros that will be settled in two payments, October 2009 and June 2010. The contract grants operating rights of those terminals, but establishes a provisional transitory period to determine, based on the economic profitability and technical requirements, the final amount of licenses to be ordered. The transitory period ends on April 30, 2010. In November 2009 Cirsa Italia S.p.A. was authorized to act as operator in testing stage and paid the first installment of 19.4 million euros .
The balance of Impairment loss basically corresponds to certain administrative concessions in Argentina (2,047 and 2,394 thousand euros, respectively, as of December 31, 2009 and 2008), as well as investments in research and development projects based on the application of new technologies to the gaming industry (1,754 thousand euros as of December 31, 2009 and 2008). 6.2 Development costs and patents They correspond mainly to the following: • Industrial companies: Creation of new models of slot machines and technological innovations for
them. Net value as of December 31, 2009 and 2008 is 4,054 and 2,983 thousand euros, respectively.
• Lottery and interactive products companies: Development of software applications for on-line
games. Net value as of December 31, 2009 and 2008 is 2,680 and 1,357 thousand euros, respectively.
The internal cost of developing new models of slot machines and software for on-line games by the B2B division of the Group are capitalized as an increase in the value of developments costs and patents. The total amount of works performed by the Group for the intangible assets in 2009 and 2008 amounted to 871 and 1,433 thousand euros, respectively. Research and development expenses recognized as expenses in 2009 amounted to 472 thousand euros (2008: 934 thousand euros). 6.3 Administrative concessions The gross balance of official licenses to operate as of December 31, 2009 mainly correspond to an official contract to operate slot machines in Panama amounting to 14,373 thousand euros (14,878 thousand euros at December 31, 2008), and 2,047 thousand euros in regard with an investment in an Argentinean company that operates a lottery employing disabled people (2,394 thousand euros at December 31, 2008). The net value of these concessions as of December 31, 2009 was 5,950 thousand euros and zero, respectively, (6,885 thousand euros and zero, respectively, at December 31, 2008).
F-181
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 29 -
6.4 Installation rights Installation rights correspond to the amounts paid in exchange for the exclusive use of the premises in which slot machines are located. 6.5 Impairment loss The balance of impairment loss basically covers an investment in a web site in Argentina, as well as the net value of certain administrative concessions in that country and investments in research and development projects based on implementing new technologies in the gaming industry. Note 9 includes several elements in relation to a test of the potential impairment of the Group's assets. 6.6 Other information At December 31, 2009, the net value of intangible assets in foreign companies amounted to 44,848 thousand euros (2008: 14,713 thousand euros). 7. PROPERTY, PLANT AND EQUIPMENT 7.1 Movements 2009 (Thousands of euros)
Additions correspond to the effect of the business combinations (Note 4), amounting to a gross value of 5,536 thousand euros of costs and 879 thousand euros of accumulated depreciation.
F-182
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 30 -
Additions of Land and Buildings and Assets in progress mainly correspond to the construction of the complex (casino, hotel and convention centre) in Rosario (Argentina). The complex started its operations as of October 15, 2009. Disposals balance shows sales of assets as well as the substitution of slot machines, which amounted to 4,206 thousand euros in 2009. 2008
Additions correspond to the effect of the business combinations (Note 4), which altogether amount to 13,132 thousand euros of costs and 4,411 thousand euros of accumulated depreciation. The Disposals balance shows sales of assets as well as the substitution of slot machines, which amounted to 5,442 thousand euros in 2008. 7.2 Work performed by the Group for property, plant and equipment The cost value of the slot machines manufactured by Group companies and sold to slot machine operators of the Group, are recognized as property, plant and equipment by crediting the corresponding expenses in the consolidated statement of comprehensive income. The amount of work performed by the Group for property, plant and equipment in 2009 and 2008 amounted to 31,306 and 22,628 thousand euros, respectively. 7.3 Mortgaged assets Several property, plant and equipment items, which net value as of December 31, 2009 and 2008 was 87,949 and 70,915 thousand euros, respectively, were used as guaranty for mortgage loan debts.
F-183
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 31 -
7.4 Availability of assets All assets are unrestricted, except for those acquired through financial lease contracts which net book value amounted to 21,875 thousand euros at December 31, 2009 (28,185 thousand euros at December 31, 2008). 7.5 Property, plant and equipment located abroad The net value of property, plant and equipment located abroad was 263.456 thousand euros at December 31, 2009 (2008: 212,294 thousand euros). 7.6 Investment commitments At December 31, 2009 investment commitments amounted to 45,000 thousand euros and mainly correspond to future investments of video lottery machines in Italy. At December 31, 2008 investment commitments amounted to 23,000 thousand euros and correspond mainly to investments pending to be capitalized at December 31, 2008 relating to the concession contract for the installation of a casino in Rosario (Argentina). 8. FINANCIAL ASSETS This caption is composed by the following balances:
2009 2008
(Thousands of euros) Non-
current Current Total Non-
current Current Total Investments in associates Investments accounted for under
equity method 3,127 - 3,127 3,804 - 3,804 Available-for-sale financial assets Equity instruments measured at cost 3,018 - 3,018 3,018 - 3,018 Loans and receivables Nortia Business Corporation, S.L. 61,930 - 61,930 56,540 - 56,540 Loans to jointly-controlled business
and associates 34,026 11,555 45,581 17,582 18,023 35,605 Loans to third parties 36,471 - 36,471 35,233 - 35,233 Public administrations 1,154 - 1,154 6,116 - 6,116 Deposits and guarantees 7,804 18,625 26,429 13,549 16,509 30,058 Fixed-income securities and deposits - 6,772 6,772 - 7,853 7,853 Trade and other receivables - 163,626 163,626 - 162,265 162,265 Other 1,427 1,211 2,638 3,294 3,635 6,929 148,957 201,789 350,746 139,136 208,285 347,421 Impairment loss (2,702) (29,340) (32,042) (2,703) (36,852) (39,555) 146,255 172,449 318,704 136,433 171,433 307,866
Current portion of Nortia Business Corporation, S.L., of Loans to third parties and of Public administrations is included in the caption Trade and other receivables. The Group estimates that fair value of these assets do not differ significantly from the recorded amounts. The accumulated balance of impairment loss of non-current financial assets mainly corresponds to loans to third parties, while impairment loss of current financial assets corresponds to trade and other
F-184
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 32 -
receivables (29,340 and 36,852 thousand euros at December 31, 2009 and 2008, respectively). 8.1 Investments in associates This caption includes the following investments: 2009
(Thousands of euros) Book value Assets Liabilities Operating revenues
The variation for the year of the caption of investments in associates is as follows:
(Thousands of euros) 2009 2008 Balance at January 1 3,804 3,595 Investment in associate’s profit 418 318 Investment in associate’s losses (117) (109) Changes in the consolidation method (978) - Balance at December 31 3,127 3,804
Transactions in 2009 and 2008 between companies above mentioned and other companies consolidated through the full and proportional consolidation method are irrelevant.
F-185
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 33 -
8.2 Loans and receivables Nortia Business Corporation, S.L. The non-current debtor balance of Nortia Business Corporation, S.L. includes the following entries:
(Thousands of euros) 2009 2008
Loan maturing in 2015, at 8.75% interest rate 42,754 39,291 Long-term promissory notes from the sale of real state, discounted at 5% interest rate 4,017 4,348 Accrued interests 15,159 12,901
61,930 56,540
Credits to jointly-controlled business and associates This caption is broken down as follows:
(Thousands of euros) 2009 2008 Loans granted to a joint venture domiciled in Argentina. These loans are expressed in US dollars and accrue interest at an annual rate of Libor (six months) plus 2% and mature between 2013 and 2016. (*) 25,160 10,710 Current accounts with jointly-controlled business and associates (*) 11,555 18,023 Other (*) 8,866 6,872 45,581 35,605
(*) The above amounts are the remaining balances after the eliminations derived from the proportional consolidation process. The maturity date of these assets is as follows:
(Thousands of euros) 2009 2008 Within one year 11,555 18,023 Between one and two years 2,217 3,518 Between two and three years 2,217 3,516 Between three and four years 8,507 3,516 Between four and five years 8,507 3,516 More than five years 12,578 3,516 45,581 35,605
The average interest rate of these assets in 2009 and 2008 was at 6.8% and 7.0%, respectively.
F-186
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 34 -
Loans to third parties The breakdown of non-current loans to third parties is as follows:
(Thousands of euros) 2009 2008 Mortgage loan in Venezuelan currency granted to a company (Inversiones Pueblamar, CA) that owns a hotel in Isla Margarita, Venezuela. No explicit interests are accrued; therefore a discount rate of 9.27% has been applied. 5,148 5,329 Mortgage loan in US dollars to a company that owns a hotel in Dominican Republic where a casino operated by the Group is located. It earns an annual interest of 7.25%. 1,385 1,631 Long-term receivables related to the sale carried out in 2006 of the shares of a Spanish operating company of the Group. No explicit interests are accrued; therefore a discount rate of 5% has been applied. - 5,383 Loan to the minority shareholder of a Spanish operating company of the Group. This loan accrues a variable interest rate that will be reviewed annually (2009: 2.54%, 2008:4.61%) 7,691 5,518 Non-voting preferred shares of a Mexican company (in US dollars). These shares have an established annual dividend payout equivalent to 8.75% of their cost. - 2,715 Non-trade loan to minority shareholders. This loan has annual variable maturity dates until 2014 and no explicit interest is accrued, therefore a 5% discount rate has been applied 5%. 4,020 3,956 Other 18,227 10,701 36,471 35,233
In October 2009 the Bolivarian Republic of Venezuela acquired by compulsory purchase the hotel Margarita Hilton & Suites owned by Inversiones Pueblamar, CA, where Cirsa Caribe, C.A. operates. These assets will be transferred to the Venezuelan Tourism company VENETUR, S.A. The Management of Cirsa Caribe, CA is currently negotiating the cost and lease terms of the casino premises with the Venezuelan Ministry of Tourism (“Ministro del Poder Popular de Turismo”) of Venezuela. The Company’s Directors do not consider that as a result of the negotiation, the casino activities will cease and have an impact on the Group consolidated financial statements. In addition, there is no uncertainty in regard with the solvency of Inversiones Pueblamar, CA; for that reason, the collection of the granted loan of 5.1 million euros is beyond doubt. The breakdown of maturity dates for non-current loans to third parties is as follows:
(Thousands of euros) 2009 2008 Within one year - - Between one and two years 6,963 6,219 Between two and three years 7,746 4,132 Between three and four years 7,798 9,199 Between four and five years 7,854 7,613 More than five years 4,348 5,355 Not determined 1,762 2,715 36,471 35,233
F-187
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 35 -
Trade and other receivables This caption is broken down as follows:
(Thousands of euros) 2009 2008 Trade receivables 59,383 74,917 Impairment losses (29,340) (36,852) Receivables from jointly-controlled business and associates 8,906 8,804 Other related parties (Note 21) 9,719 10,405 Receivables from Public administrations 25,924 22,592 Other receivables 58,289 44,873 Nortia Business Corporation, S.L. – Promissory notes from sale of assets 1,405 674 134,286 125,413
Receivables from Public administrations mainly correspond to VAT and other tax receivables. The balance of trade and other receivables is shown net of impairment loss. The movements in the impairment loss allowance are as follows.
(Thousands of euros) 2009 2008 Allowance at January 1 36,852 37,150 Additions 6,423 5,053 Write-off of bad debts (13,935) (5,351) Allowance at December 31 29,340 36,852
The Group has established credit periods between 90 and 150 days, while the average collection period is approximately of 120 days at December 31, 2009 (120 days at December 31, 2008). 8.3 Available-for-sale financial assets The caption of available-for-sale financial assets includes the participation of 8.4% in a real estate company of the Nortia Business Corporation Group, with a cost of 3,018 thousand euros. These assets are measured at cost, as they cannot be determined with reasonable accuracy at fair value. In any case, the Group estimates that under no circumstances these investments could be impaired.
F-188
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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9. IMPAIRMENT TEST 9.1 Goodwill Cash-generating units Goodwill acquired through business combinations and intangible assets with indefinite useful lives have been attributed to cash-generating units for impairment test. The breakdown of cash-generating units is as follows: • Industrial companies, as a whole • Each regional branch of slot machines • Each group of bingos jointly acquired • Each casino managed individually • Each differentiated interactive activities Key assumptions • Budgeted gross margins - to determine the value assigned to the budgeted gross margins, the
average gross margin achieved in the year immediately preceding the year budgeted is used, increased by the expected efficiency improvements. The period used in these projections is 5 years. From the fifth year the figures are extrapolated using a growth rate similar to expected inflation.
• Increase in costs - to determine the value assigned to the increase in costs, the price index
expected during the year for each country where the Group operates is used. The values assigned to key assumptions are consistent with respect to external sources of information.
• The discount rate applied to projected cash flows is determined by the specific risk of each cash-
generating unit, taking into account the type of activity and country where it is located. The following chart shows the discount rates used based on business and geographic area:
Country Activity Discount rate (before tax)
Spain Game 7.17% Spain Industrial 7.17% Spain Interactive 7.17% Italy Game 8.10% Latin America Game 9.02%
Test results As a consequence of the performed tests, no impairment loss has been recognized in 2009. In 2008 the Group recognized impairment loss amounting to 16,000 thousand euros for the reduction in the estimate of future cash flows of certain bingo halls in Madrid and Italy.
F-189
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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9.2 Other assets Impairment indicators used by the Group to determine the need of an impairment test on other non-current assets, amongst others, are as follows: • Significant drop of the result over the same period in the prior year, and/or over the budget. • Legislative changes in progress or planned, which could lead to negative effects. • Change of strategy or internal expectations regarding a particular business or country. • Position of competitors and their launches of new products. • Slowdown of income or difficulties in selling at expected prices. • Change in habits and attitudes of users, and other elements specific to each division. As in 2009 and 2008 none of the abovementioned elements did occur, no adjustments for impairment was performed. 10. INTERESTS IN JOINTLY CONTROLLED COMPANIES Jointly controlled companies have been incorporated in the consolidated financial statements through the proportional method. The information on the related companies is detailed in Appendix I. Other relevant information related to these companies is detailed in the following chart:
Data affected by % of equity
interest (Thousands of euros) 2009 2008 Non-current assets 162,853 101,994 Current assets 71,720 44,818 Non-current liabilities (116,989) (50,916) Current liabilities (43,317) (30,916) Revenues 284,884 266,916 Expenses (254,729) (243,300) Net profit for the year 30,155 23,616
11. INVENTORIES The breakdown of inventories by category, net of impairment, is as follows:
(Thousands of euros) 2009 2008 Raw and auxiliary materials 5,330 6,394 Spare parts and other 14,625 9,849 Finished products 2,379 1,607 Work in progress 2,377 2,663 Prepayments to suppliers 544 722 25,255 21,235
Inventories correspond mainly to the manufacture and trade of slot machines carried out by Group companies.
F-190
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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The balance of inventories is shown net of impairment loss. The movements in impairment loss allowance are as follows:
(Thousands of euros) 2009 2008 Balance at January 1 4,522 11,797 Additions 1,884 697 Write-off (3,193) (7,972) Balance at December 31 3,213 4,522
The write-off in 2009 and 2008 corresponds to the destruction of several inventories from the industrial division. 12. CASH AND CASH EQUIVALENTS For consolidated cash-flow statement purposes, cash and cash equivalents include the following items:
(Thousands of euros) 2009 2008 Cash 8,983 19,982 Current accounts 41,197 43,665 Current deposits 131 305 50,311 63,952
13. EQUITY 13.1 Share capital At December 31, 2009 and 2008 the Company’s share capital consisted of 122,887,121 shares with a par value of 0.20 euros each. All shares bear the same political and economic rights. The breakdown of the Company’s shareholders and their equity interest at December 31 is as follows:
2009 2008 Nortia Business Corporation, S.L., company belonging to Mr. Manuel Lao Hernández and his family 52.43% 52.43% Mr. Manuel Lao Hernández 46.65% 46.65% Treasury shares 0.92% 0.92% 100.00% 100.00%
Part of the Company’s shares (31.04% at December 31, 2009 and 2008) and shares of several subsidiaries are pledged in favor of Institut Català de Finances as guarantee for a loan granted to Nortia Business Corporation S.L., main shareholder of the Company. 13.2 Treasury shares At December 31, 2009 and 2008, the Company has 1,131,421 own shares at an average cost of 0.1626 each, which are shown reducing the Group’s net equity.
F-191
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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13.3 Retained earnings The balance of this caption includes two reserves of the Company, which are non-distributable. Legal reserve In accordance with the Spanish Corporation Law, until the balance of the legal reserve is equivalent to at least 20% of share capital, it cannot be distributed to shareholders and can only be used to offset losses if no other reserves are available. This reserve can be used to increase capital by the amount exceeding 10% of the new capital after the increase. At December 31, 2009 and 2008 the Company’s legal reserve amounted to 4,915 thousand euros. Additionally, the Group subsidiaries have provided the reserves at the amount required by the Spanish prevailing legislation. Treasury shares reserve As indicated in Note 13.2 above, the Company acquired own shares. In accordance with prevailing mercantile legislation, the Company has provided the corresponding non-distributable reserve by the amount of own shares, maintained until sold or amortized. 13.4 Non-controlling interests The balances related to non-controlling interests are as follows:
Amount in statement of
financial position Participation in results (Thousands of euros) 2009 2008 2009 2008 Division Casinos 13,248 11,946 1,407 (7,556) Slots 5,133 8,032 464 2,722 18,381 19,978 1,871 (4,834)
The inter-annual variation of balances in the consolidated statement of financial position is as follows:
(Thousands of euros) 2009 2008 Balance at January 1 19,978 27,475 Net loss (profit) for the year attributable to non-controlling interest 1,871 (4,834) Disposals or additional acquisition up to total amount of shares 2,992 (547) Additions for acquisition of companies or changes in consolidation methods (from proportional to
full) 1,066 2,823 Dividend payments (7,526) (4,939) Balance at December 31 18,381 19,978
14. BONDS This caption basically refers to the following: • The issue of senior notes by a subsidiary located in Luxembourg amounting to 270 million euros,
including an initial portion of 210 million euros issued in May 2004 and a second one of 60 million euros issued in September 2004 as an extension of the former. These senior notes are listed on the Irish Stock Exchange, accruing an annual interest of 8.75% paid each six months and maturing in 2014.
F-192
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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• The issue of new bonds by a subsidiary located in Luxembourg amounting to 230 million euros,
including an initial portion of 130 million euros issued in July 2005 and a second one of 100 million euros issued in December 2006 as an extension of the former at a 102.25% price (with a premium of 2.25%). These bonds accrue an annual interest of 7.875%, which is paid each six months, and mature in 2012.
Contracts subscribed in relation to the bonds issued by the subsidiaries in Luxembourg regulate certain obligations and commitments by the Group, which include, among others, the supply of periodic information, the maintenance of titles of ownership in subsidiaries, the restriction on disposal of significant assets, the compliance with certain debt ratios, the limitation on payment of dividends, the limitation on starting-up new businesses, and the restriction on the Group granting guarantees and endorsements to third parties. The Company’s Directors consider that all contractual obligations have been met. The shares of several Group companies have been assigned as security for these liabilities. Additionally, a Panamanian Group company issued bonds at 10.75% annual interest, matured in July 2009, and which nominal value outstanding at December 31, 2008 amounted to 399 thousand euros, respectively, of debt in US dollars. 15. BANK BORROWINGS
2009 2008
(Thousands of euros) Non-
current Current Total Non-
current Current Total Mortgage and pledge loans 72,012 6,557 78,569 52,720 1,558 54,278 Other loans 81,650 15,983 97,633 65,149 21,549 86,698 Financial lease agreements 18,394 9,759 28,153 12,221 8,979 21,200 Credit and discount lines - 24,232 24,232 - 30,016 30,016 172,056 56,531 228,587 130,090 62,102 192,192
Average interest rates accrued by these borrowings are as follows:
The annual maturity date of these liabilities is as follows:
(Thousands of euros) 2009 2008 Within one year 56,531 62,102 Between one and two years 61,894 32,693 Between two and three years 56,094 26,902 Between three and four years 20,693 46,654 Between four and five years 9,065 23,841 More than five years 24,310 - 228,587 192,192
Part of these liabilities, equal to 55,573 and 50,754 thousand euros at December 31, 2009 and 2008, respectively, is denominated in U.S. dollars.
F-193
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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At December 31, 2009 and 2008, shares of several subsidiaries are pledged in favor of Deutsche Bank London AG as security for the loan of 30 million euros received from that entity, maturing in January 2012. At December 31, 2009 the amount of credit and discount lines not used is 15,064 and 5,836, respectively. These figures amounted to 11,163 thousand euros and zero, respectively, at year end of 2008. Finally, at December 31, 2009 and 2008 the guarantees given by credit institutions and insurance companies to the Group, in connection with official gaming concessions and licenses were 79,476 and 55,320 thousand euros, respectively 16. OTHER CREDITORS The breakdown of this caption is as follows:
2009 2008
(Thousands of euros) Non-
current Current Total Non-
current Current Total Public administrations 3,872 79,315 83,187 12,620 69,732 82,352 Bills payable 7,278 11,475 18,753 16,268 11,281 27,549 Sundry creditors 93,618 71,726 165,344 70,631 53,591 124,222 104,768 162,516 267,284 99,519 134,604 234,123
Non-current part of the balance with Public administrations refers mainly to deferral on gaming taxes granted by the corresponding authorities, which accrues an annual interest rate of 7%. The current portion corresponds to gaming taxes with a short-term maturity (2009: 64,600 thousand euros, 2008: 55,264 thousand euros), and tax return of personal income tax, VAT, social security contributions and similar concepts pending to be filed. Bills payable correspond mainly to debts arising from the acquisition of companies with deferred payment, discounted at market interest rate. Sundry creditors mainly correspond to debts from acquisition of licenses in Panama, which will be settled in two maturity dates at December 31, 2011 and 2012 amounting to 4 million USD each. It also corresponds to a loan received in 2008 from International Game Technology (IGT) for an amount used by the Group at December 31, 2009 of 36,039 thousand euros (51,918 U.S. dollars) which includes principal and interest. The loan was obtained to finance the investment being made by the joint venture Casino de Rosario, S.A. It has a right of mortgage on the company’s building, accrues an annual interest rate of Libor plus 5.75% and will be cancelled in 48 equal monthly consecutive amounts from September 2010. 17. PROVISIONS The breakdown of non-current provisions is as follows:
(Thousands of euros) 2009 2008 Obligations in relation to employees 8,255 3,595 Tax assessments appealed by the Group 445 1,191 Other 2,023 4,246 Balance at December 31 10,723 9,032
F-194
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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The inter-annual variation of non-current provisions is as follows:
(Thousands of euros) 2009 2008 Balance at January 1 9,032 8,588 Allowances 2,427 453 Applications (736) (9) Balance at December 31 10,723 9,032
18. TAXES 18.1 Tax Group The Company together with 84 Spanish companies, which comply with tax legislation requirements, file their tax returns on a consolidated basis. Other Group companies file individually income tax returns in accordance with applicable tax legislation applicable. 18.2 Accrued and payable income tax The income tax expense, that has been fully recognized in the consolidated statement of comprehensive income, is broken down as follows:
(Thousands of euros) 2009 2008 Current 30,826 19,430 Deferred for (increase) decrease of taxable bases of tax group (2,793) - Deferred for (increase) decrease of taxable bases of other Group companies (2,978) 1,431 Deferred for (increase) decrease of unused deductions of the tax group (757) 248 Deferred for temporary differences 6,994 (6,357) 31,292 14,752
Current income tax payable was calculated as follows:
(Thousands of euros) 2009 2008 Current income tax 30,826 19,430 Withholdings and payments on account (7,275) (908) 23,551 18,522
F-195
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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18.3 Analysis of income tax expense
(Thousands of euros) 2009 2008 Profit before tax 28,193 33,420 Tax rate prevailing in Spain 30.0% 30.0% Theoretical income tax expense 8,458 10,026 Adjustments – Effect of: Different tax rates prevailing in other countries 7,347 5,843 Countries with no income taxation (1,061) (2,436) Impairment losses for exclusive consolidation purposes - 3,031 Credits for tax losses carry forward not capitalized 6,427 3,946 Translation losses deductible for tax purposes (583) (3,250) Losses from sales of shares for tax purposes 494 (3,584) Utilization of credits gained - (3,061) Losses in net monetary position (Venezuelan hyperinflation) 1,457 - Non-deductible expenses 8,753 2,173 Other - 2,064 31,292 14,752
The effect of adjustments of different tax rates mainly correspond to the application of higher taxes in Argentina and Venezuela. Non-deductible expenses mainly consist of financial investment impairment allowances carried out by subsidiaries in Argentina and Panama, as well as taxes on gambling activities and exchange differences in Venezuela. 18.4 Deferred tax assets and liabilities
(Thousands of euros) 2009 2008 Assets Tax losses carry forward from the tax group 34,160 30,131 Tax losses carry forward from other group companies 6,699 3,721 Deductions pending application from tax group 3,490 2,733 Deductible temporary differences: --- Receivables 6,710 10,992 --- Securities portfolio 4,895 4,403 --- Goodwill 1,997 3,334 --- Other 12,228 12,433 70,179 67,747 Liabilities Taxable temporary differences: --- Financial leases (7,486) (5,532) --- Reinvestment of income from sale of non-current assets (1,333) (2,672) --- Revaluation of properties due to first application of IFRS (7,808) (8,412) --- Provision for maximum gaming prizes (8,479) (6,559) --- Other (2,950) (1,983) (28,056) (25,158)
The Group estimated the taxable profits which it expects to obtain over the next ten fiscal years (period for which it considers the estimates to be reliable) based on budgeted projections. It also analyzed the reversal period of taxable temporary differences, identifying those that reverse in the years in which unused tax loss carry forwards may be used. Based on this analysis, the Group has recorded deferred tax assets for unused tax loss carry forwards as well as deductions pending application and deductible temporary differences for which it is considered probable that sufficient taxable profit will be generated in the future against which they can be utilized.
F-196
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 44 -
The breakdown of unused tax losses carry forward at December 31, 2009 and 2008, for the tax group which parent company is Cirsa Gaming Corporation, S.A., is as follows:
130,349 116,047 At December 31, 2009 and 2008 the Group has recognized deferred tax assets amounting to 34,160 and 31,367 thousand euros, respectively, relating to unused tax losses of the tax group amounting to 113,866 and 104,555 thousand euros. No deferred tax assets were recorded for the rest of unused tax losses carry forward that at December 31, 2009 amounted to 4,945 thousand euros (2008: 3,448 thousand euros). In addition to tax losses carry forward, the tax group, holds additional tax credits amounting to 43,668 thousand euros at December 31, 2009 (2008: 40,622 thousand euros), for unused tax deductions. The above-mentioned total amounts include 40,178 thousand euros at December 31, 2009 (2008: 37,889 thousand euros) from unused deductions that were not capitalized for not having met the terms to be used.
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 45 -
18.5 Other tax information Under prevailing tax regulations, tax returns may not be considered final until they have either been inspected by tax authorities or until the inspection period has expired. At December 31, 2009 Spanish companies (which mostly file taxes under a consolidated tax group) are open to inspection of all taxes to which they are liable for the last four years. In general, the prescription periods for countries where the Group has significant presence are between four and five years after the end of the statutory period for filing tax returns. The Group considers that, in the event of a tax inspection, no significant tax contingencies having effect on consolidated financial statements would arise 19. LEASES 19.1 Operating leases The Group as lessee The Group has entered into operating leases on buildings. These leases are for an average term between three and five years, with no renewal clauses. The future minimum payments under non-cancellable operating leases at December 31 are as follows:
(Thousands of euros) 2009 2008 Within one year 51,860 50,472 Between one and five years 226,282 229,744 More than 5 years 61,286 61,502 339,428 341,718
19.2 Finance leases The Group has financed several acquisitions of property, plant and equipment through financial lease agreements. The future minimum payments under financial leases and their present value are as follows:
2009 2008
(Thousands of euros) Minimum payments
Present value of
payments
Minimum payments
Present value of
payments
Within one year 12,458 9,759 8,979 8,979 Between one and five years 29,569 18,393 12,221 12,221 42,027 28,152 21,200 21,200
Acquisition of property, plant and equipment through financial lease agreements, not recorded as cash flows in investing activities in the consolidated cash flow statements, amounted to 3,458 thousand euros in 2009 and 12,432 thousand euros in 2008.
F-198
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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20. INCOME AND EXPENSES 20.1 Personnel (Thousands of euros) 2009 2008 Wages and salaries 150,985 148,044 Social security 37,086 35,813 Indemnities 4,797 6,935 Other personnel expenses 10,220 9,139 203,088 199,931
Remunerations pending payment at year end of 2009 and 2008 (13,365 and 14,123 thousand euros, respectively) are recognized in the caption Other creditors. The breakdown of headcount by professional category and gender is as follows:
2009 2008 Men Women Total Men Women Total Directors 258 39 297 331 54 385 Technicians, production and sales staff 5,414 3,624 9,038 5,084 3,718 8,802 Administrative personnel 636 557 1,193 580 582 1,162 6,308 4,220 10,528 5,995 4,354 10,349
20.2 External supplies and services
(Thousands of euros) 2009 2008 Rent and royalties 56,159 51,461 Advertising, promotion and public relations 31,834 31,436 Professional services 25,545 27,594 Sundry services 21,819 20,545 Supplies 18,889 18,291 Travel expenses 12,783 14,419 Repair and maintenance 11,970 13,019 Security 8,156 8,582 Postal services, communications and telephone 7,587 6,806 Insurance premiums 8,133 6,518 Cleaning services 6,478 5,384 Bank services and similar 3,511 3,120 Transportation 2,220 2,780 Research and development expenses 472 934 215,556 210,889
20.3 Foreign exchange results
(Thousands of euros) 2009 2008 Income 2,779 4,022 Expenses (2,921) (4,390) (142) (368)
Net exchange differences from translation of financial balances in foreign currency between Group companies, are recognized in Translation differences, as a component that decreases the shareholders’ equity at December 31, 2009 by an amount of 1,943 thousand euros (2008: 10,800 thousand euros), since they are dealt with as exchange differences arising from monetary
F-199
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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components of a net investment in a foreign business. 21. RELATED PARTIES The Group conducts several trade and financial transactions with its main shareholder Nortia Business Corporation, S.L., and its subsidiaries, which are broken down as follows:
(Thousands of euros) 2009 2008 Sale of slot machines 9,114 19,091 Revenues for rendering of services 3,914 3,806 Operating expenses (14,721) (16,693) Interest income 4,000 3,889 Interest expenses (21) (29)
Transactions with related entities correspond to normal trading activity and are carried out at market prices in a manner similar to transactions with unrelated parties. Balances arising from these transactions at year end are as follows:
(Thousands of euros) 2009 2008 Non-current accounts receivable from financial transactions 61,930 56,540 Current accounts receivable from financial transactions 1,405 674 Accounts receivable from trade transactions 9,719 10,405 Accounts payables from trade transactions (1,101) (2,013) 71,953 65,606
22. CONTINGENCIES Venezuela Tax authorities raised assessments against a subsidiary (in which the Group has a percentage of ownership of 70%) that operates a casino in Isla Margarita (Venezuela), relating to the supposed non-compliance with an obligation to withhold taxes on gaming prizes as established by a generic tax regulation in that country that does not specifically contemplate the activities of casinos. The related amount, for the year 1998 to 2003, is over 12 million euros. This amount was raised by the tax authorities through a global estimation process that did not consider the features of a casino that make it almost impossible to make withholding on prizes. The assessment was appealed against, arguing both the non-applicability of this obligation to a casino and the existence of severe legal deficiencies in the assessment itself. Based on advice of legal counsel, the Group considers that its position will prevail and, therefore, no provision is included in the consolidated financial statements. Tax Law for the activities of games on chance published in June 2007 by the Venezuelan tax authorities establishes an additional tax to that paid by a Group company (in which the Group has a percentage of ownership of 67.5%) related to the operation of machines, which for 2008 and 2007 amounted to approximately 2.5 million euros. This difference in the payment is due to both the company and other third companies operating in the country claim they are paying the same tax twice. The Group, in accordance with their legal advisors, estimates a sentence in favor of its interests of appeals; accordingly no provision has been recorded in this regard.
F-200
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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Argentina In October 1999, an Argentinean company of the Group opened a floating casino in waters of the Río de la Plata on the basis of an official license granted by the Federal Authorities. The Government of the Autonomous City of Buenos Aires challenged the competence of the Federal Authorities (“Loteria Nacional, SE”) in gaming matters. In particular, it claimed that gaming activities fell under its jurisdiction in the City of Buenos Aires, and hence raised objections against the license granted to the subsidiary Casino Buenos Aires, S.A. (CBA). These circumstances led to a co-participation agreement for gaming matters being signed between the Federal Authorities (LNSE) and the Government of the Autonomous City of Buenos Aires. Conveniently, this agreement was ratified by Decree 1155/2003 of PEN, dated December 1, 2003 (B,O, 02/12/2003) and Law 1,182 of the Legislation of the Government of the Autonomous City of Buenos Aires, dated November 13, 2003 (BOCBA 01/12/2003). Consequently, given the current situation, the Group’s Directors and their legal advisors consider that the rights conveniently agreed upon with LNSE are consolidated. Spain From 1996 onwards the Group companies received certain amounts as refund for excess taxes paid in the past, as a consequence of a sentence from the Constitutional Court which declared void article 38 Two 2 of Law 5/1990 of June 29 as regards the retroactive application of the complementary tax applied to gaming machines in 1990. Accordingly, the Group companies have been collecting or compensating in the last years the amounts paid in excess, which have been credited to the income statement when received, while reducing taxable base of the corporate income tax from 1996 to 2008 with regard to income recorded in those years but accrued in statute-barred years. The Group, following its consultants’ opinions, considers that said income should not have been considered as a component of the taxable profit because its accrual referred to statute barred years and not to those for which the returns were being filed. In light of that interpretation the Group did the following: • For the years 1996 and 1997, where aforementioned income (principal plus interests) was
included in the taxable base of corporate income tax from those years, claims asking for the refund of the incorrect taxes paid have been filed. The related amount (1.7 million euros) is not included in the consolidated financial statements.
• As for years 1998 to 2008, it has not been integrated in the tax base of corporate tax in those years, the amount (principal plus interest) charged in the same years but accrued in statute-barred years. The Group, in accordance with their legal advisors, considers that in the event of an inspection of non statute-barred years, its position will prevail. Therefore, it has not recorded any provision in relation to the tax that may be required in case of disagreement with the criteria applied by Spanish tax authorities. The income tax amount plus late-payment interests that might be required, in case of discrepancy, in relation to adjustments in the tax base of the last non statute-barred four years would amount to 7.0 million euros (6.7 million euros at December 31, 2008).
23. INFORMATION ON ENVIRONMENTAL ISSUES Given the activities and features of the Group, neither capital expenditures nor expenses took place in connection with the prevention, reduction or damage repair of environmental matters
F-201
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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24. AUDIT FEES Fees and expenses referred to the audit of the 2009 financial statements of the Group’s companies rendered by the primary auditors and other firms belonging to the auditor’s international network amounted to 1,386 thousand euros in 2009 and 1,334 thousand euros in 2008. In addition, fees and expenses paid during the year corresponding to other services rendered by the primary auditors or other firms within their international network amounted to 345 thousand euros in 2009 and 251 thousand euros in 2008. 25. DIRECTORS AND SENIOR EXECUTIVES The breakdown of the remuneration earned by members of the Company’s Board of Directors and senior executives is as follows:
(Thousands of euros) 2009 2008 Directors
Salaries 1,150 1,053 Senior executives
Salaries 4,400 4,200
5,550 5,253 At December 31, 2009 there are current accounts receivables with the Parent Company’s Directors amounting to 698 thousand euros (544 thousand euros in 2008). These accounts accrue an annual interest of 4.25%. The Group companies have no pension plans, life insurance policies or dismissal indemnities for former or current members of the Board of Directors and senior executives of the Parent Company. Pursuant to current legal requirements, the Directors have informed the Parent Company that they hold the following equity investments and/or carry out duties in companies whose activity is identical, similar or complementary to the activity which comprises the Group’s corporate purpose:
Director Company % of equity interest
Position / Duties
Manuel Lao Hernández Nortia Business Corporation, S.L. 94.54% Joint-Administrator Esther Lao Gorina Nortia Business Corporation, S.L. 1.65% Joint-Administrator Manuel Lao Gorina Cirsa Amusement Corporation, S.L. - Chairman Global Bingo Corporation, S.A. - Chairman Global Casino Technology Corporation, S.A. - Chairman Cirsa Finance Luxembourg, S.A. - Director Cirsa Capital Luxembourg, S.A. - Director Cirsa Interactive Corporation, S.L. - Chairman Cirsa Funding Luxembourg, S.A. - Director Cirsa Servicios Corporativos, S.L. - Chairman Cirsa Intenational Gaming Corporation, S.A. - Chairman Global Manufacturing Corporation, S.L. - Chairman Cirsa Slot Corporation, S.L. - Chairman Nortia Business Corporation, S.L. 1.65% Joint-Administrator Opesa Internacional, S.A. - Chairman
F-202
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
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26. OBJECTIVES AND POLICIES OF FINANCIAL RISK MANAGEMENT The Group is exposed to credit risk, interest risk, exchange risk and liquidity risk during the normal development of its activities. The Group's principal financial instruments include bonds, bank loans, credit and discount lines, financing obtained through the deferral of gaming taxes, financial leases, deferred payments for purchase of business, cash and current deposits. The Group's policy establishes that no trading in derivatives (exchange rates insurance) to manage exchange rate risks arising from certain fund sources in U.S. dollars will be undertaken. The Group neither uses financial derivatives to cover fluctuations in interest rates. 26.1 Credit risk Most of the operations carried out by the Group are in cash. For receivables from other activities, the Group has established a credit policy and risk exposure in collection is managed in the ordinary course of business. Credit assessments are carried out for all customers who require a limit higher than 60 thousand euros. Guarantees on loans and the credit risk exposure are shown in Note 8. Receivables that are past due more than six months are impaired or renegotiated, to the extent that there are sufficient guarantees of collection. In this regard, in 2008 Cirsa Caribe, C.A. renegotiated its debt with Inversiones Pueblamar C.A. (Note 8.2), and agreed to pay it over a term of ten years since March 31, 2008. 26.2 Interest rate risk External finance is mainly based on the issuance of corporate bonds at fixed interest rate. Bank borrowings (credit policies, trading discounts, financial lease agreements) as well as deferred payments with public administrations and other long-term non-trade debts have a variable interest rate that is reviewed annually. Previous Notes show interest rates of debt instruments. The breakdown of liabilities that accrue interests at 2009 and 2008 year end is as follows:
At December 31, 2009 and 2008 financial liabilities at a fixed interest rate represented 61% and 64%, respectively, of total liabilities. In this regard, the Group’s sensitivity to fluctuations in interest rates is low: a variation of 100 basic points in floating rates would lead to a change in the result amounting to 3,261 thousand euros in 2009 and 2,168 thousand euros in 2008. The Group estimates that fair value of the financial liabilities’ instruments does not differ significantly from the accounted amounts.
F-203
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 51 -
The breakdown of assets that accrue interests at 2009 and 2008 year end is as follows:
2009 2008
(Thousands of euros) Fixed
interest rate Floating
interest rate Fixed
interest rate Floating
interest rate
Nortia Business Corporation, S.L. 61,930 - 56,540 - Loans to jointly-controlled business and associates 11,555 34,026 18,023 17,582 Loans to third parties 10,553 25,918 19,014 16,219 Deposits and guarantees 26,429 - 30,058 - Fixed-income securities and deposits 6,772 - 7,853 - Trade and other receivables 1,405 - 674 - 118,644 59,944 132,162 33,801
The Group estimates that fair value of the assets’ financial instruments does not differ significantly from the net book value. 26.3 Foreign currency risk The Group is exposed to foreign currency risk in businesses located in Latin America, mainly in Argentina, which affect significantly revenues and expenses, Group results and the value of certain assets and liabilities in currencies other than the euro. It is also affected to a lesser extent by granted and received loans. Currencies that basically generate exchange risks are the Argentinean peso and the US dollar. In order to reduce risks, the Group conducts policies aimed to keep balanced collection and payments in cash of assets and liabilities in foreign currency. The following study on sensitivity shows the foreign currency risk: • Sensitivity of the profit for the year before tax against fluctuations of the exchange rate US
These variations correspond basically to the impact on operating magnitudes, and not on financial figures, since approximately 90% of Group financial liabilities, in both years, are paid in euros.
F-204
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 52 -
26.4 Liquidity risk The exposure to unfavorable situations of debt markets can make difficult or prevent from hedging the financial needs required for the appropriate development of Group activities. To manage liquidity risk, the Parent Company applies different measures:
• Diversification of financing sources through the access to different markets and geographical areas. In this regard, the Group has an additional borrowing capacity (see data in Note 15).
• Credit facilities committed for the sufficient amount and flexibility. Accordingly, the Group has available cash and cash equivalents amounting to 50 million euros at December 31, 2009 (2008: 64 million euros), to meet unexpected payments.
• The length and repayment schedule for financing through debt is established based on the financed needs.
In this regard, the Group’s liquidity police ensure to meet its payment obligations without requiring the access to funds in costly terms. Additionally, it is noteworthy that both at Group and individual business level, the Group performs projections regularly on the generation and expected cash needs, in order to determine and monitor the Group’s liquidity position. The relevant information on the maturity dates of financial liabilities based on contractual terms is broken down in Notes 14, 15 and 16. 27. CAPITAL MANAGEMENT POLICY The main objectives of the Group's capital management are to ensure financial stability in the short and long term, appropriate return rates, increased business value and ensure proper and adequate financing of investments and projects to be conducted in a framework of controlled expansion. The Group's strategy, both in 2009 and 2008, is to enhance the more profitable business and to act decisively on the deficit operations, to significantly improve the results and net cash flows. Control of investments and costs restraint have been also established as a priority action, with satisfactory results. As stated in Note 14, the contracts entered into in relation to corporate bonds issued include limitations on the payment of dividends. The Company does not intend to distribute dividends in the short to medium term given that its policy is not to distribute dividends.
F-205
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 53 -
28. ADDITIONAL NOTE FOR ENGLISH TRANSLATION These consolidated financial statements were originally prepared in Spanish. In the event of discrepancy, the Spanish-language version prevails. These financial statements are presented on the basis of International Reporting Standards adopted by the European Union which for the purposes of the Group are not different from those issued by the International Accounting Standards Board (IASB). Consequently, certain accounting practices applied by the Group do not conform with generally accepted principles in other countries. March 31, 2010
Signed on the original in Spanish ___________________ ________________ _______________ Manuel Lao Hernández Manuel Lao Gorina Esther Lao Gorina
F-206
Cirsa Gaming Corporation Group Notes to the consolidated financial statements for the year ended December 31, 2009
- 54 -
Grupo Cirsa Gaming Corporation
Consolidated Management Report
Year ended December 31, 2009 In 2009, despite the general economic situation, the Group’s operating revenues have increased by 10,198 thousand euros (0.9%) mainly due to the good performance shown by the International Casino Division and the Slots Division (Italy). This year’s EBITDA was 208,605 thousand euros, over 192,562 thousand euros of last year, which represents an increase of 8.3 % (+16,043 thousand euros). This increase mainly relates to the improvement in the way the Group has managed its business, focusing on achieving profitable growth and consolidating its already existing business activities. In particular, we highlight the increases in the Casino Division. In order to maintain the Group’s position of leadership at a domestic level, as well as tackle and compete in international markets and offer a larger range of products in traditional sectors and in those related to new technologies, the Group has continued, as in previous years, to invest significant level of resources in Research and Development. This year the total amount allocated for projects carried out by the Group’s Research and Development department amounted to 2,445 thousand euros. The Group’s strategy for the future is focused on continuing to consolidate its already existing business activities, improve its cost-effectiveness, and increase its EBITDA figure in absolute terms, concentrating on its activities in already existing markets and making selectively chosen investments. On May 28, 2004, the Company acquired 2.47% of its own shares at an acquisition cost of 31,007 thousand euros. On July 13, 2007, the Company transferred 1.55% of its treasury stock to Nortia Business Corporation, S.L. as a consideration for the acquisition of a group of slot machine operators. The remaining shares (0.92%) are being held in the treasury stock portfolio. The Group has no financial instruments in the financial statements that would be significant for the measurement of assets, liabilities, financial situation or results. March 31, 2010
Signed on the original in Spanish ___________________ ________________ _______________ Manuel Lao Hernández Manuel Lao Gorina Esther Lao Gorina
F-207
Appe
ndix
I - C
onso
lidat
ion
perim
eter
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Italy
- 1 -
F-208
Appe
ndix
I - C
onso
lidat
ion
perim
eter
Subs
idia
ries
Per
cent
a ge
ofP
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9 3º
Mad
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- 7 -
F-214
Balance Sheet September 30, 2012
CGC Consolidated
Thousands of Euros Parent Guarantors Non-guarantors
Company Subsidiaries Subsidiaries Eliminations Consolidated
1 Great Winchester Street London EC2N 2DB United Kingdom
Deutsche Bank Luxembourg S.A. 2 Boulevard Konrad Adenauer
L-1115 Luxembourg
Deutsche Bank AG, London Branch Winchester House
1 Great Winchester Street London EC2N 2DB United Kingdom
Legal Advisors to the Trustee
White & Case LLP 5 Old Broad Street London EC2N 1DW United Kingdom
We have not authorized any dealer, salesperson or other person to give any information or represent
anything to you other than the information contained in this listing circular. You must not rely on unauthorized
information or representations.
This listing circular does not offer to sell or ask for offers to buy any of the securities in any jurisdiction
where it is unlawful, where the person making the offer is not qualified to do so, or to any person who cannot
legally be offered the securities.
The information in this listing circular is current only as of the date on the cover page, and may change
after that date. For any time after the cover date of this listing circular, we do not represent that our affairs are
the same as described or that the information in this listing circular is correct, nor do we imply those things by
delivering this listing circular or selling securities to you.
SUMMARY ................................................................................................................................................................................... 1 RISK FACTORS ............................................................................................................................................................................ 17 USE OF PROCEEDS ..................................................................................................................................................................... 47 CAPITALIZATION ....................................................................................................................................................................... 48 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA .............................................................. 49 OPERATING AND FINANCIAL REVIEW AND PROSPECTS ................................................................................................. 51 THE SPANISH GAMING MARKET ............................................................................................................................................ 95 BUSINESS ..................................................................................................................................................................................... 98 REGULATION .............................................................................................................................................................................. 121 MANAGEMENT ........................................................................................................................................................................... 136 PRINCIPAL SHAREHOLDERS ................................................................................................................................................... 139 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS .............................................................................. 140 DESCRIPTION OF CERTAIN INDEBTEDNESS ........................................................................................................................ 142 DESCRIPTION OF THE NOTES .................................................................................................................................................. 149 BOOK-ENTRY, SETTLEMENT AND CLEARANCE ................................................................................................................. 205 MATERIAL TAX CONSIDERATIONS ....................................................................................................................................... 208 ERISA CONSIDERATIONS ......................................................................................................................................................... 218 NOTICE TO INVESTORS ............................................................................................................................................................ 220 PLAN OF DISTRIBUTION ........................................................................................................................................................... 224 LEGAL MATTERS ....................................................................................................................................................................... 225 WHERE YOU CAN FIND OTHER INFORMATION .................................................................................................................. 225 INDEPENDENT AUDITORS ....................................................................................................................................................... 226 SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES .............................................................................. 226 LISTING AND GENERAL INFORMATION ............................................................................................................................... 229 INDEX TO FINANCIAL STATEMENTS .................................................................................................................................... F-1
_________________
LISTING CIRCULAR
_________________
€100,000,000
Cirsa Funding Luxembourg S.A. a finance subsidiary of
