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DDE > SEC Filings for DDE > Form 10-Q on 9-Nov-2011All Recent SEC Filings

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Form 10-Q for DOVER DOWNS GAMING & ENTERTAINMENT INC


9-Nov-2011

Quarterly Report


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

The following discussion is based upon and should be read together with the consolidated financial statements and notes thereto included elsewhere in this document.

We are a diversified gaming and entertainment company whose operations consist of:

Dover Downs Casino - a 165,000-square foot casino complex featuring popular table games, including craps, roulette and card games such as blackjack, Spanish 21, baccarat, 3-card and pai gow poker, the latest in slot machine offerings, multi-player electronic table games, the Crown Royal poker room, a Race & Sports Book operation, the Dover Downs' Fire & Ice Lounge, Doc Magrogan's Oyster House, Frankie's Italian restaurant, as well as several bars, restaurants and four retail outlets;

Dover Downs Hotel and Conference Center - a 500 room AAA Four Diamond hotel with conference, banquet, ballroom and concert hall facilities; and

Dover Downs Raceway - a harness racing track with pari-mutuel wagering on live and simulcast horse races.

All of our operations are located at our entertainment complex in Dover, the capital of the State of Delaware.

Approximately 90% of our revenue is derived from gaming win. Several factors contribute to the win for any gaming company, including, but not limited to:

          Proximity to major population bases,

          Competition in the market,

          The quantity and types of slot machines and table games available,

          The quality of the physical property,

          Other amenities offered on site,

          Customer service levels,

          Marketing programs, and

          General economic conditions.

We believe that we hold a strong position in each of these areas. Our entertainment complex is located in Dover, the capital of the State of Delaware. We draw patrons from several major metropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all within a two hour drive. According to the 2010 United States Census, approximately 36.8 million people live within 150 miles of our complex. There are significant barriers to entry related to the gaming business in Delaware. By law, currently only the three existing horse racing facilities in the State are allowed to have a gaming license. Our property is similar to properties found in the country's largest gaming markets. Our luxury hotel is the only casino-hotel in Delaware, providing a strong marketing tool, especially to higher-end players. We also utilize our slot marketing system to allow for more efficient marketing programs and the highest levels of customer service. Our facility offers the most conference space of any hotel in Delaware.

Because all of our operations are located at one facility, we face the risk of increased competition from the legalization of new or additional gaming venues. We have therefore focused on creating the region's premier gaming destination and building and rewarding customer loyalty through innovative marketing efforts, unparalleled customer service and a variety of amenities.

Results of Operations

Gaming revenues represent (i) the net win from slot machine, table games and sports wagering and (ii) commissions from pari-mutuel wagering. Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income. Revenues do not include the retail amount of hotel rooms, food and


beverage and other miscellaneous goods and services provided without charge to customers as promotional items. The estimated direct cost of providing these items has been charged to the casino through interdepartmental allocations and is included in gaming expenses in the consolidated statement of earnings.

For the casino operations, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in our consolidated financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the casino operations, collects the State's share of the win and the amount due to the vendors under contract with the State who provide the slot machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to us as our commission for acting as a Licensed Agent. Gaming expenses include the amounts collected by the State
(i) for the State's share of the win, (ii) for remittance to the providers of the slot machines and associated computer systems, and (iii) for harness horse racing purses. We recognize revenues from sports wagering commissions when the event occurs. We recognize revenues from pari-mutuel commissions earned from live harness horse racing and importing of simulcast signals from other race tracks when the race occurs. Revenues from hotel rooms, food and beverage sales and other miscellaneous income are recognized at the time the service is provided.

Three Months Ended September 30, 2011 vs. Three Months Ended September 30, 2010

Gaming revenues decreased by $4,999,000, or 8.3%, to $54,935,000 in the third quarter of 2011 as a result of lower win from slot machine play in our casino. Continuing challenging economic conditions and the related impact on consumer spending and increased competition all contributed to the lower win. Additionally, Hurricane Irene forced the closure of our facility for almost an entire weekend in August contributing to the decline. Partially offsetting this decrease was an increase in revenue from our table game operations. Our average number of slot machines was 2,601 in the third quarter of 2011 as compared to 2,774 in the third quarter of 2010.

Other operating revenues were $5,167,000 in the third quarter of 2011 as compared to $5,766,000 in the third quarter of 2010. Food and beverage revenues decreased to $3,065,000 in the third quarter of 2011 from $3,718,000 in the third quarter of 2010 primarily due to a decrease in catering revenue and to a lesser extent lower revenues in our buffet. These decreases were the result of a change in the race schedule at Dover International Speedway since we provide catering services for their events. Rooms revenue increased slightly to $1,227,000 in the third quarter of 2011 compared to $1,140,000 in the third quarter of 2010. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $5,207,000 and $5,161,000 in the third quarter of 2011 and 2010, respectively.

Gaming expenses decreased by $3,478,000, or 6.7%, primarily as a result of lower gaming taxes, vendor fees and harness horse racing purses due to the lower slot machine gaming revenues.

Other operating expenses decreased by $814,000, or 18.1%, due to the lower other operating revenues.

General and administrative expenses were $1,461,000 in the third quarter of 2011 as compared to $1,912,000 in the third quarter of 2010. The decrease was primarily due to lower employee benefit costs during the third quarter of 2011 and the expensing of costs relating to our terminated merger agreement with Dover Motorsports, Inc. (a company related through common ownership) during the third quarter of 2010.

Depreciation expense decreased to $2,823,000 in the third quarter of 2011 as compared to $3,103,000 in the third quarter of 2010 primarily as a result of certain assets becoming fully depreciated.

Interest expense decreased by $214,000 due to lower outstanding borrowings and lower interest rates during the third quarter of 2011.

Our effective income tax rate was 37.8% in the third quarter of 2011 as compared to 37.0% in the third quarter of 2010. We expect our effective income tax rate to approximate 42.2% for the year ending December 31, 2011 which includes the impact of the non-deductible portion of the restricted stock awards that vested in the first quarter of 2011.


Nine Months Ended September 30, 2011 vs. Nine Months Ended September 30, 2010

Gaming revenues decreased by $1,956,000, or 1.2%, to $162,396,000 in the first nine months of 2011 as a result of lower win from slot machine play in our casino. Continuing challenging economic conditions and the related impact on consumer spending and increased competition all contributed to the lower win. Additionally, Hurricane Irene forced the closure of our facility for almost an entire weekend in August contributing to the decline. Partially offsetting this decrease was an increase in revenue from our table game operations. Our table game operations began on June 25, 2010 with 40 tables including blackjack, poker, craps and roulette. In July 2010, we added 12 poker tables. Our average number of slot machines was 2,632 in the first nine months of 2011 as compared to 2,841 in the first nine months of 2010. The lower number of slot machines resulted from the removal of machines to make room for our table game operations.

Other operating revenues were $15,927,000 in the first nine months of 2011 as compared to $15,856,000 in the first nine months of 2010. Rooms revenue remained consistent at $3,057,000 in the first nine months of 2011 compared to $3,066,000 in the first nine months of 2010. Food and beverage revenues decreased $130,000 to $10,131,000 from $10,261,000 in the first nine months of 2010 due primarily to a decrease in catering revenue. This decrease was a result of the change in the race schedule at Dover International Speedway. Partially offsetting the decrease were higher revenues in our buffet and increased beverage sales on the casino floor. Additionally, higher ticket sales for our live concert and boxing events contributed to the slight increase. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $15,323,000 and $13,439,000 in the first nine months of 2011 and 2010, respectively.

Gaming expenses increased by $4,427,000, or 3.2%, primarily as a result of the opening of our table game operations and higher marketing costs. Partially offsetting these increases were lower gaming taxes, vendor fees and harness horse racing purses due to the lower slot machine gaming revenues.

Other operating expenses decreased by $564,000, or 4.6%, due to more expenses being allocated to the gaming operations through interdepartmental charges since a higher percentage of gross revenues represent promotional items provided to gaming customers on a complimentary basis.

General and administrative expenses were $4,854,000 in the first nine months of 2011 as compared to $5,345,000 in the first nine months of 2010. The decrease was primarily due to lower employee benefit costs during the first nine months of 2011 and the expensing of costs related to our terminated merger agreement with Dover Motorsports, Inc during the first nine months of 2010.

Depreciation expense decreased slightly to $8,868,000 in the first nine months of 2011 as compared to $8,949,000 in the first nine months of 2010 primarily as a result of certain assets becoming fully depreciated partially offset by asset additions associated with our table game operations.

Interest expense decreased by $172,000 due to lower outstanding borrowings during the first nine months of 2011 and lower interest rates during the third quarter of 2011.

Our effective income tax rate was 42.8% in the first nine months of 2011 as compared to 41.7% in the first nine months of 2010. The increase was the result of the impact the non-deductible portion of the restricted stock awards that vested during the first nine months of 2011 had on our lower pre-tax earnings. We expect our effective income tax rate to approximate 42.2% for the year ending December 31, 2011.

Liquidity and Capital Resources

Net cash provided by operating activities was $9,139,000 for the nine months ended September 30, 2011 compared to $16,119,000 for the nine months ended September 30, 2010. The decrease was primarily due to the payment of new state gaming license fees on our table game operations in the first nine months of 2011, which relate to the 12 months ended June 30, 2011 and the 12 months ended June 30, 2012, and the lower net earnings.


Net cash used in investing activities was $1,513,000 for the nine months ended September 30, 2011 compared to $4,558,000 for the nine months ended September 30, 2010 and was primarily related to capital improvements. Capital expenditures for the first nine months of 2011 related primarily to upgrading our computer systems and other facility improvements. Capital expenditures for the first nine months of 2010 related primarily to our table game operations.

Net cash used in financing activities was $10,419,000 for the nine months ended September 30, 2011 compared to $16,045,000 for the nine months ended September 30, 2010. During the first nine months of 2011, we repaid $7,085,000 of our credit facility compared to $13,025,000 during the first nine months of 2010. We paid $2,916,000 and $2,903,000 in cash dividends during the first nine months of 2011 and 2010, respectively. We repurchased and retired $150,000 of our outstanding common stock during the first nine months of 2011 compared to $117,000 during the first nine months of 2010. On June 17, 2011, we entered into a new credit agreement and paid $268,000 in closing costs.

On October 26, 2011, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.03 per share. The dividend is payable on December 10, 2011 to shareholders of record at the close of business on November 10, 2011.

On October 23, 2002, our Board of Directors authorized the repurchase of up to 3,000,000 shares of our outstanding common stock. The purchases may be made in the open market or in privately negotiated transactions as conditions warrant. The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time. No purchases of our equity securities were made pursuant to this authorization during the nine months ended September 30, 2011 or 2010. At September 30, 2011, we had remaining repurchase authority of 1,653,333 shares.

Based on current business conditions, we expect to make capital expenditures of approximately $750,000 during the remainder of 2011. Additionally, we contributed $1,475,000 to our pension plans through the first nine months of 2011. We expect to contribute approximately $2,000,000 to our pension plans in 2011.

At September 30, 2011, we had a $90,000,000 credit agreement with a bank group. The maximum borrowing limit under the facility reduces to $85,000,000 as of March 31, 2012, $80,000,000 as of March 31, 2013 and $75,000,000 as of March 31, 2014 and the facility expires June 17, 2014. Interest is based upon LIBOR plus a margin that varies between 150 and 225 basis points (225 basis points at September 30, 2011) depending on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (the "leverage ratio"). The credit facility contains certain covenants including minimum interest coverage, maximum funded debt to earnings before interest, taxes, depreciation and amortization and minimum tangible net worth. Material adverse changes in our results of operations could impact our ability to satisfy these requirements. In addition, the credit agreement includes a material adverse change clause. The credit facility provides for seasonal funding needs, capital improvements and other general corporate purposes. At September 30, 2011, we were in compliance with all terms of the facility and there was $71,515,000 outstanding at a weighted average interest rate of 2.48%. At September 30, 2011, $18,485,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of September 30, 2011 $7,694,000 could have been borrowed as of that date.

Effective January 15, 2009, we entered into an interest rate swap agreement that effectively converts $35,000,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense. The agreement terminates on April 17, 2012. Pursuant to this agreement, we pay a fixed interest rate of 1.74%, plus a margin that varies between 150 and 225 basis points depending on our leverage ratio (225 basis points at September 30, 2011). In return, the issuing lender refunds to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin. At September 30, 2011, the interest rate on our interest rate swap was 3.99%.

We expect that our net cash flows from operating activities and funds available from our credit facility will be sufficient to provide for our working capital needs and capital spending requirements at least through the next twelve months, as well as any cash dividends our Board of Directors may declare. We expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity.


Contractual Obligations



At September 30, 2011, we had the following contractual obligations:



                                                                   Payments Due by Period
                                    Total           2011        2012 - 2013     2014 - 2015      Thereafter
Revolving line of credit(a)      $ 71,515,000    $         -    $          -    $ 71,515,000    $          -
Estimated interest payments
on revolving line of
credit(b)                           5,107,000        577,000       3,714,000         816,000               -
Pension contributions(c)              525,000        525,000               -               -               -
                                 $ 77,147,000    $ 1,102,000    $  3,714,000    $ 72,331,000    $          -



(a) Our current credit facility expires on June 17, 2014.

(b) The future interest payments on our revolving credit agreement were estimated using the current outstanding principal as of September 30, 2011 and interest rates under the new credit agreement dated June 17, 2011. For $35,000,000 of our outstanding borrowings, we used the fixed interest rate per the interest rate swap agreement through the termination date of the swap agreement.

(c) We expect to contribute approximately $2,000,000 to our pension plans for 2011, of which $1,475,000 was contributed in the first nine months of 2011. Effective July 31, 2011, we froze our pension plans which will result in reduced contributions after 2011.

Related Party Transactions

See NOTE 8 - Related Party Transactions to our consolidated financial statements included elsewhere in this document for a full description of related party transactions.

Critical Accounting Policies

The accounting policies described below are those considered critical by us in preparing our consolidated financial statements and/or include significant estimates made by management using information available at the time the estimates are made. As described below, these estimates could change materially if different information or assumptions were used.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided for financial reporting purposes using the straight-line method over estimated useful lives ranging from 3 to 10 years for furniture, fixtures and equipment and up to 40 years for facilities. These estimates require assumptions that are believed to be reasonable. We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its fair value. Generally, fair value will be determined using valuation techniques such as the present value of future cash flows.

Accrued Pension Cost

On June 15, 2011, we decided to freeze participation and benefit accruals under our pension plans. The freeze was effective July 31, 2011. The benefits provided by our defined-benefit pension plans are based on years of service and employee's remuneration through July 31, 2011. Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate, assumed rate of compensation increase, and expected long-term rate of return on assets. Changes in these estimates would impact the amounts that we record in our consolidated financial statements and our funding contributions to the plans.


Recent Accounting Pronouncements

See NOTE 3-Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this document for a description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations, financial condition and cash flows.

Factors That May Affect Operating Results; Forward-Looking Statements

This report and the documents incorporated by reference may contain forward-looking statements. In Item 1A of this report, we disclose the important factors that could cause our actual results to differ from our expectations.

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