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DDE > SEC Filings for DDE > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for DOVER DOWNS GAMING & ENTERTAINMENT INC


9-Aug-2013

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.

Dover Downs Gaming & Entertainment, Inc. is a premier gaming and entertainment resort destination 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, the Festival Buffet, 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 a full-service spa/salon, 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 gaming operations are located at our entertainment complex in Dover, the capital of the State of Delaware.

In February 2013, we opened our first Herschel's Famous 34 Pub & Grill in Athens, Georgia. Herschel's Famous 34 is a 110-seat sports-themed restaurant owned and operated by us on approximately 4,100 square feet of leased property. We have license rights to the name and likeness of former professional football star Herschel Walker for restaurant operations.

Approximately 85% 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 video lottery gaming license. Additional gaming venues have recently opened in Maryland, Pennsylvania and New Jersey. These new venues - particularly a large casino at Arundel Mills Mall in


Maryland which opened in June 2012 with slot machines and subsequently added table games in April 2013 - are having a significant adverse effect on our visitation numbers, our revenues and our profitability. 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 and was expanded in the first quarter of 2012 to add 6,500 square feet of meeting space.

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 operations.

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 June 30, 2013 vs. Three Months Ended June 30, 2012

Gaming revenues decreased by $9,154,000, or 17.5%, to $43,177,000 in the second quarter of 2013 as a result of lower win from slot machine play and to a lesser extent lower table game revenue. We believe that the decrease was primarily due to lower attendance at our facility from the opening of a large casino at Arundel Mills Mall in Maryland in June 2012 and their subsequent expansion in September 2012.

Other operating revenues were $6,871,000 in the second quarter of 2013 as compared to $6,024,000 in the second quarter of 2012. Rooms revenue increased $461,000 to $1,849,000 in the second quarter of 2013 as compared to $1,388,000 in the second quarter of 2012 primarily due to higher convention sales and sales for the Firefly Music Festival which is held on Dover International Speedway's property adjacent to us. Food and beverage revenues increased $297,000 to $3,952,000 from $3,655,000 in the second quarter of 2012 due to the opening of Herschel's Famous 34 in February 2013, higher banquet sales and revenues from our Frankie's outdoor café which is open during Dover International Speedway's NASCAR race weekend and the Firefly Music Festival. These increases were partially offset by lower revenues in many of our other food and beverage outlets from the lower casino attendance. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $4,963,000 and $5,149,000 in the second quarter of 2013 and 2012, respectively.


Gaming expenses decreased by $6,243,000 primarily from lower gaming taxes as a result of the lower gaming revenues. License fees, marketing and other expenses were also lower in the second quarter of 2013. On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 which among other things eliminates and restructures certain fees currently paid by video lottery agents.

Other operating expenses increased to $4,614,000 in the second quarter of 2013 from $4,339,000 in the second quarter of 2012 primarily due to the opening of Herschel's Famous 34.

General and administrative expenses decreased to $1,427,000 in the second quarter of 2013 as compared to $1,508,000 in the second quarter of 2012.

Depreciation expense decreased slightly to $2,524,000 in the second quarter of 2013 as compared to $2,566,000 in the second quarter of 2012.

Interest expense decreased by $21,000 due to lower outstanding borrowings during the second quarter of 2013.

Our effective income tax rate was 41.7% in the second quarter of 2013 as compared to 40.2% in the second quarter of 2012.

Six Months Ended June 30, 2013 vs. Six Months Ended June 30, 2012

Gaming revenues decreased by $22,325,000, or 20.1%, to $88,480,000 in the first six months of 2013 as a result of lower win from slot machine play and to a lesser extent lower table game revenue. We believe that the decrease was primarily due to lower attendance at our facility from the opening of a large casino at Arundel Mills Mall in Maryland in June 2012 and their subsequent expansion in September 2012.

Other operating revenues were $12,086,000 in the first six months of 2013 as compared to $11,634,000 in the first six months of 2012. Rooms revenue increased $488,000 to $2,806,000 in the first six months of 2013 as compared to $2,318,000 in the first six months of 2012 primarily due to higher convention and corporate sales and sales for the Firefly Music Festival. Food and beverage revenues decreased slightly to $7,253,000 from $7,346,000 in the first six months of 2012 due primarily to lower revenues in many of our food and beverage outlets from the lower casino attendance. These decreases in food and beverage revenues were partially offset by the opening of Herschel's Famous 34 in February 2013 and revenues from our Frankie's outdoor café. Other operating revenues do not include the retail amount of promotional allowances which are provided to customers on a complimentary basis of $9,968,000 and $10,431,000 in the first six months of 2013 and 2012, respectively.

Gaming expenses decreased by $15,018,000 primarily from lower gaming taxes as a result of the lower gaming revenues. License fees, marketing and other expenses were also lower in the first six months of 2013. On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 which among other things eliminates and restructures certain fees currently paid by video lottery agents.

Other operating expenses increased to $8,632,000 in the first six months of 2013 from $8,239,000 in the first six months of 2012 primarily due to the opening of Herschel's Famous 34.

General and administrative expenses decreased to $2,956,000 in the first six months of 2013 as compared to $3,064,000 in the first six months of 2012.

Depreciation expense decreased to $5,033,000 in the first six months of 2013 as compared to $5,246,000 in the first six months of 2012 primarily as a result of certain assets becoming fully depreciated.

Interest expense decreased by $205,000 due to lower outstanding borrowings and lower interest rates during the first six months of 2013.


Our effective income tax rate was 70.8% in the first six months of 2013 as compared to 43.7% in the first six months of 2012. The high rate in 2013 was the result of the impact the non-deductible portion of the restricted stock awards that vested during the first quarter of 2013 had on our lower pre-tax earnings. We expect our effective income tax rate to approximate 42% in each of the remaining quarters of 2013.

Liquidity and Capital Resources

Net cash provided by operating activities was $4,472,000 for the first six months of 2013 compared to $6,882,000 for the first six months of 2012. The decrease was primarily due to lower net earnings, partially offset by the reduction of certain annual license fee payments on our gaming operations. We paid annual license fees of $3,781,000 on our gaming operations in the first six months of 2012. These fees decreased to $1,017,000 in the first six months of 2013.

Net cash used in investing activities was $903,000 for the first six months of 2013 compared to $1,847,000 for the first six months of 2012 and was primarily related to capital improvements. Capital expenditures for the first six months of 2013 related primarily to assets purchased for our new Herschel's Famous34 and casino and hotel facility improvements. Capital expenditures for the first six months of 2012 related primarily to the renovation of our Festival Buffet, the construction of additional meeting space, upgrading our computer systems and equipment purchases.

Net cash used in financing activities was $3,714,000 for the first six months of 2013 compared to $6,117,000 for the first six months of 2012. During for the first six months of 2013, we had net repayments of $3,500,000 on our credit facility compared to $4,060,000 for the first six months of 2012. We paid $1,950,000 in cash dividends during in the first six months of 2012. No dividends were paid in the first six months of 2013. We repurchased and retired $144,000 of our outstanding common stock during the first six months of 2013 compared to $107,000 during the first six months of 2012. As a result of amending our credit agreement in March 2013, we incurred $70,000 in bank fees.

On January 23, 2013, our Board of Directors suspended the quarterly dividend.

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 first six months of 2013 or 2012. At June 30, 2013, we had remaining repurchase authority of 1,653,333 shares. At present we are not permitted to make such purchases under our credit facility.

Based on current business conditions, we expect to make capital expenditures of approximately $500,000 - $1,000,000 during the remainder of 2013.

At June 30, 2013, we had a $65,000,000 credit agreement with a bank group. The maximum borrowing limit under the facility reduces to $60,000,000 as of December 31, 2013 and the facility expires June 17, 2014. Interest is based upon LIBOR plus a margin that varies between 150 and 350 basis points (275 basis points at June 30, 2013) 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 fixed charge coverage, maximum funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") and minimum EBITDA and 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 and prohibits the payment of dividends. The credit facility provides for seasonal funding needs, capital improvements and other general corporate purposes. At June 30, 2013, we were in compliance with all terms of the facility and there was $55,000,000 outstanding at a weighted average interest rate of 2.94%. At June 30, 2013, $10,000,000 was available pursuant to the facility. We expect to be in compliance with the financial covenants, and all other covenants, for all measurement periods through June 17, 2014, the expiration date of the facility.


The facility is classified as a current liability as of June 30, 2013 in our consolidated balance sheet as the facility expires on June 17, 2014. Our intention is to refinance the facility prior to its expiration date.

Additional gaming venues have recently opened in Maryland, Pennsylvania and New Jersey. These new venues - particularly a large casino at Arundel Mills Mall in Maryland which opened in June 2012 with slot machines and subsequently added table games in April 2013 - are having a significant adverse effect on our visitation numbers, our revenues and our profitability. Management has estimated that approximately 32% of our total gaming win comes from Maryland patrons and approximately 65% of our Capital Club® member gaming win comes from out-of-state patrons.

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. We expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 (the "Act"), under which Delaware's video lottery agents will be authorized to offer, through their websites, internet versions of their table games (including poker) and video lottery offerings. All games will remain under the control and operation of the Delaware Lottery. These internet gaming offerings capitalize on a recent United States Department of Justice ruling clarifying that wagering within a state's boundaries does not violate the federal Wire Act.

Internet lottery games will, at least initially, be offered solely to persons within the State of Delaware. This territorial limitation would not apply to gaming pursuant to an interstate compact. Internet gaming participation will be limited to persons who meet the age requirements for equivalent non-internet games.

Revenues from the internet versions of table games and video lottery games will be distributed generally pursuant to the formula currently applicable to those games, with the exception that internet service provider costs will be deducted first, and the Lottery will retain the first $3.75 million of state-wide net proceeds. The Act also eliminates and restructures certain fees currently paid by video lottery agents to incentivize agents to make capital expenditures, spend on marketing and promotions, and make debt service payments. In February 2012, we paid a $1,540,000 gaming license fee, which was for the period July 1, 2011 to June 30, 2012 - this fee was eliminated beginning July 1, 2012. In June 2012, we paid a $2,241,000 table game license fee, which was for the period July 1, 2012 to June 30, 2013. This fee decreased to $1,017,000 for the period July 1, 2013 to June 30, 2014 and was paid in June 2013.

We anticipate that we will begin offering internet gaming on or about September 30, 2013 once the Delaware Lottery adopts regulations and secures contracts with internet service providers.

On July, 1, 2013, the State enacted a bond and capital improvements bill which appropriates $8,000,000 to the Department of Finance to be used to offset increases in vendor costs that the three Delaware video lottery agents would otherwise be required to pay for the period July 1, 2013 to June 30, 2014. Additionally, the bill created a Lottery & Gaming Study Commission responsible for examining the competitive marketplace confronting the Delaware gaming industry, including the business performance and business plans of existing lottery agents, the marketing efforts and investments made by Delaware video lottery agents, and the division of revenue from the video lottery, sports lottery, table games and internet gaming. The commission's findings and recommendations are due by January 31, 2014.


Contractual Obligations



At June 30, 2013, we had the following contractual obligations:



                                                                 Payments Due by Period
                                  Total          2013       2014 - 2015      2016 - 2017      Thereafter
Revolving line of credit(a)    $ 55,000,000    $       -    $ 55,000,000    $           -    $           -
Estimated interest payments
on revolving line of
credit(b)                         1,552,000      810,000         742,000                -                -
Operating leases                    382,000       45,000         180,000          157,000                -
                               $ 56,934,000    $ 855,000    $ 55,922,000    $     157,000    $           -



(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 June 30, 2013 and current interest rates.

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 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

There have been no new accounting pronouncements made effective during the three months ended June 30, 2013, or that are not yet effective, that have significance, or potential significance, to our consolidated financial statements.

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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