Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DDE > SEC Filings for DDE > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for DOVER DOWNS GAMING & ENTERTAINMENT INC

Form 10-Q for DOVER DOWNS GAMING & ENTERTAINMENT INC


1-May-2014

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 a Herschel's Famous 34 Pub & Grill in Athens, Georgia, which has since been rebranded as Herschel's 34 Chicken & Ribs Kitchen.
Herschel's 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 college and professional football star Herschel Walker for restaurant operations.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 (the "Act"), under which Delaware's video lottery agents are authorized to offer, through their websites, internet versions of their table games (including poker) and video lottery offerings. All games remain under the control and operation of the Delaware Lottery. These internet gaming offerings capitalize on a 2011 United States Department of Justice ruling clarifying that wagering within a state's boundaries does not violate the federal Wire Act. We began offering internet gaming in the fourth quarter of 2013; to date operating results from internet gaming have not been material.

Approximately 90% of our revenue is gaming revenue. 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 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. In recent years, additional gaming venues have opened in Maryland, Pennsylvania and New Jersey. These 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 an additional 6,500 square feet of meeting space taking our total to approximately 35,000 square feet.

Because all of our gaming 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, internet gaming 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 March 31, 2014 vs. Three Months Ended March 31, 2013

Gaming revenues decreased by $5,521,000, or 12.2%, to $39,782,000 in the first quarter of 2014 as a result of lower win from slot machine play and lower table game revenue, as well as, lower table game hold. We believe that attendance at our facility continues to be negatively impacted from the opening of a large casino at Arundel Mills Mall in Maryland in June 2012, their subsequent expansion in September 2012 and addition of table games in April 2013, and overall increased competition in regional gaming markets. Inclement weather during the first quarter of 2014 also negatively impacted our gaming operations.


Other operating revenues were $5,695,000 in the first quarter of 2014 as compared to $5,215,000 in the first quarter of 2013. Rooms revenue increased $196,000 to $1,152,000 in the first quarter of 2014 as compared to $956,000 in the first quarter of 2013 due to higher convention sales. Food and beverage revenues increased $430,000 to $3,731,000 in the first quarter of 2014 from $3,301,000 in the first quarter of 2013 due to continuing growth in our banquet revenues. 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 $4,470,000 and $5,005,000 in the first quarter of 2014 and 2013, respectively.

Gaming expenses decreased by $3,835,000 primarily from lower gaming taxes as a result of the lower gaming revenues. Marketing and other expenses were also lower in the first quarter of 2014.

Other operating expenses increased to $4,396,000 in the first quarter of 2014 from $4,018,000 in the first quarter of 2013 due to the higher other operating revenues.

General and administrative expenses decreased to $1,393,000 in the first quarter of 2014 from $1,529,000 in the first quarter of 2013 primarily from lower employee wages and benefits costs.

Depreciation expense decreased to $2,295,000 in the first quarter of 2014 from $2,509,000 in the first quarter of 2013 as a result of certain assets becoming fully depreciated.

Interest expense increased by $58,000 due to higher interest rates in the first quarter of 2014. This increase was partially offset by the lower borrowings in the first quarter of 2014.

Our effective income tax rate was 25.9% in the first quarter of 2014 as compared to 119.4% in the first quarter of 2013. The low benefit rate in 2014 and the high expense rate in 2013 were the result of the impact the non-deductible portion of the restricted stock awards that vested during the first quarter of 2014 and 2013 had on our pre-tax earnings. We expect our effective income tax rate to approximate 39% in each of the remaining quarters of 2014.

Liquidity and Capital Resources

Net cash used in operating activities was $114,000 in the first quarter of 2014 compared to net cash provided by operating activities of $2,430,000 in the first quarter of 2013. The decrease in net cash from operating activities was due to the increase in loss before income taxes, the timing of receipts from the Delaware State Lottery Office for our portion of the slot win and reimbursement of vendor fees we paid, and the timing of payments to vendors.

Net cash used in investing activities was $210,000 in the first quarter of 2014 compared to $569,000 in the first quarter of 2013 and was related to capital improvements. Capital expenditures in the first quarter of 2014 related primarily to information systems and equipment upgrades. Capital expenditures in the first quarter of 2013 related to assets purchased for our new Herschel's 34 and casino and hotel facility improvements.

Net cash used in financing activities was $2,144,000 in the first quarter of 2014 compared to $2,214,000 in the first quarter of 2013. During the first quarter of 2014, we had net repayments of $2,040,000 on our credit facility compared to $2,000,000 during the first quarter of 2013. We repurchased and retired $104,000 of our outstanding common stock during the first quarter of 2014 compared to $144,000 during the first quarter of 2013. These purchases were made from employees in connection with the vesting of restricted stock awards under our stock incentive plan. As a result of amending our credit agreement in March 2013, we paid $70,000 in bank fees.

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 quarter of 2014 or 2013. At March 31, 2014, 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 $1,000,000 - $1,500,000 during the remainder of 2014. Additionally, we expect to contribute approximately $300,000 to our pension plans during the remainder of 2014.

At March 31, 2014, we had a $60,000,000 credit agreement with a bank group. The facility expires June 17, 2014. Interest is based upon LIBOR plus a margin that varies between 150 and 350 basis points (300 basis points at March 31, 2014) 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 March 31, 2014, we were in compliance with all terms of the facility and there was $45,000,000 outstanding at a weighted average interest rate of 3.2%. At March 31, 2014, $15,000,000 was available pursuant to the facility; however, in order to maintain compliance with the required quarterly debt covenant calculations as of March 31, 2014 $1,967,000 could have been borrowed as of that date.

The facility is classified as a current liability as of March 31, 2014 and December 31, 2013 in our consolidated balance sheets as the facility expires on June 17, 2014. We are currently seeking to refinance this obligation; however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance this obligation, that the terms of such refinancing would be as favorable as the terms of our existing credit facility. These factors raise substantial doubt about our ability to continue as a going concern.

In recent years, additional gaming venues have opened in Maryland, Pennsylvania and New Jersey. These 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 gaming win comes from Maryland patrons and approximately 63% of our Capital Club® member gaming win comes from out-of-state patrons.

While we believe 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 for the foreseeable future, we will need to refinance our outstanding credit facility prior to its expiration on June 17, 2014.

On June 28, 2012, the State enacted the Delaware Gaming Competitiveness Act of 2012 (the "Act"), which eliminated and restructured 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 estimate that the table game license fee will be approximately $1,100,000 for the period July 1, 2014 to June 30, 2015, which we will pay in June 2014.

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 were released in March 2014 and included: the State sharing certain vendor costs that the three Delaware video lottery agents currently pay associated with slot machines; eliminating the annual table game license fee; and reducing the State's share of table game win. These recommendations require legislation in order to be effected. The Delaware legislature is in session until the end of June and then does not reconvene until the following January.
Since Delaware has a fiscal year that ends June 30, it is likely that any legislation will not be effective until July 1, 2014. Without legislative relief on gaming taxes and license fees, we may be unable to refinance our credit facility


on favorable terms or may default on our obligations, we may be unable to allocate sufficient resources to marketing and promotions in order to compete effectively in the regional marketplace, we may be unable to allocate sufficient resources to maintaining our facility, and we may be required to curtail operations and lay off employees in order to manage expenses - especially with respect to operations that have operated at a loss, such as table games and internet gaming. Such actions could adversely affect our business, financial condition, operating results and cash flow.

Contractual Obligations



At March 31, 2014, we had the following contractual obligations:



                                                                 Payments Due by Period
                                Total            2014         2015 - 2016      2017 - 2018      Thereafter
Revolving line of
credit(a)                    $ 45,000,000    $ 45,000,000    $           -    $           -    $           -
Estimated interest
payments on revolving
line of credit(b)                 296,000         296,000                -                -                -
Table game license fee          1,100,000       1,100,000                -                -                -
Pension contributions             300,000         300,000                -                -                -
Operating lease                   294,000          63,000          168,000           63,000                -
                             $ 46,990,000    $ 46,759,000    $     168,000    $      63,000    $           -



(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 March 31, 2014 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, expected long-term rate of return on assets and mortality. 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 March 31, 2014, 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.

  Add DDE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DDE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.