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United States Securities and Exchange Commission

Washington, D.C.  20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2004

 

Commission file number  1-16791

 

Dover Downs Gaming & Entertainment, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

51-0414140

(State or Other Jurisdiction of Incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

1131 North DuPont Highway, Dover, Delaware 19901

(Address of principal executive offices)

 

 

 

(302) 674-4600

(Registrant’s telephone number, including area code)

 

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý   No  o

 

As of July 31, 2004, the number of shares of each class of the registrant’s common stock outstanding is as follows:

 

Common Stock -

10,455,112 shares

Class A Common Stock -

16,075,059 shares

 

 



 

Part I – Financial Information

 

Item 1. Financial Statements

 

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF EARNINGS

In Thousands, Except Per Share Amounts

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

 

 

Gaming

 

$

46,959

 

$

44,292

 

$

94,268

 

$

85,849

 

Other operating

 

8,460

 

8,286

 

16,748

 

15,084

 

Gross revenues

 

55,419

 

52,578

 

111,016

 

100,933

 

Less – promotional allowances

 

4,892

 

4,536

 

9,929

 

8,692

 

 

 

50,527

 

48,042

 

101,087

 

92,241

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Gaming

 

36,913

 

35,011

 

74,565

 

67,532

 

Other operating

 

3,131

 

2,750

 

5,572

 

5,004

 

General and administrative

 

1,098

 

1,115

 

2,245

 

2,069

 

Depreciation

 

1,699

 

1,523

 

3,390

 

3,025

 

 

 

42,841

 

40,399

 

85,772

 

77,630

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

7,686

 

7,643

 

15,315

 

14,611

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

176

 

253

 

329

 

467

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

7,510

 

7,390

 

14,986

 

14,144

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

3,052

 

3,005

 

6,094

 

5,752

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

4,458

 

$

4,385

 

$

8,892

 

$

8,392

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share (Note 3):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.17

 

$

0.34

 

$

0.32

 

Diluted

 

$

0.17

 

$

0.17

 

$

0.33

 

$

0.32

 

 

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

2



 

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEET

In Thousands, Except Share and Per Share Amounts

(Unaudited)

 

 

 

June 30,
2004

 

December 31,
2003

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,969

 

$

14,138

 

Accounts receivable

 

2,572

 

1,914

 

Due from State of Delaware

 

4,304

 

8,670

 

Inventories

 

1,723

 

1,801

 

Prepaid expenses and other

 

2,529

 

2,414

 

Receivable from Dover Motorsports, Inc.

 

22

 

 

Prepaid income taxes

 

487

 

 

Deferred income taxes

 

895

 

878

 

Total current assets

 

29,501

 

29,815

 

 

 

 

 

 

 

Property and equipment, net

 

125,493

 

122,344

 

Total assets

 

$

154,994

 

$

152,159

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,590

 

$

6,516

 

Purses due horsemen

 

4,059

 

7,957

 

Accrued liabilities

 

4,908

 

6,015

 

Payable to Dover Motorsports, Inc.

 

 

96

 

Income taxes payable

 

 

53

 

Deferred revenue

 

355

 

261

 

Total current liabilities

 

14,912

 

20,898

 

 

 

 

 

 

 

Notes payable to banks

 

32,350

 

31,225

 

Other long-term liabilities

 

299

 

 

Deferred income taxes

 

6,467

 

5,061

 

 

 

 

 

 

 

Commitments and contingencies (see Notes to the Consolidated Financial Statements)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.10 par value; 1,000,000 shares authorized; issued and outstanding: none

 

 

 

Common stock, $0.10 par value; 74,000,000 shares authorized; issued and outstanding: June 30, 2004-10,455,112 shares; December 31, 2003-10,333,112 shares

 

1,045

 

1,033

 

Class A common stock, $0.10 par value; 50,000,000 shares authorized; issued and outstanding: June 30, 2004-16,075,059 shares; December 31, 2003-16,145,059 shares

 

1,608

 

1,615

 

Additional paid-in capital

 

68,050

 

67,454

 

Retained earnings

 

30,848

 

24,873

 

Deferred compensation

 

(585

)

 

Total stockholders’ equity

 

100,966

 

94,975

 

Total liabilities and stockholders’ equity

 

$

154,994

 

$

152,159

 

 

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

3



 

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

In Thousands

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

Operating activities:

 

 

 

 

 

Net earnings

 

$

8,892

 

$

8,392

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

3,390

 

3,025

 

Amortization of credit facility origination fees

 

31

 

 

Amortization of deferred compensation

 

16

 

 

Deferred income taxes

 

1,059

 

522

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(658

)

2,610

 

Due from State of Delaware

 

4,366

 

4,766

 

Inventories

 

78

 

(199

)

Prepaid expenses and other

 

(146

)

(1,380

)

Receivable from/payable to Dover Motorsports, Inc.

 

(118

)

155

 

Prepaid income taxes/income taxes payable

 

(210

)

763

 

Accounts payable

 

(2,717

)

(1,800

)

Purses due horsemen

 

(3,898

)

(4,815

)

Accrued liabilities

 

(1,107

)

(2,542

)

Deferred revenue

 

94

 

10

 

Net cash provided by operating activities

 

9,072

 

9,507

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Capital expenditures

 

(4,449

)

(1,988

)

Net cash used in investing activities

 

(4,449

)

(1,988

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Borrowings from revolving debt

 

96,930

 

77,360

 

Repayments of revolving debt

 

(95,805

)

(80,625

)

Dividends paid

 

(2,917

)

(2,657

)

Repurchase of common stock

 

 

(1,523

)

Net cash used in financing activities

 

(1,792

)

(7,445

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

2,831

 

74

 

Cash and cash equivalents, beginning of period

 

14,138

 

12,836

 

Cash and cash equivalents, end of period

 

$

16,969

 

$

12,910

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Interest paid

 

$

312

 

$

555

 

Income taxes paid

 

$

5,244

 

$

5,155

 

 

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

4



 

DOVER DOWNS GAMING & ENTERTAINMENT, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – Basis of Presentation

 

References in this document to “the Company,” “Gaming & Entertainment,” “we,” “us” and “our” mean Dover Downs Gaming & Entertainment, Inc. and its wholly owned subsidiaries.

 

The accompanying consolidated financial statements have been prepared in compliance with Rule 10-01 of Regulation S-X and accounting principles generally accepted in the United States of America, but do not include all of the information and disclosures required for audited financial statements.  These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed on March 9, 2004.  In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented.  Operating results for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

NOTE 2 - Business Operations

 

Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots – a 91,000 square foot video lottery (slots) casino complex; the Dover Downs Hotel and Conference Center – featuring luxury accommodations with conference, banquet, fine dining, ballroom and concert hall facilities; and Dover Downs Raceway – a harness racing track with pari-mutuel wagering on live and simulcast horse races.

 

Gaming & Entertainment has two wholly owned subsidiaries: Dover Downs, Inc. and Dover Downs Management Corp.  Dover Downs, Inc. was incorporated in 1967 and began motorsports and harness racing operations in 1969.  In June of 1994, legislation authorizing video lottery operations in the State of Delaware (the “State”) was adopted.  The Company’s video lottery (slots) casino operations began on December 29, 1995.  As a result of several restructurings, Dover Downs, Inc. became a wholly owned subsidiary of Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) (“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

Dover Downs Gaming & Entertainment, Inc. was incorporated in the State in December of 2001 as a wholly owned subsidiary of DVD.  Effective March 31, 2002, DVD completed a tax-free spin-off of its gaming operations by contributing 100% of the issued and outstanding common stock of Dover Downs, Inc. to the Company, and subsequently distributing 100% of the issued and outstanding common stock of the Company to DVD stockholders.  Immediately following the spin-off, Dover Downs Gaming & Entertainment, Inc. became an independent public company.

 

The Company is authorized to conduct video lottery operations as a “Licensed Agent” under the Delaware State Lottery Code. Pursuant to Delaware’s Horse Racing Redevelopment Act, enacted in 1994, the Delaware State Lottery Office administers and controls the operation of the video lottery.

 

The Company’s license from the Delaware Harness Racing Commission (the “Commission”) to hold harness race meetings on our premises and to offer pari-mutuel wagering on live and simulcast horse races must be renewed on an annual basis. In order to maintain its license to conduct video lottery operations, the Company is required to maintain its harness horse racing license.  The Company has received an annual license from the Commission for the past 35 consecutive years and management believes that its relationship with the Commission remains good.

 

5



 

Our entertainment complex is located in Dover, the capital of the State of Delaware.  Approximately 70% of our customers come from Maryland, Pennsylvania, Virginia and the District of Columbia. In July 2004, Pennsylvania adopted legislation which authorizes up to 61,000 slot machines at various existing and proposed venues throughout the state, predominantly horse racing facilities.  It is difficult for us to predict the effect that such legislation will have on us, but we estimate that one or more facilities in Pennsylvania are likely to begin operations in 2006.  Pennsylvania will have one of the highest effective tax rates on slot machine gaming in the country and will charge an up front $50,000,000 license fee to the horse racing and casino venues that are granted a gaming license.  It is difficult to predict whether these factors will discourage investment in facilities capable of competing with destination facilities, such as ours, that offer luxurious hotel accommodations and various forms of entertainment.  Pennsylvania patrons comprise approximately 7% of our customer base.

 

Due to the nature of the Company’s business activities, it is subject to various federal, state and local regulations.

 

NOTE 3 - Summary of Significant Accounting Policies

 

Basis of consolidation—The consolidated financial statements include the accounts of Gaming & Entertainment and its wholly owned subsidiaries.  Intercompany transactions and balances have been eliminated.

 

Revenue and expense recognition—Gaming revenues represent (i) the net win from video lottery (slot) machine wins and losses and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.

 

For the video lottery operations, which account for more than 80% of gross revenues for all periods presented, 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 the Company’s consolidated financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the video lottery operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to the Company as its 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 video lottery (slot) machines and associated computer systems, and (iii) for harness horse racing purses. The Company recognizes 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.

 

The retail value of hotel rooms, food, beverage and other items that are provided to customers without charge has been included in gross revenues, and a corresponding amount has been deducted as promotional allowances. 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.

 

The Company currently has a point loyalty program for its video lottery customers which allows them to earn points based on the volume of their video lottery activity.  The points can be redeemed for various services and merchandise throughout the gaming facility; however, they are not redeemable for cash or casino play. The Company records the points as an expense when they are redeemed by the customers. The value of all points outstanding as of June 30, 2004 and December 31, 2003 was $4,920,000 and $4,592,000, respectively.

 

Earnings per share-Basic and diluted earnings per share (“EPS”) are calculated in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 128, Earnings Per Share.  Weighted average shares used in computing basic and diluted EPS are as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Basic EPS

 

26,478,000

 

26,510,000

 

26,478,000

 

26,544,000

 

Effect of dilutive securities

 

111,000

 

25,000

 

89,000

 

26,000

 

Diluted EPS

 

26,589,000

 

26,535,000

 

26,567,000

 

26,570,000

 

 

6



 

Dilutive securities include stock options and unvested restricted stock awards.

 

For the three and six months ended June 30, 2004, options to purchase approximately 252,000 and 274,000 shares of common stock, respectively, were outstanding, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common stock during the period.  For the three and six months ended June 30, 2003, options to purchase approximately 676,000 shares of common stock were outstanding but not included in the computation for the same reason.

 

Accounting for stock-based compensation—The Company has a stock incentive plan which provides for the grant of stock options and/or restricted stock to officers and key employees.  The Company accounts for stock options in accordance with FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.  Statement No. 123 defines a fair-value based method of accounting for stock-based compensation plans; however, it allows the continued use of the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has elected to continue to use the intrinsic value method and based on this method did not record any stock-based compensation expense related to its stock options during the three and six-month periods ended June 30, 2004 and 2003.  The Company’s restricted stock vests based on continued employment with the Company.  Restricted stock awards result in compensation expense as discussed in NOTE 6 – Stockholders’ Equity.

 

The following table illustrates the effect on net earnings and net earnings per common share if the Company had applied the fair-value recognition provisions of Statement No. 123 to stock-based employee compensation:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net earnings, as reported

 

$

4,458,000

 

$

4,385,000

 

$

8,892,000

 

$

8,392,000

 

Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects

 

10,000

 

 

10,000

 

 

Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects

 

(155,000

)

(154,000

)

(301,000

)

(308,000

)

Pro forma net earnings

 

$

4,313,000

 

$

4,231,000

 

$

8,601,000

 

$

8,084,000

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

Basic – as reported

 

$

0.17

 

$

0.17

 

$

0.34

 

$

0.32

 

Basic – pro forma

 

$

0.16

 

$

0.16

 

$

0.32

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Diluted – as reported

 

$

0.17

 

$

0.17

 

$

0.33

 

$

0.32

 

Diluted – pro forma

 

$

0.16

 

$

0.16

 

$

0.32

 

$

0.30

 

 

Use of estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications—Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.  These reclassifications had no effect on net earnings.

 

7



 

NOTE 4 – Indebtedness

 

The Company has a $40,000,000 credit facility, as amended effective February 19, 2004, that expires on April 30, 2006.  Interest is based, at the Company’s option, upon (i) LIBOR plus 0.75% or (ii) the base rate (the greater of the prime rate or the federal funds rate plus 0.5%) minus 1%.  The terms of the credit facility contain, among others, minimum net worth, interest coverage and maximum leverage covenant requirements.  Material adverse changes in the Company’s results of operation could impact its ability to maintain financial ratios necessary to satisfy these requirements. The facility is for seasonal funding needs, capital improvements and other general corporate purposes.  At June 30, 2004, the Company was in compliance with all terms of the facility and there was $32,350,000 outstanding at a weighted average interest rate of 2.08%.  After consideration of stand by letters of credit outstanding, $7,550,000 was available pursuant to the facility at June 30, 2004.

 

NOTE 5 – Pension Plans

 

The Company maintains a non-contributory, tax qualified defined benefit pension plan. All of Gaming & Entertainment’s full time employees are eligible to participate in the pension plan.  Benefits provided by the Gaming & Entertainment pension plan are based on years of service and employees’ remuneration over their term of employment.  Pension costs are funded in accordance with the provisions of the Internal Revenue Code. The Company also maintains a non-qualified, non-contributory defined benefit pension plan for certain employees to restore pension benefits reduced by federal income tax regulations. The cost associated with the plan is determined using the same actuarial methods and assumptions as those used for the Company’s qualified pension plan.

 

The components of net periodic pension cost are as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Service cost

 

$

198,000

 

$

178,000

 

$

396,000

 

$

356,000

 

Interest cost

 

68,000

 

52,000

 

136,000

 

104,000

 

Expected return on plan assets

 

(57,000

)

(36,000

)

(114,000

)

(72,000

)

Recognized net actuarial loss

 

12,000

 

13,000

 

24,000

 

26,000

 

Amortization of prior service cost

 

2,000

 

2,000

 

4,000

 

4,000

 

 

 

$

223,000

 

$

209,000

 

$

446,000

 

$

418,000

 

 

The Company expects to contribute approximately $500,000 to its pension plans in 2004, of which $300,000 was contributed during the six months ended June 30, 2004.

 

NOTE 6 – Stockholders’ Equity

 

Changes in the components of stockholders’ equity are as follows:

 

 

 

Common
Stock

 

Class A
Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Deferred
Compensation

 

Balance at December 31, 2003

 

$

1,033,000

 

$

1,615,000

 

$

67,454,000

 

$

24,873,000

 

$

 

Net earnings

 

 

 

 

8,892,000

 

 

Dividends paid, $0.11 per share

 

 

 

 

(2,917,000

)

 

Issuance of restricted stock

 

5,000

 

 

596,000

 

 

(601,000

)

Amortization of deferred compensation

 

 

 

 

 

16,000

 

Conversion of Class A common stock to common stock

 

7,000

 

(7,000

)

 

 

 

Balance at June 30, 2004

 

$

1,045,000

 

$

1,608,000

 

$

68,050,000

 

$

30,848,000

 

$

(585,000

)

 

On July 28, 2004, the Company’s Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.06 per share.  The dividend is payable on September 10, 2004 to shareholders of record at the close of business on August 10, 2004.

 

8



 

On October 23, 2002, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization does not obligate the Company to acquire any specific number of shares and may be suspended at any time.  During the three and six months ended June 30, 2003, the Company purchased and retired 49,700 and 169,945 shares of its outstanding common stock at an average purchase price of $8.99 and $8.96 per share. Gaming & Entertainment did not repurchase any outstanding shares of its common stock during the six months ended June 30, 2004.  At June 30, 2004, the Company had remaining repurchase authority of 1,830,055 shares.

 

The Company has a stock incentive plan which provides for the grant of up to 1,500,000 shares of stock to our officers and key employees through stock options and/or awards valued in whole or in part by reference to our common stock, such as restricted stock awards.  Under the plan, option grants must have an exercise price of not less than 100% of the fair market value of the underlying shares of common stock at the date of the grant.  The stock options have eight-year terms and generally vest equally over a period of six years from the date of grant.  The restricted stock vests an aggregate of twenty percent each year beginning on the second anniversary date of the grant.  During the three and six months ended June 30, 2004, the Company issued 52,000 shares of restricted stock to certain officers and key employees.  The aggregate market value of the restricted stock at the date of issuance has been recorded as deferred compensation, a separate component of stockholders’ equity, and is being amortized on a straight-line basis over the six-year service period.  As of June 30, 2004, there were 574,859 shares available for granting options or stock awards.

 

NOTE 7 - Related Party Transactions

 

During the three and six months ended June 30, 2004 and 2003, Gaming & Entertainment allocated costs of $337,000 and $593,000, and $441,000 and $862,000, respectively, to DVD for certain administrative and operating services.  Additionally, DVD allocated costs of $33,000 and $62,000, respectively, to Gaming & Entertainment for the three and six months ended June 30, 2004.  The allocations were based on an analysis of each company’s share of the costs.  In connection with DVD’s June 2004 and 2003 NASCAR event weekends, Gaming & Entertainment provided certain catering services for which DVD was invoiced $445,000 and $343,000, respectively.  Additionally, DVD invoiced Gaming & Entertainment $131,000 and $115,000, respectively, for tickets purchased and other services related to the 2004 and 2003 events.  As of June 30, 2004, Gaming & Entertainment’s consolidated balance sheet includes a $22,000 receivable from DVD for the aforementioned costs and for other payments made by the Company on DVD’s behalf.  The Company has since settled the receivable in the third quarter of 2004.  The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been unrelated entities and/or had otherwise independently managed these functions; however, management believes that these costs are reasonable.

 

The Company’s use of DVD’s 5/8-mile harness racing track is under an easement granted to the Company by DVD which does not require the payment of any rent. Under the terms of the easement, the Company has exclusive use of the harness track during the period beginning November 1 of each year and ending April 30 of the following year, together with set up and tear down rights for the two weeks before and after such period.  The harness track is located on property owned by DVD and is on the inside of DVD’s motorsports superspeedway.  The Company’s indoor grandstands are used by DVD at no charge in connection with its motorsports events. DVD also leases its principal executive office space from the Company.  Various easements and agreements relative to access, utilities and parking have also been entered into between DVD and the Company relative to their respective Dover, Delaware facilities.

 

NOTE 8 – Commitments and Contingencies

 

The Company is a party to ordinary routine litigation incidental to its business.  Management does not believe that the resolution of any of these matters is likely to have a serious adverse effect on our results of operations, financial condition or cash flows.

 

9



 

During the three months ended June 30, 2004, the Company entered into employment, severance and noncompete agreements with certain of its officers and directors under which certain change of control, severance and noncompete payments and benefits might become payable in the event of a change in control of the Company, defined to include a tender offer or the closing of a merger or similar corporate transactions.  In the event of such a change in control of the Company and the subsequent termination of employment of all employees covered under these agreements, the maximum contingent liability would be approximately $4,762,000.

 

Item 2.                                   Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

 

The following discussion is based upon and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots – a 91,000 square foot video lottery (slots) casino complex; the Dover Downs Hotel and Conference Center – featuring luxury accommodations with conference, banquet, fine dining, ballroom and concert hall facilities; and Dover Downs Raceway – a harness racing track with pari-mutuel wagering on live and simulcast horse races.

 

More than 80% of the Company’s gross revenue is derived from video lottery (slot) machine win (as defined below).  Several factors contribute to the video lottery (slot) machine win for any gaming company, including, but not limited to:

 

                  Proximity to major population bases,

                  Competition in the company’s market,

                  The quantity and types of slot machines available,

                  The quality of the physical property,

                  Other amenities offered on site,

                  Customer service levels, and

                  Marketing programs.

 

The Company believes that it holds 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 2 hour drive. According to the 2000 United States Census, approximately 32.8 million people live within 150 miles of the complex.  There are significant barriers to entry related to the gaming business in Delaware, such as the statutory limitation of gaming licenses to the three existing horse racing facilities.  The Company’s property, designed and developed with the assistance of Caesars World Gaming Development Corporation (“Caesars”) is similar to properties found in the country’s largest gaming markets.  The Company offers the only luxury hotel in the Delaware gaming market, providing a strong marketing tool, especially to higher-end players.  The Company also utilizes its recently improved slot marketing system to allow for the most efficient marketing programs and the highest levels of customer service.

 

The biggest risks to the Company are increased competition in surrounding states from the legalization of new or additional casino or other gaming venues and the fact that all of our operations are located at one facility.  The Company has therefore focused on creating the region’s premier gaming destination and building and rewarding customer loyalty through innovative marketing efforts and unparalleled customer service.

 

Results of Operations

 

Gaming revenues represent (i) the net win from video lottery (slot) machine wins and losses and (ii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotel rooms revenue, food and beverage sales and other miscellaneous income.

 

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For the video lottery 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 the Company’s financial statements as gaming revenue. The Delaware State Lottery Office sweeps the win from the video lottery operations, collects the State’s share of the win and the amount due to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems, collects the amount allocable to purses for harness horse racing and remits the remainder to the Company as its 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 video lottery (slot) machines and associated computer systems, and (iii) for harness horse racing purses. The Company recognizes 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.

 

The retail value of hotel rooms, food, beverage and other items that are provided to customers without charge has been included in gross revenues and a corresponding amount has been deducted as promotional allowances. 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.

 

Three Months Ended June 30, 2004 vs. Three Months Ended June 30, 2003

 

Gaming revenues increased by $2,667,000, or 6.0%, to $46,959,000 in the second quarter of 2004, primarily the result of increased play in our casino.  During the first quarter of 2004, we added 500 new video lottery (slot) machines which increased our average number of machines from 2,000 in the second quarter of 2003 to 2,500 in the second quarter of 2004.  Additionally, we have redirected our marketing efforts to attract more casino customers to our hotel by providing additional complimentary and discounted rooms.  We believe that our marketing efforts have been effective at attracting customers to our casino and consequently increasing slot win.

 

Other operating revenues increased by $174,000, or 2.1%, to $8,460,000 in the second quarter of 2004, primarily due to higher occupancy levels at the Dover Downs Hotel and Conference Center and increased concert sales.

 

Other operating revenues for the second quarter of 2004 and 2003 included $4,892,000 and $4,536,000, respectively, related to promotional items provided to customers without charge.  The increase in promotional allowances is primarily due to the Company’s expanded marketing efforts to attract more casino customers to the hotel by providing additional complimentary and discounted hotel rooms.

 

Gaming expenses increased by $1,902,000, or 5.4%, reflecting the higher gaming revenues. Amounts retained by the State of Delaware and the amount collected by the State for payment to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems increased by $941,000 and $370,000, respectively.  Amounts allocated from the video lottery operation for harness horse racing purses increased from $5,131,000 in the second quarter of 2003 to $5,411,000 in the second quarter of 2004.  Collectively, these statutory costs increased as a percentage of gaming revenues in the second quarter of 2004 as compared to the second quarter of 2003 primarily due to a 1.25% surcharge imposed by the State on the Company’s share of the video lottery (slot) proceeds that took effect in June of 2003.  The remaining $311,000 increase in gaming expenses relates primarily to higher payroll as a result of our casino expansion and increased benefit costs.

 

Other operating expenses increased by $381,000, or 13.9%, reflecting the higher other operating revenues and lower cost of promotions allocated to the gaming segment.  As hotel rooms become a larger percentage of our total promotional allowances, the lower cost associated with that promotion results in less cost being allocated to the gaming segment.  Payroll and related costs and food costs in the food and beverage department represented the largest increases in other operating expenses.

 

General and administrative expenses for the second quarter of 2004 remained consistent with the second quarter of 2003 at $1,098,000 and $1,115,000, respectively.

 

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Depreciation expense increased by $176,000, primarily due to the construction of 11,000 additional square feet of gaming space to accommodate the installation of 500 video lottery (slot) machines within our existing casino complex during the first quarter of 2004 and the purchase of a new customer management and slot data system that went into service in April 2004.

 

Interest expense decreased by $77,000, primarily due to the decrease in outstanding borrowings under our credit facility and the Company’s average interest rate being 2.04% during the second quarter of 2004 as compared to 2.17% during the second quarter of 2003.

 

The Company’s effective income tax rate was 40.6% and 40.7% for the second quarter ended June 30, 2004 and 2003, respectively.

 

Net earnings were $4,458,000 in the second quarter of 2004 as compared to $4,385,000 in the second quarter of 2003.  The increase of $73,000, or 1.7%, was primarily due to the improved results for our gaming operations.

 

Six Months Ended June 30, 2004 vs. Six Months Ended June 30, 2003

 

Gaming revenues increased by $8,419,000, or 9.8%, to $94,268,000 in the first six months of 2004, primarily the result of increased play in our casino.  During the first quarter of 2004, we added 500 new video lottery (slot) machines which increased our average number of machines from 2,000 in the first six months of 2003 to 2,362 in the first six months of 2004.  Additionally, we have redirected our marketing efforts to attract more casino customers to our hotel by providing additional complimentary and discounted rooms.  We believe that our marketing efforts have been effective at attracting customers to our casino and consequently increasing slot win.

 

Other operating revenues increased by $1,664,000, or 11.0%, to $16,748,000 in the first six months of 2004, primarily due to higher occupancy levels at the Dover Downs Hotel and Conference Center and increased food, beverage and concert sales.

 

Other operating revenues for the first six months of 2004 and 2003 included $9,929,000 and $8,692,000, respectively, related to promotional items provided to customers without charge.  The increase in promotional allowances is primarily due to the Company’s expanded marketing efforts to attract more casino customers to the hotel by providing additional complimentary and discounted hotel rooms.

 

Gaming expenses increased by $7,033,000, or 10.4%, reflecting the higher gaming revenues. Amounts retained by the State of Delaware and the amount collected by the State for payment to the vendors under contract with the State who provide the video lottery (slot) machines and associated computer systems increased by $3,268,000 and $796,000, respectively.  Amounts allocated from the video lottery operation for harness horse racing purses increased from $9,781,000 in the first six months of 2003 to $10,732,000 in the first six months of 2004.  Collectively, these statutory costs increased as a percentage of gaming revenues in the first six months of 2004 as compared to the first six months of 2003 primarily due to a 1.25% surcharge imposed by the State on the Company’s share of the video lottery (slot) proceeds that took effect in June of 2003.  The remaining $2,018,000 increase in gaming expenses relates primarily to higher payroll as a result of our casino expansion and increased benefit costs, marketing, insurance and utilities.

 

Other operating expenses increased by $568,000, or 11.4%, reflecting the higher other operating revenues and lower cost of promotions allocated to the gaming segment.  Payroll and related costs and food costs in the food and beverage department represented the largest increases in other operating expenses.

 

General and administrative expenses increased by $176,000 to $2,245,000 from $2,069,000 in the first six months of 2003 primarily the result of higher legal, audit and consulting expenses related to the Company’s compliance with the Sarbanes-Oxley Act of 2002.

 

Depreciation expense increased by $365,000, primarily due to the construction of 11,000 additional square feet of gaming space to accommodate the installation of 500 video lottery (slot) machines within our existing casino complex during the first quarter of 2004 and the purchase of a new customer management and slot data system that went into service in April 2004.

 

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Interest expense decreased by $138,000, primarily due to the decrease in outstanding borrowings under our credit facility and the Company’s average interest rate being 2.01% during the first six months of 2004 as compared to 2.18% during the first six months of 2003.

 

The Company’s effective income tax rate was 40.7% for the six months ended June 30, 2004 and 2003.

 

Net earnings were $8,892,000 in the first six months of 2004 as compared to $8,392,000 in the first six months of 2003.  The increase of $500,000, or 6.0%, was primarily due to the improved results for our gaming operations.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities was $9,072,000 for the six months ended June 30, 2004 compared to $9,507,000 for the six months ended June 30, 2003.  The decrease was primarily due to the timing of cash receipts from the Delaware State Lottery Office related to our commission, partially offset by the increase in net earnings before depreciation and amortization from $11,417,000 in the first six months of 2003 to $12,329,000 in the first six months of 2004, as well as the timing of payments to vendors.

 

Net cash used in investing activities was $4,449,000 for the six months ended June 30, 2004 compared to $1,988,000 for the six months ended June 30, 2003.  The increase in 2004 as compared with 2003 was primarily due to the construction of 11,000 additional square feet of gaming space to accommodate the installation of 500 newly authorized video lottery (slot) machines within our existing casino complex and the purchase of a new customer management and slot data system.

 

Net cash used in financing activities was $1,792,000 for the six months ended June 30, 2004 compared to $7,445,000 for the six months ended June 30, 2003.  The change was primarily due to higher repayments of outstanding borrowings under our credit facility and the repurchase of 169,945 shares of the Company’s outstanding common stock during the first six months of 2003.  The Company paid $2,917,000 and $2,657,000 in regular quarterly cash dividends during the six months ended June 30, 2004 and 2003, respectively.

 

On July 28, 2004, the Company’s Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.06 per share.  The dividend is payable on September 10, 2004 to shareholders of record at the close of business on August 10, 2004.

 

On October 23, 2002, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization does not obligate the Company to acquire any specific number of shares and may be suspended at any time.  During the three and six months ended June 30, 2003, the Company purchased and retired 49,700 and 169,945 shares of its outstanding common stock at an average purchase price of $8.99 and $8.96 per share.  The Company did not repurchase any outstanding shares of its common stock during the six months ended June 30, 2004.

 

Based on current business conditions, the Company expects to make additional capital expenditures of approximately $2,000,000-$4,000,000 through 2004.  These expenditures primarily relate to additional amenities at our luxury hotel and site improvements, such as parking and signage, as well as the conversion of a portion of our casino floor to ticket-in, ticket-out (cashless) technology.  Additionally, the Company expects to contribute approximately $500,000 to its pension plans in 2004, of which $300,000 was contributed during the six months ended June 30, 2004.

 

We have a $40,000,000 unsecured revolving line of credit agreement.  At June 30, 2004, $32,350,000 was outstanding under the facility.  Based on current business trends, we believe that our cash flows from operations and the funds available pursuant to our revolving credit facility will be sufficient to meet our short and long-term cash needs.  Any significant expansion of our gaming facility that we may decide to undertake, any significant acquisitions, or any material adverse change in our operations could cause the need for additional financing.  The Company expects that its net cash flows from operating activities and funds available from its credit facility will be sufficient to provide for its working capital needs and capital spending requirements at least through 2004, as well as any cash dividends the Company’s 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.

 

13



 

The introduction or expansion of gaming in nearby states could have a material adverse effect on our cash flows and results of operations.  In July 2004, Pennsylvania adopted legislation which authorizes up to 61,000 slot machines at various existing and proposed venues throughout the state, predominantly horse racing facilities.  It is difficult for us to predict the effect that such legislation will have on us, but we estimate that one or more facilities in Pennsylvania are likely to begin operations in 2006.  Pennsylvania will have one of the highest effective tax rates on slot machine gaming in the country and will charge an up front $50,000,000 license fee to the horse racing and casino venues that are granted a gaming license.  It is difficult to predict whether these factors will discourage investment in facilities capable of competing with destination facilities, such as ours, that offer luxurious hotel accommodations and various forms of entertainment.  Pennsylvania patrons comprise approximately 7% of our customer base.

 

Related Party Transactions

 

See NOTE 7 – Related Party Transactions of the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

Critical Accounting Policies

 

The accounting policies described below are those the Company considers critical in preparing its consolidated financial statements and/or include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity.

 

Points Program

 

The Company currently has a point loyalty program for its video lottery customers which allows them to earn points based on the volume of their video lottery activity.  The Company records the points as an expense when they are redeemed by the customers.  The points can be redeemed for various services and merchandise throughout the gaming facility; however, they are not redeemable for cash or casino play.  The value of all points outstanding as of June 30, 2004 was $4,920,000.

 

Accrued Pension Cost

 

The benefits provided by the Company’s defined-benefit pension plans are based on years of service and employee’s remuneration over their employment with the Company.  The Company establishes accrued pension costs in accordance with the provisions of Financial Accounting Standards Board Statement No. 87, Employers’ Accounting for Pensions. 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 the Company records in its consolidated financial statements.

 

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 5 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. Long-lived assets are evaluated for impairment when an event occurs that indicates an impairment may exist.

 

Factors That May Affect Operating Results; Forward-Looking Statements

 

In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, proposed acquisitions, market forces, corporate strategies, consumer preferences, contractual commitments, legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and

 

14



 

experience to differ substantially from the anticipated results or other expectations expressed in our forward-looking statements. When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable” or similar words or expressions are used in this document, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given” or “there is no way to anticipate with certainty,” forward-looking statements are being made.

 

Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to differ materially from those set forth in our forward-looking statements, including the following factors:

 

                  success of or changes in our growth strategies;

 

                  our development and potential acquisition of new facilities;

 

                  anticipated trends in the gaming industry;

 

                  patron demographics;

 

                  general market and economic conditions, including consumer and corporate spending sentiment;

 

                  our ability to finance future business requirements;

 

                  our ability to effectively compete in the marketplace;

 

                  the availability of adequate levels of insurance;

 

                  our ability to successfully integrate acquired companies and businesses;

 

                  management retention and development;

 

                  changes in Federal, state, and local laws and regulations, including environmental, gaming license and tax legislation;

 

                  the effect of weather conditions or travel on attendance at our facilities;

 

                  military or other government actions; and

 

                  national or local catastrophic events.

 

We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions.  New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements. Given these risks and uncertainties, stockholders should not overly rely or attach undue weight to our forward-looking statements as an indication of our actual future results.

 

Our Gaming Activities Compete Directly With Other Gaming Facilities And Other Entertainment Businesses

 

We compete in local and regional markets with horse tracks, off-track betting parlors, state run lotteries, casinos and other gaming facilities.  We cannot be certain that we will maintain our market share or compete more effectively with our competitors. The legalization of new or additional casino or other gaming venues in jurisdictions close to Delaware, particularly Maryland, Virginia, Washington, D.C., Pennsylvania or New Jersey, could negatively impact our gaming business. From time to time legislation is proposed for adoption in these jurisdictions which if enacted, would further expand state gambling and wagering opportunities, including video

 

15



 

lottery (slot) machines at racetracks. Enactment of such legislation could increase our competition and could adversely affect our business, financial condition and overall profitability.  Approximately 70% of our customers come from Maryland, Pennsylvania, Virginia and the District of Columbia.  In July 2004, Pennsylvania adopted legislation which authorizes up to 61,000 slot machines at various existing and proposed venues throughout the state, predominantly horse racing facilities.  It is difficult for us to predict the effect that such legislation will have on us, but we estimate that one or more facilities in Pennsylvania are likely to begin operations in 2006.  Pennsylvania will have one of the highest effective tax rates on slot machine gaming in the country and will charge an up front $50,000,000 license fee to the horse racing and casino venues that are granted a gaming license.  It is difficult to predict whether these factors will discourage investment in facilities capable of competing with destination facilities, such as ours, that offer luxurious hotel accommodations and various forms of entertainment.  Pennsylvania patrons comprise approximately 7% of our customer base.

 

All Of Our Facilities Are In One Location

 

Our facilities are located adjacent to one another at a single location in Dover, Delaware. Any prolonged disruption of operations at these facilities due to destruction of or material damage to the facilities or other reasons could adversely affect our financial condition and results of operations. We maintain property and business interruption insurance to protect against such types of disruption, but there can be no assurance that the proceeds of such insurance would be adequate to repair or rebuild our facilities in such event or to compensate us for lost profit during the period of any such disruption.

 

The Revocation, Suspension Or Modification Of Our Gaming Licenses Would Adversely Affect Our Gaming Business

 

The Delaware State Lottery Office and the Delaware Harness Racing Commission regulate our gaming operations. Our license from the Commission must be renewed on an annual basis. To keep our license for video lottery (slot) machine gaming, we must remain licensed for harness horse racing by the Commission and conduct at least 80 live race days each racing season, subject to the availability of harness race horses. The Commission has broad discretion to reject any application for a license or suspend or revoke a license once it is issued. The Director of the Delaware State Lottery Office (the “Lottery Director”) has broad discretion to revoke, suspend or modify the terms of a video lottery license. Any modification or termination of existing licensing regulations or any revocation, suspension or modification of our licenses could adversely affect our business, financial condition and overall profitability.

 

Our Gaming Activities Are Subject To Extensive Government Regulation And Any Additional Government Regulation Or Taxation Of Gaming Activities Could Substantially Reduce Our Revenue Or Profit

 

Video lottery (slot) machine gaming, harness horse racing and pari-mutuel wagering are subject to extensive government regulation. Delaware law regulates the win we are entitled to retain and the percentage of commission we are entitled to receive from our gaming revenues, which comprises a significant portion of our overall revenues. The State granted us a license to conduct video lottery (slot) machine operations and a license to conduct harness horse races and pari-mutuel wagering. The laws under which these licenses are granted could be modified or repealed at any time and we could be required to terminate our gaming operations. If we are required to terminate our gaming operations or if the amount of the commission we receive from the State for conducting our gaming operations is decreased, our business operations and overall profitability would be significantly impaired.

 

We believe that the prospect of significant additional tax revenue is one of the primary reasons why jurisdictions have legalized gaming. As a result, gaming operators are typically subject to significant taxes and fees in addition to normal federal and state corporate income taxes. These taxes and fees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations and will likely incur similar burdens in any other jurisdiction in which we may conduct gaming operations in the future. Any material increase in taxes or fees, or the adoption of additional taxes or fees, may have a material adverse effect on our future financial results.

 

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We Do Not Own Or Lease Our Video Lottery (Slot) Machines And Related Technology

 

We do not own or lease the video lottery (slot) machines or central computer systems used in connection with our video lottery gaming operations. The Lottery Director enters into contracts directly with the providers of the video lottery (slot) machines and computer systems. The State purchases or leases all equipment and the Lottery Director licenses all technology providers. Our operations could be disrupted if a licensed technology provider violates its agreement with the State or ceases to be licensed for any reason. Such an event would be outside of our control and could adversely affect our gaming revenues.

 

Item 3.                                   Quantitative And Qualitative Disclosures About Market Risk

 

The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose it to market risk. Our exposure to market risks related to fluctuations in interest rates is limited to our variable rate borrowings of $32,350,000 at June 30, 2004 under our revolving credit facility.  A change in interest rates of one percent on the balance outstanding at June 30, 2004 would cause a change in total annual interest costs of $324,000. The carrying values of these borrowings approximate their fair values at June 30, 2004.

 

Item 4.                                   Controls and Procedures

 

(a)                                  Disclosure Controls and Procedures.

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. The Company currently is in the process of further reviewing and documenting its disclosure controls and procedures, and its internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

 

(b)                                 Changes in Internal Control Over Financial Reporting.

 

There were no changes in our internal control over financial reporting during the second quarter of fiscal year 2004 that have materially affected, or that are reasonably likely to materially affect our internal controls over financial reporting.

 

Part II – Other Information

 

Item 1.                                   Legal Proceedings

 

We are a party to ordinary routine litigation incidental to our business.  Management does not believe that the resolution of any of these matters is likely to have a serious negative effect on our financial condition, cash flows or profitability.

 

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Item 2.                                   Changes In Securities, Use Of Proceeds And Issuer Purchases of Equity Securities

 

On October 23, 2002, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s outstanding common stock.  The purchases may be made in the open market or in privately negotiated transactions as conditions warrant.  The repurchase authorization does not obligate the Company to acquire any specific number of shares and may be suspended at any time.  During the three and six months ended June 30, 2003, the Company purchased and retired 49,700 and 169,945 shares of its outstanding common stock at an average price of $8.99 and $8.96 per share, respectively. Gaming & Entertainment did not repurchase any outstanding shares of its common stock during the six months ended June 30, 2004.  At June 30, 2004, the Company had remaining repurchase authority of 1,830,055 shares.

 

Item 3.                                   Defaults Upon Senior Securities

 

None.

 

Item 4.                                   Submission Of Matters To A Vote Of Security Holders

 

None.

 

Item 5.                                   Other Information

 

None.

 

Item 6.                                   Exhibits And Reports On Form 8-K

 

(a)          Exhibits

 

10.1

 

Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Patrick J. Bagley dated June 16, 2004.

 

 

 

10.2

 

Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Klaus M. Belohoubek dated June 16, 2004.

 

 

 

10.3

 

Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Timothy R. Horne dated June 16, 2004.

 

 

 

10.4

 

Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Melvin L. Joseph dated June 16, 2004.

 

 

 

10.5

 

Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Denis McGlynn dated June 16, 2004.

 

 

 

10.6

 

Employment and Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Edward J. Sutor dated June 16, 2004.

 

 

 

10.7

 

Non-Compete Agreement between Dover Downs Gaming & Entertainment, Inc. and Henry B. Tippie dated June 16, 2004.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

 

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32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K

 

The Company furnished a Form 8-K on April 28, 2004 announcing that it had issued a press release on the same date reporting that the Company’s Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.06 per share.

 

The Company furnished a Form 8-K on April 29, 2004 announcing that it had issued a press release on the same date regarding its first quarter 2004 financial results.

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

DATED:

August 6, 2004

 

Dover Downs Gaming & Entertainment, Inc.

 

Registrant

 

 

 

 

 

/s/ Denis McGlynn

 

 

Denis McGlynn

 

President and Chief Executive Officer

 

and Director

 

 

 

 

 

/s/ Timothy R. Horne

 

 

Timothy R. Horne

 

Senior Vice President-Finance,

 

Treasurer and

 

Chief Financial Officer

 

19