United States Securities and Exchange Commission
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
Commission file number 1-16791
Dover Downs Gaming & Entertainment, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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51-0414140 |
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(State or Other Jurisdiction of Incorporation) |
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(I.R.S. Employer Identification Number) |
(Address of principal executive offices)
(302) 674-4600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class |
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Name of Exchange on Which Registered |
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Common Stock, $.10 Par Value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
The aggregate market value of common stock held by non-affiliates of the registrant was $88,301,675 as of June 30, 2003 (the last day of our most recently completed second quarter).
As of February 29, 2004, the number of shares of each class of the registrant’s common stock outstanding is as follows:
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Common Stock - |
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10,333,112 shares |
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Class A Common Stock - |
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16,145,059 shares |
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement in connection with the Annual Meeting of Stockholders to be held April 28, 2004 are incorporated by reference into Part III, Items 10 through 14 of this report.
Part I
References in this document to “the Company,” “Gaming & Entertainment,” “we,” “us,” and “our” mean Dover Downs Gaming & Entertainment, Inc. and its wholly owned subsidiaries.
Item 1. Business
Dover Downs Gaming & Entertainment, Inc. is a diversified gaming and entertainment company whose operations consist of Dover Downs Slots – an 80,000 square foot video lottery (slots) casino complex (which after the latest construction will be 91,000 square feet); 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.
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.
Dover Downs Gaming & Entertainment, Inc. 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 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.
Dover Downs Slots
Our video lottery (slot) machine casino opened in December 1995 with approximately 500 video lottery (slot) machines. Due to its popularity, the video lottery (slot) machine casino has expanded three times since its opening and the number of machines has increased steadily to 2,000 at December 31, 2003.
In an effort to increase the revenues from its three video lottery agents, the State passed legislation in June 2003 which extended the operating hours for video lottery agents and permitted the Director of the Delaware State Lottery Office (the “Lottery Director”) to authorize 500 additional video lottery (slot) machines at each licensed facility. This sets 2,500 as the maximum number of machines permitted per Licensed Agent. The Company has completed its architectural design work and has begun construction of 11,000 additional square feet of gaming space to accommodate installation of the 500 newly authorized machines within its existing casino complex. Installation of all 500 additional machines is expected to be complete by March 31, 2004. The new legislation also authorizes the use of separate video lottery (slot) machines for promotional tournaments, provides for the introduction of popular franchise games with the State assuming one-half of the incremental expenses and allows the Lottery Director to enter into agreements with other state or international lotteries for linked participation in progressive lottery games. The new law also revised the video lottery distribution formula to increase the State’s share of the video lottery proceeds by assessing a 1.25% surcharge on commissions received by video lottery agents. In addition, recent regulatory changes allow video lottery agents to extend credit to gaming customers and effectively removed the $100 betting limit per machine.
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Our video lottery (slot) machines range from our popular nickel machines to $100 machines in the Premium Slots area and include most popular franchise games found in the country’s major gaming jurisdictions. Additional amenities include the Garden Cafe, which becomes a lounge with live entertainment most evenings, and the Winners Circle Restaurant. The Las Vegas style “video lottery casino” housing the gaming equipment was designed and built using expertise from Caesars World Gaming Development Corporation (“Caesars”), a leader in the gaming industry. Our facilities are open every day of the year, except Christmas and Easter. Our casino was visited by almost 2,500,000 patrons in 2003.
The Delaware State Lottery Office administers and controls our video lottery (slot) machine operations. We are a Licensed Agent authorized to conduct video lottery operations under the Delaware State Lottery Code and one of only three locations permitted to do so in the State of Delaware. We are permitted by law to set the payout to customers between 87% and 95%. Since the introduction of our video lottery (slot) machine operations, we have maintained an average payout of approximately 91.3%. We believe that this represents a competitive payout percentage.
We have a management agreement with Caesars, under which, Caesars is our agent to supervise, manage and operate our video lottery (slot) machine casino. Caesars has been properly licensed by the Delaware State Lottery Office to perform these functions. We pay to Caesars a management fee based on the financial performance of the video lottery operations. We do not expect to renew the agreement when it expires in December 2004 as we no longer rely on any Caesars’ employees or systems.
We use sophisticated database marketing to develop long-term relationships with our patrons and to target promotions to specific customer segments. Our Capital Club, a slots players club and tracking system, allows us to identify customers and to reward their level of play through awards programs. Membership in this club currently stands at approximately 150,000 active patrons. We are in the process of installing a state-of-the-art customer management and slot data system. Our new system will allow us to market our property more effectively and allow for the ultimate conversion of our casino floor to ticket-in, ticket-out (cashless) technology.
We have implemented extensive procedures for financial and accounting controls, safekeeping and accounting of monies, and security provisions. Security over the gaming operations involves the integration of surveillance cameras, observation and oversight by employees, security and gaming staff, and various security features built into the video lottery (slot) machines. The above, when combined with proper internal control procedures and daily monitoring of each video lottery (slot) machine by the Delaware State Lottery Office, are intended to maintain the security, integrity and accountability of the video lottery operations.
On May 30, 2003, a committee created by the Delaware House of Representatives (the “Committee”) issued a favorable assessment as to the merits of conducting sports wagering in the State through its video lottery agents. The Committee concluded that sports gaming is feasible in the State, outlined proposed structures for its implementation and provided various financial projections. The report has been provided to the Delaware General Assembly for consideration. By Federal law, Delaware is the only state east of Montana where sports betting is legally permitted, though enabling legislation would need to be passed by the Delaware General Assembly.
Dover Downs Hotel and Conference Center
Our luxury hotel facility, the Dover Downs Hotel and Conference Center, is located adjacent to our casino. Phase one of the facility was partially opened in the first quarter of 2002 and was completed in April 2002. The hotel and conference center includes 232 rooms, a multi-purpose ballroom/concert hall, a fine dining restaurant, swimming pool and health spa. Additional construction that occurred included, among other things, building a 425-seat buffet restaurant, renovating the enclosed harness racing grandstand with state-of-the-art simulcasting facilities and building an HVAC plant. With this facility, we are capitalizing on the need for luxury hotel accommodations in the Dover area and offering a wider range of entertainment options to our patrons, including concerts featuring prominent entertainers, live boxing, gourmet dining, trade shows and conferences. The facility allows us to attract new patrons and lengthen the stay of current patrons. Since opening the Dover Downs Hotel and Conference Center, we have managed its operations ourselves. In 2003, hotel occupancy averaged almost 93% and the hotel was awarded the AAA Four Diamond Award for 2004.
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Dover Downs Raceway
Dover Downs Raceway has presented pari-mutuel harness racing events for 35 consecutive years. Live harness races are conducted at Dover Downs Raceway between November and April and are simulcast to tracks and other off-track betting locations across North America on each of the Company’s more than 130 live race dates. Our races currently are transmitted to more than 400 tracks and off-track betting locations. The harness horse racing track is a 5/8-mile track and is lighted for nighttime operations. The track is adjacent to our casino and hotel and conference center on land owned by DVD on the inside of DVD’s auto racing superspeedway. Use of the track is under an easement granted by DVD.
Dover Downs Raceway has facilities for pari-mutuel wagering on both live harness horse racing and on simulcast thoroughbred and harness horse racing received from numerous tracks across North America. Within our main grandstand is the recently renovated simulcast parlor where our patrons can wager on harness and thoroughbred races received by satellite into Dover Downs Raceway year round. Television monitors throughout the parlor area provide views of all races simultaneously and the parlor’s betting windows are connected to a central computer allowing bets to be received on all races from all tracks.
Harness racing in the State of Delaware is governed by the Delaware Harness Racing Commission (the “Commission”). We hold a license from the Commission authorizing us to hold harness race meetings on our premises and to offer pari-mutuel wagering on live and simulcast horse races.
Harness racing refers to any racing of horses in which the horses competing or participating are harnessed to a sulky, carriage or similar vehicle and are not mounted by a jockey. Pari-mutuel wagering refers to pooled betting by which the wagering public, not the track, determines the odds and the payoff. The track retains a commission, which is a percentage of the total amount wagered (“handle”). Simulcasting refers to the transmission of live horse racing by television, cable or satellite signal from one race track to another with pari-mutuel wagering being conducted at the sending and receiving track and a portion of the handle being shared by the sending and receiving tracks.
The legislation authorizing video lottery operations in the State of Delaware was adopted in June 1994, and is referred to as the “Horse Racing Redevelopment Act.” The Delaware General Assembly’s stated purpose in approving the legislation was to (i) provide non-state supported assistance in the form of increased economic activity and vitality for Delaware’s harness and thoroughbred horse racing industries, which activity and vitality will enable the industry to improve its facilities and breeding stock, and cause increased employment; and (ii) restrict the location of such lottery to locations where wagering is already permitted and controls exist. A portion of the proceeds from the wagering on the video lottery (slot) machines is allocated to increase the purses for harness horse races held at Dover Downs Raceway and is intended to provide increased vitality for Delaware’s horse racing industry.
We have an agreement with DSOA, or Delaware Standardbred Owner’s Association, Inc., effective August 1, 2003 and continuing through July 31, 2007. DSOA’s membership consists of owners, trainers, and drivers of harness horses participating in harness race meetings at our facilities and elsewhere in the United States and Canada. DSOA has been organized and exists for the purpose of promoting the sport of harness racing; improving the lot of owners, drivers, and trainers of harness racing horses participating in race meetings; establishing health, welfare and insurance programs for owners, drivers, and trainers of harness racing horses; negotiating with harness racing tracks on behalf of owners, trainers, drivers, and grooms of harness racing horses; and generally rendering assistance to them whenever and wherever possible. Under the DSOA agreement, we are required to distribute as purses for races conducted at our facilities, a percentage of our retained share of pari-mutuel revenues, depending on the level of the average daily dollar handle.
We enjoy a good relationship with representatives of DSOA and anticipate that this relationship will continue. We believe that the DSOA agreement is typical of similar agreements in the industry.
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Licensing and Regulation by Gaming and Other Authorities
General
We are subject to extensive federal, state and local regulations related to our operations, particularly our video lottery (slot) operations, live harness racing and pari-mutuel wagering. These operations are contingent upon continued government approval of such operations as forms of legalized gaming and could be subjected at any time to additional or more restrictive regulations. The following is a brief outline of some of the more significant regulations affecting our gaming operations and not intended as a recitation of all regulations applicable to our business.
Delaware law regulates the percentage of commission we are entitled to receive from our gaming activities, which comprises a significant portion of our overall revenues. Our licenses to conduct video lottery (slot) machine operations, harness horse races and pari-mutuel wagering could be modified or repealed at any time and we could be required to terminate our gaming operations.
Video Lottery (Slot) Operations
General. Video lottery (slot) operations are by statute operated and administered by the Lottery Director. We are a Licensed Agent authorized to conduct video lottery (slot) operations under the Delaware State Lottery Code.
A “video lottery (slot) machine” is defined by law as any machine in which bills, coins or tokens are deposited in order to play in a game of chance in which the results, including options available to the player, are randomly and immediately determined by the machine. A machine may use spinning reels or video displays or both, and may or may not dispense coins or tokens directly to winning players. A machine shall be considered a video lottery (slot) machine notwithstanding the use of an electronic credit system making the deposit of bills, coins or tokens unnecessary. Various video lottery (slot) machines are in use at our casino. All accept $1, $5, $10, $20, $50 and $100 bills.
The Lottery Director has discretion to adopt such rules and regulations as the Lottery Director deems necessary or desirable for the efficient and economical operation and administration of the system, including (i) type and number of games permitted, (ii) pricing of games, (iii) numbers and sizes of prizes, (iv) manner of payment, (v) value of bills, coins or tokens needed to play, (vi) requirements for licensing agents and service providers, (vii) standards for advertising, marketing and promotional materials used by Licensed Agents, (viii) procedures for accounting and reporting, (ix) registration, kind, type, number and location of video lottery (slot) machines on a Licensed Agent’s premises, (x) security arrangements for the video lottery system, and (xi) reporting and auditing of financial information of Licensed Agents.
Licensing Requirements. We were granted a license on December 13, 1995.
There are continuing licensure requirements for all officers, directors, key employees and persons who own directly or indirectly 10% or more of a Licensed Agent, which licensure requirements shall include the satisfaction of such security, fitness and background standards as the Lottery Director may deem necessary relating to competence, honesty and integrity, such that a person’s reputation, habits and associations do not pose a threat to the public interest of the State or to the reputation of or effective regulation and control of the video lottery; it being specifically understood that any person convicted of any felony, a crime involving gambling, or a crime of moral turpitude within 10 years prior to applying for a license or at any time thereafter shall be deemed unfit.
There are similar licensure requirements for providers of the video lottery (slot) machines and certain companies that seek to provide services to a Licensed Agent. Caesars has been licensed to provide management services to the Company.
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Revocation, Suspension or Modification of License. The Lottery Director may revoke or suspend the license of a Licensed Agent, such as ours, for “cause.” “Cause” is broadly defined and could potentially include falsifying any application for license or report required by the rules and regulations, the failure to report any information required by the rules and regulations, the material violation of any rules and regulations promulgated by the Lottery Director or any conduct by the licensee which undermines the public confidence in the video lottery system or serves the interest of organized gambling or crime and criminals in any manner. A license may be revoked for an unintentional violation of any federal, state or local law, rule or regulation provided that the violation is not cured within a reasonable time as determined by the Lottery Director. A hearing officer’s decision revoking or suspending the license shall be appealable to the Delaware Superior Court under the provisions of the Administrative Procedures Act. All existing or new officers, directors, key employees and owners of a Licensed Agent are subject to background investigation. Failure to satisfy the background investigation may constitute cause for suspension or revocation of the License.
Ownership Changes. Under Delaware law, a change of ownership of a Licensed Agent will automatically terminate its license 90 days after the change of ownership occurs, unless the Lottery Director determines after application to issue a new license to the new owners. Change of ownership may occur if any new individual or entity acquires, directly or indirectly, 10% or more of the Licensed Agent or if more than 20% of the legal or beneficial interest in the Licensed Agent is transferred, whether by direct or indirect means. The Commission may require extensive background investigations of any new owner acquiring a 10% or greater interest in a Licensed Agent, including criminal background checks. Accordingly, the Company has a restrictive legend on its shares of common stock which require that (a) any holders of common stock found to be disqualified or unsuitable or not possessing the qualifications required by any appropriate gaming authority could be required to dispose of such stock and (b) any holder of common stock intending to acquire 10% or more of the outstanding common stock of the Company must first obtain prior written approval from the Delaware State Lottery Office.
Harness Racing Events. In order to maintain our license for video lottery (slot) machine gaming, we are required to maintain our license for harness horse racing with the Commission and must conduct a minimum of 80 live race days each racing season, subject to the availability of racing stock.
Control Over Equipment and Technology. The Company does not own or lease the video lottery (slot) machines or computer systems used by the State in connection with its video lottery gaming operations. The Lottery Director enters into contracts directly with the providers of the video lottery (slot) machines and computer systems (the “Technology Providers”). Equipment is provided to the State by sale or lease and all Technology Providers must be licensed by the Lottery Director. There are also limitations on the number of video lottery (slot) machines that may be used at any one facility that are supplied by the same Technology Provider. The operations of the Company could be disrupted in the event that a licensed Technology Provider in any way breaches its agreement with the State or ceases to be properly licensed for any reason. Such an event would be outside of the control of the Company.
Licensing Requirements. Harness racing in the State of Delaware is governed by the Delaware Harness Racing Commission. The Company holds a license from the Commission by which it is authorized to hold harness race meetings on its premises and to make, conduct and sell pools by the use of pari-mutuel machines or totalizators. The license must be renewed on an annual basis. The Commission may reject an application for a license for any cause which it deems sufficient and the action of the Commission is final. The Commission may also suspend or revoke a license which it has issued and its action in that respect is final, subject to review, upon questions of law only, by the Superior Court of the County within which the license was granted. The action of the Commission stands unless and until reversed by the Court. 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. However, there can be no assurances that the Company will continue to be licensed by the Commission in the future.
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Under the law, the Commission has broad powers of supervision and regulation. The Commission may prescribe rules, regulations and conditions under which all harness racing and betting pools shall be conducted; may regulate the performance of any service or the sale of any article on the premises of a licensee; may compel the production of books and documents of a licensee and require that books and records be kept in such manner as the Commission may prescribe; may visit, investigate and place accountants or other persons as it deems necessary, at the expense of a licensee, in the office, track or place of business of a licensee; may summon witnesses and administer oaths; and may require the removal of any employee or official employed by a licensee. All proposed extensions, additions or improvements to the property of a licensee are subject to the approval of the Commission.
The Commission is required to inspect a licensee’s racing plant not less than five days prior to a race meeting and may withdraw the license for the meeting if the racing plant is found to be unsafe for animals or persons or is not rendered safe prior to the opening of the meeting. A licensee must deposit with the Commission, ten days before a race meeting, a policy of insurance against personal injury liability in an amount to be approved by the Commission.
USTA. Any license granted by the Commission is also subject to such reasonable rules and regulations as may be prescribed from time to time by the United States Trotting Association (“USTA”). The USTA sets various rules relating to the conduct of harness racing. According to its Articles of Incorporation, the purposes of the USTA shall include the improvement of the breed of trotting and pacing horses, the establishment of rules regulating standards and the registration of such horses thereunder, the advancement and promotion of the interest of harness racing in the United States, the investigation, ascertainment and registration of the pedigrees of such horses, the regulation and government of the conduct of the sport of harness racing, the establishment of rules for the conduct thereof, not inconsistent with the laws of the various states, and the sanctioning of the holding of exhibitions of such horses and meetings for the racing thereof, the issuance of licenses to qualified persons to officiate at harness race meetings and exhibitions, the issuance of licenses to the owners of horses permitting the exhibition and racing of such horses and the qualification thereof, the issuance of licenses to drivers of horses participating in such races or exhibitions, and providing for the enforcement of the rules promulgated by the USTA, and providing for the fixing of penalties, fines, and the suspension or expulsion from membership, or privileges or for any other misconduct detrimental to the sport.
Gaming Taxes and Fees
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 would likely incur similar burdens in any other jurisdiction in which we may conduct gaming operations in the future.
Compliance with Other Laws
Regulations adopted by the Financial Crime Enforcement Network of the U.S. Treasury Department require us to report currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. Substantial penalties can be imposed against us if we fail to comply with these regulations.
The State has enacted a ban on smoking in all indoor public facilities with certain minor exceptions such as fire halls and fraternal organization premises where fundraising takes place. The ban became effective November 27, 2002. The law prohibits smoking inside the Company’s casino, hotel and conference center, restaurants, harness track indoor grandstands and simulcasting facilities, provided that smoking is permitted in up to 25% of the rooms in the hotel. Efforts to seek legislative relief from the law have been unsuccessful.
Our operations are also subject to a variety of other rules and regulations, including, but not limited to, zoning, environmental, construction and land-use laws and regulations.
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Competition
The gaming industry in the United States is intensely competitive and features many participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery (slot) and poker machines, whether or not located in casinos, native American gaming, pari-mutuel wagering on live and simulcast horse racing, off track betting, state run lotteries, internet gambling and other forms of gambling. Gaming competition is particularly intense in each of these markets.
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, as it has been for several years in Maryland and Pennsylvania, which if enacted, would further expand state gambling and wagering opportunities, including video lottery (slot) machines at racetracks. Enactment of such legislation could increase our competition and could adversely affect our business, financial condition and overall profitability.
At present, video lottery (slot) machines are only permitted at two other locations in Delaware: Delaware Park and Harrington Raceway. The neighboring states of Pennsylvania and Maryland do not presently permit video lottery (slot) machine operations. Pennsylvania, Maryland and New Jersey all have state-run lotteries. Atlantic City, New Jersey is located approximately 100 miles from our entertainment facility and offers a full range of gaming products.
Competition in horse racing is varied since racetracks in the surrounding area differ in many respects. Some tracks only offer thoroughbred or harness horse racing; others have both. Tracks have live racing seasons that may or may not overlap with neighboring tracks. Depending on the purse structure, tracks that are farther apart may compete with each other more for quality horses than for patrons.
Live harness racing also competes with simulcasts of thoroughbred and harness racing. All racetracks in the region are involved with simulcasting. In addition, a number of off-track betting parlors compete with track simulcasting activities. With respect to the simulcasting of our live harness races to tracks and other locations, our simulcast signals are in direct competition with live races at the receiving track and other races being simulcast to the receiving location.
Within the State of Delaware, we face little direct live competition from the State’s other two tracks. Harrington Raceway, a south central Delaware fairgrounds track, conducts harness horse racing periodically between May and November. There is no overlap presently with our live race season. Delaware Park, a northern Delaware track, conducts thoroughbred horse racing from April through mid-November. Its race season only overlaps with ours for approximately six weeks each year.
We compete with harness and thoroughbred racing and simulcasting facilities in the neighboring states of Pennsylvania, Maryland and New Jersey. We also receive simulcast harness and thoroughbred races from approximately 80 race tracks.
Competition for our hotel and conference center varies and consists of local and regional competition. With respect to hotel accommodations only, we compete with a variety of nearby hotels in the Dover area; however, few of these offer the luxury accommodations that we offer. With respect to trade shows, conferences, concerts and hotel room packages tied to these events or tied to our casino and other gaming offerings, we compete at a regional level with the other gaming operations referred to above and with convention centers and larger hotels in major cities such as Philadelphia, Washington, D.C., Baltimore and Wilmington.
In addition, our activities compete with other leisure, entertainment and recreational activities.
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Growth Strategies
We offer a unique gaming and entertaining experience and make available to our patrons a number of different options: slot machine gaming, live harness horse racing, fine dining, national recording and entertainment acts, live boxing and simulcasting of thoroughbred and harness horse races from across the United States. Our mission is simple: to provide all of our customers a premier gaming and entertainment experience with a focus on quality customer service. Our growth strategy is to foster customer loyalty by following this mission, focus on our most valuable customers, expand and improve the quality of our slot gaming positions, enhance our gaming products with additional entertainment offerings and create an exciting gaming environment while focusing on areas that we believe will increase our revenue and profitability. Our efforts in this regard include the following:
Increase The Utilization Of Our Casino
At December 31, 2003, we had 2,000 video lottery (slot) machines at our Dover facility. In an effort to increase the revenues from its three video lottery agents, the State passed legislation in June 2003 which extended the operating hours for video lottery agents and permitted the Lottery Director to authorize 500 additional video lottery (slot) machines at each licensed facility. This sets 2,500 as the maximum number of machines permitted per Licensed Agent. The Company has completed its architectural design work and has begun construction of 11,000 additional square feet of gaming space to accommodate installation of the 500 newly authorized machines within its existing casino complex. Installation of all 500 additional machines is expected to be complete by March 31, 2004. The new legislation also authorizes the use of separate video lottery (slot) machines for promotional tournaments, provides for the introduction of popular franchise games with the State assuming one-half of the incremental expenses and allows the Lottery Director to enter into agreements with other state or international lotteries for linked participation in progressive lottery games.
We use a sophisticated database marketing program to develop long-term relationships with our patrons and to target promotions to specific customer segments. Our Capital Club, a slots players club and tracking system, allows us to identify customers and to reward their level of play through awards programs. Membership in this club currently stands at approximately 150,000 active patrons. We are in the process of installing a state-of-the-art customer management and slot data system. Our new system will allow us to market our property more effectively and allow for the ultimate conversion of our casino floor to ticket-in, ticket-out (cashless) technology. We expect to increase attendance at both our casino and hotel and conference center through effective promotional use of our database and by making improvements to our facilities and gaming offerings based on what we learn from our Capital Club members. For example, we continue to add machines with differing denominations and progressive slot machines with large jackpot sizes because they offer patrons a more exciting gaming experience.
On May 30, 2003, the Committee issued a favorable assessment as to the merits of conducting sports wagering in the State through its video lottery agents. The Committee concluded that sports gaming is feasible in the State, outlined proposed structures for its implementation and provided various financial projections. The report has been provided to the General Assembly for consideration. By Federal law, Delaware is the only state east of Montana where sports betting is legally permitted, though enabling legislation would need to be passed by the Delaware General Assembly.
Capitalize On Our Luxury Hotel And Conference Center
Our luxury hotel facility, the Dover Downs Hotel and Conference Center, is located adjacent to our casino. The facility was partially opened in the first quarter of 2002 and was completed in April 2002. The first phase of the hotel and conference center includes 232 rooms, a multi-purpose ballroom/concert hall, a fine dining restaurant, swimming pool and health spa. Additional construction that occurred in adjacent facilities during the first phase included, among other things, building a new 425-seat buffet restaurant, renovating the enclosed harness racing grandstand with state-of-the-art simulcasting facilities and building an HVAC plant. The second phase, if implemented, is expected to include an additional 268 rooms. With this facility, we are capitalizing on the need for luxury hotel accommodations in the Dover area and offering a wider range of entertainment options to our patrons, including concerts featuring prominent entertainers, live boxing, gourmet dining, trade shows and conferences. The facility allows us to attract new patrons and lengthen the stay of current patrons.
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Increase The Attendance And Wagering On Live Harness Horse Racing Through Increased Purse Levels
With a percentage of video lottery (slot) machine revenues supplementing the purses for the horsemen, we have experienced dramatic increases in the amount of our purses. As of the end of our 2002-2003 season, our average daily purse distribution had increased to $171,000 from $8,000 in 1995. According to information published by the Harness Tracks of America, Inc., an association we belong to comprised of harness race tracks throughout the world, this level would have us ranked second among thirty-six United States harness tracks in daily purse distribution. The result is that we continue to attract higher quality horses. We have such prestigious events as our annual “Progress Pace” with an estimated $400,000 purse, an event which attracts the country’s top three-year-old horses. Bettors are attracted to races with larger purses and typically wager more on the higher quality and more predictable horses. We have also completed various upgrades to enhance the harness horse racing facilities, including renovations to the track and grounds, receiving barn and paddock areas and, more recently, our simulcast parlor which has state-of-the-art facilities that allow year round wagering. We continue to focus on improvements that we believe allow us to increase attendance and wagering, including wagering on our events from other tracks and off track wagering facilities that receive our racing signal during our race season.
Seasonality
Gaming & Entertainment’s quarterly operating results are affected by weather and the general economic conditions in the United States. Our quarterly operating results are generally distributed evenly throughout the year. However, the results for any quarter are not necessarily indicative of results to be expected in any future period.
Employees
As of December 31, 2003, Gaming & Entertainment had approximately 759 full-time employees and 137 part-time employees. We engage temporary personnel to assist during our live harness racing season. None of our employees are party to a collective bargaining agreement and we believe that our relationship with our employees is good.
We file annual, quarterly and current reports, information statements and other information with the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
We maintain a website where additional information concerning our business and various upcoming events can be found. The address of our Internet website is http://www.doverdowns.com. We provide a link on our website, under Investor Relations, to our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports.
10
Item 2. Properties
We own our principal executive office located in Dover, Delaware; Dover Downs Slots—our 80,000 square foot casino (which after the latest construction estimated to be completed by March 31, 2004 will be 91,000 square feet); the Dover Downs Hotel and Conference Center—featuring luxury accommodations with conference, banquet, fine dining, ballroom and concert hall facilities; and the Dover Downs Raceway—indoor grandstands, betting and simulcasting parlors, all of which are located at our entertainment complex situated on approximately 78 acres of land owned by us.
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.
Item 3. 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.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
11
Part II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
Gaming & Entertainment’s common stock is listed on the New York Stock Exchange under the ticker symbol “DDE.” Gaming & Entertainment Class A common stock is not publicly traded but is freely convertible into Gaming & Entertainment common stock at any time at the option of the holder thereof. As of February 29, 2004, there were 10,333,112 shares of common stock and 16,145,059 shares of Class A common stock outstanding. There were 1,157 holders of record for common stock and 16 holders of record for Class A common stock.
The high and low sales prices for the Company’s common stock on the New York Stock Exchange and the dividends declared per share for the years ended December 31, 2003 and 2002, beginning after the Company’s spin-off from DVD, are detailed in the following table. The Company’s spin-off from DVD became effective on March 31, 2002, at which time Gaming & Entertainment became an independent public company.
|
Quarter Ended: |
|
High |
|
Low |
|
Dividends |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
December 31, 2003 |
|
$ |
10.00 |
|
$ |
8.02 |
|
$ |
0.05 |
|
|
September 30, 2003 |
|
10.35 |
|
7.97 |
|
0.05 |
|
|||
|
June 30, 2003 |
|
10.04 |
|
8.80 |
|
0.05 |
|
|||
|
March 31, 2003 |
|
10.15 |
|
8.45 |
|
0.05 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
December 31, 2002 |
|
10.55 |
|
7.65 |
|
0.05 |
|
|||
|
September 30, 2002 |
|
13.00 |
|
7.41 |
|
0.0375 |
|
|||
|
June 30, 2002 |
|
14.90 |
|
11.60 |
|
0.0375 |
|
|||
Securities authorized for issuance under equity compensation plans at December 31, 2003 are as follows:
|
Plan Category |
|
Number of |
|
Weighted-average |
|
Number of
securities |
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
Equity compensation plans approved by security holders |
|
862,360 |
|
$10.02 |
|
626,859 |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
— |
|
— |
|
— |
|
|
Total |
|
862,360 |
|
$10.02 |
|
626,859 |
|
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 2003, the Company purchased and retired 169,945 shares of its outstanding common stock at an average price of $8.96 per share. Gaming & Entertainment did not repurchase any outstanding shares of its common stock during the fourth quarter of 2003. At December 31, 2003, the Company had remaining repurchase authority of 1,830,055 shares.
12
Item 6. Selected Financial Data
The following table summarizes certain selected consolidated financial data of Gaming & Entertainment, which has been derived from the consolidated financial statements of Gaming & Entertainment for the years ended December 31, 2003, 2002 and 2001, the six months ended December 31, 2000 and for each of the two years ended June 30, 2000. The historical information may not be indicative of Gaming & Entertainment’s future performance as an independent public company. This information set forth below should be read in conjunction with “Management’s Discussion And Analysis of Financial Condition And Results of Operations,” the “Consolidated Financial Statements” and the notes thereto, included elsewhere in this document.
Five Year Selected Financial Data
|
|