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United States
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 1-11929
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Dover Downs Entertainment, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0357525
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
1131 North DuPont Highway, Dover, Delaware 19901
(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:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
Common Stock, $.10 Par Value 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 [X] No [_]
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $221,693,919 as of February 28, 2002.
As of February 28, 2002, the number of shares of each class of the
Registrant's common stock outstanding is as follows:
Common Stock - 14,284,252 shares
Class A Common Stock - 23,769,085 shares
Documents Incorporated by Reference
-----------------------------------
Portions of the Registrant's Proxy Statement in connection with the
Annual Meeting of Stockholders to be held May 22, 2002 are incorporated by
reference into Part III, Items 10 through 13 of this report.
1
Part I
References in this document to "we," "our," "us," "DVD," "Dover Downs"
or "the Company" mean Dover Downs Entertainment, Inc. and its wholly-owned
subsidiaries.
Item 1. Business
----------------
Dover Downs, Inc. was incorporated in 1967 and began motorsports and
harness horse racing operations in 1969. As a result of several restructurings,
Dover Downs, Inc. became a wholly-owned subsidiary of DVD, and transferred all
of the motorsports operations to Dover International Speedway, Inc.
Consequently, Dover Downs, Inc. became the operating entity for all of DVD's
gaming operations. Our video lottery (slot) machine casino opened in December
1995 with 500 video lottery (slot) machines. Due to its popularity, the video
lottery (slot) machine casino has expanded several times and the number of slot
machines has steadily increased to its current level of 2,000.
On March 7, 2002, DVD announced that the tax-free spin-off of Dover
Downs, Inc., its gaming business, is expected to be effective March 31, 2002.
The Company will change its name to Dover Motorsports, Inc. and focus on the
fixed facility and temporary circuit motorsports operations. To accomplish the
spin-off DVD has contributed 100 percent of the issued and outstanding common
stock of Dover Downs, Inc. to Dover Downs Gaming & Entertainment, Inc. (Gaming &
Entertainment), a newly formed wholly-owned subsidiary of DVD. On the effective
date of the spin-off, DVD will distribute all of the capital stock of Gaming &
Entertainment to DVD stockholders on a pro-rata basis. Holders of DVD common
stock or Class A common stock will receive 0.7 shares of Gaming & Entertainment
common stock or Class A common stock for each share of DVD common stock or Class
A common stock owned at the close of business on March 18, 2002, the record date
for the spin-off. Each share of common stock or Class A common stock to be
distributed will be accompanied by one stock purchase right. Accordingly, the
operations of this business have been reflected as a discontinued operation in
the accompanying consolidated financial statements. The Company's continuing
operations subsequent to the spin-off will consist solely of its motorsports
activities.
Dover Downs is a leading promoter of motorsports events in the United
States. Based upon attendance and television viewership, motorsports is one of
the most popular and fastest growing spectator sports in the United States. The
Company operates five motorsports tracks (four permanent facilities and one
temporary circuit) in four states and promoted 16 major events during 2001 in
four of the premier sanctioning bodies in motorsports - the National Association
for Stock Car Auto Racing (NASCAR), Championship Auto Racing Teams (CART), the
Indy Racing League (IRL) and the National Hot Rod Association (NHRA). The
Company owns and operates Dover International Speedway in Dover, Delaware, the
new Nashville Superspeedway complex near Nashville, Tennessee, Gateway
International Raceway near St. Louis, Missouri and Memphis Motorsports Park near
Memphis, Tennessee. The Company organizes and promotes the Toyota Grand Prix of
Long Beach in Long Beach, California, and the Grand Prix of Denver in Denver,
Colorado, beginning with the inaugural event scheduled for September 2002. The
Company has also entered into agreements with the City of St. Petersburg in
Florida and with CART to organize and promote the Grand Prix of St. Petersburg.
The inaugural event is expected to be held in February 2003.
Dover International Speedway
We have presented NASCAR-sanctioned racing events for 33 consecutive
years at Dover International Speedway and currently conduct five major
NASCAR-sanctioned events at the facility annually. Two races are in the Winston
Cup professional stock car racing circuit, two races are in the Busch Series,
Grand National Division (Busch Series) racing circuit and one race is in the
Craftsman Truck Series racing circuit.
Each of the Busch Series events and the Craftsman Truck Series event at
Dover International Speedway are conducted on the days before a Winston Cup
event. Dover International Speedway is one of only seven speedways in the
country that presents two Winston Cup events and two Busch Series events each
year. Additionally, the Company is one of only six tracks to host three major
NASCAR events at one facility on the same weekend. The June and September dates
have historically allowed Dover International Speedway to hold the first and
last Winston Cup events in the Maryland to Maine region each year.
2
Dover International Speedway is a high-banked, one-mile long, concrete
superspeedway with a seating capacity for the 2001 season of approximately
140,000. Unlike some superspeedways, substantially all grandstand and skybox
seats offer an unobstructed view of the entire track. The concrete racing
surface makes the auto racing track the only concrete superspeedway (one mile or
greater in length) that conducts NASCAR Winston Cup Series events.
Nashville Superspeedway
The Company acquired Nashville Speedway, USA on January 2, 1998. To
accommodate the demand for major motorsports in the Nashville area, the Company
constructed a new superspeedway and motorsports complex in Wilson County,
Tennessee. The 1.33-mile concrete superspeedway has 25,000 permanent grandstand
seats with an infrastructure in place to expand to 150,000 seats as demand
requires. Additionally, the first phase of construction included lights at the
superspeedway to allow for nighttime racing and the foundation work for a dirt
track, short track and drag strip, which may be completed in the future. The new
Nashville Superspeedway opened in April 2001 with a strong schedule of events,
including a NASCAR Busch Series event, a NASCAR Craftsman Truck Series event, an
IRL event and other regional and national touring events. Nashville
Superspeedway has also signed an agreement with NASCAR to promote an additional
Busch Series event in June 2002.
Grand Prix Association of Long Beach
The Company acquired Grand Prix Association of Long Beach, Inc. (Grand
Prix) on July 1, 1998. For the past 27 years, Grand Prix has organized and
promoted the CART-sanctioned Grand Prix of Long Beach, an annual temporary
circuit professional motorsports event run in the streets of Long Beach,
California. The Grand Prix of Long Beach has the second highest paid attendance
of any Indy-style car race, second only to the Indianapolis 500.
Grand Prix will also organize and promote the Grand Prix of Denver in
Denver, Colorado. The Grand Prix of Denver will be a CART-sanctioned event, with
the inaugural event scheduled for September 2002.
Grand Prix has also entered into agreements with the City of St.
Petersburg in Florida and with CART to organize and promote the Grand Prix of
St. Petersburg. The inaugural event is expected to be held in February 2003.
Gateway International Raceway
Gateway International Raceway (Gateway), acquired in the Grand Prix
acquisition, promoted four major events in 2001. These events were sanctioned by
NASCAR, IRL and NHRA. The facility also hosts a number of regional and national
touring events.
The auto racing facility includes a 1.25-mile paved oval track with
55,000 permanent seats, a national-caliber drag strip capable of seating
approximately 30,000 people and a road course. The facility, which is equipped
with lights for nighttime racing, is located in Madison, Illinois, approximately
five miles from the St. Louis Arch.
Memphis Motorsports Park
Memphis Motorsports Park (Memphis), also acquired in the Grand Prix
acquisition, promoted three major events in 2001. These events were sanctioned
by NASCAR and NHRA. The facility also hosts a number of regional and national
touring events.
The auto racing facility includes a 3/4-mile paved tri-oval track with
16,000 permanent seats, a national-caliber drag strip capable of seating
approximated 25,000 people , a 1/4-mile dirt track and a road course. The
facility is located in Millington, Tennessee, approximately 10 miles from
Memphis, Tennessee.
3
Broadcasting Rights
In recent years, television coverage and corporate sponsorship have
increased dramatically for NASCAR-sanctioned events. All NASCAR Winston Cup and
Busch Series events sponsored by the Company are currently televised nationally.
According to NASCAR, major national corporate sponsorship of NASCAR-sanctioned
events (which currently includes over 70 Fortune 500 companies) also continues
to increase significantly. DVD's sponsors include such companies as Anheuser
Busch, Dietz and Watson, Dodge, Ford, Kroger, MBNA, Pepsi, Pfizer and RJR
Nabisco.
NASCAR retains the television, audio and other electronic media rights
for Winston Cup and Busch Series events and has a six-year television rights
agreement with the NBC and Turner networks and an eight-year agreement with Fox
and its FX cable network. NASCAR has announced that the industry-wide domestic
television broadcast revenues were approximately $259 million for the 2001 race
season and will increase at an average annual rate of approximately 17% through
the 2006 racing season. Under the terms of its sanction agreements, NASCAR
retains 10% of the gross broadcast rights fees allocated to each NASCAR Winston
Cup or Busch Series event as a component of its sanction fees and remits the
remaining 90% to the event promoter. The event promoter continues to pay 25% of
the gross broadcast rights fees to the event as part of the awards to the
competitors.
Competition
The Company's racing events compete with other racing events sanctioned
by various racing bodies and with other sports and recreational events scheduled
on the same dates. Racing events sanctioned by different organizations are often
held on the same dates at separate tracks. The quality of the competition, type
of racing event, caliber of the event, sight lines, ticket pricing, location,
and customer conveniences, among other things, distinguish the motorsports
facilities.
Seasonality
DVD derives a substantial portion of its total revenues from admissions
and event-related revenue attributable to its major motorsports events held from
April through October. As a result, DVD's business is highly seasonal.
Inflation
Inflation has not had a material effect on DVD's operations. If
inflation increases, we will attempt to increase our prices to offset our
increased expenses. No assurance can be given, however, that we will be able to
adequately increase our prices in response to inflation.
Employees
As of December 31, 2001, DVD had approximately 739 full-time employees
and 150 part-time employees. 114 full-time employees and 15 part-time employees
are in the continuing operations. The remainder of the employees are in the
discontinued operation. We hire temporary employees to assist during our
motorsports racing season.
Item 2. Properties
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Dover International Speedway Properties
Our motorsports superspeedway (Dover International Speedway) is located
in Dover, Delaware, on approximately 747 acres of land owned by the Company.
Properties owned by Gaming & Entertainment include; Dover Downs Slots--an 80,000
square foot casino, the Dover Downs Raceway harness racing grandstands, and
betting and simulcasting parlors, and the Dover Downs Hotel and Conference
Center, all of which are located adjacent to our motorsports superspeedway in
Dover, Delaware. Use of the 5/8-mile harness racing track is under an easement
granted by DVD which does not require the payment of any rent. Under the terms
of the easement Gaming & Entertainment 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
4
inside of DVD's one mile motorsports superspeedway. The indoor grandstands will
be used by DVD free of charge in connection with its motorsports events and are
owned by Gaming & Entertainment. DVD also leases its principal executive office
space from Gaming & Entertainment. Various easements and agreements relative to
access, utilities and parking have also been entered into between DVD and Gaming
& Entertainment.
Nashville Fairgrounds Property
The Nashville Fairgrounds racetrack is located on 12 acres of land in
Nashville, Tennessee and was leased from the Metropolitan Board of Fair
Commissioners through September 2007. Effective December 28, 2001, Nashville
Speedway, USA assigned its lease of this facility to a third party. As a result,
the Company's operations at this facility ceased.
Nashville Superspeedway Property
Nashville Superspeedway is located on approximately 1,465 acres of land
owned by the Company in Wilson County and Rutherford County, Tennessee,
approximately 30 miles from downtown Nashville, Tennessee.
Long Beach Properties
Grand Prix owns its office at 3000 Pacific Avenue, Long Beach,
California, which consists of approximately 82,000 square feet of land and a
building with approximately 50,000 square feet of office and warehouse space.
Grand Prix leases a 750-square foot ticket office in downtown Long Beach for the
sale of tickets and leases storage facilities in Long Beach for its equipment
and structures.
Gateway International Raceway Property
Gateway International Raceway is located on approximately 416 acres of
land in Madison, Illinois, five miles from the St. Louis Arch. The Company owns
approximately 123 acres and has three long-term leases (expiring in 2011, 2025
and 2070) for an additional 259 acres, with purchase options. The Company is
also a party to a ten-year lease (with four five-year renewals) of 20 acres for
the purpose of providing overflow parking for major events on a neighboring golf
course, and a five-year lease of approximately 14 acres for major event parking.
The Company has granted a first mortgage lien on all the real property owned and
a security interest in all property leased by the Company at Gateway to
Southwestern Illinois Development Authority (SWIDA) as security for the
repayment of principal and interest on its $21.5 million loan from SWIDA.
Memphis Motorsports Park Property
Memphis Motorsports Park is located on approximately 350 acres of land
owned by the Company approximately ten miles northeast of downtown Memphis,
Tennessee. The facility is encumbered by a first trust deed to First Tennessee
Bank for the purpose of securing a standby letter of credit issued by First
Tennessee Bank to Gateway International Motorsports Corporation to satisfy its
debt service reserve fund obligation to SWIDA.
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 results of
operations, financial condition or cash flows.
Item 4. Submission Of Matters To A Vote Of Security Holders
-----------------------------------------------------------
None.
5
Part II
Item 5. Market For The Registrant's Common Stock And Related Stockholder Matters
--------------------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange
under the ticker symbol "DVD." There is no public trading market for DVD Class A
common stock. However, Class A common stock is freely convertible at any time
into shares of common stock on a one-for-one basis at the option of the
stockholder. As of February 28, 2002, there were 14,284,252 shares of common
stock and 23,769,085 shares of Class A common stock outstanding. There were
1,256 holders of record for common stock and 17 holders of record for Class A
common stock.
The range of share prices for the Company's common stock on the New
York Stock Exchange for the year ended December 31, 2001, the six-month period
ended December 31, 2000 and the fiscal year ended June 30, 2000 are as follows:
Quarter Ended: High Low
-------------- ---- ---
September 30, 1999 $ 17.94 $ 13.50
December 31, 1999 20.00 13.63
March 31, 2000 17.81 11.06
June 30, 2000 14.00 11.19
September 30, 2000 13.75 9.88
December 31, 2000 12.88 10.50
March 31, 2001 12.55 10.50
June 30, 2001 15.40 11.80
September 30, 2001 15.20 11.69
December 31, 2001 16.87 11.73
Dividends of $0.045 per share were declared for each fiscal quarter in
the year ended December 31, 2001, the six-month period ended December 31, 2000
and the fiscal year ended June 30, 2000.
For comparison purposes, after the tax-free spin-off of Gaming &
Entertainment to the Company's stockholders, the historical market value of the
Company's common stock will be less meaningful since the historical values
included Gaming & Entertainment. Similarly, a comparison of the historical
dividend payout to future dividends should factor in the effect of the spin-off.
6
Item 6. Selected Financial Data
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The following table summarizes certain selected historical financial data
and should be read in conjunction with the Consolidated Financial Statements and
the notes thereto included elsewhere in this document. The historical financial
information presented below is not necessarily indicative of the results of
operations or financial position that DVD would have reported if it had operated
exclusive of its discontinued gaming operation during the periods presented or
in the future. See NOTE 4-Discontinued Operation appearing in the Notes to the
Consolidated Financial Statements on page 29 of this Annual Report on Form 10-K.
Five Year Selected Financial Data
Six Months
Year Ended Ended
December 31, December 31, Year Ended June 30,
--------------------------------------------
2001 2000 2000 1999 (a) 1998 1997
---- ---- ---- -------- ---- ----
(unaudited)
Statement of Earnings Data
(in thousands):
Revenues ......................... $ 86,551 $ 39,045 $ 77,311 $ 68,683 $ 25,874 $ 20,516
Expenses:
Operating ...................... 50,882 21,573 41,984 37,138 10,462 7,583
Depreciation and amortization .. 10,023 4,001 6,671 5,829 1,470 981
General and administrative ..... 11,408 4,661 8,578 8,519 1,436 873
-------- -------- --------- -------- -------- --------
Total expenses ............... 72,313 30,235 57,233 51,486 13,368 9,437
Operating earnings ............... 14,238 8,810 20,078 17,197 12,506 11,079
Interest expense (income), net ... 1,614 9 924 1,267 (702) (969)
-------- -------- --------- -------- -------- --------
Earnings from continuing
operations before income taxes ... 12,624 8,801 19,154 15,930 13,208 12,048
Income taxes ..................... 5,753 3,945 8,181 6,735 5,742 5,160
-------- -------- --------- -------- -------- --------
Earnings from continuing
operations ....................... $ 6,871 $ 4,856 $ 10,973 $ 9,195 $ 7,466 $ 6,888
======== ======== ========= ======== ======== ========
Earnings per share(b):
Basic .......................... $ 0.18 $ 0.13 $ 0.30 $ 0.26 $ 0.25 $ 0.23
======== ======== ========= ======== ======== ========
Diluted ........................ $ 0.18 $ 0.13 $ 0.30 $ 0.25 $ 0.24 $ 0.23
======== ======== ========= ======== ======== ========
December 31, June 30,
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2001 2000 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Balance Sheet Data (in thousands): (unaudited)
Working capital (deficit) ....... $(113,968) $ (44,740) $ (45,739) $ (30,644) $(11,851) (c)
Property and equipment, net ..... 245,143 235,189 189,245 143,781 38,868 (c)
Total assets .................... 417,556 381,095 334,658 261,742 92,710 (c)
Total stockholders' equity ...... $ 244,519 $ 230,382 $ 217,791 $ 172,658 $ 71,365 (c)
(a) The Grand Prix Association of Long Beach, Inc. was acquired on July 1, 1998.
(b) Prior year per share amounts have been adjusted to give retroactive effect
to a two-for-one stock split distributed on September 15, 1998.
(c) Not readily available.
7
Item 7. 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 related notes
included elsewhere in this Annual Report on Form 10-K. For purposes of comparing
the year ended December 31, 2001 and the six-month period ended December 31,
2000 with the same periods from the prior year, the Company has relied upon
consolidated financial statements that are not presented elsewhere in this
document.
On July 25, 2001, the Board of Directors of the Company resolved to
pursue the separation of its gaming and motorsports business segments into two
publicly owned companies. On March 7, 2002, DVD announced that the tax-free
spin-off of Dover Downs, Inc., its gaming business, is expected to be effective
March 31, 2002. Accordingly, the operations of this business have been reflected
as a discontinued operation and excluded from consolidated revenues and expenses
for all years in the accompanying consolidated financial statements and our
discussions herein.
Results of Operations
Year Ended December 31, 2001 vs. Year Ended December 31, 2000
Revenues increased by $3,847,000, or 4.7%, to $86,551,000, primarily
the result of events at the new Nashville Superspeedway and record attendance
and increased broadcast revenue for the Company's NASCAR Winston Cup events at
Dover International Speedway. The aforementioned increases in motorsports
revenue were offset by decreased attendance at certain motorsports events at the
Company's other facilities and unusually inclement weather that negatively
impacted nine of the sixteen major motorsports events promoted by the Company
during the year ended December 31, 2001.
Operating expenses increased $6,894,000, or 15.7%, for 2001 compared
with 2000, primarily the result of events promoted for the first time at the new
Nashville Superspeedway, which opened in April 2001, and pre-opening expenses
related to the inaugural Grand Prix of Denver scheduled to occur in September
2002.
Depreciation and amortization expense increased by $2,441,000 primarily
due to the opening of the Nashville Superspeedway complex in April 2001 and the
addition of grandstand seats at Dover International Speedway in June 2001.
General and administrative expenses increased by $2,302,000 to
$11,408,000 from $9,106,000 in 2000, primarily due to the opening of the
Nashville Superspeedway complex in April 2001.
Net interest expense increased by $1,498,000 primarily as a result of
the Company capitalizing $1,531,000 of interest related to the construction of
major facilities in 2001 compared with $3,045,000 in 2000. Capitalization of
interest on the new Nashville Superspeedway ceased when the facility opened in
April 2001.
The Company's effective income tax rates for the years ended December
31, 2001 and 2000 were 45.6% and 43.0%, respectively. The increase resulted
primarily from lower earnings from continuing operations before income taxes
magnifying the impact of goodwill amortization that is not deductible for income
tax purposes.
Earnings from continuing operations decreased by $5,627,000, primarily
as a result of unusually inclement weather negatively impacting attendance at
nine of the major motorsports events promoted by the Company during 2001, and
increased depreciation, interest and general and administrative expenses related
to the opening of the Nashville Superspeedway in April 2001, offset by increased
earnings from Dover International Speedway.
8
Earnings from discontinued operation (net of income taxes) were
$21,095,000 in 2001 as compared to $21,568,000 in 2000. The decrease of
$473,000, or 2.2%, was primarily due to increased general and administrative
costs from pre-opening expenses related to the Dover Downs Hotel and Conference
Center and increased interest expense related to the construction of the Dover
Downs Hotel and Conference Center, offset by increased play in the casino. Also,
prior year operating expenses were reduced by $2,475,000 as a result of the
Company reversing a portion of prior accruals for disputed management fees.
Six Months Ended December 31, 2000 Compared With Six Months Ended December 31,
1999
Revenues increased by $5,393,000, or 16.0%, to $39,045,000.
Approximately $465,000 of the revenue increase resulted from increased
attendance, $222,000 from increased ticket prices and $2,889,000 from increased
sponsorship and broadcast revenues from the NASCAR-sanctioned events at Dover
International Speedway. The remainder of the revenue increase is primarily from
adding a Craftsman Truck Series event to the Dover fall NASCAR weekend and the
scheduling of the CART event at Gateway International Raceway in September 2000
compared with May 1999. The aforementioned increases in revenues were offset
somewhat by the Company's decision not to promote an IRL event at Dover
International Speedway during the six-month period ended December 31, 2000, and
the scheduling of the Craftsman Truck Series event at Gateway International
Raceway in May 2000 compared with September 1999.
Operating expenses increased by $2,005,000 principally due to the addition
of a Craftsman Truck Series event to the Dover fall NASCAR weekend, the
scheduling of the CART event at Gateway International Raceway in September 2000
compared with May 1999 and pre-opening expenses attributable to Nashville
Superspeedway. The aforementioned increases in operating expenses were offset
somewhat by the Company's decision not to promote an IRL event at Dover
International Speedway during the six-month period ended December 31, 2000 and
the scheduling of the Craftsman Truck Series event at Gateway International
Raceway in May 2000 compared with September 1999.
Depreciation and amortization increased by $911,000, or 29.5%, from
capital expenditures related to the Company's various motorsports facilities
completed during the six-month period ended December 31, 2000 and the year ended
June 30, 2000.
General and administrative expenses increased by $528,000 to $4,661,000
from $4,133,000, primarily due to expenses of approximately $500,000
attributable to Nashville Superspeedway pre-opening costs and a legal
settlement.
Net interest expense was $9,000 during the six-month period ended
December 31, 2000 compared with $817,000 during the six-month period ended
December 31, 1999. The Company capitalized $1,890,000 and $658,000 of interest
during the six-month periods ended December 31, 2000 and 1999, respectively,
related to the construction of major facilities.
Our effective income tax rates were 44.8% and 44.9% for the six-month
periods ended December 31, 2000 and 1999, respectively.
Earnings from continuing operations increased by $1,527,000 primarily
due to higher attendance and related revenues as well as an increase in the
broadcast rights fees for the NASCAR-sanctioned motorsports events presented at
Dover International Speedway and the scheduling of the CART-sanctioned event at
Gateway International Raceway.
Earnings from discontinued operation (net of income taxes) were
$11,056,000 in the six-month period ended December 31, 2000 as compared to
$10,442,000 in the six-month period ended December 31, 1999. The increase of
$614,000, or 5.9%, was primarily due to increased play in the casino and the
reversal of a portion of prior accruals for disputed management fees related to
our casino operations.
9
Fiscal Year 2000 Compared With Fiscal Year 1999
Revenues increased by $8,628,000, or 12.6%, to $77,311,000.
Approximately $2,214,000 of the revenue increase resulted from increased
attendance and $995,000 from increased ticket prices for the NASCAR-sanctioned
events at Dover International Speedway. The remainder of the increase was
principally from increased broadcast rights fees, sponsorship, concessions and
marketing-related revenues at Dover International Speedway and the addition of a
Busch Series event at Memphis Motorsports Park in the second quarter of fiscal
2000. The aforementioned increases in revenues were offset somewhat by the
rescheduling of the CART-sanctioned event at Gateway International Raceway to
September 2000 compared with May 1999.
Operating expenses increased by $4,846,000 principally due to a
$2,319,000 increase in purse and sanction fee expenses at Dover International
Speedway, and from the addition of a Busch Series event at Memphis Motorsports
Park in the second quarter of fiscal 2000, offset by the rescheduling of the
CART-sanctioned event at Gateway International Raceway.
Depreciation and amortization increased by $842,000, or 14.4%, due to
capital expenditures related to the Company's various motorsports facilities
completed in fiscal 2000 and 1999.
General and administrative expenses increased by $59,000 to $8,578,000
from $8,519,000, primarily due to the growth at the Company's various
motorsports facilities. As a percentage of total revenues, the Company's general
and administrative costs decreased to 11.1% from 12.4% in fiscal 1999.
Net interest expense was $924,000 in fiscal 2000 compared to $1,267,000
in fiscal 1999. The decreased interest expense resulted from borrowings on the
Company's revolving credit agreement, offset by the capitalization of $1,814,000
and $414,000 of interest in fiscal 2000 and 1999, respectively, related to the
construction of major facilities.
Our effective income tax rates were 42.7% and 42.3% for the fiscal
years ended June 30, 2000 and 1999, respectively.
Earnings from continuing operations increased by $1,778,000, primarily
due to higher attendance and related revenues as well as an increase in the
broadcast rights fees for the NASCAR-sanctioned motorsports events presented at
Dover International Speedway and the addition of a Busch Series event at Memphis
Motorsports Park, offset by the rescheduling of the CART-sanctioned event at
Gateway International Raceway from May to September.
Earnings from discontinued operation (net of income taxes) were
$20,952,000 for the fiscal year ended June 30, 2000 as compared to $17,696,000
for the fiscal year ended June 30, 1999. The increase of $3,256,000, or 18.4%,
was primarily due to increased levels of play in the casino.
Liquidity and Capital Resources
Net cash provided by continuing operations was $16,002,000 for the year
ended December 31, 2001 compared to $35,229,000 for the year ended December 31,
2000. The decrease in 2001 as compared to 2000 was primarily due to a decrease
in earnings from continuing operations before depreciation and amortization
expense from $20,080,000 in 2000 to $16,894,000 in 2001, and the timing of
certain construction payments related to the new Nashville Superspeedway and
the timing of income tax payments.
Net cash used in investing activities was $19,729,000 for the year
ended December 31, 2001 compared to $76,821,000 for the year ended December 31,
2000. The decrease in 2001 as compared to 2000 was primarily due to the
completion of the new Nashville Superspeedway project in April 2001.
Net cash provided by financing activities increased from $38,808,000
for the year ended December 31, 2000 to $44,608,000 for the year ended December
31, 2001. The increase in 2001 as compared to 2000 was primarily due to
additional borrowings under our revolving credit agreement primarily to fund
construction costs related to the Dover Downs Hotel and Conference Center which
is being constructed by Dover Downs, Inc. The repayment of monies advanced to
Dover Downs, Inc. is addressed below.
10
The Company expects that its net cash flow from operating activities
and funds available from its credit facility will be sufficient to provide for
our working capital needs and capital spending requirements in calendar 2002, as
well as any cash dividends the board of directors may decide to declare. At
December 31, 2001, the Company had two credit facilities with a total capacity
of $150,000,000. Amounts outstanding at December 31, 2001 were $110,610,000, and
after consideration of standby letters of credit outstanding, the amount
available pursuant to the two facilities was approximately $13,000,000. The
$25,000,000 credit facility expires on June 15, 2002 and the $125,000,000 credit
facility expires on September 30, 2002.
The Company has signed a new $105,000,000 credit facility expected to
expire on December 31, 2004, but the effectiveness of that agreement is
contingent upon the completion of the tax-free spin-off of the Company's gaming
operations, and as a result, the amounts outstanding under the Company's
$150,000,000 facilities at December 31, 2001 have been classified as short-term.
The new credit facility contains minimum net worth, fixed charge coverage and
maximum leverage covenant requirements that the Company must comply with in
order to avoid the requirement for early payment of the credit facility.
Material adverse changes in the Company's results of operations would impact our
ability to maintain financial ratios necessary to satisfy these requirements.
DVD's existing $150,000,000 credit facilities are guaranteed by Dover
Downs, Inc. and all of its other subsidiaries. The new $105,000,000 credit
facility does not include Dover Downs, Inc. as it will be spun-off. Prior to the
new facility becoming effective, $45 million of the amount outstanding under the
existing DVD credit facilities will be paid down through a new $55 million
credit facility which has been established by Gaming & Entertainment.
Additionally, at December 31, 2001 Gaming & Entertainment owed DVD $7.8 million
primarily representing the payment of certain costs by Dover Downs for Gaming &
Entertainment and borrowings under Dover Downs' credit facility maintained for
the benefit of Dover Downs and all of its subsidiaries. Dover Downs and Gaming &
Entertainment have agreed to cancel any remaining intercompany balances and
adjust Dover Downs' stockholders' equity by an equal amount at the date of the
spin-off. As such, the intercompany balance is reflected as a reduction to
stockholders' equity in the accompanying consolidated balance sheet.
Related Party Transactions
During the year ended December 31, 2001, the six-month period ended
December 31, 2000 and the years ended June 30, 2000 and 1999, the Company
purchased certain paving, site work and construction services involving total
payments of $572,000, $187,000, $432,000 and $432,000 from a company
wholly-owned by an employee/director. During the six-month period ended December
31, 2000, the Company purchased an aircraft from a company wholly-owned by the
aforementioned employee/director for $6,029,000. The Company purchased
administrative services from Rollins Truck Leasing Corp. and affiliated
companies (RTLC), which were related to the Company through common ownership,
during the year ended December 31, 2001, the six-month period ended December 31,
2000 and the years ended June 30, 2000 and 1999. The total cost of these
services, which have been included in general and administrative expenses in the
consolidated statement of earnings, was $6,000, $20,000, $37,000 and $30,000,
respectively. Gaming & Entertainment purchased administrative services from RTLC
during the year ended December 31, 2001, the six-month period ended December 31,
2000 and the years ended June 30, 2000 and 1999. The total cost of these
services, which have been included in earnings from discontinued operation in
the consolidated statement of earnings, was $71,000, $233,000, $420,000 and
$350,000, respectively. RTLC ceased to provide these services effective in April
2001.
During the year ended December 31, 2001, the six months ended December
31, 2000 and the years ended June 30, 2000 and 1999, Gaming & Entertainment
allocated corporate costs of $2,307,000, $828,000, $1,640,000 and $1,414,000,
respectively, to Dover Downs. The allocation was based on both an allocation to
the business that directly incurred the costs and an analysis of each company's
share of the costs. 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 separate, independent entities and had otherwise managed
these functions; however, management believes that these costs are reasonable.
11
Subsequent to the spin-off, use of Gaming & Entertainment's 5/8-mile
harness racing track will be under an easement granted by Dover Downs which does
not require the payment of any rent. Under the terms of the easement Gaming &
Entertainment 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 Dover Downs and is on the inside
of Dover Downs' motorsports superspeedway. The indoor grandstands will be used
by the Company free of charge in connection with its motorsports events and are
owned by Gaming & Entertainment. Dover Downs also leases its principal executive
office space from Gaming & Entertainment. Various easements and agreements
relative to access, utilities and parking have also been entered into between
the Company and Gaming & Entertainment.
The Transition Support Services Agreement provides for each of Dover
Downs and Gaming & Entertainment to provide each other with certain
administrative and operational services subsequent to the spin-off. The Tax
Sharing Agreement provides for, among other things, the treatment of income tax
matters for periods beginning before and including the date of the spin-off and
any taxes resulting from transactions effected in connection with the spin-off.
At the date of the acquisition of Grand Prix Association of Long Beach,
$299,000 was due to Grand Prix from certain shareholders/officers for
outstanding loans made for the purpose of purchasing Grand Prix common stock. As
of December 31, 2001, $92,000 was outstanding from a current director of the
Company. This remaining balance was repaid in full in January 2002.
Contractual Obligations
The Company has issued a standby letter of credit to guarantee Variable
Rate Tax Exempt Infrastructure Revenue Bonds, Series 1999, issued by the Sports
Authority of Wilson, Tennessee in the amount of $25,900,000. The proceeds from
the bonds were used to acquire, construct and develop certain public
infrastructure improvements in Wilson County, Tennessee. Interest only payments
are required until September 1, 2002, and will be made from a capitalized
interest fund established from the bond proceeds. The principal payments range
from $400,000 in September 2002 to $1,600,000 in 2029. When the capitalized
interest fund is depleted, which is estimated to be in or around July of 2002,
the debt service on the bonds will be payable solely from sales and incremental
property taxes generated from the facility. If the taxes are insufficient to
cover the payment of principal and interest on the bonds, payments will be made
pursuant to the aforementioned letter of credit. The Company believes that the
sales and incremental property taxes generated from the facility will satisfy
the debt service requirements of the bonds. However, if the debt service is not
satisfied from the aforementioned sources, the bonds would become a liability of
the Company. If we fail to maintain the letter of credit which secures the bonds
or we allow an uncured default to exist under our reimbursement agreement
relative to the letter of credit, the bonds would be immediately redeemable.
The Company has entered into several sanctioning agreements to conduct
motorsports events at its various venues. The Company has held NASCAR-sanctioned
events for 33 consecutive years and its subsidiary, Grand Prix Association of
Long Beach, has operated the Grand Prix of Long Beach for 27 consecutive years.
Nonrenewal of a NASCAR event license or the CART agreement for the Long Beach
event would have a material adverse effect on the Company's financial condition
and results of operations.
At December 31, 2001, the Company had two credit facilities with a
total capacity of $150,000,000. Interest is based, at the Company's option, upon
(i) LIBOR plus .75% or (ii) the base rate (the greater of the prime rate or the
federal funds rate plus .5%) minus 1%. The $25,000,000 credit facility expires
on June 15, 2002 and the $125,000,000 credit facility expires on September 30,
2002. The agreements are for seasonal funding needs, capital improvements and
other general corporate purposes. At December 31, 2001, the Company was in
compliance with all terms of the facilities and there was $110,610,000
outstanding at a weighted average interest rate of 3.04%. Under the terms of the
credit facilities, approximately $13,000,000 of additional borrowings were
available to the Company at December 31, 2001.
12
A subsidiary of the Company entered into an agreement (the "SWIDA
loan") with Southwestern Illinois Development Authority ("SWIDA") to receive the
proceeds from the "Taxable Sports Facility Revenue Bonds, Series 1996 (Gateway
International Motorsports Corporation Project)", a Municipal Bond Offering, in
the aggregate principal amount of $21,500,000. The offering of the bonds closed
on June 21, 1996. The repayment terms and debt service reserve requirements of
the bonds issued in the Municipal Bond Offering correspond to the terms of the
SWIDA loan. SWIDA loaned all of the proceeds from the Municipal Bond Offering to
the Company's subsidiary for the purpose of the redevelopment, construction and
expansion of Gateway International Raceway, and the proceeds of the SWIDA loan
were irrevocably committed to complete construction of Gateway International
Raceway, to fund interest, to create a debt service reserve fund and to pay for
the cost of issuance of the bonds. The Company has established certain
restricted cash funds to meet debt service as required by the SWIDA loan, which
are held by the trustee (BNY Trust Company of Missouri). At December 31, 2001,
$3,161,000 of the Company's cash balance is restricted by the SWIDA loan. A
standby letter of credit for $2,502,000, which is secured by a Trust Deed on the
Company's facilities in Memphis, Tennessee, also was obtained to satisfy debt
service reserve fund obligations. The SWIDA loan is secured by a first mortgage
lien on all the real property owned and a security interest in all property
leased by the Company's subsidiary at Gateway International Raceway. The SWIDA
loan bears interest at varying rates ranging from 8.35% to 9.25% with an
effective rate of approximately 9.1%. The structure of the bonds permits
amortization from February 1997 through February 2017 with debt service
beginning in 2000 following interest only payments from February 1997 through
August 1999. In addition, a portion of the property taxes to be paid by the
Company (if any) to the City of Madison Tax Incremental Fund have been pledged
to the annual retirement of debt and payment of interest.
The scheduled maturities of long-term debt outstanding at December 31,
2001 are as follows: 2002-$111,245,000; 2003-$685,000; 2004-$745,000;
2005-$805,000; 2006-$875,000; and thereafter-$16,795,000.
Critical Accounting Policies
The accounting policies described below are those the Company considers
critical in preparing its consolidated financial statements. These policies
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.
Goodwill
The Company has made acquisitions in the past that included goodwill.
Under generally accepted accounting principles in effect through December 31,
2001, these assets were amortized over their estimated useful lives, and were
tested periodically to determine if they were recoverable from operating
earnings on an undiscounted basis over their useful lives.
Effective in 2002, goodwill will no longer be amortized but will be
subject to an annual (or under certain circumstances more frequent) impairment
test based on its estimated fair value. Estimated fair value is typically less
than values based on undiscounted operating earnings because fair value
estimates include a discount factor in valuing future cash flows. There are many
assumptions and estimates underlying the determination of an impairment loss.
Another estimate using different, but still reasonable, assumptions could
produce a significantly different result. Therefore, additional impairment
losses could be recorded in the future.
Accrued Pension Cost
The benefits provided by the Company's pension plans are based on years
of service and employee's renumeration over their employment with the Company.
The Company establishes accrued pension costs in accordance with the provisions
of 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 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.
13
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The Company adopted the provisions of this statement during
2001, and it did not have a material impact on our results of operations,
financial position or cash flows.
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
Statement 142. The Company has elected to adopt the provisions of Statement 142
effective January 1, 2002, at which time the Company will cease to record
amortization expense on its goodwill. The adoption of Statement 142 will result
in a $1,454,000 reduction of amortization expense in 2002. We expect to complete
our analysis of any potential impairment of our goodwill as a result of adopting
this standard by the end of the second quarter of 2002.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to operating
expense. If the obligation is settled for other than the carrying amount of the
liability, we will recognize a gain or loss on settlement.
We are required and plan to adopt the provisions of Statement No. 143
in 2003. To accomplish this, we must identify all legal obligations for asset
retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. We have not yet completed our analysis of
the impact of adoption of this standard.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We adopted the provisions of Statement No. 144
effective January 1, 2002. The adoption of Statement No. 144 did not have a
significant impact on our results of operations, financial position or cash
flows.
Factors That May Affect Operating Results; Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K
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 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
14
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: our growth strategies; our development and
potential acquisition of new facilities; anticipated trends in the motorsports
industry; patron demographics; our ability to enter into additional contracts
with sponsors, broadcast media and race event sanctioning bodies; our
relationships with sponsors; general market and economic conditions, including
consumer and corporate spending sentiment; our ability to finance future
business requirements; the availability of adequate levels of insurance; the
ability to successfully integrate acquired companies and businesses; management
retention and development; changes in Federal, state, and local laws and
regulations, including environmental regulations; the affect of weather
conditions on outdoor event attendance; military actions; air travel; national
or local catastrophic events; as well as the risks, uncertainties and other
factors described from time to time in our SEC filings and reports.
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.
Our Relationship With Sanctioning Bodies Is Vital To Our Success In Motorsports
Our continued success in motorsports is dependent upon keeping a good
working relationship with the governing bodies of motorsports that sanction
national racing events. These governing bodies include NASCAR, CART, IRL and
NHRA. The governing bodies regularly issue and award sanctioned events and their
issuance depends, in large part, on maintaining good working relationships with
the sanctioning bodies. Many events are sanctioned on an annual basis. By
awarding a sanctioned event or a series of sanctioned events, the sanctioning
bodies do not warrant, either expressly or by implication, nor are they
responsible for, the financial success of any sanctioned event. Moreover, no
existing sanction agreement, unless expressly provided for in the agreement, can
be construed to require the sanctioning body to enter into a sanction agreement
or to issue a sanction for any other event in the future. Our inability to
obtain additional sanctioned events in the future and to maintain sanction
agreements at current levels would likely result in lower than anticipated
revenues from admissions, sponsorships, hospitality, concessions, and
merchandise, which could have a material adverse effect on our business,
financial condition and results of operations.
We Rely On Sponsorship Contracts To Generate Revenues
We receive a substantial portion of our annual revenues from
sponsorship agreements, including the sponsorship of our various events, our
permanent venues, "official product" sponsorships, billboards, signage and
skyboxes. Loss of our title sponsors or other major sponsorship agreements or
failure to secure such sponsorship agreements in the future could have a
material adverse effect on our business, financial condition and results of
operations.
Increased Government Regulation Of Sponsors And Restrictions On Advertising
Could Substantially Reduce Our Advertising Revenue
We receive a significant portion of our revenue from sponsorship and
advertising by various companies. Tobacco and liquor companies have
traditionally sponsored motorsports events. In June 1997, major tobacco
companies entered into an agreement with federal negotiators and various states
attorneys general whereby the tobacco companies agreed to give up certain
advertising and promotional activity in exchange for liability limits in pending
and future lawsuits. New laws or settlements could have a material adverse
effect on the tobacco and liquor industry motorsports sponsorship and
advertising expenditures. Government regulations and restrictions on advertising
by tobacco companies, liquor companies and other potential sponsors could
adversely impact revenues as well as the revenues of the motorsports industry as
a whole. While we believe that the popularity of motorsports would allow us to
secure alternate sponsors, there is no assurance that alternate sponsors could
be obtained.
15
Our Motorsports Events Face Intense Competition For Attendance, Television
Viewership And Sponsorship
We compete with other auto speedways for the patronage of motor racing
spectators as well as for promotions and sponsorships. Moreover, racing events
sanctioned by different organizations are often held on the same dates at
different tracks. The quality of the competition, type of racing event, caliber
of the event, sight lines, ticket pricing, location and customer conveniences,
among other things, distinguish the motorsports facilities. In addition, all of
our events compete with other sports and recreational events scheduled on the
same dates. As a result, our revenues and operations are affected not only by
our ability to compete in the motorsports promotion market, but also by the
availability of alternative spectator sports events, forms of entertainment and
changing consumer preferences.
Our Street Races Depend On City Permits And Good Relationships With City
Officials
In order to conduct the Grand Prix of Long Beach, we must obtain an
annual permit from the City of Long Beach to hold the race on city streets.
Although Grand Prix has operated a racing event on the streets of Long Beach for
twenty-seven years, there can be no assurance that this event will continue to
be held or be successful. Similarly, the Grand Prix events we have planned for
Denver, Colorado and St. Petersburg, Florida require that we obtain a variety of
licenses and permits. Our ability to conduct street races requires that we
maintain excellent relationships with the host city and its officials.
Grand Prix's Ability To Meet Payment Obligations Under A Loan Agreement With An
Illinois Government Agency Depends On Revenues From Gateway
In order to finance the redevelopment of Gateway International Raceway,
Grand Prix entered into a loan agreement with the Southwest Illinois Development
Authority, which agreed to fund a loan to Grand Prix by issuing municipal bonds
in the aggregate principal amount of $21,500,000. The bonds are unconditionally
guaranteed by Grand Prix. Grand Prix issued a 20-year $21,500,000 promissory
note to SWIDA which bears interest at an effective rate of approximately 9.1%
per annum. Payments on the SWIDA loan are intended to be made primarily from the
revenues from the operations of Gateway. Although Grand Prix is current on its
obligation and expects to meet its future debt payment obligations out of the
revenues from Gateway, and although Grand Prix will receive certain assistance
from the City of Madison, Illinois in the form of a tax increment finance fund
which should assist it in meeting its debt burdens, there can be no assurance
that earnings from the future operations of Gateway will be sufficient to meet
Grand Prix's debt service obligations. A default under the SWIDA loan could have
a material adverse effect on our business, financial condition and results of
operations.
The Sales Tax And Property Tax Revenues To Service The Revenue Bonds For
Infrastructure Improvements At Nashville May Be Inadequate
In September 1999, the Sports Authority of Wilson County, Tennessee
issued $25,900,000 in revenue bonds to build local infrastructure improvements
which will benefit the operation of the new Nashville Superspeedway complex.
Interest only payments are required until September 1, 2002 and will be made
from a capitalized interest fund established from bond proceeds. When the
capitalized interest fund is depleted, which is estimated to be in or around
July of 2002, the debt service on the bonds will be payable solely from sales
and incremental property taxes generated from the facility. In the event the
taxes are insufficient to cover the payment of principal and interest on the
bonds, payments will be made under a $26,326,000 irrevocable direct-pay letter
of credit issued by several banks pursuant to a reimbursement and security
agreement under which we have agreed to reimburse the banks for drawings made
under the letter of credit. Such an event could have a material adverse effect
on our business, financial condition and results of operations.
16
The Seasonality Of Our Motorsports Events Increases The Variability Of Quarterly
Earnings
Our business has been, and is expected to remain, seasonal given that
it depends on our outdoor events for a substantial portion of revenues. We
derive a substantial portion of our motorsports revenues from admissions and
event-related revenue attributable to five NASCAR-sanctioned events at Dover,
Delaware which are currently held in May and September. This has been offset to
some degree by our other motorsports events, but quarterly earnings will vary.
Our Insurance May Not Be Adequate To Cover Catastrophic Incidents
We maintain insurance policies that provide coverage within limits that
are sufficient, in the opinion of management, to protect us from material
financial loss incurred in the ordinary course of business. We also purchase
special event insurance for motorsports events to protect against race-related
liability. However, there can be no assurance that this insurance will be
adequate at all times and in all circumstances. If we are held liable for
damages beyond the scope of our insurance coverage, including punitive damages,
our business, financial condition and results of operations could be materially
and adversely affected.
Bad Weather Can Have An Adverse Financial Impact On Our Motorsports Events
We sponsor and promote outdoor motorsports events. Weather conditions
affect sales of tickets, concessions and souvenirs, among other things at these
events. Although we sell many tickets well in advance of the outdoor events and
these tickets are non-refundable, poor weather conditions may adversely affect
additional ticket sales, concessions and souvenirs, which could have an adverse
effect on our business, financial condition and results of operations.
We do not currently maintain weather-related insurance for major
events. Due to the importance of clear visibility and safe driving conditions to
motorsports racing events, outdoor racing events may be significantly affected
by weather patterns and seasonal weather changes. Any unanticipated weather
changes could impact our ability to stage events. This could have a material
adverse effect on our business, financial condition and results of operations.
Item 7A. Quantitative And Qualitative Disclosure About Market Risk
------------------------------------------------------------------
The carrying values of DVD's long-term debt approximates its fair value
at December 31, 2001 and 2000. DVD is exposed to market risks related to
fluctuations in interest rates for its variable rate borrowings of $110,610,000
at December 31, 2001 under its revolving credit facilities. A change in interest
rates of one percent on the balance outstanding at December 31, 2001 would cause
a change in total annual interest costs of $1,106,000.
In September 1999, the Sports Authority of the County of Wilson,
Tennessee issued its Variable Rate Tax Exempt Infrastructure Revenue Bonds,
Series 1999, in the amount of $25,900,000. The proceeds were used to acquire,
construct and develop certain public infrastructure improvements in Wilson
County, Tennessee, which will be beneficial to the operation of the
superspeedway complex the Company constructed through its wholly-owned
subsidiary, Nashville Speedway, USA. Interest only payments are required until
September 1, 2002 and will be made from a capitalized interest fund established
from bond proceeds. When the capitalized interest fund is depleted, which is
estimated to be in or around July of 2002, the debt service on the bonds will be
payable solely from sales and incremental property taxes (the taxes) generated
from the facility. If the taxes are insufficient to cover the payment of
principal and interest on the bonds, payments will be made under a $26,326,000
letter of credit issued on behalf of the Company by several banks.
Item 8. Financial Statements And Supplementary Data
---------------------------------------------------
DVD's consolidated financial statements and the Independent Auditors'
Report included in this report are shown on the Index to Consolidated Financial
Statements on page 22.
17
Item 9. Disagreements With Accountants On Accounting And Financial Disclosure
-----------------------------------------------------------------------------
None.
Part III
Item 10. Directors And Executive Officers Of The Registrant
-----------------------------------------------------------
Except as presented below, the information called for by this Item 10
is incorporated by reference to the DVD Proxy Statement to be filed pursuant to
Regulation 14A for the Annual Meeting of Stockholders to be held on May 22,
2002.
Executive Officers of the Registrant. As of December 31, 2001, the executive
officers of the registrant were:
Name Position Age Term of Office
---- -------- --- --------------
Klaus M. Belohoubek Vice President-General Counsel 42 7/99 to date
and Secretary
Robert M. Comollo Treasurer 54 11/81 to date
Timothy R. Horne Vice President-Finance and 35 11/96 to date
Chief Financial Officer
Denis McGlynn President and 56 11/79 to date
Chief Executive Officer
Edward J. Sutor Executive Vice President 52 3/99 to date
Klaus M. Belohoubek has been Vice President-General Counsel and
Secretary since 1999 and has represented the Company in various capacities since
1990. Mr. Belohoubek will also serve as Vice President-General Counsel and
Secretary of Gaming & Entertainment immediately following the spin-off. Mr.
Belohoubek also has served as Vice President-General Counsel and Secretary to
Rollins Truck Leasing Corp.
Robert M. Comollo has been employed by the Company for 21 years, of
which 20 years have been in the capacity of Treasurer. Mr. Comollo will also
serve as Treasurer of Gaming & Entertainment immediately following the spin-off.
Timothy R. Horne became Vice President-Finance and Chief Financial
Officer in November of 1996. Mr. Horne was previously employed by KPMG LLP. Mr.
Horne will also serve as Vice President-Finance and Chief Financial Officer of
Gaming & Entertainment immediately following the spin-off.
Denis McGlynn has served as the Company's President and Chief Executive
Officer for 22 years. Mr. McGlynn will also serve as President and Chief
Executive Officer to Gaming & Entertainment immediately following the spin-off.
Edward J. Sutor became Executive Vice President in March of 1999. From
1983 until 1999, Mr. Sutor served as Senior Vice President of Finance at Caesars
Atlantic City. Mr. Sutor will work exclusively for Gaming & Entertainment
immediately following the spin-off as its Executive Vice President.
The Company's Chairman of the Board, Henry B. Tippie, is a non-employee
director and, therefore, not an executive officer of the Company. Mr. Tippie has
served DVD in that capacity, or as Vice Chairman of the Board, for over 5 years.
Mr. Tippie will also serve as Chairman of the Board to Gaming & Entertainment as
a non-employee director immediately following the spin-off.
18
Item 11. Executive Compensation
-------------------------------
The information called for by this Item 11 is incorporated by reference
to the DVD Proxy Statement to be filed pursuant to Regulation 14A for the Annual
Meeting of Stockholders to be held on May 22, 2002.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
-----------------------------------------------------------------------
The information called for by this Item 12 is incorporated by reference
to the DVD Proxy Statement to be filed pursuant to Regulation 14A for the Annual
Meeting of Stockholders to be held on May 22, 2002.
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
The information called for by this Item 13 is incorporated by reference
to the DVD Proxy Statement to be filed pursuant to Regulation 14A for the Annual
Meeting of Stockholders to be held on May 22, 2002.
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
------------------------------------------------------------------------
(a)(1) Financial Statements - See accompanying Index to Consolidated Financial
Statements on page 22.
(2) Financial Statement Schedules - None.
(3) Exhibits:
2.1 Share Exchange Agreement and Plan of Reorganization dated June 14, 1996
between Dover Downs Entertainment, Inc., Dover Downs, Inc., Dover Downs
International Speedway, Inc. and the shareholders of Dover Downs, Inc.
as filed with the Company's Registration Statement Number 333-8147 on
Form S-1 dated July 15, 1996, which was declared effective on October
3, 1996, is incorporated herein by reference.
2.2 Agreement and Plan of Merger, dated as of March 26, 1998, by and among
Dover Downs Entertainment, Inc. FOG Acquisition Corp., and Grand Prix
Association of Long Beach as filed with the Company's Registration
Statement Number 333-53077 on Form S-4 on May 19, 1998, is incorporated
herein by reference.
2.3 Amended and Restated Agreement Regarding Distribution and Plan of
Reorganization, dated as of February 15, 2002, by and between Dover
Downs Entertainment, Inc. and Dover Downs Gaming & Entertainment, Inc.
as filed with the Registration Statement of Dover Downs Gaming &
Entertainment, Inc. Number 1-16791 on Form 10 dated February 26, 2002,
which was declared effective on March 7, 2002, is incorporated herein
by reference.
3.1 Restated Certificate of Incorporation of Dover Downs Entertainment,
Inc., dated March 10, 2000 as filed with the Company's Quarterly Report
on Form 10-Q dated April 28, 2000, is incorporated herein by reference.
3.2 Amended and Restated By-laws of Dover Downs Entertainment, Inc. dated
March 1, 2002.
4.1 Rights Agreement dated as of June 14, 1996 between Dover Downs
Entertainment, Inc. and ChaseMellon Shareholder Services, L.L.C. as
filed with the Company's Registration Statement Number 333-8147 on Form
S-1 dated July 15, 1996, which was declared effective on October 3,
1996, is incorporated herein by reference.
10.1 Amended and Restated Credit Agreement Among Dover Downs Entertainment,
Inc., the Several Banks and Other Financial Institutions Party Thereto
and PNC Bank, Delaware as Agent Dated as of November 1, 1999, as filed
with the Company's Quarterly Report on Form 10-Q dated November 5,
1999, is incorporated herein by reference.
19
10.2 Reimbursement and Security Agreement Between Dover Downs Entertainment,
Inc., Nashville Speedway USA, Inc. and PNC Bank, Delaware dated as of
September 1, 1999 as filed with the Company's Quarterly Report on Form
10-Q dated November 5, 1999, is incorporated herein by reference.
10.3 Project Consulting and Management Agreement between Dover Downs, Inc.
and Caesars World Gaming Development Corporation dated May 10, 1995 as
filed with the Company's Registration Statement Number 333-8147 on Form
S-1 dated July 15, 1996, which was declared effective on October 3,
1996, is incorporated herein by reference.
10.4 First Amendment to Project Consulting and Management Agreement between
Dover Downs, Inc. and Caesars World Gaming Development Corporation
dated October 25, 1996 as filed with the Company's Form 10-K dated
February 27, 2001, is incorporated herein by reference.
10.5 Second Amendment to Project Consulting and Management Agreement between
Dover Downs, Inc. and Caesars World Gaming Development Corporation
dated December 29, 2000 as filed with the Company's Form 10-K dated
February 27, 2001, is incorporated herein by reference.
10.6 Dover Downs Entertainment, Inc. 1996 Stock Option Plan as filed with
the Company's Registration Statement Number 333-8147 on Form S-1 dated
July 15, 1996, which was declared effective on October 3, 1996, is
incorporated herein by reference.
10.7 Dover Downs Entertainment, Inc. 1991 Stock Option Plan as filed with
the Company's Registration Statement Number 333-8147 on Form S-1 dated
July 15, 1996, which was declared effective on October 3, 1996, is
incorporated herein by reference.
10.8 Employee Benefits Agreement, dated as of January 15, 2002, by and
between Dover Downs Entertainment, Inc. and Dover Downs Gaming &
Entertainment, Inc. as filed with the Registration Statement of Dover
Downs Gaming & Entertainment, Inc. Number 1-16791 on Form 10 dated
February 26, 2002, which was declared effective on March 7, 2002, is
incorporated herein by reference.
10.9 Transition Support Services Agreement, dated as of January 15, 2002, by
and between Dover Downs Entertainment, Inc. and Dover Downs Gaming &
Entertainment, Inc. as filed with the Registration Statement of Dover
Downs Gaming & Entertainment, Inc. Number 1-16791 on Form 10 dated
February 26, 2002, which was declared effective on March 7, 2002, is
incorporated herein by reference.
10.10 Tax Sharing Agreement, dated as of January 15, 2002, by and between
Dover Downs Entertainment, Inc. and Dover Downs Gaming & Entertainment,
Inc. as filed with the Registration Statement of Dover Downs Gaming &
Entertainment, Inc. Number 1-16791 on Form 10 dated February 26, 2002,
which was declared effective on March 7, 2002, is incorporated herein
by reference.
10.11 Real Property Agreement, dated as of January 15, 2002, by and between
Dover Downs Entertainment, Inc. and Dover Downs Gaming & Entertainment,
Inc. as filed with the Registration Statement of Dover Downs Gaming &
Entertainment, Inc. Number 1-16791 on Form 10 dated February 26, 2002,
which was declared effective on March 7, 2002, is incorporated herein
by reference.
10.12 Credit Agreement among Dover Downs Entertainment, Inc. and PNC Bank,
Delaware, as agent, dated as of February 20, 2002.
10.13 Guaranty and Suretyship Agreement by and between Dover Downs
International Speedway, Inc., Dover Downs Properties, Inc., Gateway
International Motorsports Corporation, Gateway International Services
Corporation, Grand Prix Association of Long Beach, Inc., Memphis
International Motorsports Corporation, M & N Services Corp, Nashville
Speedway, USA, Inc., and PNC Bank, Delaware, as agent, dated as of
February 20, 2002.
21.1 Subsidiaries
20
23.1 Consent of Independent Accountants
(b) Reports on Form 8-K
The Company filed two Form 8-Ks, one on January 16, 2002 and the second
on March 7, 2002, both relative to the spin-off of Dover Downs, Inc., the gaming
business of DVD, to the Company's stockholders.
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
Dover Motorsports, Inc. (formerly known as
DATED: May 10, 2002 Dover Downs Entertainment, Inc.)
------------ -------------------------------------------
Registrant
BY: /s/ Denis McGlynn
---------------------------------------
Denis McGlynn
President and Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Timothy R. Horne Vice President-Finance and May 10, 2002
------------------------------- Chief Financial Officer
Timothy R. Horne
/s/ Henry B. Tippie Chairman of the Board May 10, 2002
-------------------------------
Henry B. Tippie
/s/ John W. Rollins, Jr. Director May 10, 2002
-------------------------------
John W. Rollins, Jr.
/s/ Patrick J. Bagley Director May 10, 2002
-------------------------------
Patrick J. Bagley
/s/ Jeffrey W. Rollins Director May 10, 2002
-------------------------------
Jeffrey W. Rollins
/s/ Melvin L. Joseph Director May 10, 2002
-------------------------------
Melvin L. Joseph
/s/ R. Randall Rollins Director May 10, 2002
-------------------------------
R. Randall Rollins
/s/ Eugene W. Weaver Director May 10, 2002
-------------------------------
Eugene W. Weaver
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report on Consolidated Financial Statements......... 23
Consolidated Statement of Earnings for the year ended December 31,
2001, the six-months ended December 31, 2000 and the years ended June 30,
2000 and 1999............................................................. 24
Consolidated Balance Sheet at December 31, 2001 and 2000, and June 30,
2000...................................................................... 25
Consolidated Statement of Cash Flows for the year ended December 31,
2001, the six-months ended December 31, 2000 and the years ended June 30,
2000 and 1999............................................................. 26
Notes to the Consolidated Financial Statements............................ 27
22
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors,
Dover Downs Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Dover
Downs Entertainment, Inc. and subsidiaries, as of December 31, 2001 and 2000,
and June 30, 2000, and the related consolidated statements of earnings and cash
flows for the year ended December 31, 2001, the six-months ended December 31,
2000 and each of the years in the two-year period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dover Downs Entertainment, Inc. and subsidiaries as of December 31, 2001 and
2000, and June 30, 2000, and the results of their operations and their cash
flows for the year ended December 31, 2001, the six-months ended December 31,
2000 and each of the years in the two-year period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Philadelphia, Pennsylvania
February 19, 2002
23
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Year ended Six months ended Year ended June 30,
December 31, December 31, ---------------------------
2001 2000 2000 1999
------------ ------------ ------------ ------------
Revenues .................................. $ 86,551,000 $ 39,045,000 $ 77,311,000 $ 68,683,000
Expenses:
Operating ............................ 50,882,000 21,573,000 41,984,000 37,138,000
Depreciation and amortization ........ 10,023,000 4,001,000 6,671,000 5,829,000
General and administrative ........... 11,408,000 4,661,000 8,578,000 8,519,000
------------ ------------ ------------ ------------
72,313,000 30,235,000 57,233,000 51,486,000
------------ ------------ ------------ ------------
Operating earnings ........................ 14,238,000 8,810,000 20,078,000 17,197,000
Interest income ........................... 107,000 175,000 313,000 701,000
Interest expense, net ..................... (1,721,000) (184,000) (1,237,000) (1,968,000)
------------ ------------ ------------ ------------
Earnings from continuing operations before
income taxes ............................ 12,624,000 8,801,000 19,154,000 15,930,000
Income taxes .............................. 5,753,000 3,945,000 8,181,000 6,735,000
------------ ------------ ------------ ------------
Earnings from continuing operations ....... 6,871,000 4,856,000 10,973,000 9,195,000
Earnings from discontinued operation, net
of income taxes of $14,499,000 in 2001,
$7,577,000 for the six months ended
December 31, 2000, $14,366,000 in 2000
and $12,145,000 in 1999 ................. 21,095,000 11,056,000 20,952,000 17,696,000
------------ ------------ ------------ ------------
Net earnings .............................. $ 27,966,000 $ 15,912,000 $ 31,925,000 $ 26,891,000
============ ============ ============ ============
Earnings per common share - basic:
Earnings from continuing operations ... $ 0.18 $ 0.13 $ 0.30 $ 0.26
Earnings from discontinued operation .. 0.56 0.29 0.58 0.50
------------ ------------ ------------ ------------
Net earnings .......................... $ 0.74 $ 0.42 $ 0.88 $ 0.76
============ ============ ============ ============
Earnings per common share - diluted:
Earnings from continuing operations ... $ 0.18 $ 0.13 $ 0.30 $ 0.25
Earnings from discontinued operation .. 0.55 0.29 0.56 0.49
------------ ------------ ------------ ------------
Net earnings .......................... $ 0.73 $ 0.42 $ 0.86 $ 0.74
============ ============ ============ ============
The Notes to the Consolidated Financial Statements
are an integral part of these statements.
24
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
December 31,
------------------------- June 30,
2001 2000 2000
----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,948,000 $ 408,000 $ 5,277,000
Accounts receivable............................................ 4,170,000 5,055,000 10,517,000
Inventories.................................................... 423,000 333,000 341,000
Prepaid expenses and other..................................... 3,127,000 3,091,000 3,707,000
Income taxes receivable........................................ 3,819,000 -- --
Deferred income taxes.......................................... 120,000 132,000 137,000
------------ ------------ ------------
Total current assets...................................... 14,607,000 9,019,000 19,979,000
Property and equipment, net......................................... 245,143,000 235,189,000 189,245,000
Restricted cash .................................................... 3,161,000 1,971,000 808,000
Other assets, net................................................... 1,503,000 1,415,000 1,453,000
Goodwill, net....................................................... 50,489,000 51,943,000 52,671,000
Net assets of discontinued operation................................ 102,653,000 81,558,000 70,502,000
------------ ------------ ------------
Total assets.............................................. $417,556,000 $381,095,000 $334,658,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 1,024,000 $ 5,363,000 $ 8,479,000
Accrued liabilities............................................ 3,394,000 2,005,000 4,437,000
Payable to Dover Downs Gaming & Entertainment, Inc. ........... -- 30,551,000 32,515,000
Income taxes payable........................................... -- 1,378,000 2,225,000
Current portion of long-term debt.............................. 635,000 585,000 585,000
Notes payable to bank.......................................... 110,610,000 -- --
Deferred revenue............................................... 12,912,000 13,877,000 17,477,000
------------ ------------ ------------
Total current liabilities................................. 128,575,000 53,759,000 65,718,000
Notes payable to bank............................................... -- 58,750,000 15,000,000
Long-term debt...................................................... 19,905,000 20,540,000 20,540,000
Other liabilities................................................... 131,000 156,000 174,000
Deferred income taxes............................................... 24,426,000 17,508,000 15,435,000
Commitments and contingencies (see Notes to the Consolidated
Financial Statements)
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares authorized;
issued and outstanding: none.....................................
Common stock, $.10 par value; 75,000,000 shares authorized;
issued and outstanding: December 2001-14,284,252 shares; December
2000-14,052,092 shares; June 2000-13,796,500 shares.............. 1,428,000 1,405,000 1,380,000
Class A common stock, $.10 par value; 55,000,000 shares
authorized; issued and outstanding: December 2001-23,769,085
shares; December 2000-23,857,885 shares; June 2000-24,054,985
shares........................................................... 2,376,000 2,385,000 2,405,000
Additional paid-in capital.......................................... 120,080,000 119,303,000 119,222,000
Retained earnings................................................... 128,425,000 107,289,000 94,784,000
------------ ------------ ------------
252,309,000 230,382,000 217,791,000
Receivable from Dover Downs Gaming & Entertainment, Inc. ........... (7,790,000) -- --
------------ ------------ ------------
Total stockholders' equity................................ 244,519,000 230,382,000 217,791,000
------------ ------------ ------------
Total liabilities and stockholders' equity................ $417,556,000 $381,095,000 $334,658,000
============ ============ ============
The Notes to the Consolidated Financial Statements
are an integral part of these statements.
25
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Six months ended Years ended June 30,
December 31, December 31, -----------------------------
2001 2000 2000 1999
------------- ------------- ------------- ------------
Cash flows from operating activities:
Net earnings................................... $ 27,966,000 $ 15,912,000 $ 31,925,000 $ 26,891,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............. 10,023,000 4,001,000 6,671,000 5,829,000
Earnings from discontinued operation, net (21,095,000) (11,056,000) (20,952,000) (17,696,000)
Tax benefit of options exercised.......... 531,000 -- -- --
(Increase) decrease in assets, net of
effect of acquisition:
Accounts receivable.................... 885,000 5,462,000 (4,692,000) (1,378,000)
Inventories............................ (90,000) 8,000 45,000 (42,000)
Prepaid expenses and other............. (36,000) 616,000 (133,000) (1,984,000)
Increase (decrease) in liabilities, net
of effect of acquisition:
Accounts payable....................... (4,339,000) (3,116,000) 5,082,000 (292,000)
Accrued liabilities.................... 1,389,000 (2,432,000) (15,000) (269,000)
Current and deferred income taxes...... 1,733,000 1,231,000 6,194,000 1,320,000
Deferred revenue....................... (965,000) (3,600,000) 1,667,000 2,759,000
------------- ------------- ------------- ------------
Net cash provided by continuing operations........ 16,002,000 7,026,000 25,792,000 15,138,000
------------- ------------- ------------- ------------
Cash flows from investing activities:
Capital expenditures........................... (18,445,000) (49,179,000) (50,592,000) (36,212,000)
Restricted cash................................ (1,190,000) ( 1,163,000) (261,000) (19,000)
Cash acquired in business acquisition.......... -- -- -- 1,490,000
Other.......................................... (94,000) -- (125,000) --
------------- ------------- ------------- ------------
Net cash used in investing activities of
continuing operations.......................... (19,729,000) (50,342,000) (50,978,000) (34,741,000)
------------- ------------- ------------- ------------
Cash flows from financing activities:
Borrowings from revolving debt................ 639,295,000 155,350,000 152,494,000 42,500,000
Repayments of revolving debt.................. (587,435,000) (111,600,000) (152,994,000) (29,339,000)
Repayments of long-term debt.................. (585,000) -- (335,000) (760,000)
Loan repayments............................... -- -- -- 207,000
Net proceeds from public offering............. -- -- 19,185,000 --
Dividends paid................................ (6,830,000) (3,407,000) (6,550,000) (6,213,000)
Proceeds from stock options exercised......... 260,000 86,000 573,000 167,000
Other assets and liabilities.................. (97,000) (18,000) (90,000) (155,000)
------------- ------------- ------------- ------------
Net cash provided by financing activities of
continuing operations ......................... 44,608,000 40,411,000 12,283,000 6,407,000
------------- ------------- ------------- ------------
Net cash (used in) provided by discontinued
operation...................................... (38,341,000) (1,964,000) 15,648,000 11,827,000
------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents.................................... 2,540,000 (4,869,000) 2,745,000 (1,369,000)
Cash and cash equivalents, beginning of period.... 408,000 5,277,000 2,532,000 3,901,000
------------- ------------- ------------- ------------
Cash and cash equivalents, end of period.......... $ 2,948,000 $ 408,000 $ 5,277,000 $ 2,532,000
------------- ------------- ------------- ------------
Supplemental information:
Interest paid.................................. $ 4,044,000 $ 238,000 $ 1,515,000 $ 1,762,000
------------- ------------- ------------- ------------
Income taxes paid.............................. $ 4,020,000 $ 2,714,000 $ 3,939,000 $ 6,153,000
------------- ------------- ------------- ------------
Non-cash investing and financing activities:
Land acquired.................................. -- -- -- $ 4,707,000
Cash paid...................................... -- -- -- (3,054,000)
------------
Land traded.................................... -- -- -- $ 1,653,000
============
Stock issued in connection with acquisition.... -- -- -- $ 80,241,000
============
The Notes to the Consolidated Financial Statements
are an integral part of these statements.
26
DOVER DOWNS ENTERTAINMENT, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Business Operations
Dover Downs Entertainment, Inc. (Dover Downs or the Company) is a
leading promoter of motorsports events in the United States. The Company
operates five motorsports tracks (four permanent facilities and one temporary
circuit) in four states and promoted 16 major events during 2001 in four of the
premier sanctioning bodies in motorsports - the National Association for Stock
Car Auto Racing (NASCAR), Championship Auto Racing Teams (CART), the Indy Racing
League (IRL) and the National Hot Rod Association (NHRA). The Company owns and
operates Dover International Speedway in Dover, Delaware, the new Nashville
Superspeedway complex near Nashville, Tennessee, Gateway International Raceway
near St. Louis, Missouri and Memphis Motorsports Park near Memphis, Tennessee.
The Company organizes and promotes the Toyota Grand Prix of Long Beach in Long
Beach, California, and the Grand Prix of Denver in Denver, Colorado, beginning
with the inaugural event scheduled for September 2002. The Company has also
entered into agreements with the City of St. Petersburg in Florida and with
CART to organize and promote the Grand Prix of St. Petersburg. The inaugural
event is expected to be held in February 2003.
On March 7, 2002, the Company announced that the tax-free spin-off of
Dover Downs, Inc., its gaming business, is expected to be effective March 31,
2002. The Company will change its name to Dover Motorsports, Inc. and focus on
the fixed facility and temporary circuit motorsports operations. To accomplish
the spin-off, the Company has contributed 100 percent of the issued and
outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming &
Entertainment, Inc. (Gaming & Entertainment), a newly formed wholly-owned
subsidiary of the Company. On the effective date of the spin-off, the Company
will distribute all of the capital stock of Gaming & Entertainment to the
Company's stockholders on a pro-rata basis. Holders of the Company's common
stock or Class A common stock, will receive 0.7 shares of Gaming & Entertainment
common stock or Class A common stock for each share of the Company's common
stock or Class A common stock owned at the close of business on March 18, 2002,
the record date for the spin-off. Each share of common stock or Class A common
stock to be distributed will be accompanied by one stock purchase right.
Accordingly, the operations of this business have been reflected as a
discontinued operation in the accompanying consolidating financial statements.
No gain or loss will be recognized as a result of the spin-off due to the pro-
rata nature of the distribution. The Company's continuing operations subsequent
to the spin-off will consist solely of its motorsports activities. Based on an
Internal Revenue Service Private Letter ruling, the spin-off will be tax-free to
Dover Downs and its stockholders, except for cash received for any fractional
shares. Immediately after the spin-off, the Company will not own any shares of
Gaming & Entertainment, and Gaming & Entertainment will be an independent public
company. The actual number of shares of Gaming & Entertainment stock to be
distributed will depend on the number of shares of Dover Downs stock outstanding
on the record date. See NOTE 4 - Discontinued Operations for further discussion.
NOTE 2 - Acquisition
On July 1, 1998, the Company completed its acquisition of Grand Prix
Association of Long Beach, Inc. (Grand Prix) through the merger of a
wholly-owned subsidiary of the Company with and into Grand Prix with Grand Prix
surviving as a wholly-owned subsidiary of the Company. The purchase price was
comprised of the conversion of the outstanding Grand Prix common stock into
5,036,458 shares of the Company's stock and assumption by the Company of the
outstanding stock options of Grand Prix. The acquisition qualified as a tax free
exchange and was accounted for using the purchase method of accounting for
business combinations. The excess of the purchase price over fair market value
of the underlying assets was $52,551,000.
27
NOTE 3 - Summary of Significant Accounting Policies
Basis of consolidation and presentation-The accompanying consolidated
financial statements include the accounts of Dover Downs and its wholly-owned
subsidiaries. Intercompany transactions and balances have been eliminated.
Cash and cash equivalents-The Company considers as cash equivalents all
highly liquid investments with an original maturity of three months or less.
Inventories-Inventories of items for resale are stated at the lower of
cost or market with cost being determined on the first-in, first-out basis.
Property and equipment-Property and equipment are stated at cost.
Depreciation is provided for financial reporting purposes using the
straight-line method over the following estimated useful lives:
Facilities 10 - 40 years
Furniture, fixtures and equipment 5 - 10 years
The carrying values of property and equipment are evaluated for
impairment based upon expected future undiscounted cash flows. If events or
circumstances indicate that the carrying value of an asset may not be
recoverable, an impairment loss would be recognized equal to the difference
between the carrying value of the asset and its fair value.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is amortized over the estimated useful life
of the asset to which it relates. During the year ended December 31, 2001, the
six-month period ended December 31, 2000 and the years ended June 30, 2000 and
1999, the Company incurred $3,252,000, $2,074,000, $3,051,000 and $2,382,000 of
interest cost of which $1,531,000, $1,890,000, $1,814,000 and $414,000,
respectively, was capitalized.
Goodwill-Goodwill resulting from acquisitions prior to July 1, 2001
represents the excess of the purchase price over the fair value of net assets
acquired and was amortized using the straight-line method principally over a
period of 40 years. Amortization expense for the year ended December 31, 2001,
the six months ended December 31, 2000 and the years ended June 30, 2000 and
1999 was $1,454,000, $728,000, $1,451,000 and $1,448,000, respectively. At
December 31, 2001 and 2000, and June 30, 2000, accumulated amortization was
$5,156,000, $3,702,000 and $2,974,000, respectively. Recoverability of goodwill
is assessed using estimated undiscounted future cash flows.
Income taxes-Deferred income taxes are provided in accordance with the
provisions of Statement of Financial Accounting Standards (Statement) No. 109,
Accounting for Income Taxes, on all differences between the tax bases of assets
and liabilities and their reported amounts in the financial statements based
upon enacted statutory tax rates in effect at the balance sheet date.
Revenue and expense recognition-Revenues, including admissions,
broadcasting rights, sponsorships, concessions, luxury suite rentals, and
commissions and souvenirs, and certain direct expenses pertaining to specific
events are deferred until the event is held. Deferred expenses primarily include
race purses and sanctioning fees remitted to NASCAR or other sanctioning bodies.
Advertising costs-The costs of general advertising, promotion and
marketing programs are charged to operations as incurred.
Preopening costs-Preopening costs represent the direct salaries and
other operating costs incurred by the Company prior to opening new permanent or
temporary facilities. The Company accounts for start-up activities under
provisions of the AICPA Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities, which requires costs of start-up activities to be expensed
as incurred.
28
Earnings per share-Basic and diluted earnings per share (EPS) are
calculated in accordance with Statement No. 128, Earnings Per Share. The number
of weighted average shares used in computing basic and diluted EPS are as
follows:
Six months
Year ended ended Year ended June 30,
December 31, December 31, ----------------------------
2001 2000 2000 1999
------------ ------------ ------------ -----------
Basic EPS 37,955,000 37,872,000 36,482,000 35,566,000
Effect of options 299,000 208,000 844,000 1,019,000
------------- ------------ ------------ -----------
Diluted EPS 38,254,000 38,080,000 37,326,000 36,585,000
============= ============ ============ ===========
Accounting for stock options-The Company accounts for stock options in
accordance with Statement No. 123, Accounting for Stock-Based Compensation.
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. The Company has elected to continue to
use the intrinsic value method.
Use of estimates-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments-The carrying amount reported in the
balance sheet for current assets and current liabilities approximates their fair
value because of the short maturity of these instruments. The carrying value of
long-term debt at December 31, 2001 approximates its fair value based on
interest rates available on similar borrowings.
Segment information-Statement No. 131, Disclosures About Segments of an
Enterprise and Related Information, has been adopted by the Company for all
periods presented in these consolidated financial statements. Statement No. 131
establishes guidelines for public companies in determining operating segments
based on those used for internal reporting to management. Based on these
guidelines, the Company reports information under a single motorsports segment.
Recent accounting pronouncements-In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement No. 141, Business Combinations.
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The Company adopted the
provisions of this statement during 2001, and it did not have a material impact
on our results of operations, financial position or cash flows.
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
Statement No. 142. The Company has elected to adopt the provisions of Statement
No. 142 effective January 1, 2002, at which time the Company will cease to
record amortization expense on its goodwill. The adoption of Statement No. 142
will result in a $1,454,000 reduction of amortization expense in 2002 as
compared to 2001. We expect to complete our analysis of any potential impairment
of our goodwill as a result of adopting this standard by the end of the second
quarter of 2002.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
29
Statement No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to operating
expense. If the obligation is settled for other than the carrying amount of the
liability, we will recognize a gain or loss on settlement.
We are required and plan to adopt the provisions of Statement No. 143
in 2003. To accomplish this, we must identify all legal obligations for asset
retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. We have not yet completed our analysis of
the impact of adoption of this standard.
In October 2001, the FASB issued Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We adopted the provisions of Statement No. 144
effective January 1, 2002. The adoption of Statement No. 144 did not have a
significant impact on our results of operations, financial position or cash
flows.
Fiscal year-On January 19, 2001, the Company changed its fiscal
year-end from June 30 to December 31. The six-month period ended December 31,
2000 transitioned the Company's reporting period to the new fiscal year-end.
Summarized statement of earnings information is as follows:
Six months ended Year ended
December 31, December 31,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Revenues $39,045,000 $33,652,000 $82,704,000 $74,510,000
Operating earnings 8,810,000 6,860,000 22,028,000 18,780,000
Earnings from continuing operations 4,856,000 3,331,000 12,498,000 9,902,000
Earnings from discontinued operation 11,056,000 10,440,000 21,568,000 19,969,000
----------- ----------- ----------- -----------
Net earnings $15,912,000 $13,771,000 $34,066,000 $29,871,000
=========== =========== =========== ===========
Earnings per share - basic:
Earnings from continuing operations $ 0.13 $ 0.09 $ 0.33 $ 0.28
Earnings from discontinued operation 0.29 0.29 0.58 0.56
----------- ----------- ----------- -----------
Net earnings $ 0.42 $ 0.38 $ 0.91 $ 0.84
=========== =========== =========== ===========
Earnings per share - diluted:
Earnings from continuing operations $ 0.13 $ 0.09 $ 0.33 $ 0.27
Earnings from discontinued operation 0.29 0.29 0.57 0.55
----------- ----------- ----------- -----------
Net earnings $ 0.42 $ 0.38 $ 0.90 $ 0.82
=========== =========== =========== ===========
NOTE 4 - Discontinued Operation
The gaming segment of Dover Downs has been accounted for as a
discontinued operation and, accordingly, the accompanying consolidated financial
statements of Dover Downs have been reclassified to report separately the net
assets and operating results of this discontinued operation. The historical
financial statements also include an allocation of interest expense of
$2,645,000, $209,000, $377,000 and $353,000 for the year ended December 31,
2001, the six months ended December 31, 2000 and the years ended June 30, 2000
and 1999, respectively, which has been allocated based upon each company's
earnings before interest, taxes, depreciation and amortization, income tax
payments and capital expenditures. Management believes this is a reasonable
method of allocating interest expense.
30
A summary of the net assets of this discontinued operation is as
follows:
December 31,
------------------------------- June 30,
2001 2000 2000
------------ ------------ ------------
Current assets $ 24,485,000 $ 48,701,000 $ 45,489,000
Property, plant and equipment, net 106,772,000 45,156,000 39,648,000
Current liabilities (27,658,000) (11,535,000) (14,003,000)
Deferred income taxes (946,000) (764,000) (632,000)
------------ ------------ ------------
Net assets of discontinued operation $102,653,000 $ 81,558,000 $ 70,502,000
============ ============ ============
A summary of the operating results of this discontinued operation is as
follows:
Year ended Six months ended Year ended June 30,
December 31, December 31, ----------------------------
2001 2000 2000 1999
------------ ----------- ------------ ------------
Revenues $186,722,000 $85,441,000 $168,561,000 $139,249,000
Operating earnings 36,614,000 18,633,000 35,534,000 29,926,000
Earnings before income taxes 35,594,000 18,633,000 35,318,000 29,841,000
Income taxes 14,499,000 7,577,000 14,366,000 12,145,000
------------ ----------- ------------ ------------
Net earnings $ 21,095,000 $11,056,000 $ 20,952,000 $ 17,696,000
============ =========== ============ ============
In conjunction with the spin-off, Dover Downs and Gaming &
Entertainment have entered into various agreements that address the allocation
of assets and liabilities between the two companies and that define the
companies' relationship after the separation. These are the Agreement Regarding
Distribution and Plan of Reorganization, the Real Property Agreement, the
Employee Benefits Agreement, the Transition Support Services Agreement, and the
Tax Sharing Agreement.
The Plan of Reorganization sets forth the principal corporate
transactions required to effect the separation of the gaming business from the
motorsports business, the continuation of the gaming business following such
separation, including the allocation between Dover Downs and Gaming &
Entertainment of certain assets and liabilities, and the distribution of shares
of Gaming & Entertainment common stock and Class A common stock. After the
spin-off, all assets and liabilities relating to the gaming business shall be
owned and assumed by Gaming & Entertainment or its subsidiaries, and all assets
and liabilities relating to the motorsports business shall be owned and assumed
by Dover Downs or its subsidiaries.
The Real Property Agreement governs certain real property transfers,
leases and easements affecting our Dover, Delaware facility.
The Employee Benefits Agreement provides for the transition from
employee benefits under plans or programs sponsored by Dover Downs to those
sponsored by Gaming & Entertainment. In connection with the spin-off and
pursuant to the terms of the Employee Benefits Agreement, Dover Downs will
transfer to Gaming & Entertainment the assets and liabilities associated with
Dover Downs' defined benefit pension plan and the 401(k) plan currently
sponsored by Dover Downs with respect to employees who become employees of
Gaming & Entertainment (or remain employed by Dover Downs, Inc.) after the
spin-off.
The Transition Support Services Agreement provides for each of Dover
Downs and Gaming & Entertainment to provide each other with certain
administrative and operational services. The party receiving the services will
be required to pay for them within 30 business days after receipt of an invoice
at rates agreed upon by Dover Downs and Gaming & Entertainment. Each party will
provide these services until terminated by the party receiving the service or by
the party providing the service after the expiration of a one year transition
period.
31
The Tax Sharing Agreement provides for, among other things, the
treatment of income tax matters for periods beginning before and including the
date of the spin-off and any taxes resulting from transactions effected in
connection with the spin-off. With respect to any period ending on or before the
spin-off or any tax period in which the spin-off occurs, Dover Downs will:
o continue to be the sole and exclusive agent for Gaming & Entertainment
in all matters relating to the income, franchise, property, sales and
use tax liabilities of Gaming & Entertainment;
o subject to Gaming & Entertainment's obligation to pay for items
relating to its gaming business, bear any costs relating to tax audits,
including tax assessments and any related interest and penalties and
any legal, litigation, accounting or consulting expenses;
o continue to have the sole and exclusive responsibility for the
preparation and filing of combined federal and combined state income
tax returns; and
o subject to the right and authority of Gaming & Entertainment to direct
Dover Downs in the defense or prosecution of the portion of a tax
contest directly and exclusively related to any Gaming & Entertainment
tax adjustment, generally have the powers, in Dover Downs' sole
discretion, to contest or compromise any claim or refund on Gaming &
Entertainment's behalf.
NOTE 5 - Intercompany Balances
At December 31, 2001, Gaming & Entertainment owed Dover Downs $7.8
million. This balance will fluctuate prior to the spin-off and primarily
represents the payment of certain costs by Dover Downs for Gaming &
Entertainment and borrowings under Dover Downs' credit facility maintained for
the benefit of Dover Downs and all of its subsidiaries. Dover Downs and Gaming &
Entertainment have agreed to cancel any remaining intercompany balances and
adjust Dover Downs' stockholders' equity by an equal amount at the date of the
spin-off. As such, the intercompany balance is reflected as a reduction to
stockholders' equity in the accompanying consolidated balance sheet.
NOTE 6 - Property and Equipment
Property and equipment consists of the following as of December 31:
December 31,
-------------------------- June 30,
2001 2000 2000
------------ ----------- ------------
Land.................................... $ 27,792,000 $ 28,660,000 $ 28,644,000
Racing facilities....................... 228,867,000 147,094,000 141,429,000
Furniture, fixtures and equipment....... 16,126,000 14,875,000 8,367,000
Construction in progress................ 261,000 64,078,000 27,115,000
------------ ------------ ------------
273,046,000 254,707,000 205,555,000
Less accumulated depreciation...... (27,903,000) (19,518,000) (16,310,000)
------------ ------------ ------------
$245,143,000 $235,189,000 $189,245,000
============ ============ ============
Depreciation expense was $8,490,000, $3,235,000, $5,129,000 and
$4,289,000 for the year ended December 31, 2001, the six months ended December
31, 2000 and the years ended June 30, 2000 and 1999, respectively.
32
NOTE 7 - Indebtedness
Long-term debt is as follows:
December 31,
------------------------------- June 30,
2001 2000 2000
------------------------------- -------------
Notes payable to bank $ 110,610,000 $ 58,750,000 $ 15,000,000
SWIDA loan 20,540,000 21,125,000 21,125,000
-------------- ------------- -------------
131,150,000 79,875,000 36,125,000
Less: current portion (111,245,000) (585,000) (585,000)
-------------- ------------- -------------
$ 19,905,000 $ 79,290,000 $ 35,540,000
============== ============= =============
At December 31, 2001, the Company had two credit facilities with a
total capacity of $150,000,000. Interest is based, at the Company's option, upon
(i) LIBOR plus .75% or (ii) the base rate (the greater of the prime rate or the
federal funds rate plus .5%) minus 1%. The $25,000,000 credit facility expires
on June 15, 2002 and the $125,000,000 credit facility expires on September 30,
2002. The agreements are for seasonal funding needs, capital improvements and
other general corporate purposes. At December 31, 2001, the Company was in
compliance with all terms of the facilities and there was $110,610,000
outstanding at a weighted average interest rate of 3.04%. Under the terms of the
credit facilities, approximately $13,000,000 of additional borrowings were
available to the Company at December 31, 2001.
The Company has signed a new $105,000,000 credit facility expected to
expire on December 31, 2004, but the effectiveness of that agreement is
contingent upon the completion of the tax-free spin-off of the Company's gaming
operations, and as a result, the amounts outstanding under the Company's
$150,000,000 facilities at December 31, 2001 have been classified as short-term.
The new credit facility contains minimum net worth, fixed charge coverage and
maximum leverage covenant requirements that the Company must comply with in
order to avoid the requirement for early payment of the credit facility.
Material adverse changes in the Company's results of operation would impact our
ability to maintain financial ratios necessary to satisfy these requirements.
The Company's existing $150,000,000 credit facilities are guaranteed by
Dover Downs, Inc. and all of its other subsidiaries. The new $105,000,000 credit
facility does not include Dover Downs, Inc., as it will be spun-off. Prior to
the new facility becoming effective, $45 million of the amount outstanding under
the existing Dover Downs credit facilities will be paid down through a new $55
million credit facility which has been established by Gaming & Entertainment.
A subsidiary of the Company entered into an agreement (the "SWIDA
loan") with Southwestern Illinois Development Authority ("SWIDA") to receive the
proceeds from the "Taxable Sports Facility Revenue Bonds, Series 1996 (Gateway
International Motorsports Corporation Project)", a Municipal Bond Offering, in
the aggregate principal amount of $21,500,000. The offering of the bonds closed
on June 21, 1996. The repayment terms and debt service reserve requirements of
the bonds issued in the Municipal Bond Offering correspond to the terms of the
SWIDA loan. SWIDA loaned all of the proceeds from the Municipal Bond Offering to
the Company's subsidiary for the purpose of the redevelopment, construction and
expansion of Gateway International Raceway, and the proceeds of the SWIDA loan
were irrevocably committed to complete construction of Gateway International
Raceway, to fund interest, to create a debt service reserve fund and to pay for
the cost of issuance of the bonds. The Company has established certain
restricted cash funds to meet debt service as required by the SWIDA loan, which
are held by the trustee (BNY Trust Company of Missouri). At December 31, 2001,
$3,161,000 of the Company's cash balance is restricted by the SWIDA loan.
Satisfy a standby letter of credit for $2,502,000, which is secured by a Trust
Deed on the Company's facilities in Memphis, Tennessee, also was obtained to
satisfy debt service reserve fund obligations. The SWIDA loan is secured by a
first mortgage lien on all the real property owned and a security interest in
all property leased by the Company's subsidiary at Gateway International
Raceway. Also, the SWIDA loan is unconditionally guaranteed by Grand Prix, a
wholly owned subsidiary. The SWIDA loan bears interest at varying rates ranging
from 8.35% to 9.25% with an effective rate of approximately 9.1%. The structure
of the bonds permits amortization from February 1997 through February 2017 with
debt service beginning in 2000 following interest only payments from February
1997 through August 1999. In addition, a portion of the property taxes to be
paid by the Company (if any) to the City of Madison Tax Incremental Fund have
been pledged to the annual retirement of debt and payment of interest.
33
The scheduled maturities of long-term debt outstanding at December 31,
2001 are as follows: 2002-$111,245,000; 2003-$685,000; 2004-$745,000;
2005-$805,000; 2006-$875,000; and thereafter-$16,795,000.
NOTE 8 - Income Taxes
The current and deferred income tax provisions (benefits) from
continuing operations are as follows:
Year ended Six months ended Years ended June 30,
December 31, December 31, ------------------------
2001 2000 2000 1999
------------ ------------ ---------- ----------
Current:
Federal $(1,263,000) $ 822,000 $ 308,000 $3,839,000
State 1,916,000 1,045,000 1,707,000 1,360,000
----------- ---------- ---------- ----------
653,000 1,867,000 2,015,000 5,199,000
Deferred:
Federal 5,670,000 2,103,000 6,092,000 1,491,000
State (570,000) (25,000) 74,000 45,000
----------- ---------- ---------- ----------
5,100,000 2,078,000 6,166,000 1,536,000
----------- ---------- ---------- ----------
Total income taxes $ 5,753,000 $3,945,000 $8,181,000 $6,735,000
=========== ========== ========== ==========
Deferred income taxes relate to the temporary differences between
financial accounting income and taxable income and are primarily attributable to
differences between the book and tax basis of property and equipment and net
operating loss carryforwards (expiring through 2021). The Company believes that
it is more likely than not that the deferred tax assets will be realized based
upon reversals of existing taxable temporary differences and future income.
A reconciliation of the effective income tax rate with the applicable
statutory federal income tax rate is as follows:
Year ended Six months ended Years ended June 30,
December 31, December 31, --------------------
2001 2000 2000 1999
------------ ---------------- ---- ----
Federal tax at statutory rate 35.0% 35.0% 35.0% 35.0%
State taxes, net of federal benefit 6.8% 7.5% 6.0% 5.7%
Non-deductible goodwill and other 3.8% 2.3% 1.7% 1.6%
----- ----- ----- -----
Effective income tax rate 45.6% 44.8% 42.7% 42.3%
===== ===== ===== =====
NOTE 9 - Pension Plan
Benefits provided by the Dover Downs Entertainment, Inc. pension plan
are based on years of service and employees' remuneration over their employment
with the Company. Pension costs are funded in accordance with the provisions of
the Internal Revenue Code. The Company also maintains a nonqualified,
noncontributory 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.
34
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet:
December 31, June 30,
-------------------------- ----------
2001 2000 2000
----------- ----------- ----------
Change in benefit obligation:
Benefit obligation at beginning of period $ 3,114,000 $ 2,458,000 $ 1,819,000
Service cost 569,000 242,000 399,000
Interest cost 232,000 99,000 154,000
Transfer from Rollins Truck Leasing Plan 736,000 - -
Actuarial loss 336,000 326,000 121,000
Benefits paid (54,000) (11,000) (35,000)
----------- ----------- -----------
Benefit obligation at end of period 4,933,000 3,114,000 2,458,000
Change in plan assets:
Fair value of plan assets at beginning of period 1,762,000 2,409,000 1,673,000
Actual return/(loss) on plan assets 77,000 (636,000) 238,000
Transfer from Rollins Truck Leasing Plan 835,000 - -
Employer contribution 250,000 - 533,000
Benefits paid (54,000) (11,000) (35,000)
----------- ----------- -----------
Fair value of plan assets at end of period 2,870,000 1,762,000 2,409,000
Funded status (2,063,000) (1,352,000) (49,000)
Unrecognized net loss/(gain) 1,263,000 979,000 (88,000)
Unrecognized prior service cost 454,000 530,000 263,000
----------- ----------- -----------
(Accrued)/prepaid pension cost $ (346,000) $ 157,000 $ 126,000
=========== =========== ===========
At December 31, 2001, the assets of the plan were invested 43% in
equity funds, 24% in intermediate bond funds and the remainder in money market
funds. The discount rate for the year ended December 31, 2001 was 7%, the six
months ended December 31, 2000 was 7.5%, and for the years ended June 30, 2000
and 1999 was 8%. The assumed rate of compensation increase was 5% and the
expected long-term rate of return on assets was 9% for all periods presented.
The components of net periodic pension cost are as follows:
Year ended Six months ended Years ended June 30,
December 31, December 31, ---------------------
2001 2000 2000 1999
------------ ---------------- --------- --------
Service cost $ 569,000 $ 242,000 $ 399,000 $ 328,000
Interest cost 232,000 99,000 154,000 104,000
Expected return on plan assets (174,000) (106,000) (160,000) (82,000)
Recognized net actuarial loss 50,000 - - 10,000
Net amortization 32,000 16,000 32,000 23,000
--------- --------- --------- ---------
$ 709,000 $ 251,000 $ 425,000 $ 383,000
========= ========= ========= =========
Total retirement plan cost attributable to Gaming & Entertainment,
which is included in the net periodic benefit cost above, was $502,000,
$143,000, $286,000 and $241,000 during the year ended December 31, 2001, the
six-month period ended December 31, 2000 and the years ended June 30, 2000 and
1999, respectively.
The Company also maintains a defined contribution 401(k) plan which
permits participation by substantially all employees.
Pursuant to the terms of the Employee Benefits Agreement entered into
between the Company and Gaming & Entertainment, the Company will transfer to
Gaming & Entertainment the assets and liabilities associated with the Company's
defined benefit pension plans and 401(k) plan with respect to employees who are
Gaming & Entertainment employees after the spin-off.
35
NOTE 10 - Stockholders' Equity
Changes in the components of stockholders' equity are as follows:
$.10 Par
$.10 Par Value
Value Class A Additional
Common Common Paid-in Retained
Stock Stock Capital Earnings
-------------- ------------- ------------- -------------
Balance at June 30, 1998 $ 300,000 $ 1,225,000 $ 21,109,000 $ 48,731,000
Net earnings 26,891,000
Dividends on common stock,
$.175 per share (6,213,000)
Exercise of stock options 4,000 8,000 155,000
Grand Prix acquisition 252,000 80,196,000
Two-for-one split 556,000 1,221,000 (1,777,000)
Conversion of Class A shares 28,000 (28,000)
-------------- ------------- ------------- -------------
Balance at June 30, 1999 1,140,000 2,426,000 99,683,000 69,409,000
Net earnings 31,925,000
Issuance of common stock, net 150,000 19,035,000
Dividends on common stock,
$.18 per share (6,550,000)
Exercise of stock options 11,000 58,000 504,000
Conversion of Class A shares 79,000 (79,000)
-------------- ------------- ------------- -------------
Balance at June 30, 2000 1,380,000 2,405,000 119,222,000 94,784,000
Net earnings (six months) 15,912,000
Dividends on common stock,
$.09 per share (3,407,000)
Exercise of stock options 5,000 81,000
Conversion of Class A shares 20,000 (20,000)
-------------- ------------- ------------- -------------
Balance at December 31, 2000 1,405,000 2,385,000 119,303,000 107,289,000
Net earnings 27,966,000
Dividends on common stock,
$.18 per share (6,830,000)
Exercise of stock options 14,000 246,000
Tax benefit of exercised stock options 531,000
Conversion of Class A shares 9,000 (9,000)
-------------- ------------- ------------- -------------
Balance at December 31, 2001 $ 1,428,000 $ 2,376,000 $ 120,080,000 $ 128,425,000
============== ============= ============= =============
Holders of Common Stock have one vote per share and holders of Class A
Common Stock have ten votes per share. There is no cumulative voting. Shares of
Class A Common Stock are convertible at any time into shares of Common Stock on
a share for share basis at the option of the holder thereof. Dividends on Class
A Common Stock cannot exceed dividends on Common Stock on a per share basis.
Dividends on Common Stock may be paid at a higher rate than dividends on Class A
Common Stock. The terms and conditions of each issue of Preferred Stock are
determined by the Board of Directors. No Preferred shares have been issued.
36
The Company has adopted a Rights Plan with respect to its Common Stock
and Class A Common Stock which includes the distribution of Rights to holders of
such stock. The Rights entitle the holder, upon the occurrence of certain
events, to purchase additional stock of the Company. The Rights are exercisable
if a person, company or group acquires 10% or more of the outstanding combined
equity of Common Stock and Class A Common Stock or engages in a tender offer.
The Company is entitled to redeem each Right for $.005.
On March 3, 2000, Dover Downs completed the issuance of 1,500,000
additional shares of Common Stock through a public offering resulting in net
proceeds to the Company of $19,185,000. The Company used the net proceeds of the
offering to pay down a portion of its borrowings under its revolving line of
credit facility.
On July 31, 1998, the Board of Directors authorized a two-for-one stock
split to be distributed September 15, 1998. All share and per share information
included in the accompanying consolidated financial statements and notes thereto
have been adjusted to give retroactive effect to this stock split.
The Company has a stock option plan pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees at not
less than 100% of the fair market value 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.
Historically, certain Gaming & Entertainment employees have
participated in the Dover Downs stock option plan. In conjunction with the
spin-off, Gaming & Entertainment has adopted a stock option plan under which
1,500,000 shares of common stock have been reserved for issuance to Gaming &
Entertainment employees. Following the spin-off, outstanding stock option grants
under the Dover Downs plan held by Gaming & Entertainment employees will be
replaced with Gaming & Entertainment stock option grants. The Gaming &
Entertainment grants will have the same relative ratio of the exercise price to
market value and the same vesting provisions, option periods and other
applicable terms and conditions as the Dover Downs stock option grants being
replaced. At December 31, 2001, there were approximately 293,514 Dover Downs
stock option grants held by Gaming & Entertainment employees subject to
replacement with Gaming & Entertainment stock option grants. Gaming &
Entertainment cannot determine the exact number of shares of its common stock
that will be subject to substitute grant until after the spin-off.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for its stock option plans. For disclosure purposes, the Company
determined compensation cost for its stock options based upon the fair value at
the grant date using the Black-Scholes option-pricing model with the following
assumptions:
December, June,
-------------- --------------
2001 2000 2000 1999
---- ---- ---- ----
Risk-free interest rate 4.30% 5.75% 6% 6%
Volatility 38% 46% 47% 25%
Expected dividend yield 1.18% 1.27% 1.35% 1.02%
Expected life (in years) 6.5 6.5 6.5 6.5
The weighted-average fair value of options granted during the year
ended December 31, 2001, the six-month period ended December 31, 2000, and the
years ended June 30, 2000 and 1999 was $4.70, $5.37, $5.58 and $4.73,
respectively.
Had compensation cost been recognized in accordance with SFAS No. 123,
the Company's diluted earnings per share disclosed in the accompanying financial
statements would be reduced by approximately $.02 in 2001, $.01 per share in the
six-month period ended December 31, 2000, $.02 per share in fiscal 2000, and
$.01 per share in fiscal 1999.
37
Option activity was as follows:
December 31, June 30,
--------------------------- -------------------------
2001 2000 2000 1999
---------- ---------- ---------- ----------
Number of options:
Outstanding at beginning of period 1,156,030 1,154,522 1,642,406 1,035,528
Granted 65,000 60,000 218,000 734,562
Exercised (137,788) (58,492) (680,884) (127,684)
Expired (120,500) - (25,000) -
---------- ---------- ---------- ----------
Outstanding at end of period 962,742 1,156,030 1,154,522 1,642,406
========== ========== ========== ==========
At period end:
Options available for grant 207,410 151,910 211,910 404,910
Options exercisable 512,790 562,998 563,243 932,545
Weighted Average Exercise Price:
Options granted $ 11.55 $ 11.18 $ 11.48 $ 4.66
Options exercised $ 1.87 $ 1.52 $ .83 $ 1.32
Options outstanding $ 8.76 $ 8.19 $ 7.70 $ 4.38
Options exercisable $ 6.23 $ 4.56 $ 3.63 $ 1.59
At December 31, 2001, the range of exercise prices of outstanding
options was $0.87-$16.19.
Included in the 734,562 options and the weighted average exercise price
for options granted in 1999 are 512,062 options relating to the Grand Prix
Association of Long Beach acquisition. The Grand Prix options were converted
into Dover Downs options at an exercise price of $.87 per share.
NOTE 11 - Related Party Transactions
During the year ended December 31, 2001, the six-month period ended
December 31, 2000 and the years ended June 30, 2000 and 1999, the Company
purchased certain paving, site work and construction services involving total
payments of $572,000, $187,000, $432,000 and $432,000 from a company
wholly-owned by an employee/director. During the six-month period ended December
31, 2000, the Company purchased an aircraft from a company wholly-owned by the
aforementioned employee/director for $6,029,000. The Company purchased
administrative services from Rollins Truck Leasing Corp. and affiliated
companies (RTLC), which were related to the Company through common ownership,
during the year ended December 31, 2001, the six-month period ended December 31,
2000 and the years ended June 30, 2000 and 1999. The total cost of these
services, which have been included in general and administrative expenses in the
Consolidated Statement of Earnings, was $6,000, $20,000, $37,000 and $30,000,
respectively. Gaming & Entertainment purchased administrative services from RTLC
during the year ended December 31, 2001, the six-month period ended December 31,
2000 and the years ended June 30, 2000 and 1999. The total cost of these
services, which have been included in earnings from discontinued operation in
the Consolidated Statement of Earnings, was $71,000, $233,000, $420,000 and
$350,000, respectively. RTLC ceased to provide these services effective in April
2001.
During the year ended December 31, 2001, the six months ended December
31, 2000 and the years ended June 30, 2000 and 1999, Gaming & Entertainment
allocated corporate costs of $2,307,000, $828,000, $1,640,000 and $1,414,000,
respectively, to Dover Downs. The allocation was based on both an allocation to
the business that directly incurred the costs and an analysis of each company's
share of the costs. 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 separate, independent entities and had otherwise managed
these functions; however, management believes that these costs are reasonable.
38
Subsequent to the spin-off, use of Gaming & Entertainment's 5/8-mile
harness racing track will be under an easement granted by Dover Downs which does
not require the payment of any rent. Under the terms of the easement Gaming &
Entertainment 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 Dover Downs and is on the inside
of Dover Downs' one-mile motorsports speedway. The indoor grandstands will be
used by the Company free of charge in connection with its motorsports events and
are owned by Gaming & Entertainment. Dover Downs also leases its principal
executive office space from Gaming & Entertainment. Various easements and
agreements relative to access, utilities and parking have also been entered into
between the Company and Gaming & Entertainment.
The Transition Support Services Agreement provides for each of Dover
Downs and Gaming & Entertainment to provide each other with certain
administrative and operational services subsequent to the spin-off. The Tax
Sharing Agreement provides for, among other things, the treatment of income tax
matters for periods beginning before and including the date of the spin-off and
any taxes resulting from transactions effected in connection with the spin-off.
Refer to Note 4 - Discontinued Operations for further discussion.
At the date of the acquisition of Grand Prix Association of Long Beach,
$299,000 was due to Grand Prix from certain shareholders/officers for
outstanding loans made for the purpose of purchasing Grand Prix common stock. As
of December 31, 2001, $92,000 was outstanding from a current director of the
Company. This remaining balance was repaid in full in January 2002.
NOTE 12 - Commitments and Contingencies
Prior to December 28, 2001, Nashville Speedway, USA, a wholly-owned
subsidiary of the Company, leased the racetrack at the Tennessee State
Fairgrounds pursuant to a lease expiring September 30, 2007, or earlier on
September 30, 2002 at the Company's option. Effective December 28, 2001,
Nashville Speedway, USA assigned its lease of this facility to a third party. As
a result, the Company's operations at this facility ceased. Total rental expense
charged to the Company was a function of the profitability of the Nashville
operation conducted at the fairgrounds. There was no rent expense for the year
ended December 31, 2001 or the six-month period ended December 31, 2000. For the
years ended June 30, 2000 and 1999, $46,000 and $210,000, respectively, was
charged to rent expense.
The Company leases certain property at the Madison, Illinois facility
with leases expiring at various dates through 2070. The leases are subject to
annual adjustments based on increases in the consumer price index. Total rental
payments charged to operations for these leases amounted to $243,000 for the
year ended December 31, 2001, $122,000 for the six-month period ended December
31, 2000, and $236,000 and $222,000 for the years ended June 30, 2000 and 1999,
respectively. The minimum lease payments due under these leases are as follows:
2002 $ 224,000
2003 224,000
2004 224,000
2005 224,000
2006 224,000
Thereafter $4,255,000
In September 1999, the Sports Authority of the County of Wilson,
Tennessee issued its Variable Rate Tax Exempt Infrastructure Revenue Bonds,
Series 1999, in the amount of $25,900,000. The proceeds were used to acquire,
construct and develop certain public infrastructure improvements in Wilson
County, Tennessee, which will be beneficial to the operation of the
superspeedway complex the Company constructed through Nashville Speedway, USA.
Interest only payments are required until September 1, 2002 and will be made
from a capitalized interest fund established from bond proceeds. When the
capitalized interest fund is depleted, which is estimated to be in or around
July of 2002, the debt service on the bonds will be payable solely from sales
and incremental property taxes (the taxes) generated from the facility. If the
taxes are insufficient to cover the payment of principal and interest on the
bonds, payments will be made under a $26,326,000 letter of credit issued on
behalf of the Company by several banks and the bonds would become a liability of
the Company.
39
The Company received a notice of proposed tax adjustment for the years
1997 through 2000 related to a state sales and use tax audit. The Company is
vigorously contesting the notice. Final proposed adjustments have not been
received for these years. Management believes that the ultimate outcome of the
audit will not have a material adverse impact on the Company's results of
operations, financial position or cash flows.
The Company is from time to time 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.
NOTE 13 - Quarterly Results - in thousands, except per share data (unaudited)
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Year Ended December 31, 2001
Revenues $ 1,076 $46,506 $35,891 $ 3,078
Operating (loss) earnings (5,659) 16,301 11,301 (7,705)
(Loss) earnings from continuing operations (3,347) 8,954 6,093 (4,829)
Earnings from discontinued operation 5,729 5,414 5,298 4,654
------- ------- ------- -------
Net earnings (loss) $ 2,382 $14,368 $11,391 $ (175)
Net earnings (loss) per share - basic:
Continuing operations $ (.09) $ .24 $ .16 $ (.13)
Discontinued operation .15 .14 .14 .13
------- -------- -------- -------
Total $ .06 $ .38 $ .30 $ -
Net earnings (loss) per share - diluted:
Continuing operations $ (.09) $ .24 $ .16 $ (.13)
Discontinued operation .15 .14 .14 .13
------- ------- ------- -------
Total $ .06 $ .38 $ .30 $ -
Six Months Ended December 31, 2000
Revenues $ - $ - $33,951 $ 5,094
Operating earnings (loss) - - 13,121 (4,311)
Earnings (loss) from continuing operations - - 7,664 (2,808)
Earnings from discontinued operation - - 5,551 5,505
------- ------- ------- -------
Net earnings $ - $ - $13,215 $ 2,697
Net earnings (loss) per share - basic:
Continuing operations $ - $ - $ .20 $ (.07)
Discontinued operation - - .15 .14
------- ------- ------- -------
Total $ - $ - $ .35 $ .07
Net earnings (loss) per share - diluted:
Continuing operations $ - $ - $ .20 $ (.07)
Discontinued operation - - .15 .14
------- ------- ------- -------
Total $ - $ - $ .35 $ .07
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September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Year Ended June 30, 2000
Revenues $28,610 $ 5,042 $ 1,071 $42,588
Operating earnings (loss) 10,339 (3,479) (4,324) 17,542
Earnings (loss) from continuing operations 5,663 (2,332) (2,809) 10,451
Earnings from discontinued operation 5,581 4,859 5,140 5,372
------- ------- ------- -------
Net earnings $11,244 $ 2,527 $ 2,331 $15,823
Net earnings (loss) per share - basic:
Continuing operations $ .16 $ (.06) $ (.08) $ .28
Discontinued operation .15 .13 .14 .14
------- ------- ------- -------
Total $ .31 $ .07 $ .06 $ .42
Net earnings (loss) per share - diluted:
Continuing operations $ .16 $ (.06) $ (.08) $ .28
Discontinued operation .15 .13 .14 .14
------- ------- ------- -------
Total $ .31 $ .07 $ .06 $ .42
Per share data amounts for the quarters have each been calculated separately.
Accordingly, quarterly amounts may not add to the annual amounts because of
differences in the average common shares outstanding during each period.
41